16/3/16: ESRI and Imaginary Numbers: Irish Economy Forecast 2016-2017

My article for Sunday Business Post on latest ESRI forecasts for the Irish economy 2016-2017: http://www.businesspost.ie/esri-report-irelands-growth-rate-increasingly-resembles-imaginary-numbers/.

17/5/2014: ESRI on Education & Training in Ireland

ESRI released "Further Education and Training in Ireland: Past, Present and  Future" (http://www.esri.ie/publications/latest_publications/view/index.xml?id=3943)

Lots of sharp and interesting findings, including:

1. Provision within the sector appears to have grown and national policy does not appear to have played any central role in determining the level, distribution or composition of Irish FET provision. In other words it is free-for-all.
 
2. As a result, there is a substantial amount of variation in terms of …the relative emphasis on meeting labour market needs and countering social exclusion across the sector. In other words, the programmes are not really delivering on skills shortages.
 
3. A substantial proportion of provision within the FET sector does not lead to any formal accreditation.  The lack of accreditation is more typical in programmes with a strong community or social inclusion ethos. Which might not be a problem, if real skills are delivered. Alas, this is not the case.
 
4. The distribution of major awards across field of study does not appear to reflect strongly the structure of the vocational labour market. This is evident in the fact that the majority of key stakeholders, interviewed for the study, feel that current FET provision is only aligned ‘to some extent’ with labour market needs.
 
5. From an international perspective, compared to the German, Dutch and Australian systems, Irish FET is much more fragmented and is much less focused around vocational labour market demand.  In terms of its composition and focus, Irish FET sector bears close similarities to provision in Scotland.  
 
6. Data provision on Irish FET is extremely poor by international standards.
7. The reform of provision will require that SOLAS implement a funding model that ensures that poorly performing programmes are no longer financed, with available resources directed towards areas identified as being of significant value on the basis of emerging national or regional information.  

The irony of this is that ESRI report comes out some weeks after I wrote about the deficiencies in our training programmes in the Sunday Times http://trueeconomics.blogspot.ie/2014/05/1552014-jobs-employment-lot-done-more.html and months after the OECD report covering the same.

You can read more on the topic of skills, unemployment and training here: http://trueeconomics.blogspot.ie/2014/05/1552014-innovation-employment-growth.html

19/4/2014: If Only Forecasts Were Falling Ripe from Trees...

Here we go, folks… ESRI's latest thoughts on Irish economy... and they are earth-shattering.

Let's take a few pointers from the wise:


1) "Ireland could face a debilitating period of stagnation – characterised by high unemployment, falling prices and low growth – if recovery in Europe falters".

"Could"?! 2013 marked a year of contracting GDP and total demand. We now have six consecutive years of falling total demand (sum of domestic investment and spending by consumers and government). Unemployment is already sky-high, long term unemployment is a hinge problem. Prices are not quite falling, but growing at near-zero rate, and stripping out State controlled sectors, goods and services (something ESRI misses on every occasion, like a clock)we have deflation. So all of this "could" happen?


2) "…Prof Fitzgerald said deleveraging by households could continue for “some considerable time” if recovery stalled in the rest of the EU, resulting in a return to stagnation in Ireland."

Can someone explain to me why would deleveraging of the households (repayment of massive debts accumulated during the Celtic Garfield years) suddenly end if "the rest of the EU" were to post robust growth? Is it possible that growth in Germany will start paying Irish mortgages down? Or consumer demand in France picking up can moderate the size of our credit cards bills? How?

Irish exporting sectors employ a small fraction of our households. Irish exports are geared not toward wages payments, but MNCs profits. Pick up in our exports is unlikely to drive household earnings up (easing debt/income ratios or repayment funds available to households - two conditions necessary for new credit creation) in short or medium term.

3) But wait, according to the ESRI, the core threats to the economy are not debt, but the EU growth and housing markets (more specifically: excess demand in the property markets in Dublin and Cork that are at a risk of not being satisfied in poor credit conditions). So in the nutshell, ESRI thinks that if we start building more houses and Germans start buying more BMWs, our economic growth will take off like a rocket.

Confusing symptoms for causes, ESRI is worried about the Japanese scenario for Ireland. But let's take a look at plausibility of the ESRI logic:

• Japan is a fully sovereign economy with own monetary and fiscal policies (both of which Ireland lacks)
• Large population and domestic demand (which Ireland lacks)
• Indigenous (as opposed to tax-maximising MNCs) exports 
• Set smack in the middle of the most dynamic growth cluster in the world (Asia Pacific) as opposed to the growth-shy Europe (remember, a pick up in growth in the euro area implies annual growth of 2-2.2 percent; a pick up of growth in Asia Pacific means annual growth of 5-7 percent). 

The real problem with Japan's economy is actually pretty similar to that of Ireland's:

• pre-1960s Japan's growth was driven by a period of post-WW2 rebuilding, 
• between 1960s and 1980 it was driven by the rapid catching up with the advanced economies, 
• thereafter until 1990s - by a massive property and credit bubble. 
• So stagnation, property crash and low inflation/deflation were not the causes of the malaise in Japan, but its symptoms. The real malaise for Japan is identical to the one we have in Ireland - lack of catalyst for future growth. 
• In Japan this problem is exacerbated by adverse demographics. In Ireland - by lack of monetary and fiscal policies room. Ireland is 2 decades behind Japan in household and corporate and banking deleveraging. 

So go figure: can growth in the EU and housing supply improvements in Ireland do enough for Dublin?

Ok, take it from a different angle: 1991-2007 marked massive growth around the world. Japan stagnated. 1991-2007 marked massive monetary and fiscal expansion in Japan. Japan stagnated. 1991-2007 marked significant deleveraging of Japanese economy. Japan stagnated. That is 18 years of stagnation and deflation under the global conditions more favourable than Ireland faces today, with full economic policies kit available to Japan, not available to Ireland, and with indigenous exporting engine much mightier than that of Ireland.

Is ESRI having a clue? Of course it does. It can clearly see that once things get really good, things will be really good: "Conversely, Prof FitzGerald believes if the euro zone recovery picks up pace this year and in 2015, and is accompanied by an increase in domestic demand, Ireland could see a more rapid reduction in the numbers unemployed and a return of the public finances to a small surplus over the period 2017-2019."

Ah, now we talking. And if we discover a pot of gold and a chest of diamonds at the end of that proverbial rainbow, just to the North of the fabled riches of oil, gas, uranium, rare earth metals, and Bord Bia certified caviar... then we can afford pensions for the ESRI boffins too. 

5/6/2013: The economics of Lost Generations: Sunday Times 16/5/2013

This is an unedited version of my Sunday Times column from May 16, 2013


Not known for its 'ahead of the pack' thinking and bruised by recent controversies, nowadays, the ESRI focuses on a more retrospective in-depth analysis of the trends shaping Irish economy and society. Aptly, this week's most talked-about Irish research note was ESRI paper on the impact of the crisis on households. Covering data through 2009/2010, it offers both a fascinating look into economics of our lost generations, and a reminder that it takes official Ireland at least 3 years before everyday reality gets translated into policy-shaping analysis.

The topic is close to my heart: back in 2010 and then in 2012, in these very pages, I wrote about the fact that Ireland is facing not one, not two, but a number of lost generations covering those under the age of 50. Things only got worse since.

The crises we face continue to destroy lives and wealth of the 35-50 year-olds, who mortgaged their future back in 2003-2007. Pensions and savings are gone, psychological and social wellbeing is under unrelenting pressure from the threat of unemployment, losses in after-tax disposable income, negative equity, the banks' push to extract revenues from borrowers, and the internecine policies adopted by the Government.

Housing wealth and negative equity exact the greatest toll. Housing wealth accounted for over 3/4 of the total real disposable wealth that formed the bedrock of pensions provisions in the years before the crisis hit. This has now tumbled by over half, once taxes and property prices declines can be factored in.

Income losses are not far behind. Not withstanding the effects of tax increases, an average working age family in this country lost close to EUR100,000 in income between the beginning of 2008 and the end of 2012.

Much of these losses were accumulated by the prime working age group of 35-50 year-olds. Adjusting for changes in population and unemployment in these groups, relative to the rest of the country population, the opportunity cost of foregone savings, and adding the impact of tax increases, the real disposable income declines during the crisis run somewhere closer to EUR120,000 per family with two working adults in the 30-50 years of age group. When you consider the losses in housing wealth over the life time, and interest costs on negative equity components of mortgages, the total real life-time losses due to the crisis easily reach over EUR200,000 per family. This number assumes expected house prices appreciation in line with 2% annual inflation from 2013 on, but excludes effects of future tax hikes.

And more tax hikes are coming still. The Government might boast that ‘most of the adjustment is behind us’. Alas, IMF’s latest forecasts for the Irish economy clearly show that by 2018, compared to 2012, Irish Government tax take needs to increase by EUR12.5 billion per annum. Of these, EUR8.7 billion in revenue will come from personal income taxes and VAT. For comparison, between 2009 and 2012 receipts from these two tax heads rose only EUR2.9 billion. Social Insurance contributions are required to rise by EUR2.2 billion in 2013-2018, against the decline of EUR2.6 billion recorded in 2009-2012.

The ESRI research, published this week, does not go as far as attaching real numbers to the losses sustained by Irish households, but it does conclude that "income and consumption increase roughly steadily for the average household over the age of 45 from 1994/95 to 2009/10. ...In sharp contrast to the increase in earning and expenditure of older households over the last two decades, there has been a large drop in income and consumption for the younger average household in the crisis. Between the 2004/05 survey and that of 2009/10, real disposable income decreased by 14 per cent, real consumption including housing by 25 per cent and excluding housing by 32 per cent."

In other words, at the end of 2012, gross investment in the Irish economy stood at the levels below those in 1997, domestic demand at mid-2003 levels and private domestic demand (excluding Government spending) at the levels last recorded in 1998.

The future looks bleak for today's 30-50 year-olds even beyond income declines and the negative equity considerations. Per ESRI, "Mortgages are most prevalent in the 35-44 year bracket, with more than half of households in this group having a mortgage. About 43 per cent of the households aged 25 to 34, and 45 per cent of those aged 45 to 54 are mortgage holders as well." In other words, those in 30-50 years of age cohorts are in the worse shape when we consider housing wealth.

The ESRI fails to note that these households are also facing a very uncertain future when it comes to the cost of funding their mortgages.

Currently, ECB benchmark rate stands at 0.50%, which is miles below the pre-crisis period average of 3.10%.. At some point in time, Germany and other core European economies will be back delivering the rates of growth comparable to those seen over 2002-2007 period and the ECB rates will inevitably rise. At the same time, Irish banks will be carrying an ever-worsening book of household loans. With every year, average mortgage vintage on banks books moves closer and closer to 2006-2007 peak market valuations, as better quality older mortgages are being paid down. As real estate prices continue to signal zero hope of a rapid recovery, Irish banks will have to keep margins well above pre-crisis averages. Failing SMEs loans and Basel III capital hikes add to this pressure.

This week IMF released a set of research papers focusing on expected paths for unwinding extraordinary monetary policy measures deployed by the central banks around the world. Their benchmark scenario references interest rates increases of 2.25% for longer maturities and the adverse scenario a 3.75% rates hikes. Were the benchmark scenario to play out, mortgages rates can jump by over 2 percentage points on today's rates, before the increases that would be required for capital supports.

For mortgages of 2003-2007 vintage a return to historical levels of ECB rates combined with higher lending margins will spell a disaster.

Put simply, anyone who thinks the worst is now behind us should heed the warning: wealth destruction wrecked by the property bubble collapse is yet to run its full course.

The ESRI report doesn't tell us much about the expected effects of the crisis on our youngest working-age cohorts of 18-25 year olds. Truth is they too count as Ireland's Lost Generation.

Lower incomes and higher debt burdens of the 30-50 year-olds will translate into longer working careers and less secure retirement. For the younger generations, this means fewer promotional opportunities and reduced life-time earnings in the future, as well as higher tax burden to care for the under-pensioned older generation. The disruption and delays in access to career-building early jobs will also cost dearly. Many of today’s graduates of the universities with professional degrees and skills face rapid depreciation of their earnings when they delay entry into the professions.

Our economy’s re-orientation toward ICT services is an additional risk factor. Recent research points to an alarmingly high rate of skills depreciation in ICT services sectors, with declining employability of those in late 30s and early 40s compared to their younger counterparts. Likewise, worldwide and in Ireland, the earnings premium, even adjusting for the risk of unemployment, associated with education is now much smaller than in the late 1990s - early 2000s.

In short, today's young face lower life-time real earnings, higher life-time burden of taxation and dramatically reduced value of intergenerational wealth transfers (or put simply -inheritance).

The ESRI attributes younger households' aggressive cuts in consumption during the crisis to the bottlenecks in credit supply, parrot-like mimicking the Government assertion that if only the banks were lending again, things will miraculously return to normal. The reality on the ground is different. Irish society has been hit by a series of inter-related crises that not only reduced credit supply to younger households, but made household balance sheets insolvent by a combination of high debt, reduced life-time disposable incomes and wiping out middle and upper-middle classes wealth.

The only solution to these crises is to help repair households' balance sheets by helping them to deleverage their debts faster and a lower cost. This can be achieved solely by lowering tax burden on the households and aggressively writing down unsustainable levels of debt. Like it or not, were the banks to start lending tomorrow, even ignoring the fact that the cost of credit is only going to climb up in the future, the impact this will have on the economy and Irish households will be negligible.

Two successive Irish Governments have spent over 5 years throwing scarce resources on repairing the banks. It is time to realize that doing more of the same and expecting a different outcome is not bright policy to pursue. It is time to focus on what matters most in any economy – people.

Box-out:

This week, the IMF published its Article IV assessment of Malta’s economic conditions. The study expresses one major concern about the risks faced by the Maltese economy in the near future that is salient to the case of Ireland, yet remains unvoiced in the case of our assessments by the Fund. Quoting from the release: "In the longer term, regulatory and tax reform at the European or global level could erode Malta’s competitiveness. The Maltese economy, including the financial sector and other niche services, has greatly benefitted from a business-friendly tax regime. Greater fiscal integration of EU member states and potential harmonization of tax rates could erode some of these benefits, with consequences on employment, output, and fiscal revenues."

Ireland is a much more aggressively reliant on tax arbitrage than Malta to sustain its economic model and has been doing so for far longer than Malta. Both, our modern manufacturing and traded services sectors are virtually captive to the foreign multinationals reliant on tax arbitrage opportunities to domicile here. Yet, neither the IMF, nor any other member of the Troika seem to be concerned about the prospect of tax reforms in Europe and elsewhere in the context of Irish economy. May this be because the elephant in the room (our reliance on tax arbitrage) is simply too large to voice in the open?

17/5/2013: Welcome to Surreal Irish National Accounts

A significant, but only because it is now 'official', confirmation that Ireland's GDP and GNP figures are vastly over-exaggerated by the distorting presence of some MNCs in Ireland has finally arrived to the pages of FT: http://www.ft.com/intl/cms/s/0/eb114bda-be3f-11e2-9b27-00144feab7de.html#axzz2TYJudjwo

As one of those who said this time and again, starting with my work in the Open Republic Institute in 2001 and through today, I am grateful to Jamie Smyth for pointing this out.

The ESRI, which - being tasked directly with doing research on Irish economy and being paid for doing such research - has slept through the years of boom as the Government wasted resources in chasing imaginary investment/GDP and spending/GDP targets. After years of the Social partnership bulls**t, we only now, driven into desperation by necessity of the crisis, are beginning to face the reality that we are poorer than our GDP and GNP levels actually imply.

I take heart that all those who never once before voiced their concern about the distorting nature of our MNCs-dependent economic variables are now quoted in the FT voicing that concern. Since the beginning of the crisis I put forward consistently a three-points position countering Ireland's official sustainability analysis when it comes the economy being able to sustain current levels of Government debt:

1. Despite all the focus in Irish and international media and official circles, it is the total economic debt mountain (household, government and non-financial corporate debts) that matters in determining sustainability of our economic development;
2. Irish economy's capacity to carry the above debt burden is determined not by GDP, but by something closer to an average of GNP and Total Domestic Demand which, in 2012, stood at 81.54 and 75.21% of our official GDP.
3. Irish exports growth is now becoming decoupled from the real economy as it is primarily driven by services exports which are dominated by a handful of tax arbitrage plays with little real connection to value added generated in this country.

The ESRI note cited in FT - detailed and well-research as it is - only scratches the surface of tax arbitrage effects on our official statistics. 

The note is available here: http://www.esri.ie/UserFiles/publications/RN20130102.pdf