8/1/2013: Some Notes on Green Shoots

Here's a summary of my points from tonight's RTE Frontline discussion. Note: these are not exaclty written up as an article, so treat them as working notes.

As a preamble, let's recognise three things:

1. The current Government did inherit the economy effectively dead on the ground - at the bottom of a massive cliff. Since then, the economy remained largely static and structurally virtually identical to the one in 2010.
2. The current Government did inherit a policies straight-jacket, breaking out of which would have required a massive amount of courage and leadership.
3. The current stabilization can lead to an uplift in growth, to 1%-1.5% pa on GDP and under 1% pa on GNP side, but I would not call such a development 'green shoots'.

In my view, two rhetorical or allegorical analogies can be made for the Irish economy today:

One: the economy is a glass-half-full for the few (MNCs & some exporters) and empty for the many (ordinary households and SMEs).

Another: the green shoots we might be seeing in months to come are more likely the shoots from the last years' crops seeds that have failed to germinate in 2010-2011. The field of the Irish economy has not been properly seeded in years now.

Four core problems faced by Ireland going into 2013 are largely the same ones as we faced in 2008-2012 and the same ones the Coalition Government had highlighted in years of opposition:

1. Fiscal deficit and debt
2. Banks 
3. Households debt
4. Growth and structural reforms

On (1): Fiscal deficits and debt

• Fact: Debt continues to rise, and is expected to hit (December 19th, 2012 IMF report) 122.5% of our GDP this year. At the end of 2011 it was 106.5% of GDP and thus the current Government has added/adding 16% of GDP or EUR35 billion worth of new debt. Most of this is not banks-related as the bulk of banks recaps took place in 2011.
• Fact: Primary deficits have been cut significantly: from 5.9% in 2011 to 1.8% in 2013 expected. Yet in 2013 we still will have second highest overall fiscal deficit in the Euro area, possibly - highest, depending on what other countries do. We also have rapidly expanding interest rate bill - the increase in interest charges on the state in 2013 y/y will consume almost 2/3rds of the austerity 'savings' generated in Budget 2013.
• Fact: The government continued with the programme of, what I call, quick-fix or 'fake' austerity that primarily focused on cuts to capital spending and tax increases, and not on structural reforms. Let's take a look at 2012 - the year when the Government was claiming to have been focusing on growth. Net Voted Capital spending was cut 19% - an overshoot on targets by 4%. Net Voted Current spending was not cut, but actually rose 0.1% y/y or 1.6% above the target the Government set in April 2012! That's a rate of overshooting of what ca 2.4% for the full year.
• So the Government has delivered so far: higher debt and higher current spending, higher taxes, higher charges, lower capital spending and, thus, lower investment and jobs.

On (2) and (3): Banks and Household Debt

• Fact: Lending by the banks continued to contract in 2012. Loans to private sector in Ireland, within covered banking instituions have declined on aggregate by over 4.3% in 12 months through November 2012. Rate of decline in loans to Irish households in July-November 2012 never once slowed below 3.6% and since this Government came to power, household loans are down 19% in total, mortgages down 20%, consumer credit 22%. All three continued to decline m/m in November 2012.
• Fact: Deposits have stabilised and expanded by 2.6% in November 2012 y/y, but the fabled 'savings' glut the Government so much decries has not translated in real pay downs of Irish households' debts. We still have the most indebted households in the euro area. In fact, IMF has highlighted that for the Government in their recent report and yet there is little movement on dealing with this problem.
• Fact: Banks are overcapitalised and zombified and the Government has no control over their internal practices or operations. Thus, mortgages rates are going up on ARMs and unsecured credit costs are rising in massive jumps despite the claims of 'improved funding outlook' and ECB continued liquidity supports. 
• Fact: Banks were given yet another 'trump card' at the expense of the country, by the Government, the veto power in the new Personal Insolvencies Regime
• Fact: the IMF has warned very clearly in its December statement that Irish banks remain source of risk in light of mortgages crisis. 
• That mortgages crisis, may I remind the Government, is accelerating once again, even before the fig leafing of the 'Insolvencies Reforms': in Q3 2012 we had over 181,000 mortgages at risk of default of defaulted - up 6.5% q/q and 22% y/y. When this Government came to power there were 131,000 mortgages at risk of default or defaulted. This Government's 'repairing of the banks' has contributed to adding some 50,000 to these.
• The debt crisis in Irish homes is now out of control and all we hear from this Government is the promise of the Insolvencies Regime reforms that will provide no support for troubled homeowners, property tax on negative equity homes, more semi-states price hikes on homeowners and householders, plus 'My Hands are Tied' when it comes to dealing with the banks from the Ministers in charge of this economy.

On (4): Growth:

• The Government puts forward two core figures identifying its recent achievements: lower unemployment and positive growth. Both are - at best - glass half-full.
• In 2011 GDP went up 1.4%, but GNP contracted 2.5%. In 2012, we can expect GDP to increase by around 0.4% and GNP to shrink once again by ca 0.5% (IMF data). 
• Since the Government came to power, GDP in this country has grown so far by ca 1.8% cumulatively, and GNP shrunk by ca 3%. The economy is flat on the ground and showing no real signs of a robust recovery. It is not contracting outright, but given the gravity of the fall, this 'stabilisation' is a poor showing.
• Unemployment: official QNHS data for Q3 2012 shows that unemployment declined 0.2% (-3,600) on Q3 2011. But the number of people in the labour force has fallen -7,900 - more than double the rate of unemployment decline.  Live Register shows decline (December 2012 on 2011) of - 11,051 signees, yet almost half of these declines can be accounted for by people engaged in State-run Training Programmes. Based on exits from the workforce in Q3 2012, this suggests that the Live Register drop in 12months through December 2012 can be accounted for by people running out of benefits and joining State training programmes. In other words, jobs creation is not doing anything to add net new jobs in this economy. 
• Since Q2 2011, when the Government took office, numbers of people in employment declined 20,000, in full-time employment - dropped by 29,000.
• Quoting from the CSO: "The number of persons employed decreased by 0.2% (-4,300) over the year to Q3 2012. This compares with an annual decrease in employment of 1.3% in the previous quarter and a decrease of 2.1% in the year to Q3 2011. The annual rate of decrease of 0.2% in the year to Q3 2012 is the lowest since employment first decreased on an annual basis in the third quarter of 2008." Glass half-full if you kept your job, empty if you lost one or are looking for one.
• The retail sector continues to struggle. Headline figure today for November sales is a decline of 0.2% in the value of all sales, y/y and a decline of 0.5% in the volume. This at least partially controls for the uncertainty of Budget 2013, as it compares sales to the period of uncertainty about Budget 2012.
• Note: Minister Rabbitte made a reference to the m/m decline in sales of TV equipment as the core driver of declines in retail sales in November. This is simply 1% of the truth. In y/y terms, largest drops in sales were in Motor Trades (-4.5% in value & volume), Furniture and Lighting (-9.0% and -4.5% in value and volume), Books, Newspapers and Stationery (-8% and -9%) and Other Retail Sales (-8.3% and -7.1%). Seven out of 13 categories of sales posted declines in value of sales, y/y and nine in volume.

On Structural Reforms:

• We need reforms of charges and fees in professional services, as well as in semi-states' controlled costs (energy, health insurance, education, transport, etc) - none were enacted so far by this Government to-date.
• We need reforms of local authorities to reduce rates on businesses and to improve value-for-money - only minor, unambitious approach was taken so far by the Government, aside from creation of (for now) centralized 'local' property tax. Again - revenue measures were put ahead of structural reforms.
• We need reforms of the Government services - reflected not on the capital side or revenue sides of the budget but in current spending - little done so far, short of slash-and-burn through the easier cohorts of employees (part-timers, contractors) and the continued loading of costs onto the shoulders of services users (the largest component of so-called 'cuts').
• We need reforms to boost our institutional competitiveness - outside semi-states and public services, in areas such as taxation system, entrepreneurial supports (including tax policies), international trade, visa regimes, mobility of residents who are non-EU nationals (especially within professional grades, where such mobility is critical to their productivity), etc. Nothing, or even the opposite of the reforms is being done by the Government.
• We need reforms of personal insolvencies regime to help homeowners and to stop the cancer of debt spreading uncontained. Very little is being done on this front by the Government.
• We need political reforms to create an environment where policies are created not in a near-vacuum of the Ministerial Panels or Super-Groups, but in the open, with real debates, real testing by the Dail and the public, transparently and beyond the whip system constraints.

I am going to be brief on the outlook for 2013-2015. If we do the above, and do it well, we shall see a robust, sustainable recovery, starting with mid- or late-2013 and gaining momentum into 2015, with potential rates of growth at around 2.5% in 2014 rising to 3.5+% in 2015. If we have also positive global recovery environment to aid us, there is no reason why growth of 5%+ in 2015 should be off-limit. 

Economics 20/05/2009: Moscow, US Green Shoots

Is Alan Ahearne being paid to write Irish Times political infomercials? Today's Irish Times editorial from Alan Ahearne (here) is a marked departure from the long-standing tradition that the civil servants should stay on their main jobs (in Alan's case - that is, apparently to advise Minister Lenihan on matters of Economic policy - not Finance or PR) and not spend public money-financed time on addressing the media. Talking to the electorate is Minister Lenihan's job, as a politician and a member of the Government, not Alan Ahearne's.

That said, Alan's opinion fall flat on a number of other, more substantive points.

"These bonds will add to the gross stock of public debt, but so long as the valuation of loans is roughly correct, there will be no change in net public debt. Nama’s assets and liabilities will roughly match," says Alan. Great. We couldn't have imagined this intricacy of accounting without Alan pointing it out to us. But hold on - Alan does not give a figure in his article as to what the expected returns to NAMA can be, or which assumptions he uses to compute such a return. Not a single number! 'Roughly match' may mean a shortfall of Euro 20bn or a gain of Euro20bn, or anything in between, or indeed anything above these numbers. Again, Alain is silent on the matter.

"This approach to fixing banks’ balance sheets has a proven track record. The asset management model has been supported and recommended by banking experts across the globe and used successfully in many countries in the past as part of the work-out process of problem loans. Done properly, investments in the banking system using this approach have eventually been recovered in full," says the article. Ok: which experts? where has NAMA-style model been successful in the past, under what conditions and to what extent? Crucially, how do successful past NAMA-style models compare in terms of underlying fundamentals to Ireland's case? Not a word from Alan on these issues.

Alan Ahearne goes into a lengthy challenge to the German plan for banks rescue. This is irrelevant to his article, as we are not asking our Government officials to provide us with the news stories analysis for Germany. His job and the job of his masters is to deal with NAMA, not with Germany. In this context, it appears that Alan simply uses an argument against the German plan as an argument in favour of NAMA. This, if so, would be fallacious, since Germans making a mistake with their plans does not validate NAMA fundamentals in any way.

In short, I am simply amazed by the political nature of Alan's article, its lack of clarity and rigor, its complete lack of respect for the taxpayers who expect official Government opinion to be grounded in factual evidence. This is hardly an article one can expect from an economist, but rather an article one can expect from a politician. Too bad the Irish Times editorial staff didn't ask Alan to re-write it before accepting for publication...


Moscow is still all sun and cool... Yesterday was a good and productive day for the mission, meetings between companies and a great dinner in the National Hotel, overlooking the Red Square entrance and the Kremlin. There are some good news on companies front, which I hope to report in the Sunday Times article later, so no preview here. But I was impressed by one Irish company sealing a deal (long time under negotiations) in software area. I was also positively impressed by the Irish delegation head, Billy Kelleher, TD - his first official visit and he has been very good so far. As someone remarked couple of days ago (no names here) - he might be a much better choice of a delegation head. Mike Hogan of EI and the rest of EI team are doing great work on the ground - this is not new as I always known Mike and his team to be really first class point of contact to the Russian market.

Night out on town proved that Moscow is still very much abuzz with life, despite the slowdown. Couple relatively hip places (a Mexican dive with, strangely enough, a very loud rock band playing right in the entrance door, and a can-be-anywhere-else-in-the-world pricey beer joint) all had a calm, but busy, atmosphere. Confidence seems to be unshaken, as far as normal businesses go, but construction is dead and finance people are in hiding.

I was briefing a group of the Moscow Bar Association lawyers yesterday over a friendly coffee on some developments out there in the broader world. The main issue they wanted to know about was the whole mess of the EU/US financial services regulations. Not so much the banks, but the hedge funds etc. Hedgies are in the news in Russia because of the Chrysler story (when they refused an offer of $0.30 on the dollar of the company bonds and got hammered by the Communist-in-Chief in the White House of betting on a taxpayer bailout of the company. Well, there is a point to be made - has there been a single hedge fund in the US which received any bailout money? No. How many US automakers received such funds? All. Spot any difference? Of course, the automakers are all unionized and the unions are the cronies of the Democratic Party. Trace the line to Obama. Aside from politics, my view is that trying to regulate international (as opposed to domestic) financial markets is like squeezing water - should the US/EU try to put any severe measures in place, funds will move off-shore. We will see some measures passed and paraded as a dramatic departure from the status quo, but in the end they will be purely cosmetic. Much more under threat are domestic bankers, who have little choice when it comes to packing suitcases and moving to the Bahamas. In the end, costs will rise for all service providers - hedgies will see the rise much less than domestic bankers, implying that rates of return will fall, but the returns to international financial services will fall less (in the short run) than to domestic financial services. This situation will drive more competition into international finance and will lead to consumer-damaging decline in competition in the domestic sectors. Over a number of years, returns to international finance will fall and returns to domestic banking and finance will rise. As more and more banking clients move off-shore to follow lower cost international finance, EU and US economies will slow down in growth. So all regulatory risk talk is really a cost/return argument in my view. Let's see who is the most daft in regulation - the US Democrats or the EU - in a couple of years time...

US Green shoots just had a massive set back as the US housing starts fell a record low of 458,000 in April. Calculated Risk blog is predicting that we are going to see US house prices falling 40-50% relative to the peak by the end of 2010. Yeah, Davy guys, eat your shorts on US housing market improvements... And of course the inflation story is still out there (here), don't forget.

Economics 18/05/2009: Wealth-destruction, Moscow, Ireland's Green Shoots

Here (hat tip PMD) is a superb article from WSJ on how to destroy thy country's wealth... too bad the US policymakers have not figured the Brian-Brian-Mary solution to the same problem. Possibly, they are not being advised by the wealth loathing, ever-State-loving ESRI?

On a personal note - I am in Moscow: sunny +25 degrees and the city is blooming (chestnut trees, apple trees, cherry trees and lilacs). Construction sites with no workers in sight, but traffic jams are as bad as ever. Ruble is down and prices are up, but on the net, I would not be surprised if there is a real deflation (prices seem to be up about 15%, while ruble is down ca 34%. They are fretting the latests stats from Europe: EU27 gas imports from Russia down 61% in Q1 2009 and exports of gas to CIS down 50%.

Closer to home problems/solutions: LA Times has a very interesting report (here) on solar energy potential. I will it to you to judge the commercial feasibility of what is being discussed (especially given the business-focused bits at the end of the article), but mark my words - within 10-15 years time we will see the end of the fossil fuels era and the start of a new era. It won't be driven by the environmental considerations (although those will form a secondary return on new technologies). Instead it will be driven by two major factors:

1. Generally prohibitive cost of energy in the long run; and
2. Higher induced volatility (risk) of energy costs when you factor in the pesky nasty regimes around the world who control most of our oil and gas.

Need an illustration of the latter point - see here.

On Green Shoots theory: here is a good commentary from Martin Feldstein (ex NBER) - he is spot on about Europe's prospects (see my earlier, 2008-dated, comment on WSJblogs exactly to the same point). This, of course, is not as optimistic as Peter Orszag's latest drone about US economy not being in a 'free-fall', but... (here). Then again, recall that Orszag is the director of the President's Office of Management and Budget, so how can things be in a free-fall after Mr Orszag pumped more debt into the US economy within the span of just few months than Alan Greenspan managed to do in years? But care to read more? Here Nouriel Roubini (Dr Doom) and Ken Rogoff (Dr Financial Crises) muse as to why the 'Green Shoots' are a delusion. I don't give any heed to Merkel's comments on German economy (here) - I'd rather trust our bankers than politicians when it comes to reading the tea leafs of global economics.

But here is my own contribution to the debate (for those of you who missed in last Sunday Times issue) - this is an unedited version of the article that appeared in The Sunday Times.

“Despair ruins some, presumption many,” said Benjamin Franklin some 250 years ago.

If despair haunted Ireland’s policy and media circles since last Summer, in recent weeks, much of the economic commentary started focusing on the emergence of the ‘green shoots’ in our economic environment. Even abysmal, by any measure, unemployment and Exchequer data for April are being spun as showing signs of improvement.

Are we seeing the proverbial ‘light at the end of the tunnel’? And if yes, do we know at what rate will the conditions improve in months and years to come? Regrettably, these claims may be erring on the presumption side of Franklin’s quote.

First, there is the alleged stabilization in the rate of decline in the Exchequer revenue. The problem with this assertion is that it ignores the other side of the budgetary equation – the expenditure side. Current spending was up 4.5% in the first four months of the year. Factoring deflation, this is a hefty increase. At this rate the
real difference between economic growth and public sector expansion in 2009 can reach some 16%, before the vast NAMA commitments. In household finances this is equivalent to being insolvent and reckless about it at the same time.

Another issue is the rising cost of servicing public debt (up 21.4% in year on year terms in April). In the longer term, our growing over-reliance on less than 1 year maturity borrowings to finance current expenditure simply means that instead of taking a quick dose of painful medicine today we risk ending up on a drip therapy of minor cost adjustments. This would make the disease of overspending immune to future policies. Should interest rates rise in 2010-2012, as any sane market observer would expect, the Exchequer will be forced to
refinance a mountain of fresh borrowings at an even higher cost to the taxpayers.

Another recent sighting of ‘green shoots’ relates to the unemployment data. While it is true that the pace of increases in the Live Register is abating, the pace of jobs destruction remains furious. And, given the dynamics of rising layoffs in the services sectors, just as the previous wave of unemployment might be subsiding a new one is already heading our way.

Purchasing Manager’s Index (PMI) for April, published by the NCB Stockbrokers, shows employment in services bouncing around the bottom and in manufacturing contracting at a pace only slightly slower than in January – the worst month on record. Layoffs in Business Services accelerated in April, extending the current decline to fourteen consecutive months. Financial Services companies shed jobs at the sharpest pace in history last month.

So things are getting worse, not better on the unemployment front and its now the better quality higher-paying jobs that are being destroyed the fastest. If a loss of an average construction sector job implies a net loss to the economy of some €60,000 per annum, an average Business and Financial services job destroyed takes some €140,000 out of the economy.

At the aggregate unemployment data level, if January-April ‘stabilized’ pace of jobs losses continues to the end of the year, we are looking at 515,000 or more on Live Register by 2010 well above the 384,113 currently. Even more worryingly, this week’s data from CSO, discussed in the box-out below, is showing that the long-term unemployment is rising at an accelerating rate.

Following a marginal improvement in March, April current consumer confidence index fell to 75.1 from 76.2, although the expectations index rose to 27.7 compared to 22.5. Again, as with other ‘stabilizing’ indices this is temporary correction, not a lasting improvement. The so-called consumer ‘misery’ index – a standard measure of forward-looking indicators determining future consumer confidence – went deeper into red in April and is now poised for a further decrease in May based on the data to-date.

When it comes to the PMI data, April business activity in services recorded “an acceleration in the pace of decline”, according to the NCB Stockbrokers. In fact, April figures were so bad, that only February 2009 showed a deeper contraction. The steepest fall-off occurred in the highest value-added sector of the Irish economy – Business Services – down for the eleventh month in a row and falling at the fastest pace since January. Financial Services posted the steepest contraction in its history. And companies are expecting further drops in demand for their services in months ahead.

The story is not that much different in manufacturing. April manufacturing sectors PMI showed a further considerable deterioration of operating conditions. Output in the sector continues to contract at a near-record rate while jobs were cut sharply and new purchasing fell off the cliff. Any ‘green shoots’ in the cycle must involve an increase in planned future purchasing activity by companies and a restart of the investment cycle. This is clearly not on the minds of the majority of Irish managers.

So in the short run, there is no evidence of significant signs of improvement or stabilization in the downward spiral of our real economy.

This does not bode well for our future growth capacity. On Friday, ESRI published an excellent paper titled Recovery Scenarios for Ireland looking at the prospects for our economy through 2015. Under optimistic assumptions, the ESRI forecast is for the Irish income per capita to reach 2007 levels by 2015 implying a round-trip to the peak of 8 years.

Even more significantly, ESRI concluded that “as a consequence of the recession, the potential growth rate of the economy is likely to have fallen from 3.6 % per annum to 3% per annum”.

For all its merits, the paper assumes no changes in the long-run trend for the foreign direct investment inflows into Ireland. This issue is non-trivial. With vast majority of our exports generated by the MNCs, we simply cannot ignore the changing nature of the future international investment cycles on our economy. Looking over the recent years, vast majority of Ireland-based MNCs have chosen not to locate new products and services here. Only a handful elected to put higher value-added R&D and management activities in Ireland. This is a problem, as many MNC-produced goods and services are nearing the end of their life cycle. In time, failure to attract new products and services will spell an irreversible decline of the large share of our trade flows.

My own analysis, based on parameterising a recent IMF model of economies experiencing simultaneous shocks to housing markets, GDP growth and credit creation, predicts that the ongoing contraction in the Irish economy will bottom out at ca 16-18% decline in GDP per capita by the beginning of 2011. My estimates also show that it will take the economy until the middle of 2017 to fully regain, the levels of income per capita enjoyed in 2007.

Over 60% of the recession-related fall-off in our output will be captured by domestic factors: the property markets bust, fiscal policy debacle and rising structural unemployment. Adding to this a possibility that our multinationals-dominated sectors can experience a severe contraction in future investments can reduce our potential GDP growth rate to below 2.5% per annum. In this case, a recovery to 2007 income per capita levels might take us well into 2020.

Economics 14/05/09: Economy bottoming out?

Per Davy note today: "pace of decline of activity has slowed: January-February was the worst point of the recession. All available indicators suggest that the Irish recession is past the most acute point. It is becoming clear that January-February was the most intense phase."

This statement is conditional on two assumptions - not explicitly identified -

1. Irish fiscal position remains sustainable underpinned by relatively easy borrowing, despite the demand for new and massive volume of funding under NAMA; and
2. Global economic stabilization is going to spill-over into Irish growth.
   

"Consumer confidence bottomed last summer," says Davy. I would not be impressed by this statement too much. Consumer confidence can be volatile. Underlying fundamentals are still weak and even assuming consumer confidence is on an upward trend (I am yet to see this happening), consumer spending might not resume, as jobs losses fear and taxation increases expectations are still there. It will take a NAMA-induced budgetary hit on households after-tax income to send confidence tumbling down to historic lows, but this is on the books for H2 2009 anyway.

"Core" retail sales are rising says Davy note. Hmmm, rising? Latest data for retail sales ex motor (core) we have shows that in February 2009 core sales rose 1.3% after contracting 1.1% in January and rising 1.1% in December after falling 2.3% in November... A saw-like pattern at the very best. If Davy want to stake their claim on February numbers, why not call for the 'bottoming out' in December?

"Survey indicators for services, manufacturing and construction have improved". Now, don't tell that to PMI survey administrators at Markit and NCB...

"Unemployment claimants are increasing more slowly". I am stunned to see Davy economics team actually looking at month-to-month dynamics for something so rich in lags and various degrees of severity by unemployment type as unemployment figures. Presuming they are referring to the Live Register data, what we do know is the following:

• the pace of overall increases in Live Register data have slowed down from a destructively high level in January-February 2009;
• this does not tell us anything about a trend, but can either signal a temporary bounce or indeed a reversal in trend;
• I prefer the former explanation to the latter because I can clearly see a new wave of layoffs rising - construction sector jobs destruction is by now complete. But financial services and business services jobs and retail sector workers are probably going to see rising rate of layoffs. If I were working for Davy, I would explained to the 'masters ordering the music' for this note that laying off a financial services worker is 6-8 times more expensive for the economy than laying off a low-skilled construction worker. I would also explain that the probability of a laid off construction worker leaving this country is probably 10-15 times greater than the probability of a laid off Financial or Business Services worker going elsewhere. I would further add that our banks have issued much larger and more stretched mortgages to the latter, not the former and thus their impairments on mortgages side is, guess what, much more adversely impacted by the next wave of layoffs than by the former one.
  

"Meanwhile, the fact that Irish exports outperformed during the collapse in global trade late last year and in early 2009 received little attention". I agree with this statement. The problem is can we hold on to this performance and also, how much of the good news is driven by the resilient and competent MNCs and how much is driven by the lower value-added domestic exporters? One only needs to look at the combination of sectors with rising imports (inputs) and exports (outputs) to see where the answer to this question lies.

Having told us the half-baked story of the 'green shoots' Davy forecast the economy will bottom in Q1-Q2 2010. Now, this is puzzling. If we are seeing reductions in the rates of decline in some series today, while other are, according to Davy recording an outright improvement, what will be happening to the economy between Q3 2009 and Q2 2010? Bouncing at the bottom? No - Davy say that it will bottom out in Q1-Q2 2010. So things will be deteriorating then through Q4 2009. But hold on a second. The same Davy note also says - in its title - that "Ireland is probably past the worst of the recession"...

Anyone to spot a blatant contradiction here?

Well, Davy didn't:

"Consumer spending may trough in six to nine months due to the savings ratio peak and slower income declines" - so we are not past the worst yet in terms of consumer spending?

"The risks to our forecasts are evenly balanced: the economy may hit the floor sooner if we are too pessimistic about the fragile recovery in the global economy, but a double-dip recession is possible if the reaction of households to the recent Budget is negative". So again, under both scenarios, we are not past the worst point yet.

And as a side bar - how far detached from the reality do you have to be to presume that the household reaction to the recent Budget can be anything but negative?

I am simply amazed at the lack of consistency or basic logic in the Davy's arguments! But enough on this - there is an article of mine coming out on Sunday on the issue of 'green shoots'... so until then the topic shall rest.

But here is a good analysis of 'green shoots' theory for the global economy that folks in Davy might want to read.

Economics 05/05/2009: US' Green weeds

US data, some assert, points to a recovery around the corner. Well, it just might matter how far around the corner the recovery really is, doesn't it? A mile? Few hundred years? Or just at your feet - sitting cap-cap-in-hand and begging to be noticed.

Now, unlike many other economists, I can confess that I can't really tell. We, the economists, are, you see, rather far-sighted - neither good peripheral vision, nor short-sightedness afflict our ability to see into the future. We can tell you with some accuracy what the Euro/dollar exchange rate should be in 3-5 years ($1.10-1.05/Euro) but not what it might be tomorrow.

But there are facts that even we, the mighty economists cannot ignore. Here are some on those alleged 'green shoots'.

Fact 1: Home sales and prices: US new home sales were up in February +4.7% to a miserably low 337,000. At the peak in 2005 the number was 1.4mln. Do the maths.

March pending home sales index rose 3.2% compared with February and was up 1.1% y-o-y. The index covers sales contracts signed on existing homes. About time, given the historically low mortgage rates and an $8,000 tax credit for the first-time buyers. And it takes on average 6 weeks for this to feed through to the existent home sales figures. But housing starts are at 358,000 - 80.4% off their peak of 1,823,000 and the US still has some 12.2 months worth of housing stock on sale - more than 2.4 times the normal average.

Inventory-to-sales ratio for homes is now up at 1.43 (February figures) - relative to normal average of 1.25. In prices terms, median home is now selling for $200.9K - 20% below $251K.

Existing home sales have fallen 1/3 since the peak of September 2005 and the median price is down 28.7% since peak in July 2006. Again, February saw a rise ine xisting homes sales of 4.4% and the median price rose 2.4%, but inventories are still running at double the 5 month level of sales that is considered normal. Not surprisingly (see below under Fact 5), 45% of all home sales in February were foreclosed properties.

Since 2007, 0.9% of GDP was shaved off every quarter due to the 80% collapse in the new housing starts alone. Even if the US economy has hit the bottom in terms of new homes starts, this will only mean that housing starts from Q3 2009 (considering lags) will contribute 0% to GDP growth.


Fact 2: Consumption: In Q4 2008 personal consumption was down 3%. Then the Feds pumped $127bn into personal income via tax rebates (up 11% y-o-y), offsetting an $89bn cut in earnings in Q1 2009. This will slow down in Q2 2009 as the only personal income stimulus will be May Social Security 'bonus' of $250 per person. On the back of this, the engine of US economy, consumers is now showing signs of some revival - as the latest UofM index suggests. The process is aided by lower prices (deflation), lower gasoline costs and lower mortgage rates, although with most mortgages being fixed, the latter is of less help unless you are of the severely endangered species genus - the new buyer.

Demand for durable goods fell 0.8% in March in a seventh monthly decline since July 2008. New orders posted falls in virtually all sectors. Shipments were down 1.7%. On a positive note, inventories fell 1.1% and capital spending by businesses rose 1.5% posting a second consecutive increase, albeit on an abysmally depressing fall-off in January. Both, in my view, are not signs of strength, but of the moderation in the rate of industrial production slowdown – a ‘dead cat’ bounce. Since inventories are still running high, cutting these down to sales levels will mean erasing the loss in GDP growth of up to 2%. But the net contribution to GDP growth is going to be - you've guessed it - zero. And income is not necessarily going to translate into new spending - households first priority right now is deleveraging and the second priority is precautionary saving. What's left might be consumed, however little that might be...

But here is the bad news. All recessions in the modern history have on average saw personal income contracting 4-7%. So far, wages declined at 4% annual rate in Q1 2009, and payroll-tax receipts were down 8.2% in Q1 2009 y-o-y. So personal income growth will not be showing any 'green shoots' any time soon. Should we head for the upper range of the average 'normal' recession estimates, we are in for another acceleration in wages declines, to bring the total annual loss of income (and thus demand) to over $250bn in 2009. Good luck getting those Middle-Americans to consume much more than WalMart crisps and soda any time soon.


Fact 3: Growth in GDP won't yield growth in jobs: Unemployment is a lagging indicator in general, but consumers don't care that much what economists think - they need stability of income and security of job tenure before they start buying big ticket items again. Q2 2008 US had strong positive growth at +2.8% increase in GDP, while unemployment climbed up. In a traditional recession, this does not matter much as devaluation would normally drive investment cycle restart on the exports side, pulling in domestic consumers as well. Not this time around, folks. So we are down to looking at unemployment figures and unemployment sources.

Q1 2009 we saw US unemployment ranks swell by 2mln with unemployment rate moving to 8.5% (up from 7.6% in Q4 2008). US is now running on unemployment that is the highest (per unemployment rate) in over 25 years. And things are getting tougher by the day - March saw unemployment increases in 46 out of 50 states. California has 11.2% unemployment rate - record number for over 68 years. Even Jimmy 'Peanut' Carter wasn't able to wreck as much destruction during his disastrous Presidency.

Worse yet: underemployment (unemployed + part-time workers seeking full-time jobs + discouraged workers) is at 15.6%. Now, here is a tricky thing - underemployment is a leading indicator - temporary employment (a component of the part-time numbers) leads unemployment by 6-10 months. So if we are not seeing temporary jobs gains yet, we won't see ordinary unemployment falling for another 2-3 quarters. And then it will take some time for the labour market to work through the pool of surplus labour before we can expect a pick up in wages. The pesky issue is: in March there were further losses of 71,700 temp jobs - an acceleration on February and well above the monthly average of 47,900 temp jobs lost since December 2007 when the temporary jobs numbers fell for the first time.

Industrial production is down 1.5% in March m-o-m and 12.8% y-o-y, capacity utilization down to 69.3% - record low since 1967. Now, with this excess capacity in place, Goldman Sachs research estimated that even if output gap grows from 7% in 2009 to 10% in 2010, while GDP grws at 4.75% pa, it will take the economy some 5 years to work off excess capacity. This, of course is a powerful drag on business investment, which is good news for software companies and IT solutions speceialists and bad news for investment goods producers.


Fact 4: Financial Services are still in trouble. Banks, especially regional ones, are popping like soap bubbles - the grand total of failed US regional banks now stands at 32 since January 1 and 57 since the beginning of this recession. The rate of closures is accelerating. Two weeks ago - 5 banks were shut down, last week - 4. Not many green shoots (other than weeds) out there, amongst the smaller financials.

Per all the hype about the recent banks' results, here is a good analysis: "Citigroup said it made $1.6 billion [profit]. One of the ways Citigroup achieved this gain was booking a profit of $2.7 billion on the decline in Citi's own debt. ...Under accounting rules, Citi was allowed to book a one-time gain equivalent to the decline in its bonds because, in theory, it could buy back its debt cheaply and save $2.7 billion over time. Of course, Citi didn't actually do that. Even though more consumer loans went bad in the first quarter, Citi reduced its loan loss reserve from $3.4 billion in the fourth quarter to $2.1 billion in the first quarter, thereby picking up another $1.3 billion of 'earnings'. And the recent change in mark to market accounting enabled Citi to book an additional $413 million in 'profit' on impaired assets. Without theses one-time adjustments, Citi's $1.6 billion in first quarter profit becomes a $2.8 billion loss." Hmm... If I were a bank, I bet I could print profits out thin air and on the back of taxpayers cash injections too.

And the fundamentals are getting weaker too: some 3.22% of consumer loans were delinquent (30+ days overdue) at December 2008 mark - the highest rate of delinquencies in almost 35 years - since February 1974. The late payment rate on dealers-supplied auto loans were at a record 3.53% in Q4 2008, up from 3.25% in Q3 2008, direct auto loans: up from 1.71% to 2.03%. Late payments on home equity credit lines - a record 1.46% up from 1.15%, direct home equity loans delinquencies were up to 3.03% from 2.63%. Credit cards delinquencies rose to 4.52% from 4.20% but remained only slightly above the 4.47% average over the last four years. So with newly minted 2mln unemployed in Q1 2009 - expect these numbers to keep on rising.

There is no point to reiterate the estimates (the latest being from the IMF) that show the US banking sector standing to lose $1.5-2.5 trillion due to writedowns. So far, only $1 trillion of these were taken.


Fact 5: Personal and Business bankruptcies are up and rising. Average personal bankruptcy filings were at 5,945 daily in March - 9% increase in m-o-m terms and 28% up y-o-y. 5.06% of prime mortgage holders have already missed one or more payments, sub-prime mortgage holders (1/3 of the total market) delinquencies are at 22%. Foreclosures are up 46% y-o-y in March and 17% in m-o-m terms. Moody's estimate that number of repossessed homes will rise to 2.1mln in 2009 from 1.7mln in 2008. But business bankruptices are rising even faster than consumers' - last year, 136 US plcs filed for bankruptcy, up 74% on 2007, according to law firm Jones Day in April. IntraLinks, a bankruptcy data analysis group, said in April it had seen a 180% jump in bankruptcy and reorganization deals for the three-month period ended February 15, 2009, compared to the same period last year. US consumers bankruptcy filings jumped 29% in February y-o-y to 98,344, according to the American Bankruptcy Institute. ABI expect 1.4 million consumer bankruptcies in 2009, "at least".

On the net, do tell me if you see some 'green' shoots out there. I would love to seed them.