Economics 01/07/2010: Recovery or a triple dip?

So the recession is over… or it just went into a triple dip… you have a say.

Today’s QNA for Q1 2010 showed a 2.7% increase in real GDP compared with the final quarter of last year. This brings to an end eight consecutive quarters of economic contraction – the longest recession of all advanced economies to date.

What happened? Have you felt that warm wind of spring back in March and decided that it is time for Ireland Inc to start upward march to renewed prosperity?

Err… not really. What did happen was a simple trick: Deflation took out a bite out of the price level adjustment, as nominal GDP grew a fantastically unnoticeable and statistically indifferent from zero 0.0956%. Yes, that’s right, less than one tenth of one percent. Take a snapshot: in Q1 2010, our MNCs-led exporting economy was better off than in Q4 2009 by a whooping €37 million, while our domestic economy shed another €2,199 million. Don't know about you, I feel so much richer today than back in December 2009...

One has to be sarcastic about the Government that needs a massive deflation to generate economic growth. Industry gains - again driven by MNCs manufacturing - are clearly not supported by domestic services and construction.
Oh, and subsidies-reliant sectors - Government and Agriculture - are going relatively strong. Clearly CAP is recession proof - per chart below - with Agriculture up 84% on Q4 2009. Investment continues to compress: capital formation down 14% qoq, and 30% yoy. And that’s gross! Government spending was down a paltry 0.9% qoq or €96 million – a clear slowdown in deficit reduction efforts. Give it a thought, we will be borrowing this year some €17bn - not accounting for banks alone. At the current rate of Government spending contraction, Q1 2010 reductions in public spending (net!) will cover just 10% of our annual interest bill on one year worth of borrowing!
Consumer spending contracted further by 0.2% supported from hitting much greater decline numbers by services spending and, potentially, 2010 registration plates fetish. Remember, total retail sales are down more than 6% in Q1 2010. Added support to consumer spending was winter freeze, which was a boost to the likes of state-owned ESB and Bord Gas – carbon footprint notwithstanding, good news for state monopolized energy sector.

Time for champagne, then? Perhaps not quite vintage variety yet, but some bubbly? I am afraid not.

There’s another trick to the data: Net exports boomed – as we imported fewer things to consume, invest and use in future production, while Ireland-based MNCs booked on massive profits. So massive in fact that net increases in transfers of profits abroad were literally bang on (take few euros) with net increase in our trade balance.

This has to be the fakest ‘recovery’ one can imagine.

Before charts, illustrating the above, few more points. Services exports were particularly strong (good news):

• volume of goods exports rose 2.4% yoy in Q1 2010,
• volume of services exports was up 9.5% yoy.

Services – the Cinderella of our external trade policies – now account for 46% of total exports.

As MNCs-driven economy steamed ahead, domestic economy continued to contract -0.5% in Q1 2010, in qoq terms. Profits expatriation by the MNCs reached €7.9bn in Q1, up from €7.1 in Q4, and GDP/GNP gap widened to over 20% in quarterly terms.

Should things stay on this 'recovery' course, by the end of this year some 26% of our entire economy's output will be stuff that has nothing to do with our economy. That would put us on par with some serious banana republics out there as an offshore centre. And not that I, personally mind. It's just fine that companies book profits via Ireland Inc. The problem is when we, the natives, start believing the hype that our GDP generates.

Seeing much of a recovery anywhere?

And a more detailed look at exports and imports - the causes of our today's celebration:

As I have pointed out many times before, our MNCs need imported components, goods etc in order to generate exports. So as imports fall, two things come to mind:

1. A serious concern that lower imports might reflect slowing down of MNCs-led exporting; and/or
2. A serious concern that our consumers (dependent on imports) are still running away from our retail sector.

You be the judge as to what really goes on, but either way, this is not a good omen. The 'recovery' might be a Pyrrhic victory.

At any rate, you'd need a microscope to notice that we are out of a recession in the chart below:
But you can clearly see what's going on on that side of economy which generates jobs, pays our bills and actually translates into our standards of living (aside from Government stuff, that is):

Welcome to an MNCs-led recovery, then:
If it doesn't feel like much of a boom, then don't listen to anyone saying 'We've finally turned the corner'. Or be warned it might be a dead-end alley, or worse a brick wall...

Economics 13/04/2010: ESRI's latest forecasts for Ireland

ESRI's latest quarterly commentary is coming out today. Here are the core numbers:

• 2010, "expect GNP to be essentially unchanged from its 2009 volume; the corresponding figure for GDP is ½ per cent less than in 2009".
• 2011, "expect GNP to grow by 2¾ per cent and GDP to grow by 2½ per cent. While this return to growth is to be welcomed, it should be seen as a modest pace of growth."

My double take:

• 2910 figures are fine for GDP, a bit optimistic for GNP
• 2011 figures would be above my forecasts of 1.7-1.9% GNP, 2.0-2.2% GDP.

"In spite of the stability in the numbers employed, we expect unemployment to fall between 2010 and 2011, averaging 13¾ per cent in 2010 and 13 per cent in 2011. This expected fall in the rate of unemployment is related in part to expected migratory outflows – 60,000 in the year ending April 2010 and 40,000 in the year ending April 2011. We also expect to see on-going falls in labour force participation."

My view - if we are to have 60K outward migrants in 2010, what would hold the others back in 2011? There will be no prospects for new employment (and ESRI agree) and there will be improved jobs offers abroad (IMF agrees), so why not 80K in 2011 to follow 60K outflowing in 2010?

"In our analysis, we assume that the Government will implement its indicated budgetary package for 2011 where spending cuts and tax increases will amount to €3 billion. When combined with a return to modest growth and the consequent impact on revenues, we expect to see the General Government Deficit falling to 10¾ per cent of GDP in 2011, down from 12 per cent in 2010."

Putting aside the issue of whether this Government has ability to implement planned cuts, 10.75% deficit in 2011 certainly implies that there is no chance of Ireland meeting its obligations to reduce deficit to below 3% of GDP by 2014.

"We note that the recapitalisation needs of the Irish banks are now likely to be at least €33 billion, assuming that the State investment in Anglo Irish Bank ultimately amounts to €22 billion. In terms of net cost to the State, a figure of €25 billion is possible."

Great, folks, €22-27 billion was my estimate of the eventual cost of Nama produced back in the H1 2009. ESRI finally converged to this forecast of mine. Good to note.

Economics 26/03/2010: National output figures

Held back by work, I am only now catching up with data released this week by CSO, so do stay tuned - these pages will be featuring more analysis in days to come.

First, QNA for Q4 2009 came in, putting annual decline in GDP at 7.1% for 2009 and GNP at a whooping 11.3% (per table below):
This is slightly better than my predicted annual declines of GDP to the tune of 7.3% and GNP to 11.5-11.7%. Nonetheless, as CSO admits, these figures mark historical record of declines.

Throughout the year, I have traced the paths for the main QNA series in charts. A picture, after all, is worth a thousand words. So here they are, updated for the latest figures:

The first chart above shows GDP and GNP time series. Two things are apparent from these figures: first, all three series peaked at the same time - in 2007. This is significant for as we shall see below, the same does not hold for growth rates. Second, notice how factor cost-based GDP is showing more mild downward trend than market prices-based GDP measure? This suggests that deflation (market prices change) has been so far much more significant than declines in factor costs. This does not really bode well for our hopes of improving our competitiveness through this cycle.

Next chart shows components of GDP and GNP:
Notice how two state-supported sectors - public sector and agriculture (the latter supported, of course, via CAP) show no signs of a recession? Both are having jolly good time - courtesy of taxpayers (Irish and European). Also, do keep in mind that some of the public sector activities fall into other categories - e.g. transport was probably supported by the semi-state companies and their ability to ignore recession when it comes to hiking prices and charges (DAA is one good example here). So in real terms, private sector activity in each one of these sub-sectors is down by more than the CSO aggregates suggest.

Next chart illustrates another historic record:
The gap between our MNCs-dominated exporting economy and our domestic economy is now at historic highs - reaching 23% in 2009. This means that almost a quarter of what Ireland claims to produce (GDP) is really an accountancy trick and has nothing to do with this country. Of course, for years we have been conditioned to think that we are filthy rich because our GDP is so high. Oh, how deep the fallacy runs.

Now, think about the core metrics of state solvency deployed in international markets. Take our national debt. At current €77.6bn (per NTMA) it officially stands at just 45.6% of our GDP (46.2% if we are to use more time-consistent estimate from Finance Dublin). In the real world, this figure should reflect our real national income, for we can't seriously expect the foreign MNCs to be responsible for Ireland's debt. So the real figure should be 55.5% of GNP. Almost a 10 percentage points spread.

Now, let's take our current position and take a peek into the future. Suppose we take last 6 years' average growth rates for respective series. How long will it take for our various measures of income (bogus GDP and more honest GNP) to bring us back to the prosperity of 2007?
As chart above illustrates, should our MNCs continue racing ahead as they did up until now, happy days will come back to our shores again in 2018. Of course, relying on our domestic (real) economy to chug along as it did in 2003-2009 period means we will be back to 2007 levels of income some time around 2026. Mister Cowen can keep telling us that things have bottomed out and that all will be well once growth returns. Numbers are a bit more honest here.

What else did the QNA release give us that CSO omitted in its release?

Let's take a look at quarterly frequency:
Notice how both GDP and GNP are running close to (but below) 4-quarter moving averages? This is the third time it is happening in the current crisis and every time it is followed by a renewed pull away from the MA line downward. GNP is seemingly poised to cross over in Q1 2010, posting a possible quarterly gain. Of course, this is just a momentum force, which has to be backed by fundamentals. And the fundamentals are still pretty nasty. But there isn't a hope of even a technical rebound indicated in the GDP line. So:

• Will we see a GDP/GNP gap contracting somewhat in Q1 2010 with GDP starting to show much more weakness than GNP?
• Will GNP loose technical momentum building up and renew its downward slide?

Only time will tell, but, here is an interesting snapshot. Remember the latest QNHS? Q4 2009 marked the return of Construction sector to the leading role in driving unemployment higher. This is collaborated by the following figure:
Activity in construction and building sector shows absolutely no willingness to move above the moving average line. If anything, it is still contracting at a massively rapid rate.

Lastly, let me show you an interesting chart on annual rates of change in the GDP/GNP series:
Notice that in contrast with levels in overall activity (the first chart above), growth rates actually peaked in two different years, with 2007 decline in the growth rate of GNP clearly providing a warning signal for the Government that things might be getting slightly unsteady. Coupled with what was going on at the time in the financial markets (remember, the crisis in financial markets started actually in July 2007), that was a warning shot. I recall interpreting it this way in a couple of my columns - back in Business & Finance and in the Sunday Tribune.

I will cover trade figures contained in QNA release in the later post dealing with overall trade issues, so do stay tuned.

Economics 24/09/2009: There used to be a real economy in there...

Enough of Nama, for now. Data from CSO is coming thick.

Initial estimates for the second quarter of 2009 show year on year declines in both GDP (-7.4%) and GNP (-11.6%), with the gap between GDP and GNP widening. Compared with the corresponding quarter of 2008, GDP at constant. Quarter-on-quarter, GDP remained constant in Q2 2009, while GNP slid 0.5%. It is worth recalling that GDP-wise Q1 and Q2 2008 were already negative growth territory, so current ‘stabilization’ comes on top substantial declines taken in 2008.

Predictable sources of declines: consumer spending (down 6.8% yoy), capital investment (down 24.4% in Q2 2009 yoy), net exports are up yoy boosted by MNCs (goods manufacturing) and by collapse in imports. Industry output down 11.3% yoy and within construction sector – 30.8%. Every sector is posting fall-offs.

Incidentally, do tell me there is demand for credit out there that urgent we have to break the back of the entire country to repair it. I can't see one - capital investment tanked, so companies are not in a mood to invest in future capacity (see stocks changes, too), while personal consumption is bouncing at the bottom, every time a little lower. Oh, I get it, if only the banks were issuing new loans, we all can go out, borrow some more dosh to pay for... hmm... Brian Cowen's excesses in spending? But back into non-Nama land:

Q1 2009 annual rate of decline was 13.1%, so Q2 decline looks positively slower at 11.6% when it comes to GNP at constant prices. For GDP these figures were 9.3% and 7.4%. But, of course, one has to remember that Q1 2009 annual changes were against Q1 2008, when both GDP and GNP grew by 0.1%. Q2 2009 changes, however, came on top of 0.4% growth in GDP and 0.6% growth in GNP.

In constant euros, our Q1 2009 GNP, at €35,182mln was comparable to the level of income in Q1 2005 (€35,238mln), while Q2 2009 GNP of €35,175mln was below that recorded in Q2 2005 (€35,862mln).

Gross domestic capital formation has fallen to €7,659mln in Q2 2009 down from €8,217mln in Q1 2009. We are now at the lowest level in capital formation terms since the end of 2002 (as far as these series stretch). Physical change in stocks has totalled -€911mln in Q1 and Q2 2009 the greatest cumulative drop for half-year of any year on record (since the start of 2003).

Two charts below illustrate some less apparent trends:
Services balance is deteriorating as financial and legal services exports are suffering. Of course, our hospitality and tourism exports have fallen off as well, thanks to economically illiterate Budget 2009. This is a point of alarm. Our exports of services are now below those recorded in 2007 in constant prices. Our total exports have fallen 2.5% in Q2 2009 (yoy) – a less deeper cut than in Q1 2009 when total exports contracted 3.0%. Goods exports have fallen 3.1% in Q1 2009 and 3.7% in Q2 2009, so things are getting worse here. Services exports contracted 2.8% in Q1 2009 and -0.9% in Q2 2009. Imports overall have declined 10.6% in Q1 and hen 7.1% in Q2 2009 – better than before, but still third deepest fall since the series revision in Q1 2004. Goods imports are down 22.3 in Q2 2009 yoy – marginally better than 24.8% contraction in Q1 2009.

Table below compares trade performance relative to corresponding quarters of 2007:


The above chart shows that taxes, public administration and defence contributions to GNP are falling over time – since Q1 2007 and despite April Budget and October 2008 budget, this fall continues today. This is not to be confused with the falling cost of Government in terms of taxation-exerted drag on growth. The decline in Government share of GNP is reflective of two things:
(1) there has been a marked decline in capital investment (i.e we still waste piles of cash on non-investment activities);
(2) the rising interest rate bill on Government debt is now adversely impacting GNP.

Now, GNP/GDP gap illustrated…
Self explanatory, really.

Now, recall those evil Americans who, according to our Taoiseach and his Cabinet members, gave Ireland this recession... Chart below illustrates:
Yeps, they (Americans) sneezed, Europe got a slight fever, the UK is out with a major flu and Ireland is... well... Ireland is busy dumping tens of billions in cash it does not have on public sector wages, social welfare payoffs and, next best thing to Partnerships - Nama...