21/4/2014: Exports-led recovery? Not that promising so far...

Regular readers of this blog know that since the beginning of the crisis, I have been sceptical about the Government-pushed proposition that exports led recovery can be sufficient to lift Ireland out of the current crises-induced stagnation.

Over the recent years I have put forward a number of arguments as to why this proposition is faulty, including:

1. A weakening link between our GDP, GNP and national income,
2. A worrisome demographic trend that is structurally leading to lower labour markets participation, alongside the renewed emigration,
3. Structural weaknesses in the economy left ravaged by some 15 years if not more of bubbles-driven growth,
4. Taxation and state policy structures that favor old modes of economic development and which are incompatible with high value-added entrepreneurship, employment creation and growth, 
5. Substitution away from more real economy-linked goods exports in favor of the superficially inflated exports of services in the ICT and international financial services sectors, etc

But the dynamics of our exports are also not encouraging. 

Here's a summary of some trends in Irish exports since 1930s, all expressed in relation to nominal value of merchandise trade (omitting effects of inflation). Based on 5-year cumulative trade volumes (summing up annual trade volumes over 5 year periods):

• Irish exports grew 147.8% in 1980-1984 and 86.7% in 1985-1989 - during the 1980s recession. This did not lift Irish economy out of the crisis, then.
• Irish exports grew 56.3% in 1990-1994 period and 56.4% in 1995-1999 period. Thus, slower  rate of growth in exports during the 1990s than in the 1980s accompanied growth in the 1990s. This hardly presents a strong case for an 'exports-led recovery'.
• Irish exports expanded cumulatively 148.0% in 2000-2004, before shrinking by 0.4% in 2005-2009 period and is expected to grow at 4.6% cumulatively in 2010-2014 (using 2010-2012 data available to project trend to 2014). 

The last point above presents a problem for the Government thesis on exports-led recovery: the rates of growth in merchandise exports currently expected to prevail over 2010-2014 period are nowhere near either the 1980s crisis-period rates of growth or 1990s Celtic Tiger period rates of growth.

Ok, but what about trade surplus? Recall, trade surplus feeds directly into current account which, some believe almost religious, is the only thing that matters in determining the economy's ability to recover from debt-linked crises. Again, here are the facts:

• During the 1980-1984 Ireland run trade deficit that on a cumulative basis amounted to EUR5,969mln. This gave way to a cumulated surplus of EUR8,938mln in 1985-1989 period. So attaining a relatively strong trade surplus did not lift Irish economy from the crisis of the 1980s.
• In Celtic Tiger era, during 1990-1994 period, cumulated surpluses rose at a robust rate of 155.7% on previous 5 year period, and this increase was followed by a further improvement of 113.9% in 1995-1999 period. 
• During Celtic Garfield stage, in 2000-2004 period Irish trade surplus increased by a cumulative 245.4%. However, in 2005-2009 period trade surplus shrunk 10.9% cumulatively on previous 5 years. Based on data through 2012, projected cumulated growth in trade surplus (recall, this is merchandise trade only) grew by 43.6%.

Again, trade surplus growth is strong, currently, but it is nowhere near being as strong as in the 1990s. Worse, current rate of growth in trade surplus is well below the rate of growth attained in the 1980s.

Charts to illustrate:

Oh, and do note in the above chart the inverse relationship between the ratio of merchandise exports to imports (that kept rising during the Celtic Tiger and Garfield periods as per trend) and the downward trend in exports growth. 

05/01/2011: Exchequer returns - part 1

So the Exchequer returns are out and I will blog on these in detail over the next couple of days with in-depth annual data analysis. In the mean time, let's take a quick look at the official statement. Couple of things - other than headline figures - come to the forefront:
1) Minister Lenihan statement, and
2) Nama news

First, Minister statement (emphasis and commentary are mine):
"On the spending side, overall net voted expenditure at €46.4 billion was over €700 million below the level recorded in 2009, reflecting the ongoing tight control of public spending. While day-to-day spending was marginally ahead of target in the year, this is due to a shortfall in Departmental receipts rather than overruns in spending.

[In fact, DofF data shows that overall spending savings this year relative to 2009 were €729mln, consisting of a cut of €990mln on capital spending side and an overspend of €261mln on current spending side. This, by any possible means, does not constitute any real 'tight control' over public spending. In fact, the net savings achieved in 2010 on 2009 amount to 0.463% of GDP. Given the Government is aiming to cut some 7% off 2014 GDP in deficit reductions through 2014, this means that at the pace of 2010 'tight control' savings, Minister Lenihan's budgetary measures can be expected to deliver 3% deficit in 20.1 years or by 2031, not by 2014.

Or let my suggest the following arithmetic Minister Lenihan should have engaged in in judging his own performance (remember, 'tight control' is something he was supposed to deliver over the last 3 years and 4 Budgets): if we take an increase from the average bond yields of 2009 to the average bond yields of 2010,

• In the course of 2010, the interest cost of financing our 2010 deficit, rose by ca €750mln;
• In the course of 2010, Minister Lenihan achieved net savings of €729mln
• Conclusion: Minister Lenihan's 'tight control' doesn't even cover the rising interest rate bill on our deficits, let alone our debt!]
  

... The Government has consistently identified export-led growth as the strategy that will return this economy to growth and generate jobs. This strategy is working thanks to the improvement of competitiveness, and the flexibility and adaptability of the Irish economy. Exports in 2010 were at an all time high and represented growth of 6.2% on 2009. This strong performance was particularly positive in the manufacturing and agri-food sectors.

[So Minister Lenihan has 'identified' export-led growth as the strategy to deliver on 2014 fiscal targets. This is true. Achieving 3% deficit in 2014, per Government own white paper for 2011-2014 (I refuse to call this fiction a National Recovery Plan), will require creation of 300,000 exporting jobs. Now, using past historical data, creation of 300,000 exporting jobs in 4 years will require a 50% increase in overall exports, implying an annual average growth rate in exports of ca 10.8%. Every year, folks. Not 6.2% achieved in 2010 that delivered historically high levels of exports of €161 billion, but 10.8%. You be the judge how realistic Government's fiction is.]

Now on to Nama-related news.

Cornerturned blog has posted on the change in Nama ownership from 49% State-owned to only around 33% State-owned. This constitutes a public asset give away to private shareholders in Nama SPV - aka 3 Irish banks. Nama is now maximising returns rather than repairing the banking system, this implies that the latest change of ownership structure is indeed a transfer of an asset.

However, even more revealing is the charade that this latest twist in Nama situation reveals. Per latest change, Nama is now owned (67%) by banks, of which one is outright owned by the taxpayer, another has significant taxpayer stake and the third - well, the third will probably also require taxpayer equity injections at certain point in time. Two of these banks have received state aid which was also used to 'invest' in Nama SPV. Hence we have:

1. Taxpayers pay banks to 'invest' in Nama SPV and 'invest' in the SPV directly as well via Exchequer 49% stake;
2. Nama uses taxpayers money to 'repair' the banks;
   
3. Taxpayers write off part of their share in favor of banks which are themselves on life support courtesy of taxpayers funds;
4. Banks - not taxpayers - will reap any potential upside from the SPV.

Which means, really, that in Nama SPV we have an Enron-ized Parmalat - dodgy accounting tricks used to conceal the real nature of ownership leading to a reverse commissariamento disclosed today... Well done, lads.