17/4/15: Pies in the skies & Irish exports: Jan-Feb 2015

Some interesting numbers on trade in goods for Ireland. As you know, I usually update these series on a quarterly basis - in part due to data volatility, in part due to lack of time. But there is something interesting afoot in the data, so here it is for the first two months of 2015 - subject to future verification of any trend.

Total imports of goods stood at EUR4.563 billion in February 2015, up 11.9% year-on-year, having risen 5.1% y/y in January. This means imports over the first two months of 2015 are up 8.3% y/y. February annual rate of growth in imports was the highest in 9 months.

Meanwhile, exports of goods and services shot to EUR7.937 billion in February, up 16.9% y/y, having posted an increase of 14.2% in January. Again, over the first two months of 2015, exports rose 15.5% y/y.

Trade balance at the end of February stood at EUR3.374 billion, up 24.3% y/y, after posting a 31.4% rise in January. Over January-February 2015, cumulated trade balance is up a whooping 27.7% y/y, and for the December-February 3 months period it is up 31.7% y/y.

These are bizarre and, frankly, unbelievable numbers. Last time we have seen this level of volatility in trade balance to the upside was in August 2012 (for one month only and then, nothing comparable to 41.1% y/y increase registered in December, 31.4% rise in January and 24.3% rise in February).

So something is brewing in the external trade stats. Last year, we had a runaway performance in the National Accounts-registered external trade numbers without having a corresponding rise in the customs reported figures, which was down to 'contract manufacturing' scheme (or whatever you want to call this accounting trick). This time around, either the said scheme is now also polluting our customs trade data or something new is afoot.

The 'new' bit appears to be the 'old' bit - look at the sources of growth in our trade:

and in our trade balance:

In simple terms, ex-Chemicals (pharma), our exports since the start of 2009. Pharma / Chemicals exports are up. Our trade balance in goods, ex-Chemicals is negative. That is right - negative (some 'exporting nation' we are) and pharma trade surplus is vast and on the rise again.

Let's take a slightly more detailed decomposition of movements in trade volumes, cumulated over the last 3 months (December 2014 - February 2015). What do we have?

• Imports of all goods ex-chemical sectors rose 6 percent year on year, or EUR561mln. Exports of same rose 8 percent or EUR683.6 million. So trade deficit here shrunk by EUR122 million y/y - a good result, but accounting for only 5 percent of the entire gain in trade surplus over the same period across the economy.
• Imports of chemicals and related products (pharma in broad sense) were up EUR423.4mln or 16% y/y, but exports of same rose EUR2.592 billion or 22% y/y. Trade balance here rose by EUR2.169 billion.
• So 95% of the trade balance gains in December- February 2015 was down to the category known as Chemicals and related products, n.e.s. (5) and only 5% of the gains were down to the rest of the entire goods-related economy.

And guess what: the 'old' news is truly 'old': the ratio of exports to imports in the economy excluding chemicals sector is falling - steadily, since at least 1995. Meanwhile, the ratio of exports to imports in the chemicals sector, having fallen on foot of patent cliff in 2009-2013 is now rising once again since Q1 2014. Purely as a coincidence, Q1 2014 is when the bogus exports from the 'contract manufacturing' schemes started showing up in the official national accounts data.

Incidentally, the above also explains the miracle of Irish productivity - the massive 'improvements' of which in recent years is nothing more than a pharma (and few other MNCs-dominated sectors, some not included in the goods data and polluting our services data instead) rebalancing into new tax optimisation schemes, post-patent ones.

Welcome to the land where sand castles are sold to visitors as 'de real ting' and pies in the skies are served for desert...

26/8/2014: On that 'tax optimising' shift in Pharma Sector

To clarify my previous comment (see post: http://trueeconomics.blogspot.ie/2014/08/2682014-irish-trade-in-goods-h1-2014.html), here is the chart showing 6mo cumulative evolution of the ratio of exports to imports for pharma and pharma-related sectors:

You can see the three recent trends in exports ratio to imports ratios:

1. Based on purple line, there is one regime operating through H1 2008 - with shallow decline in ratio of exports to imports roughly from H2 2002 through H1 2008 pointing to relative rise of imports in overall trade. This is the consumption and construction boom. In H2 2008 we have a sharp rise in exports/imports ratio peaking at H2 2010: the period of collapsed imports relative to exports. Thereafter we have a decline in the ratio.
2. Based on Organic Chemicals (blue line) and Other chemical products (green line) we have two regimes: between H1 2004-H1 2005 and H2 2008 the two lines are broadly counter-moving. Red line includes some of the inputs into the blue line, but also domestic consumption component. This does not directly imply, but can indicate, rising amount of imports of inputs and rising (even faster) amount of outputs in the pharma sector. The evidence is weak, so not to over-draw any conclusions, it should be qualified. The second period - post H2 2006 through H1-H2 2009 we have a flattening and then peaking in exports of pharma relative to imports of pharma inputs. This is aggressive booking of profits (margin between exports and imports).
3. After H1-H2 2009 we have rapid decline in the ratio of exports to imports in pharma sector itself, and more gentle decline in related sectors. This, with caveats once again, can signal re-balancing of tax and operational efficiencies away from Ireland being a profit-booking centre to Ireland becoming a cost-booking centre.

There are many various schemes for optimising tax exposures for pharma firms, as well as other MNCs. Based on the aggregate data, it is virtually impossible to tell, which one is operating across the entire sector. But one thing is very clear from the above data - value added in the broader Organic Chemicals sector is collapsing. Worse, it is collapsing at a faster rate between H2 2013 and H1 2014 than in any period since H1 2009. It would have been good if the CSO were to publish more detailed data on this and produce an in-depth study. Somehow, I doubt they can and/or will, however.

26/8/2014: Irish Trade in Goods: H1 2014 results

Time to update H1 results for Irish external trade in goods. As a note: CSO does not provide any information on trade in services except as a part of quarterly national accounts.

Irish exports of goods in H1 2014 stood at EUR44.096 billion, down 0.54% on H2 2014 and up 1.45% y/y. Compared to 3 years average, exports are down 2.27%.

Compared to other H1 records, H1 2014 is up on H1 2013, but down on H1 2011 and 2012. Current reading is slightly behind EUR44.142 billion average H1 reading for 2000-2014 period and well below EUR45.077 billion H1 average for 2009-present.

Irish imports of goods rose in H1 2014 to EUR26.189 billion an increase of 7.8% on H2 2013 and a rise of 5.96% y/y. Imports are now up 7.28% on 3 year average and are at their highest level since H2 2008.

As the result of these trends, Trade surplus (for goods trade alone) has fallen to EUR17.907 billion, down 10.65% on H2 2013 and down 4.49% y/y. Compared to 3 year average, trade surplus is down 13.53%. H1 2014 trade surplus now stands at its lowest level in 6 years.

Charts below illustrate the above trends.

As profit-taking in the pharma and chemicals sectors is shifting toward tax optimisation based on off-shoring (as opposed to booking profits into Ireland), ratio of exports to imports continues to fall from the pre-patents-cliff peak:

Chart to illustrate:

However, a welcome sign of return to growth in exports in H1 2014 compared to H1 2013 means that our trade in goods regime is now out of the 'Pain Spot' of simultaneously shrinking trade balance and contracting exports that it occupied in 2010, 2012 and 2013. Down to continued decline in trade surplus, however, it is still not in the 'Sweet Spot' of exports-led recovery:

So overall, trade in merchandise is providing negative contribution to GDP growth y/y so far in 2014. Let's hope H2 will reverse this.

15/7/2013: Current Account Q1 2013: Extreme Imbalances in the Irish Economy

CSO recently released Balance of Payments stats for Q1 2013 - you can read the main headlines and see underlying data here.

Current account data is of more interest from my point of view. And it shows some changes both at a trend and at shorter-term levels, as well as the extremes of skewness in Irish economic activity in favour of the MNCs-dominated Financial and ICT services.

Let's run through the credit side (exports from Ireland) of the CA first.

Aggregate levels of exports (goods and services):

• Aggregate level (goods and services) exports run at EUR55.657bn in Q1 2013, down on EUR60.295bn in Q4 2012 and down on EUR58.034bn in Q1 2012. This marked the level of exports comparable to Q1 2011 (EUR55.570bn) before we adjust for inflation.
• Aggregate exports were dow 7.69% q/q in Q1 2013, having posted an increase of 1.22% q/q in Q4 2012. The rate of decline was 4.1% y/y compared to 2.19% rise in y/y figure for Q4 2012. 
• Current level of quarterly exports is down 12.03% on peak.
• Cumulated exports of goods and services for last 6 months were down 3.87% on previous 6 months and down 0.93% y/y. Last 12 months cumulated exports (12 months through March 2013) were still up 2.21% y/y. 

Chart above clearly shows the downward shift in the shorter-term trend from the peak of Q2 2012. The chart also shows that prior to the Q2 2012, from Q3 2009, rate of increase in overall exports was slower than in the period of Q1 2005-Q4 2007. This suggests that the 'exports-led recovery' of 2010-2011 was not rapid enough to compare with the previous periods of strong exports growth, such as Q1 1998-Q4 2000, and Q1 2005-Q4 2007. Instead, the rate of growth in exports was closer to that attained in Q1 2003 - Q4 2004 - the period coincident with growth post-collapse of the dot.com bubble.

Breakdown between goods and services exports:

• Credit on goods side (exports) shrunk 3.82% q/q in Q4 2012 and this was followed by the decline of 4.83% in Q1 2013. Y/y exports of goods were down 9.21% in Q1 2013, after posting a y/y increase of 0.52% in Q4 2012. Credit on goods side of the Current Account was down 18.16% on peak in Q1 2013. 
• Longer term series for credit on goods side were down 7.12% in current 6 months cumulative basis compared to previous 6 months period and y/y last 6 months cumulated credit on goods side was down 4.47%. Over the last 12 months (through March 2013) cumulated credit on merchandise side was down 1.74%.
• On services side of credit in current account, q/q rise of 4.65% in Q4 2012 was followed by a decline of 8.66% q/q in Q1 2013. Y/y changes are more solid: +8.90% in Q4 2012, slower at +2.68% in Q1 2013. Current levels are 8.66% below peak.
• Longer term trend for Services shows current 6 months cumulated services credits down 0.74% on previous 6 months - bad news. Good news, current 6 months cumulated credit up 5.84% y/y. 12 months cumulated credit through March 2013 is still solidly up 8.75% y/y.

On trends side: chart above shows worrying shorter-term changes downward in merchandise credit, from a gently up-sloping trend established in and contraction in Q4 2009, and a sharp short-term decline on robustly upward trend in services.

Breakdown in the core MNCs-driven services credits is in the following chart:

Balance side:

• Merchandise balance has deteriorated at an accelerated rate in Q1 2013. Net balance in Q1 2013 stood at EUR7.458 billion surplus, down from EUR8.616 billion in Q4 2012 and EUR8.401 billion in Q1 2012. Overall, this is the lowest Q1 balance on merchandise side since the disastrous Q1 2008.
• On Services, side, balance rose to EUR754 million in Q1 2013 from EUR238 million in Q4 2012 and is up on EUR178 million recorded in Q1 2012. Q1 2013 balance marked the third highest balance in the series, but the balance is rather sluggish compared to previous two top performing quarters (Q2 and Q3 2012).

• Overall balance is at EUR1.197 billion in Q1 2013, down on EUR2.895 billion in Q4 2012 and up on deficit of EUR704 million in Q1 2012. Good news is: Q1 2013 marked the 7th strongest quarterly balance on current account side of all quarters since Q1 1998, and the strongest first quarter of any year since Q1 1998.

 Chart below shows breakdown in balance contributions by key MNCs-driven services sector:

The chart above underpins the extremely skewed distribution of source of the current account balance. Taking three sources of the balance attributable to MNCs-driven trade in services: Financial Services, Computer Services, net of Royalties and licenses payments, the three sources of balance accounted for 21.5% of all credits recorded on the credit side of the Current Account, but 190% of the total balance. In other words, even when we factor out net outflows of funds to cover licenses and royalties, the resulting balance on two sub-sectors of ICT and financial services stood at EUR2.271 billion which is almost double the total current account surplus of EUR1.197billion recorded across the entire economy.