22/6/15: IMF Review of Ireland: Part 2: Banks

IMF assessment of Irish banking sector remains pretty darn gloomy, even if the rhetoric has been changing toward more cheerleading, less warning. Here is the core statement:

"Bank health continues to improve, but impaired assets remain high and profitability low. The contraction in the three domestic banks’ interest earning assets continued, albeit at a slower pace in 2014." IN other words, deleveraging is ongoing.

"Nonetheless, operating profitability doubled to 0.8 percent of assets on foot of lower funding costs as well as nonrecurrent gains from asset sales and revaluations (Table 8). Led by the CRE and SME loan books, there was a sizable fall in the stock of nonperforming loans (NPL), by some 19 percent in 2014, although NPLs are still 23 percent of loans." Note, at 23% we are still the second worst performing banking system in the euro area, after Greece.

"This fall, together with rising property prices, allowed significant provision releases while keeping the coverage ratio stable. Profitability after provisions was achieved for the first time since the onset of the crisis. Together with lower risk weighted assets, this lifted the three banks’ aggregate core tier 1 capital ratio by over 1 percentage point, to 14½ percent."

Now, take a look at the chart above: loans volume fell EUR6.5bn y/y (-3.6%), but interest income remained intact at EUR7.9bn. While funding costs fell EUR3.7bn y/y. The result is that the banks squeezed more out of fewer loans both on the margin and in total. Give it a thought: loans should be getting cheaper, but instead banks are getting 'healthier'. At the expense of who? Why, the remaining borrowers. Net trading profits now turned losses in 2014 compared to 2013. Offset by one-off profits.

Deposits also fell in 2014 compared to 2013 as economy set into a 'robust recovery'. It looks like all the jobs creation going around ain't helping savings.

A summary / easier to read table:

Notice, in addition to the above discussion, the Texas Ratio: Non-Performing Loans ratio to Provisions + CT1 capital (higher ratio, higher risk in the system). At 108, things are better now than in 2012-2013, but on average, 2011-2012 Texas ratio was around 104, better than 2014 ratio. And that with 51.7% coverage ratio and with CT1 at 14.5%. Ugh?..

On the other hand, deleveraging helped so far: loan/deposit ratio is now at 108% a major improvement on the past.

Net Stable Funding Ratio (NSFR) - a ratio of longer term funding to longer term liabilities and should be >100% in theory. This is now at 110.5%, first time above 100% - a good sign, reflective of much improved funding conditions for all euro area banks as well as Irish banks' gains.

Liquidity Coverage Ratio (LCR) - monitoring the extent to which banks hold the necessary assets to cover any short-term liquidity shocks (basically, how much in highly liquid assets banks hold) is also rising and is above 100% - another positive for the banks.


Still, the above gains in lending margins - the rate of banks' extraction from the real economy - are not enough for the IMF. "Lending interest rates must enable banks to generate adequate profits to support new lending. While increasing, Irish banks’
operating profitability remains relatively low. Declines in funding costs aided by QE will assist, but there are also drags from the prevalence of tracker mortgages in loan portfolios and from prospects for a prolonged period of low ECB rates. However, with rates on new floating rate mortgages at 4.1 percent at end March, compared with an average of 2.1 percent in the euro area, political pressures to reduce mortgage rates have emerged. The mission stressed the importance of loan pricing adequate to cover credit losses—including the high costs of collateral realization in Ireland—and to build capital needed to transition to fully loaded Basel III requirements in order to avoid impediments to a revival of lending."

Here's a question IMF might want to ask: if Irish banks are already charging almost double the rates charged by other banks, while enjoying lower costs of funding and falling impairments, then why is Irish banks profitability a concern? And more pertinently, how is hiking effective rates charged in this economy going to help the banks with legacy loans, especially those that are currently marginally performing and only need a slight nudge to slip into arrears? And another question, if Irish banks charge double the rates of other banks, what is holding these other banks coming into the Irish market? Finally, how on earth charging even higher rates will support 'revival of lending'?

Ah, yes, question, questions… not many answers. But, per IMF, everything is happy in the banking sector in Ireland. Just a bit more blood-letting from the borrowers (distressed - via arrears resolutions tightening, performing - via higher interest charges) and there will be a boom. One wonders - a boom in what, exactly? Insolvencies?

25/3/15: IMF on Ireland: Risk Assessment and Growth Outlook 2015-2016

In the previous post covering IMF latest research on Ireland, I looked at the IMF point of view relating to the distortions to our National Accounts and growth figures induced by the tax-optimising MNCs.

Here, let's take a look at the key Article IV conclusions.

All of the IMF assessment, disappointingly, still references Q1-Q3 2014 figures, even though more current data is now available. Overall, the IMF is happy with the onset of the recovery in Ireland and is full of praise on the positives.

It's assessment of the property markets is that "property markets are bouncing back rapidly from their lows but valuations do not yet appear stretched." This is pretty much in line with the latest data: see http://trueeconomics.blogspot.ie/2015/03/25315-irish-residential-property-prices.html

The fund notes that in a boom year of 2014 for Irish commercial property transactions "the volume of turnover in Irish commercial real estate in
2014 was higher than in the mid 2000s, with 37.5 percent from offshore investors." This roughly shows a share of the sales by Nama. Chart below illustrates the trend (also highlighted in my normal Irish Economy deck):

However what the cadet above fails to recognise is that even local purchases also involve, predominantly, Nama sales and are often based on REITs and other investment vehicles purchases co-funded from abroad. My estimate is that less than a third of the total volume of transactions in 2014 was down to organic domestic investment activity and, possibly, as little as 1/10th of this was likely to feed into the pipeline of value-added activities (new build, refurbishment, upgrading) in 2015. The vast majority of the purchases transactions excluding MNCs and public sector are down to "hold-and-flip" strategies consistent with vulture funds.

Decomposing the investment picture, the IMF states that "Investment is reviving but remains low by historical standards, with residential construction recovery modest to date. Investment (excluding aircraft orders and intangibles) in the year to Q3 2014 was up almost 40 percent from two years earlier, led by a rise in machinery and equipment spending."

Unfortunately, we have no idea how much of this is down to MNCs investments and how much down to domestic economy growth. Furthermore, we have no idea how much of the domestic growth is in non-agricultural sectors (remember, milk quotas abolition is triggering significant investment boom in agri-food sector, which is fine and handy).

"But the ratio of investment to GDP, at 16 percent, is still well below its 22 percent pre-boom average, primarily reflecting low construction. While house completions rose by 33 percent y/y in 2014, they remain just under one-half of estimated household formation needs. Rising house prices are making new construction more profitable, yet high costs appear to be slowing the supply response together with developers’ depleted equity and their slow transition to
using external equity financing."

All of this is not new to the readers of my blog.

The key to IMF Article IV papers, however, is not the praise for the past, but the assessment of the risks for the future. And here they are in the context of Ireland - unwelcome by the Ministers, but noted by the Fund.

While GDP growth prospects remain positive for Ireland (chart below), "growth is projected to moderate to 3½ percent in 2015 and to gradually ease to a 2½ percent pace", as "export growth is projected to revert to about 4 percent from 2015". Now, here the IMF may be too conservative - remember our 'knowledge development box' unveiled under a heavy veil of obscurity in Budget 2015? We are likely to see continued strong MNCs-led growth in 2015 on foot of that, except this time around via services side of the economy. After all, as IMF notes: "Competitiveness is strong in the services export sector, albeit driven by industries with relatively low domestic value added." Read: the Silicon Dock.

Here are the projections by the IMF across various parts of the National Accounts:

So now onto the risks: "Risks to Ireland’s growth prospects are broadly balanced within a wide range, with key sources being:

• "Financial market volatility could be triggered by a range of factors, yet Ireland’s vulnerability appears to be contained. Financial conditions are currently exceptionally favorable for both the sovereign and banks. A reassessment of sovereign risk in Europe or geopolitical developments could result in renewed volatility and spread widening. But market developments currently suggest contagion to Ireland would be contained by [ECB policies interventions]. Yet continued easy international financial conditions could lead to vulnerabilities in the medium term. For example, if the international search for yield drove up Irish commercial property prices, risks of an eventual slump in prices and construction would increase, weakening economic activity and potentially impacting domestic banks." In other words, unwinding the excesses of QE policies, globally, is likely to contain risks for the open economy, like Ireland.
• "Euro area stagnation would impede exports. Export projections are below the average growth in the past five years of 4¾ percent, implying some upside especially given recent euro depreciation. Yet Ireland is vulnerable to stagnation of the euro area, which accounts for 40 percent of exports. Over time, international action on corporate taxation could reduce Ireland’s attractiveness for some export-oriented FDI, but the authorities see limited risks in practice given other competitive advantages and as the corporate tax rate is not affected."
• "Domestic demand could sustain its recent momentum, yet concerns remain around possible weak lending in the medium term. Consumption growth may exceed the pace projected in coming years given improving property and labor market conditions. However, domestic demand recovery could in time be hindered by a weak lending revival if Basel III capital requirements became binding owing to insufficient bank profits, or if slow NPL resolution were to limit the redeployment of capital to profitable new loans." Do note that in the table listing IMF forecasts above, credit to the private sector is unlikely to return to growth until 2016 and even then, credit growth contribution will remain sluggish into 2017.

And the full risk assessment matrix:

Oh, and then there is debt. Glorious debt.

I blogged on IMF's view of the household debt earlier here: http://trueeconomics.blogspot.ie/2015/03/25315-imf-on-irish-household-debt-crisis.html and next will blog on Government debt risks, so stay tuned.

25/3/15: IMF on Irish household debt crisis

IMF on Irish household debt crisis (from today's Article IV paper):

"Household balance sheets are healing gradually, yet loan distress remains high and over half of arrears cases are prolonged. Households have cut nominal debts by 20 percent from peak through repayments primarily funded by a 4 percentage point rise in their trend savings rate. Debt ratio falls have been large by international standards but debt levels remain relatively high at 177 percent of disposable income. Household net worth has risen 25 percent
from its trough."

One note of caution: IMF statement ignores sales of household debt out of the Central Bank-covered statistics to vulture funds. Furthermore, repossessions, insolvencies, bankruptcies, voluntary surrenders and some mortgages restructurings have also contributed to the reduction in household debt. Thus, not all of the debt reduction is down to organic debt repayment by households.

It is also worth noting that per chart above, Irish household debt is currently at the levels of 2005-2006 - hardly a robust reduction on crisis-peak.

More from the IMF: "A recent survey finds household debts concentrated among families with mortgages, having 2 to 3 children, with the reference person aged 35 to 44, and in the two top income quintiles. Yet, their debt servicing burden is still similar to other groups, reflecting the high share of long-term “tracker” mortgages, with an average interest rate of 1.05 percent at end 2014."

The problem is that the recent survey IMF cites covers data through 2013 only! (http://www.cso.ie/en/media/csoie/releasespublications/documents/socialconditions/2013/hfcs2013.pdf).

Overall issues, therefore, are:

1. Irish household debts remain extreme relative to disposable income;
2. Distribution of household debts is adversely impacting the most productive segment of Irish population and the segment of population in critical years for pensions savings; and
3. Deleveraging of the households is by no means completed and remains exposed to the risk of rising interest rates in the future.

All points I raised before and all points largely ignored by Irish policymakers.

25/3/15: As Bogus Is, Bogus Does... IMF on Irish MNCs-led Growth

The IMF has published its Article IV consultation paper for Ireland and I will be blogging more on this later today. For now the top-level issue that I have been covering for some time now and that has been at the crux of the problems with irish economic 'growth' data: the role of MNCs.

My most recent post on this matter is here: http://trueeconomics.blogspot.ie/2015/03/24315-theres-no-number-left-untouched.html

IMF's Selected Issues paper published today alongside Article IV paper covers some of this in detail.

In dealing with the issues of technical challenges in estimating potential output in Ireland, the IMF states that "Irish GDP data volatility and revisions make it difficult to assess the cyclical position of the economy in the short-run. Ireland’s quarterly GDP growth data are among the most volatile of all European Union countries, more than twice the variability typically seen."

The IMF provides a handy chart:

And due to long lags in reporting final figures, as well as volatility, our GDP figures, even those reported, not just projected, are rather uncertain in their nature:

However, as IMF notes: other structural issues with the economy, besides poor reporting timing and quality and inherent volatility, further 'complicate' analysis:

"Multinational enterprises (MNE) accounting for one-quarter of Irish GDP can vary their output substantially with little change in domestic resource utilization. As shown in a recent study, MNEs represent only 2.1 percent of the number in enterprises in Ireland but slightly over half of the value added in the business economy. MNE output swings, sometimes related to sectoral idiosyncratic shocks (e.g., the “patent" cliff” in 2013...), can occur with little apparent change in
domestic resource utilization."

In other words, there is little tangible connection between output of many MNEs and the real economy. And the latest iteration of tax optimisation schemes deployed by the MNCs is not helping the matters: "The sharp increase in offshore contract manufacturing observed in 2014 is another example of such a shock. Such shocks to the productivity of the MNE sector may be best treated as shifts in potential GDP, because the result is a change in GDP without any significant change in resource tensions or slack in the
economy."

But MNCs are important for Ireland's tax base, right? Because apparently they are not that important for determining real rates of growth. Alas, the IMF has the following to say on that: "Swings in the value added of MNEs contribute substantially to variations in Irish GDP. Yet such swings are not found to have a significant effect on [government] revenues."


How big of an effect do MNCs have on the real economic growth as opposed to registered growth? IMF obliges: "The gross value added excluding the sectors dominated by MNEs behaves quite differently from aggregate GDP in some years. For example, in 2013 it grows by 3 percent at a time when official GDP data
were flat." In other words, the real, non-MNCs-led economy shrunk by roughly the amount of growth in the MNCs to result in near-zero growth across the official GDP.

However, since 2013 (over the course of 2014) a new optimisation scheme emerged as the dominant driver of manufacturing MNCs-led growth: contract manufacturing. IMF Article IV itself contains a handy box-out on that scheme, so important it is in distorting our GDP and GNP figures. Per IMF: "In 2014, multinational enterprises (MNEs) operating in Ireland made greater use of offshore
manufacturing under contract."

A handy CSO graphic illustrates what the hell IMF is talking about:

As covered in the link to my earlier blog post above, "Goods produced through contracted manufacturing agreements are treated differently in the national accounts than in customs measures of trade. As these goods do not cross the Irish border, they are not included in customs data on exports. If, however, the goods remain under the ownership of the Irish company, they are recorded as exports in the national accounts. Payments for manufacturing services and patent and royalty payments are service imports in the national accounts, offsetting in part the positive GDP impact of contracted manufacturing."

And to confirm my conclusions, here is IMF on the impact of contract manufacturing (just ONE scheme of many MNCs employ in Ireland) on Irish growth figures: "Contracted manufacturing appears to have had a significant impact on GDP growth in 2014 although it is difficult to make a precise estimate. Customs data on goods exports rose by 2.8 percent y/y in volume terms in the first nine months of 2014. In contrast, national accounts data on exports rose 12 percent in the same period. The gap between these two export measures can be attributed in part to contracted production, but could also reflect other factors like warehousing (goods produced in Ireland but stored and sold overseas) and valuation effects." Note: I cover this in more detail in my post.

"Assuming conservatively that contract manufacturing accounted for about half of the difference between customs and national accounts data, the implied gross contribution to GDP growth in the first three quarters of 2014 from contract manufacturing is 2 percentage points. However, there is a need to take into account the likelihood that service imports were higher than otherwise, but it is not possible to identify the volume of additional service imports linked to contract manufacturing."

One scheme by MNCs accounts for more than 2/5ths of the entire Irish 'miracle of growth'. Just one scheme!

And now… to the punchline:

Update: Seamus Coffey commented on the 2013 figure for domestic (real) economy cited above with an interesting point of view, also relating to the broader issue of the Contract Manufacturing: http://twishort.com/DTShc and his blogpost on the subject is here: http://economic-incentives.blogspot.ie/2015/03/the-growth-effect-of-contract.html

26/2/15: 'Kermit The IMF' on Irish Growth: It's Not Easy Being Greeen...

This is an unedited version of my column in the Village Magazine for February 2015

January IMF review of the economic situation in Ireland rained a heavy dose of icy water over the already overheating Government spin machine, and much of the IMF concerns centre around exactly the same themes that were highlighted in these very pages last month.

Top of the IMF worries list is growth.

Budget 2015 assumed GDP expansion of 3.9 percent in 2015, with 3.4 percent average growth from 2016 through 2018. The IMF forecasts growth of 3.3 percent in 2015, 2.8 percent in 2016 and “about 2.5 percent thereafter”. In simple terms, over 2015-2018, cumulative growth forecast discrepancy between IMF and the Government is now just shy of 3.3 percent. Put differently, based on IMF forecasts, Irish Government may be significantly overestimating economic prospects of the country.

Source: IMF and Department of Finance

The drivers behind IMF’s skeptical view of our prospects are exactly in line with those discussed in this column before. Exports growth is likely to be much shallower than the Government anticipates, while the domestic demand is still subject to massive debt overhang carried by households and companies.

As an aside, the IMF assessment of the Budget 2015 measures is far from confirming the mainstream Irish media and Irish Left’s view. The IMF had this to say about the measures: “Income tax cuts that increase the already strong progressivity of the system are the main items. While not significant to the revenue intake, reductions in property taxes by 14 local authorities, including Dublin, are a setback for collections from this recent broadening of the tax base.” Doing away with the tax breaks is fine, if it is done in the environment of falling distortionary taxes. Still, coupled with elimination of the property capital gains relief, the entire Budget 2015 was hardly a transfer from the poor to the rich, but rather a net tax increase on the upper earners, especially the self-employed professionals, relative to lower waged.

But back to the impact of growth risks on our Government’s balance sheet. Consider the IMF estimates for public debt dynamics.

Firstly, note that public debt fell from 123 percent of GDP in 2013 to 111 percent of GDP at the end of 2014. Impressive as this change might be, it is driven by one-off changes and not by any significant debt drawdowns. Consolidation of the IBRC into General Government accounts and its subsequent liquidation first pushed Irish Government debt up by 6.2 percent of GDP (EUR12.6 billion) in 2013 and then cancelled most of the same in 2014. All in, IBRC liquidation shaved off 6 percentage points off our 2014 debt to GDP ratio. In between, change in the EU accounting rules raised our 2013 GDP by 6.5 percent. Stronger economic conditions and smooth exit from the Troika Programme have meant that the Irish Government was free to spend some of the borrowed cash reserves on buying out IBRC-linked bonds held in the Central Bank. This drawdown of previously borrowed cash contributed to some 4 percentage points drop in Irish debt to GDP ratio. For all the Government’s bravado, last year’s economic recovery contributed only 1.75 percentage points to the debt decline or roughly one sixth of the overall improvement.

Still, barring adverse shocks, we remain, for now, on course to drive debt to GDP ratio below 100 percent of GDP before the end of 2019.

As IMF notes, however, a temporary drop of 2 percentage points in 2015-2016 forecast nominal GDP growth rates would push our debt to GDP ratio to 117 percent in 2016. And on the balance side, a one percent rise in primary spending by the Government can push public deficit to 3.6 percent of GDP in 2015 and 3.0 percent in 2016 instead of Government projected 2.7 percent and 1.8 percent, respectively.

The IMF is concerned that the Irish Government is suffering from the ‘adjustment fatigue’, especially once the upcoming political pressures of the general election start looming on the horizon. The danger is that “…medium-term fiscal consolidation is at risk from spending pressures, requiring the adoption of a clear strategy to enable the restraint envisaged to be realized. … As the public investment budget is already low, current expenditures will have to bear the brunt of spending restraint, while ensuring the capacity to meet demands for health and education services from rising child and elderly populations. Nominal public sector wages and social benefits must be held flat for as long as feasible and the authorities will need to continue to seek savings across the budget.”

Somewhat predictably, the Irish authorities offered no strategy for fiscal management beyond 2015 and no expenditure policy solutions that can address such risks. Instead of sticking to promised costs moderation, the authorities told the IMF that increased current spending, including on higher public sector wages, can be offset by “discretionary revenue measures”. In other words, should the Government want to fund pre-election giveaways to its preferred social partners (aka public sector wage earners) it can simply hike taxes on less favoured groups. A slip of the veil revealing the ugly nature of our politics-captured economic strategy.

Politics is now firmly displacing economics in both, the way we set our forecasts, as well as interpret the existent data.

Take, for example our reported nearly 5 percent growth over 2014. Various recent ministerial statements extoled the virtues of the Government that made Ireland “the envy of Germany” as the best performing economy in Europe. Largely ignored in the official rhetoric was that much of this growth came from the “contract manufacturing outside Ireland that is dominated by a few companies”. The problem is that none of it has any real connection to Ireland and, as IMF notes, much of it “could quickly turn”.

Private domestic demand, excluding aircraft leasing and investment in tech services-linked intangibles rose by closer to 3 percent. Again, according to the IMF this figure may be a more realistic estimate of the real recovery. In other words, somewhere between 30 and 40 percent of the recorded growth in 2014 was down to just one an accounting trick. And multinationals had plenty other accounting tricks up their sleeves that no one is bothering to count.

Even the 3 percent domestic growth estimate stands inconsistent with the data on household finances. Stripping out gains in household net worth attributable to the property markets, households’ financial positions hardly improved in 2014. Mortgages in arrears accounted for 23.7 percent of all house loans outstanding, when measured by the balance of loans, down from 25.6 percent a year ago. Based on the Central Bank data, at the end of Q3 2014, some 244,816 mortgages accounts (amounting to EUR46.1 billion) were either in arrears, in repossession, or at risk of arrears – a number that is roughly 4,500 higher than a year ago. Based on the Department of Finance data, 85 percent of all accounts in arrears ‘permanently restructured’ at the end of November 2014 involved arrears solutions that result in higher debt over the life time of mortgage than prior to restructuring.

Based on the Central Bank data, Q3 2014 household deposits in the Irish banking system stood at EUR85.9 billion, slightly down on EUR86.0 billion a year ago.

In part, the above figures translate into the improvement in banking sector performance at the expense of households. In the first half of 2014, Irish banks recorded their first positive return on assets since the beginning of the crisis, and the net interest margin (the difference between the bank lending rate and the cost of funding) rose to a crisis-period high of 1.5 percent. But credit growth remained negative, contracting at a rate higher than in 2011. Put this in simple terms, the banks continued to bleed their clients dry at a faster rate than the recovery was making them stronger, and there was preciously little observable improvement in households’ financial positions compared to 2013. Certainly not enough to claim the picture to be consistent with rapid economic growth.

The IMF isn’t undiplomatic enough to say that, but the Fund is clearly concerned more than the Irish authorities at this state of imbalances. As they should be: the Central Bank internal stress-testing for new mortgages being issued by the banks today is for the interest rates rising to over 6-6.5 percent over the life time of the loan.

Of course, the Central Bank is a myopic institution when it comes to telling us what effects such rates would have on existent corporate and household loans. But give it a thought. Currently, average existent mortgage on the market is priced at interest rates below 2 percent per annum. And with that, 17.3 percent of all mortgages accounts are officially in arrears, and 34.3 percent of all balances relating to mortgages loans are either in arrears, in repossessions or restructured.

Should the interest rates double, let alone triple, what mortgages default rates on currently performing mortgages can we expect? What amount of economic growth do we need to shore up our household finances sufficiently enough to escape the interest rate squeeze that even the Central Bank admits might arrive in the foreseeable future? Can the current trends in the recovery – the ones that are leaving households out in the cold, while superficially inflating official GDP figures – deliver any sense of sustainability of our economic performance across the financial, fiscal and economic areas in this country should even mild shocks take place?

One can only wonder as to the answers to these questions, as well as to the silence of our authorities on these topics.

18/6/2014: IMF on Irish Economic Growth: Sunshine is Still Awaiting the Future

Per IMF: "Growth is expected to firm to about 2.5  percent from 2015, with a gradual rotation to domestic demand despite little support from credit initially. Risks appear broadly balanced in the near term, but are tilted to the downside over the medium term, in part owing to risks to reviving financial intermediation which is important for sustaining job rich domestic demand growth."

Ah, the dreams… Firstly, actual IMF projection is for growth ow 2.4% not 2.5% in 2015. That 2.5% based on Fund own forecast will only arrive in 2016, not 2015. Secondly, per IMF previous forecasts (see next post), that 2.5% growth was supposed to hit us in 2015 (based on December 2013 forecast), reach 2.7% in 2015 based on June 2013 forecast and reach 2.5% in 2014 based on June 2012 forecast… so that 2.5% growth is, as before, still a mirage on the horizon...

"Strong domestic indicators and an improving external environment support staff projections for real GDP growth of 1.7 percent in 2014. Recent World Economic Outlook projections put growth of Ireland’s trading partners at 2 percent, driving export growth of 2.5 percent." Oops… but a tar ago the Fund said in 2014 we shall have 3.5% exports expansion… In fact, the fund downgraded Irish exports growth from 3.7% in 2015 to 3.6% between December 2013 and today's forecasts.

"Final domestic demand is expected to expand by 1.1 percent, led by investment, with significant upside potential given the investment surge in the second half of 2013. A modest ó percent increase in private consumption reflects rising incomes driven by job creation and improving consumer confidence. Public consumption will remain a drag on domestic demand as public sector wage costs continue to decline under the Haddington Road agreement." Wait… so consumption and domestic investment are booming. And IMF is moving forecast for 2014 for final domestic demand from 0.4% in December 2013 to 1.1% now. But materially, IMF forecast did not change that much: it was 1% for 2014 in June 2013, 1.1% in June 2012 and 1.4% in May 2011. And this is against a shallower GDP base since then! In other words, growth is improving forward because it disappointed in the past...

Summary:

Neat summary of risks around recovery: "prospects appear broadly balanced in 2014–15 but tilted to the downside over the medium term. Staff’s growth projections lie at the bottom end of the forecast range for 2014, and near the median for 2015, with sources of upside to both exports and domestic demand. Key risks include:

• External demand. Ireland’s openness (exports at about 110 percent of GDP) makes it vulnerable to trading partner growth, such as a scenario of protracted slow global growth, or if escalating geopolitical tensions were to notably affect EU growth.
• Financial market conditions. The substantial spread tightening despite high public and private debts faces some risk of reversal, perhaps linked to a surge in global financial market volatility. Although the direct fiscal impact would be modest owing to long debt maturities, adverse confidence effects would likely slow domestic demand.
• Low inflation. Ongoing low inflation in the euro area would lower inflation in Ireland, slowing declines in debt ratios and dragging on domestic demand in the medium term.
• Bank repair shortfalls. As firms’ internal financing capacity is drawn down, sustaining domestic demand recovery will depend increasingly on a revival of sound lending, where substantial work remains ahead to resolve high NPLs to underpin banks’ lending capacity."

Surprisingly, IMF lists no risks relating to households or SMEs, despite pointing at these in relation to the banks. Which implies that the Fund sees no difficulty arising in the households and SMEs sectors from banks aggressively pursuing bad debts, but it sees risk of this to the banks. I am, frankly, puzzled.

You can see the virtual flat-lining of Irish economy in 2012-2013 here:

Next post: IMF growth projections: a trip through the years...

18/6/2014: IMF analysis of Irish households' balance sheet

In previous two posts (here and here) I looked at the IMF's assessment of Irish banks. Now, lets take a quick look at the state of Irish households' balance sheets… Note: I covered outstanding credit to Irish households here.

Again, per IMF: "Household savings remain elevated, with three-quarters of savings devoted to debt reduction since 2010." Which practically means that savings and investment are now decoupled completely: we 'save' loads, we 'save' primarily to pay down debts. We, subsequently, invest nearly nada.

And savings rate has declined: in last 4 quarters on record below 10%, back toward the levels last seen at the end of 2008. Which should mean that consumption should be rising (as savings down)? Not really. Burden of debt is trending down still, from 2012 local peak, but this is still not enough to trigger increased consumption. Hence, the only conclusion is that savings down + consumption flat = income down. Might ask Minister Noon if his policies on indirect taxation have anything to do with this…

More ominously, for all this repayment of debts reflected in our 'savings' rates, the debt pile is not declining significantly:

What is going on? Especially since the recent 18 months should have registered significant debt reductions due to insolvencies and mortgages arrears resolutions acceleration? Ah, of course, that is what is driving the aggregate debt figures (although in many cases the debts are actually rising due to mortgages arrears resolutions, plus sales of debt to agencies outside the cover of Irish Central Bank, like IBRC mortgages sales).

Plus, for all the talk about mortgages arrears resolutions, the problem is barely being tackled when it comes to actual figures:

Oh, and the banks are continuing to squeeze depositors and fleece borrowers:

It's Happy Hour in the banking rip-off (sorry, CBI, profit margins rebuilding) saloon... All along, households are still under immense pressure on the side of their debt overhang.


Next Post: Economic Forecasts from the IMF

5/10/2014: Why the News of Budget 2014 'Easing' Is a Daft Idea

The reports are out about the IMF 'agreeing' to Government taking shallower adjustment in Budget 2014 are so far not based on IMF statements of record. In its latest review, published yesterday and amended to reflect the latest data, IMF clearly states that we still need a full EUR5.1bn adjustment to be taken over 2014-2015.

Irish Times reports undisclosed sources claiming that the IMF is now not opposing a shallower adjustment in 2014 in exchange for steeper adjustment in 2015. http://www.irishtimes.com/business/sectors/financial-services/imf-agrees-to-easing-of-3-1bn-target-1.1550925 This might be so. But there are several things you should consider before taking this as some unambiguous positive for Budget 2014.

Firstly, if true, this means that Ireland 'easing on austerity' in Budget 2014 to accelerate into 2015 adjustment will be equivalent to a household taking a 1 year mortgage relief in the form of reduced principal repayment relief (sort of a 'interest plus partial principal payment') that has to be recovered in full comes the following year. Even Irish Central Bank would not suggest this would be a meaningful relief to the borrower. In a sense, Irish Government will be taking a gamble if it reduces the EUR3.1 billion adjustment target - if growth undershoots the Budget 2014 projects or revenues slack or unexpected expenditure increases take place or any other possible risks arise, we will face more austerity in 2015 and possibly into 2016. All for a short-term small 'relief'?

Secondly, there are more reasons for being sceptical about the latest Government 'breakthrough':

1. Relief to be gained from such a transaction is not worth much - at most EUR300-400 million 'savings' to be immediately swallowed up by the 'black hole' of Government 'investment' - I wrote about this in my Sunday Times column on September 22nd. 
2. Much of this is unlikely to impact directly in 2014 due to time lags.
3. Much of the 'investment' will go to funding building activities in politicised constituencies. Remember primary care centres locations selection fiasco? The modus operandi that produced them is still here with us. 
4. The 'savings' will be terminated in 2015 as EUR5.1bn required total adjustment will have to erase fully the 'savings' generated in reduced adjustment for 2014. In short - we will get more waste, more future pain; and
5. Relief comes at a price of increased uncertainty into the Budget 2015 just at the time when we are heading into even more uncertainty of having to fund ourselves in the markets (keep in mind - our 2014 borrowing requirements are largely already covered by NTMA pre-borrowing, so real uncertainty over funding will coincide with the need for larger fiscal adjustment in 2015). This uncertainty is likely to result in Troika monitoring extending into 2016 and beyond, instead of Ireland gaining any meaningful clearance from Troika cover with 2015 fiscal adjustment. I covered this in the said Sunday Times article as well.

Oh, and one more little point: there is absolutely nothing new in the IMF taking such a position on Irish budget. IMF operates on the basis of longer-term targets and greater flexibility in adjustment than our EU 'partners'. IMF has signalled on a number of other occasions the same. 

So what exactly does the IMF 'support' for Budget 2014? Not much at all so far. And the risks from it, as noted above, are almost codified.

"The review had preliminary discussions on fiscal consolidation in Budget 2014. The Irish authorities are firmly committed to meeting the 5.1 percent of GDP ceiling on the deficit in 2014. They note some room to meet this ceiling with a smaller consolidation effort than the €3.1 billion (1.8 percent of GDP) set out previously, but have deferred a decision on the amount of adjustment in 2014 until closer to Budget 2014. [IMF] ...staff stressed the importance of delivering the planned cumulative consolidation in 2014–15 of €5.1 billion (2.9 percent of GDP). Under the revised macroeconomic projections, this amount of cumulative consolidation is also consistent with reaching a deficit within the EDP target of less than 3 percent of GDP by 2015." 

Note any statement about a 'relief'? I don't see one... But: "In this context, it was agreed that the authorities will publish Budget 2014 on October 15 with fiscal targets until 2016 fully in line with the 2010 Council Recommendation under the EDP, including the required fiscal consolidation effort until 2015, and national fiscal rules (proposed structural benchmark, MEFP)." Meanwhile, "the specific consolidation effort for 2014 will be discussed with the EC, ECB and IMF staff taking into account budgetary outturns in the first three quarters of 2013 and further information on growth developments and prospects." 

The IMF reiterates the same position of serious ambiguity on Budget 2014 and strict clarity on 2014-2015 adjustments targets throughout the entire Review. The Fund also clearly states where the thrust of 'savings' should be delivered: "An expenditure-led consolidation remains appropriate, including improved targeting of social supports and subsidies while protecting core public services and the most vulnerable."

20/12/2012: Pensions, health costs & education fees for 2014-2015

Staying with the IMF report on Ireland, and with the theme of 2014-2015 adjustments, here's again what the IMF had to say on what we should expect from the Government:

"The authorities should outline the remaining consolidation measures for 2014–15 around the time of Budget 2013 (MEFP ¶8). The program envisages additional consolidation of 3 percent of GDP over 2014–15. Taking into account the measures already specified for these years (such as on capital spending), and carryover savings from earlier measures, new measures of about 1½ to 2 percent of GDP remain to be identified for 2014-15."

I wrote about the above here. But there's more:

"To maximize the credibility of fiscal consolidation, and to reduce household and business uncertainties, the authorities should set out directions for some of the deeper reforms that will deliver this effort. These could include, for instance, on the revenue side, reforming tax reliefs on private pension contributions; and on the expenditure side, greater use of generic drugs and primary and community healthcare, and an affordable loan scheme for tertiary education to enable rising demand to be met at reasonable cost."

Further, per box-out on Health costs overrun: "there is scope for increased cost recovery in respect of private patients‘ use of public hospitals"

Hence, per IMF, the Government should hit even harder privately provided pensions (on top of the wealth tax already imposed), thus undermining even more private pensions pools and increasing dependency on state pensions. For those of us with kids, IMF - concerned with already unsustainably high personal debt levels - has in store more debt. This time to pay for our kids education. And for those of us with health insurance, there is more to pay too.

The above combination of measures is idiocy of the highest order. Per IMF, Irish economy is suffering from private debt overhang which leads to more deleveraging, less consumption and less investment. And these lead to lower growth. I agree. But what IMF is proposing is going to:

• Increase private debts and reduce the speed of deleveraging, and
• Raise the demand for already stretched public services.

This is the Willie Sutton moment for Ireland: the state (with the IMF blessing) is simply plundering through any source of money left in the country is a hope of finding a quick fix for Government insolvency. Now, with low hanging fruit already bagged, this process is starting to directly impact our ability to sustain private debts. But no one gives a damn! As Sutton, allegedly claimed, it makes sense to rob banks, because that is where the money are. Alas, with banks out of money, the Government, prompted by the IMF 'advice' is going to continue robbing us.

So a message to our Pensions industry, which hoped that going along with expropriation of customers' funds via pensions levy would allow the industry to avoid changes to tax incentives on pensions (the blood of the sector demand). Prepare for tax reliefs savaging. Once you fail to stand up to the bullies and protect the interests of your customers, you deserve what you are going to get. Every bit of it.

19/12/2012: Fiscal Issues, flagged by the IMF

Keep on reading the IMF report, folks. Nice little bots on offer regarding the fiscal programme performance.

Platitudes abound, well-deserved, but...

"A combination of slower growth, higher unemployment, and the over-run in health spending, have dimmed prospects for any significant fiscal over performance in 2012. Indeed, given the weak economic conditions, only about half of the 6 percent of GDP consolidation effort over 2011-12 has translated into headline primary balance improvement. [Meaning that we've been running into a massive headwind, with pants caught on rose bushes behind us...] Nonetheless, the authorities‘ consistent achievement of the original program fiscal targets despite adverse macroeconomic conditions gives confidence in their institutional capacity and commitment to consolidation."

Question is, when will rose bushes thorns get our fiscal pants shredded? We don't know, but here's the road ahead:

Of course, we knew this before, but it is a nice reminder that Enda Kenny's claim that Budget 2013 is going to be the hardest of all budgets is simply bull - the above figures have to be delivered on top of Enda's 'hardest' Budget 2013. Per IMF, however:
"The program envisages additional consolidation of 3 percent of GDP over 2014–15. Taking into account the measures already specified for these years (such as on capital spending), and carryover savings from earlier measures, new measures of about 1½ to 2 percent of GDP remain to be identified for 2014-15.

"To maximize the credibility of fiscal consolidation, and to reduce household and business uncertainties, the authorities should set out directions for some of the deeper reforms that will deliver this effort. These could include, for instance, on the revenue side, reforming tax reliefs on private pension contributions; and on the expenditure side, greater use of generic drugs and primary and community healthcare, and an affordable loan scheme for tertiary education to enable rising demand to be met at reasonable cost."

In other words, the Government will have to find somewhere around €3-3.2bn more cuts/tax hikes in 2014-2015 on top of those already factored in for 2013.

Now, in spirit with IMF paper, let me reproduce for you a box-out from IMF report on public sector wages in Ireland:

Enjoy the above - you can enlarge the text by clicking on the images.

19/12/2012: IMF on Irish Banks Zombies

Continuing with reading IMF latest report on Ireland, here's another bit. This time about Irish banks. Now, recall that in recent months and days we heard about Bank of Ireland and AIB meeting their lending targets, the latest data on mortgages printed a little rise in the number of them outstanding etc. The Government has been running around telling anyone willing to listen (not many, admittedly) that banks are 'repaired' and 'well-capitalized'. Here's IMF take on the comedy (emphasis is mine):

"Bank lending has remained weak. Lending flows have fallen to new lows, with gross mortgage loans to households down 10.3 percent y/y in the first three quarters of 2012 and new SME loan drawdowns (excluding financial intermediation and property-related) down 20.7 percent y/y in first half. Interest rates on SME loans (proxied by loan agreements below €1 million) remain well above euro area average levels."

Few charts:

So as the economy is starving for credit, irish banks - heavily subsidized by ELA and ECB funding (see below) are gouging SMEs for every last bit they can squeeze. Jobs creation in this environment? You gotta be kidding!

While the banks have deleveraged somewhat out of ELA and ECB (per below):

1. Their dependence on these sources is still extraordinarily high.
2. Taken in conjunction with lack of lending to the SMEs, the above suggests that what Ireland needs is not just an EU buyout of banks debts carried by the Exchequer, but also a special funding provision arrangement, which can allow Irish banks to retain high ELA/ECB exposures for at least 5-10 years, to allow economy some breathing room to pay these down. 
3. While banks deleveraged, households - despite significant savings and higher than Euro area average returns on savings - are nowhere near deleveraging curve, with debt/income ratios falling so far only  to the levels of mid-2009 (we are not even at pre-crisis levels!)

But IMF has more on Irish banks: "Domestic banks have high and rising impaired assets and remain unprofitable, which is eroding their currently strong capital buffers. Gross non-performing loans have risen to 23 percent of PCAR banks gross loans at end September, up from 17 percent a year ago, with 50 percent provisioning coverage." So: to summarize the above:

• Gross loans declined from  €247.2bn to €229.6bn  Q3 2011-2012
• Loan loss provisions rose from €19.5bn to €26.5bn (cover rising from 7.89% to 11.54%
• Gross NPLs (Non-Performing Loans)  meanwhile rose from €42.1bn (17% of Gross Loans) to €53.0bn (23.1% of Gross Loans), so te loans provisions amounted to 46.3% of NPLs in 2011 and now account for 50% of NPLs.
• However, Net NPLs to net equity ratio has risen dramatically from 68.6% to 109.3%. In other words, equity cushion is being depleted once again, especially as continued accumulation of NPLs coincided with drawdowns of net equity from €32.9bn to €24.2bn.

More form the IMF: "For the first three quarters of 2012, these banks reported a €0.8 billion pre provision loss excluding non-recurrent items (-0.3 percent of average assets) and, under their restructuring plans, they are not expected to break-even until 2014. Although these banks remain well capitalized, with Core Tier 1 ratios of 15.5 percent of risk-weighted assets and 7.5 percent of total assets, these buffers are expected to decline as loans are worked out and will be further eroded if operational losses persist."

What the hell does this mean, you might ask? Oh, why, let IMF speak. Here's the list of core risks faced by Ireland:

"This gradual recovery faces impediments that pose significant risks. Net exports, still the sole engine of growth, are naturally sensitive to any further weakening in trading partner activity. A sustained recovery that generates sufficient job creation also requires a revival of domestic demand, which faces a range of hurdles that create substantial uncertainty around prospects beyond the near-term:

• Financial reform benefits. In the wake of an exceptionally deep financial crisis, with impacts across the system, financial sector reform challenges remain substantial, and there is uncertainty around the timing and magnitude of the benefits of financial sector reforms for reviving banks‘ profitability and capacity to lend to households and SMEs. 
• Debt overhangs. Government debt is set to peak at some 122 percent of GDP, household debt is 209 percent of disposable income, and many SMEs are burdened by property-related loans. These debts drag on growth through private deleveraging, reduced access to credit at higher cost, and concerns about future tax burdens.
• Bank-sovereign loop. These debt stocks are compounded by still large contingent liabilities from the banking system in a scenario where weak growth reduces asset values and heightens loan losses. As a result, the challenges for sovereign and banks in accessing market funding are interlocked, magnifying the growth uncertainties.
• Fiscal drag. Fiscal consolidation will continue to be significant in coming years, with the growth impact depending on the composition of measures and also on external economic conditions and progress in easing credit constraints."

Do note that the banks play a role in all, I mean all, of the above risks. And the risks are correlated:

"Leaning against such developments with additional fiscal consolidation may help slow down the rise in the debt ratio, but would further reduce growth and raise unemployment and increase risks of hysteresis. Moreover, the resulting higher loan losses would generate new capital needs once banks‘ buffers are exhausted, which could raise debt ratios in the medium term, heightening the challenges to
recovery. Such setbacks in Ireland would exacerbate the broader euro zone crisis..."

And now to 'Boom!' factor: The "risks around medium-term growth prospects are a key source of
fragility in Ireland‘s debt sustainability, in part because prolonged low growth could result in
new capital needs in the financial sector."

In other words, were we to so see fiscally-induced and debt-overhang enabled structurally lower growth (at current rates), the debt crisis can lead to a new capital call from the banks on the Government. In this light, all the Government talk about 'improved' banking operations are, frankly put, tripe.

17/12/2012: Christmas Message from the IMF

Full IMF statement on Programme Review for Ireland is linked here. Very positive, per usual, with some cautionary note at the end. I will quote that part, you can read the platitudes.

"Looking ahead, however, a more gradual economic recovery is projected, with growth of 1.1 percent in 2013 and 2.2 percent in 2014, with public debt expected to peak at 122 percent of GDP in 2013. This baseline outlook is subject to significant risks from any further weakening of growth in Ireland’s trading partners, while the gradual revival of domestic demand could be impeded by high private debts, drag from fiscal consolidation, and banks still limited ability to lend. If growth were to remain low in coming years, public debt could continue to rise, in part reflecting the potential for renewed bank capital needs to emerge."

Irish Government Budget 2013 is built on the assumed growth of 1.5% (0.5 ppt ahead of IMF forecast) in 2013 and 2.5% in 2014 (0.3 ppt ahead of IMF forecast). Government debt is forecast by the Budget 2013 to peak at 121% of GDP, against IMF forecast of 122%.

Mr. David Lipton, First Deputy Managing Director and Acting Chair, said: "Vigorous implementation of financial sector reforms is needed to revive sound bank lending in support of economic growth. Key steps forward include arresting the deterioration of banks’ asset quality, reducing their operating costs, and lowering funding costs through orderly withdrawal of guarantees. The personal insolvency reform being adopted should facilitate out-of-court resolution of household debt distress, especially if complemented by a well functioning repossession process to help maintain debt service discipline and underpin banks’ willingness to lend."

Note the renewed emphasis on repossessions.

And to top it all, the IMF repeated a call for 'breaking the link between banks and the sovereign'. This marks a series of similar statements seemingly addressed at the EU leadership and I won't be surprised if the Fund were to focus on this issue much more as the EU continues to prevaricate on restructuring Irish debt.

So ehre we have it, folks - homes repossessions and debt relief for the sovereign. Prepare for the Benchmarking 3.0 once that 'debt relief' is delivered, then.

25/10/2012: My notes for the interview on Troika review

Here is transcript of my interview on today's radio programme covering the Troika review of Ireland - warning: unedited material. Italics denote quotes from the Troika statement.

Unfortunately, Ireland's recovery will not be achieved or even started by the exit from Troika funding program. For a number of reasons, conveniently omitted by Minister Noonan, but some of these are hinted at in the Troika assessment:

1) Real recovery will require dealing with private (household) debts. This is not happening and Troika review, as well as increasingly frustrated tone coming from our own Central Bank clearly show that. 

Once Ireland exits the bailout, we will have to fund our Exchequer debt repayments and reduced deficits via borrowing in the private markets. It might be that we will be able to fund ourselves at lower cost than currently, but the cost is likely to be still above that obtainable via ESM or Troika. This means more resources will be sucked out of the weak economy, further reducing the pace of private economy deleveraging. In other words, exit from the bailout will likely make it harder for the economy to recover.

2) Real recovery will require economic activity to start picking up in terms of private domestic investment, household spending, expanded activities by our own firms, not MNCs in exporting. All of this requires credit, it also requires disposable income.  Again, this will be only hindered by Ireland 'exiting' Troika funding.

3) Recovery in the  fiscal space will require lower, not higher, costs of funding for the Exchequer debt roll-overs and paydowns of Troika debts. As above, exit from the bailout will likely assure that this cost will be rising, not falling.

4) Recovery in the economy will require the Exchequer restructuring, significantly, some of the banks-related debts carried by the State. Most notably - the likes of the promissory notes - and this is clearly not going to be consistent with the Exchequer borrowing in the markets, at least not while we restructure the banks-related debt. It is better for Ireland to stay within the ESM and deliver on restructuring, and only after that aim to gradually exit the programme.

5) Lastly, recovery on exit from the program will require more aggressive reforms and stringent adherence to the fiscal discipline established. Alas, once we exit the program, the Government will lose its ONLY functional trump card in dealing with the Trade Unions. The Bogey Man of the Troika will be gone and the Social Partners will most likely exert pressure on the Government to borrow beyond its means to compensate them for the hardships of the Troika period. We can be at a risk of undoing overnight the precious little progress we've achieved to-date.

So, overall, I do not think this economy is going to recover once we exit the bailout. In fact, I think the entire logic of this argument as advanced by Minister Noonan is backwards. We should only exit the bailout once the economy is sufficiently strong to sustain orderly transition from subsidized funding to real world funding. Exiting Troika arrangements will not free Ireland from painful adjustments needed, but will likely risk derailing what has been achieved so far.

On Troika review specifics:

Banks remain well-capitalised and downsizing has progressed well, yet further efforts are needed to address their profitability and asset quality challenges.

Irish banks are well capitalized solely because there are no substantial writedowns of mortgages being undertaken in the banking sector. Meanwhile, mortgages arrears are snowballing, implying that the current levels of capitalization are unlikely to be sustained in the short term future. In other words, Troika praise here is simply a PR exercise.

Real GDP growth has slowed to a projected rate of ½ percent in 2012. Prospects for growth in 2013 are for modest pick up to just over 1 percent as domestic demand declines moderately...

So if I get this right: GDP will grow 0.5% in 2012 and 1.0% in 2013. GNP will shrink in 2012 and 2013 as well. Which means the real economy in Ireland - the one you and I and the listeners to this station are inhabiting will be shrinking 6 years in a row. That's 'strong performance'? In real terms we had GNP of 162bn in 2007, it fell to 127 billion in 2011 and is now, as IMF suggests will fall even further - close to 122-124bn or lower by the end of 2013. This is the much-lauded recovery we are bragging about?!

The authorities are ramping up reforms to restore the health of the Irish financial sector so that it can help support economic recovery. Intensified efforts are required to deal decisively with mortgage arrears and further reduce bank operating costs.

What are these reforms? Anyone noticed ANY progress in the banking sector? Especially on dealing with mortgages? I didn't. May be Minister Noonan can show us some couples who had their debt problems resolved? Not delayed, not shelved, but actually resolved. 

4/9/2012: H1 2012 Trade in Goods & busted expectations

At first I resisted (rather successfully) for a number of days from blogging about the trade in goods stats for June released on August 16th. Aside from the already rather apparent pharma patent cliff and resulting collapse of exports to the US, there is little to be blogged about here. Well, may be on some BRICs data, but that will come later, when I am to update bilateral trade with Russia stats.

Then, playing with the numbers I ended up with the following two charts showing trade stats for H1 2012:

As dynamics show in the chart above, Ireland's goods exports are... err... static in H1 2012 compared to H1 2011 - down 1.69% y/y compared to H1 2011 and this comes against a rise in exports of 5.91% y/y in H1 2011 (compared to H1 2010). The exports-led recovery has meant that in H1 2008 exports are up just 3.62% on H1 2008 and are down 0.58% on H1 2007. Recovery? What recovery?

Of course, over the same period of time, imports fell 3.14% on H1 2011 (after rising 9.25% y/y in H1 2011 compared to H1 2010), and in H1 2012 imports stood at 20.09% below their H1 2008 and down 23.20% on their H1 2007 levels.

Which means that our exports-led recovery is currently running as follows: imports are down substantially more than exports (which is accounted for primarily by the collapse in domestic demand and investment activities), while exports are running only slightly behind their pre-crisis levels.

Thus, trade balance was up 0.05% y/y in H1 2012, while it is up 58.49% on H1 2008 and 51.48% on H1 2007. The body that is the Irish economy is producing  pint of surplus blood by draining 5 pints and re-injecting 4 pints back. Hardly a prescription for curing the sick according to modern medicine approach.

But that alone is not what keeping me focused on the numbers. Instead, it is the hilarity of our captains' expectations when it comes to the proposition that 'exports will rescue us'. Many years ago, in the days when the crisis was just only starting to roar its head, I said clearly and loudly: exports are hugely important, but they alone will not be sufficient to lift us out of this mess. Back then, I had Brugel Institute folks arguing with me that current account surpluses will ensure that ireland's debt levels are sustainable. Not sure if they changed their tune, but here's what the Government analysis was based on, put against the reality.

In the chart below, I took 3 sets of Government own forecasts for growth in exports for 2009-2012, extracted from Budget 2010, 2011 and 2012. I then combined these assumptions into 3 scenarios: Max refers to maximum forecast for specific year projected by the Department of Finance, Min references the lowest forecast number, and the Average references the unweighted average of all forecasts available for each specific year. I applied these to exports statistics as reported for 2009 and plotteed alongside actual outrun:

Current H1 2012 outrun for exports is €449 million lower than the worst case scenarios built into the Budgets 2010-2012 by the Governments. It is also €4,399 million behind the highest forecasts.

Put differently, the outcome for H1 2012 is worse than the darkest prediction delivered by the Department for Finance.

Of course, the exercise only refers to goods exports and must be caveated by the fact that our services exports might take up the slack. So no panic, yet. And a further caveat should be added to reflect the fact that the above is not our exporters fault, as we are clearly suffering from the tightness in global trade. On the minus side, there's a caveat that the pharma patent cliff has been visible for years and that the Government has claimed that they are capable of addressing this.

Sleepless nights should not be caused by the latest stats, yet. But if things remain of this path, they will come.

18/6/2012: Irish Trade in Goods: April 2012

In the previous post (here) I highlighted some concerns emerging from April 2012 data on trade in goods. Now, let's take a look at actual data. All data is seasonally adjusted.

April imports volume came in at €3,561 million, down 22.5% or €1,034 million on March 2012 and down 27.61% or €1,358 million on April 2011. Historical average for monthly imports is €4,417 million, while crisis period average is €4,121 million. 12mo MA is €3,945 million. All of this means that current April imports are seriously under-trend and we can expect either an uptick going forward or continued weakness. The former would imply recovery in exports, the latter would imply continued slowdown in exports.

Compared to same period 2010, Imports are now running down -15.64%.

April volume of exports was €6,993 million down €713 million or -9.25% m/m and down €584 million or -7.71% y/y. Exports in April were down 3.08% on April 2010. Current level of imports is significantly below historical average of €7,289 million and crisis period average of €7,407. 12mo MA is €7,647.

Trade surplus has risen on foot of rapid fall off of imports despite a rather pronounced drop in exports. Trade surplus stood at €3,432 million, up €320 million (+10.28%) m/m and up €774 million (+29.12%) y/y. Compared to April 2010, April 2012 trade surplus for goods trade is up 14.63%.

Average monthly surplus is €2,872 million and crisis period average is €3,286 million. 12mo MA is ahead of both at €3,702 million.

January-April 2012 imports are down 7.2%, exports are down 0.9% and trade surplus is up 7.6% year on year.

Imports intensity of exports (or ratio of exports €€s per € of imports) is now at 196.4 - up on March level of 167.7 and up on 154.0 in April 2011. Historical average ratio is 168% and crisis period average is 182%. 12mo MA ratio is 195 and January-April 2012 average ratio is up 6.6% y/y.

The CSO has not reported any terms of trade indices since December 2011.