13/7/15: About That Europe's Recovery Party

Last week, IMF published its WEO update for July. Little to go by in the general 'news' terms, but a telling sign of just how well repaired the world economy is becoming.

First, off the top, IMF dropped its forecast for global growth for 2015 from 3.5% in April 2015 to 3.3% in July. 2016 outlook remains unchanged at 3.8%. Given IMF estimates 2013-2014 growth at 3.4% each year, this means that 2015 is now expected to be sub-average for the three years period - hardly a sign of an improvement.

When considered by broader regions, Advanced Economies drove deterioration in the outlook. 2015 growth in advanced economies is now projected to be around 2.1%, down on 2.4% projection back in April. 2016 outlook is unchanged at 2.4%. Meanwhile, Emerging Markets and Developing Economies growth forecast has deteriorated from 4.3% in 2015 projected back in April, to 4.2% in July update. 2016 outlook remains the same at 4.7% projected growth rate.

IMF lauded the return to growth in the Euro area, which is supposedly booming - forecast to expand at 1.5% in 2015 (July outlook), same as in April outlook. And the Fund produced a doozer of an uplift to 2016 forecast growth - from 1.6% expected back in April to 1.7% expected in July update. Meanwhile, the U.S. economy got severely downgraded to 2.5% forecast expansion for 2015 (against 3.1% forecast back in April) and to 3.0% expansion forecast for 2016 (against 3.1% forecast back in April).

You can't make this up: the return to growth in Europe is still full-blown 40 percent lower growth than in wobbling U.S. Just in case you wondered: over 2013-2015, according to the latest forecast from the Fund,

• U.S. economy will expand, cumulatively, by 5.39%
• Euro area economy will grow by 1.91%
• Japan will grow by 2.31%
• UK will expand by 7.16%, and
• Other Advanced Economies group will grow by 7.90%.

Yes, that's right - Euro area will under-perform Japan, the heroes of 'blanket QE bombing' of the economy. 

Economics 27/11/2009: Euro area data signals near 2% growth in November

Updated

Eurocoin - a leading barometer of future economic activity in the Eurozone - increased to 0.55 in November, the third positive reading in a row up from 0.33 in October. The reading points to an underlying growth in the Euro area of slightly above 2% on a annual basis. Gains have been led by consumer and business confidence as the main drivers, the stock market and industrial production contributed to a lesser extent. We are now back to H2 2007 level in Eurocoin reading.

So here is the forecast, as promised:
Notice that my forecast assumes ca 1.1% growth q-o-q in Q4 2009 and a dip to ca 0.3-0.4% in January 2010. Not a W, but a moderation nonetheless, driven primarily by what I believe will be a very weak Christmas season across Europe. In Ireland, as always there is an issue of extreme volatility in growth, but I will be watching Christmas sales for signs of serious weakness - there is a distinct possibility of large shut downs on retail and restaurants trade side the other side of holidays into January. Let's hope I am wrong (and I have been wrong in the past - my previous forecast for Q3 2009 Euro area growth was -0.5-1% and it came out at a 0.8 percentage points swing from my closer end of the estimate).

On a less economic side of news:

EU Commissioner for Internal markets for the next 5 years will be one French MEP Michel Barnier. Barnier will take portfolio with responsibilities for financial services. Barnier had so far distinguished himself as trade protectionist with strong opposition to the so-called 'Anglo-Saxon' model of economic development. That is to say he is firmly in favor of rules-based regulation of financial services. This is a net negative development, as currently Brussels is in the process of drafting a massive volume of regulations relating to financial services and such a process of reform requires a very balanced and sector-specific approach. Barnier is hardly fulfilling such a description. On July 28 this year, Le Monde (Barnier's home paper) described the possible appointment of Barnier to the Internal Markets portfolio as equivalent to "entrusting the surveillance of a chicken coop to a fox".

Why a chicken coop & fox analogy? Not because Le Monde is that much concerned over Barnier's credentials as over-regulation driven finance tsar, but because Barnier will be running financial sector across the EU at the time when President Sarkozy has a clearly defined (and publicly expressed) objective to make Paris a bigger financial services centre than London. It will be interesting to see how the battle between Barnier-the-European-Federalist and Barnier-the-French-Politico will be unfolding.

Forbes reports (here): "One former official who worked with Barnier said: 'He has always been very close to the French conservatives. He was close to Chirac and now he is close to Sarkozy. He will know that he is in that position thanks to Sarkozy.'"

If there is any more to add here it is that Barnier was Minister for Agriculture in France between 2007 and 2009 - a post that saw him preside over the most subsidised, most protected and least 'common market' of all sectors in Europe in a country that holds second place only to Ireland in per-farmer subsidies. He now will oversee the most mobile and least protected sector across the EU. Spot the irony...


And since we are on news digest - here is the story that caught my eye. This goes to heart of the debate as to what makes a state a pariah state. After all, Soviet Union used in place its Nobel Prize winners into exile or under house arrest in a remote city closed-off to the rest of the world, it even forced one to turn down his Nobel Prize, but stealing it away from a person? New low for the state that the West is courting with bouts of friendly rhetoric. And what an irony for the Nobel Peace Prize Committee, which awarded President Obama's prize this year in part for his renewing dialogues with rogue states like... Iran (here)...

Economics 03/08/2009: Lessons from Roubini for NAMA, Euro area GDP, Wages Falling in Ireland

NAMA has dominated newsflow in this country and on this blog. But the world around us still evolves to the laws that ignore the existence of the Senile Trio of Brian+Brian+Mary. So to recognize this - few housekeeping items that built up over the week.

First, the Eurocoin is out and it is time to update my Euroarea GDP projections. Chart below summarizes.Main features to note:

• Eurocoin improved in July, for the 5th month in a row;
• My forecast for Eurocoin to move in August and September marginally down from its current -0.42 position to -0.44-0.45 and stay there through September/October, awaiting a decisive move (either up or down - a 50:50 chance from this point in time) for either an W-shaped recession or something with a single (albeir of unknown duration) bottom;
• My forecast for June and July Euro coin came in relatively well -0.52 as opposed to Eurocoin measured -0.61 to -0.42. Bang-on in the middle.

Nouriel Roubini’s RGE Monitor also expects “the cyclical recovery in the eurozone [to be led by Germany and France and] to lag recovery in the US, the BRICs and non-Central and Eastern Europe (CEE) emerging markets”. This is relatively consistent with my expectation for Eurozne to bottom out in the sub0cycle around November-December 2009. Assuming there is no double dip. “Among the main factors muting Europe’s recovery in 2010 are a permanent decline in potential output; unwinding pressures of large internal imbalances leading to deflationary pressures; a more restricted monetary and fiscal policy response compared to the U.S. and especially to China; a leveraged financial sector with too-big-to-fail institutions and too-big-to-save features; and a strong reliance on bank funding by the corporate sector subject to a larger financing gap than that seen in the US.”

There are interesting NAMA-related bits in Roubini’s forecasts: “In order not to impair the banking sector’s lending ability permanently, a quick disposal of bad assets is warranted. Lending to the private sector is slowing quickly, and for small and medium sized enterprises with no access to capital markets, bank credit lines represent the only recourse for liquidity. Based on IMF and ECB estimates, total bank losses in the eurozone will amount to between $650 billion and $900 billion, implying substantial additional recapitalization costs.” So two things jump out:

1. NAMA is going to draw down ca €90bn of taxpayers funds to repair, hmmm €90bn in banks bad debts. Across the entire Eurozone, a 7% Tier 1 capital requirement against the backdrop of $650-900bn in total banks losses expected by Roubini will require (RWA inclusive) around €52-73bn in recapitalization costs – €37-51bn. The idiocy of NAMA is that we will spend more in recapitalizing our puny banking system than would be required to support the entire Eurzone! This shows why the IMF (see here) thinks that direct equity take over by injecting capital into the banks works more efficiently than what NAMA is proposing to do.
2. The second point of relevance to NAMA is that of speed of repairs. Roubini is clear that time is of essence. Of course, our Brian+Brian+Mary squad has sat on their hands for over a year now, doing preciously little other than panic-driven measures (blanket guarantees, rash recpaitalizations without proper equity transfers, nationalization of the dodgiest bank possible, followed by another rash recapitalization round, NAMA announcement, the extension of the guarantees…) But even more interesting is the fact that even if everything goes as planned by our Triumvirate, NAMA repairs will not bite in until January 2010 – 29 months after the crisis in the global financial markets started to unfold and 17 months after this Government bothered to recognize the reality of the challenges we face. If that is ‘a quick disposal of bad assets’ that ‘is warranted’ per Roubini, God help us.
   

In the mean time, ISME survey (2,000 firms participating) last week showed new rounds of wage cuts unfolding in Irish SMEs. main highlights are:

• 94% of SMEs have introduced pay cuts / freeze since the start of the year, 45% have introduced a pay cut, with 49% implementing pay freezes. Only 6% paid some wage increases;
  
• 50% of the companies cut working hours;
  
• Average pay cut was so far 13%;
• 26% of companies are still planning fresh redundancies in the next 3 months (August-October).

Summary tables (both courtesy of ISME):
Jack O'Connor of SIPTU was not available for a comment on these.

Economics 26/06/2009: EU growth, Planning Permissions & QNHS

Eurocoin is out again and it is time to update our forecasts for Euroarea growth. First a note - Eurocoin have revised their past numbers in line with new methodology.
Note that above I use upper range forecast for July Eurocoin of -0.52 and implied GDP growth forecast of -2.1% for Q2 2009. Lower range forecast for the indicator is -0.91 and for GDP growth of -2.5%. Thus, I see an even chance of renewed deterioration in growth conditions in the Euroarea into mid Summer.


CSO Planning Permissions data Q1 2009: planning permissions were granted for 14,177 dwelling units, compared with 18,582 units for the same period in 2008, a decrease of 23.7%. Planning Permissions were granted for 10,256 houses in Q1 2009 and 13,301 a year earlier, a decrease of 22.9%. Planning permissions were granted for 3,921 apartment units,
compared with 5,281 units for the same period in 2008, down 25.8%. One-off houses accounted for 19.3% of all new dwelling units granted planning permission in this quarter. The total number of planning permissions granted for all developments was 7,486. This compares with 11,055 in Q1 2008, a decrease of 32.3%. Total floor area planned was 3,419 thousand sq. metres in Q1 2009. Of this, 61.1% was for new dwellings, 25.4% for other new constructions and 13.4% for extensions. The total floor area planned decreased by 24.3% in comparison with the same quarter of 2008.

Illustrated:
Total annual permissions are down, Q1 permissions trending down as well, especially for dwellings.Total floor area down, but by less.
As average floor area per unit is rising along established trends - delivering value for money is tighter markets?The trend for better quality and smaller quantity is evident, which should improve performance for better builders, but pressure the profit margins. One area of concern is that the authorities are not granting higher density permissions, implying that per existent acre of site, cost of building is up, further reducing margins.
Track homes are not exactly popular, while
one-off houses are even less so. That said - square footage is also rising for one-off dwellings as, presumably, rural Ireland decided to spread out in the recession (those CAP payments are still rolling in?).
No such luck for apartments buyers, but they do have some nicer square footage to go by, as sales stagnated and developers need more goodies for money to close on new units. We can expect Ken 'The Merciless' MacDonald to start writing lengthy articles telling us that NOW IS THE TIME TO BUY one of his apartments, as RETURN OF CAPITAL APPRECIATION IS IMMINENT... Beware of the merchant...


Quarterly National Household Survey was out earlier in the week.

In Q1 2009 there were 1,965,600 persons in employment, an annual decrease of 158,500 or 7.5%. This compares with an annual decrease in employment of 3.9% in Q4 2008 and growth of 1.7% in the year to Q1 2008. There was an annual decrease of 122,200 or 10.2% in the number of men in employment, while the number of women in employment decreased by 36,300 or 3.9%.

The overall employment rate among persons aged 15-64 fell to 63.2%, down from 68.4% in Q1 2008. This brings the employment rate back to a level comparable to that recorded in Q1 1999, thus erasing all the demographic and migration benefits accruing to Ireland in the last 10 years.

Full-time employment decreased by 176,200 over the year, part-time employment increased by 17,700, with 14,700 of the increase attributable to males and 2,900 to females. Recalling that even before the current crisis Ireland was creating predominantly part-time jobs, we are now facing seriously adverse quality of employment conditions in the country.

There were 222,800 persons unemployed in Q1 2009, an increase of 113,400 (+103.7%) in the year. Male unemployment increased by 85,300 (+116.7%), with the number of unemployed females increasing by 28,200 (+77.7%). The seasonally adjusted unemployment rate increased from 8.1% to 10.2% over the quarter and from 4.9% over the year - the highest level since 1997. Seasonally adjusted, the male and female unemployment rates stood at 12.5% and 7.0% respectively. The long-term unemployment rate was 2.2% in Q1 2009 compared to a rate of 1.3% in Q1 2008.

Now, some illustrations:
Employment is folding everywhere, except for personal protection services. wait another few months and a new emergency rip-off Budget, and guarding our unpopular Government will be the boom sector...
Average hours worked down, short-term work up, contractors work down. And in more details:
Bad employment up, good employment down. But public sector is not feeling the heat:

Regionally - all the subsidies to waste, the same black spots of unemployment remain:Border, Midlands, Mid-West and South-East are all bad performers in unemployment terms in the boom days of 2007. Ditto today. A new entry - casualty of the downturn - is the West. Doubtless, there will be calls for new tax on Dublin to pay welfare rolls wages out in our Gateways to Excellence Regions... But look at participation rates:
Collapsing across the state. Note Border and Midlands - dramatic fold down in participation rates - driven by, most likely an exodus of younger workers from Dublin and other areas' construction sites... No wonder I heard Midlands referred to as our Little Poland (Lithuania, etc).

And finally - my favourite topic - demographic dividend...
Note that as of Q1 2009, unemployment rate among 15-19 yo males was 33%! We are indeed wasting our young to protect job security of our public sector middle-aged and elderly...