Economics 15/09/2009: Why there is no hope...

This is, to put it in PMD's words, why there is no hope for long term growth in Ireland (here).

Throughout the years of Celtic Tiger, the Social Partnership presided over:

• The planning system and spatial development strategies that assured the current crisis in property markets and locked tens of thousands of Irish residents in the 'commuter belt' - slaves to cars, spending hours on the roads, and now also facing punitive taxes (here);
• The tax system that created all the incentives for generation of the housing and credit bubble in the economy as it benefited the political, unions and 'Social Pillar' partners at a cost of gross mismanagement and even abuses of public trust;
• The system of governance and policy formation that made FAS, Benchmarking and the likes of HSE inevitable outcomes of paucity and culture of entitlement that exemplify Ireland;
  
• Vast transfers of wealth from the private sector taxpayers to public sector and political classes via ESOTs, privatization payoffs and exclusive employment contracts that are the legacy of the state in former state enterprises;
• Inchydoney Accord, Bertie Ahearn's 'Socialism' and Brian Cowen profligate spending in the budgets of 2005-2008 all were the direct corollaries of the unaccountable and feudal system of economic policy formation that relied on this cronyist 'Good Old Boys Club' operating behind the closed doors - the princely court at which the Bearded Men of the Social Pillar/Unions were outnumbering 3:1 the business representatives and at which the taxpayer was represented by the economic pie being sliced and served;
  
• Retarded competition in the domestic markets that benefited the clients of the state, and so on.
  

Cui bono?

The self-appointed guardians of the public interest - our NGOs and trade unions - had their leadership firmly at the trough which was filled by the Government with the taxpayers cash. It is their signatures that grace every Partnership Agreement. It is their leaders who enjoyed FAS hospitality on the state body board. Their counterparts on employers' side, at the very least, had a better taste of not pretending to stand in for the little man's interest.

Now that the pipeline is dry, the Partnership unravelled. Yet, instead of fighting the legacy of the clientilist, anti-democratic, corporatist reminders of the 1930s, our 'Opposition' parties prefer to advocate the continuation of the political order that assured the current crisis.

Irony? It would be, if not for the lack of alternatives at a voting booth.

Future growth, especially future sustainable growth, will have to rely on freeing economy from the shackles of the policy making exercise that is conducted by those who add no value through their labor and are reliant only on state transfers (of money via subsidies or customers via restricted access) to stay in business. It is that simple, folks. Public sector, FAS, Forfas, all of our Departments add no real value to either productivity growth in this country or to the productive capacity of this country in general. At the very best, they can provide support. Companies are not run by their administrative assistants they are run by entrepreneurs and key personnel at the coalface of productive processes. Neither are economies.

Until the entire political class of Ireland understands it (and thus accepts the logical proposition that follows from it, namely that the Social Partnership is a problem, not a solution), my forecast for Ireland's long term growth will remain 0-1%pa. Good luck sustaining Brian Cowen's salary on this...

Economics 24/06/2009: SMEs feeling the heat

Yesterday's business conditions survey from ISME paints a picture of dire operating conditions for Irish SMEs.

Q2 2009 survey results "confirm that smaller companies are still in the throes of economic despair with employment levels, investment and sales remaining extremely negative. Despite this harsh environment business optimism has improved for the second quarter running, albeit from historically low levels." The survey was based on 600 companies responses shows both that there is no 'green shoots' improvement and that expectations for 12 months ahead are not offering much hope of an upturn "with companies further readjusting downwards their employment and investment levels."

Business confidence "has improved since the previous quarter with a net 56% of companies less optimistic in comparison to a net 71% in the previous quarter. The most negative sector is Construction with a net 73% less optimistic, followed by Retail at 71%, Distribution (70%), Manufacturing (51%) and Services at 48%." In contrast, "74% of companies, up from 69% in the previous quarter, viewed the current business environment as being either ‘poor’ or ‘very poor’." Only 23% expect business conditions to improve over the next 12 months, up from 16% in Q1 2009. 66% of companies said viability of their businesses was under threat over the next 12 months, if present conditions remain.

Employment conditions continue to deteriorate dramatically:
"Nearly two thirds (62%), (56% in the previous quarter), of companies employing less than this time last year and only 6% employing more. These figures are the worst ever recorded and confirm that there has been no slowing down in job losses in the sector, with evidence suggesting that this trend is to continue over the next number of months. The Construction sector was worst affected with 83% of companies letting people go in comparison to 72% of Distributors, 61% of Retailers and Manufacturers, and 43% of Service firms."

Furthermore, "employment prospects remain bleak with 43% of companies anticipating letting people go over the next 12 months, with only 7% planning to increase employment numbers. Distribution companies are the most pessimistic with a net 52% expecting to let people go, in comparison to 40% in the Construction sector, 35% Retailers, 32% Manufacturers and 28% of service businesses."

Clearly distribution services are feeling the squeeze of higher excise duties, VAT and other consumption damaging taxes and retail sector collapse. Construction sector, despite having bled jobs at the fastest rate of all segments of Irish economy in the past still remains one of the focal points of jobs destruction. Ditto retailers. The spread between these sectors and services is narrow enough signifying that we are indeed heading for the second wave of layoffs in the higher wage sectors.

"Sales continue to fall off a cliff with a net 77% of companies reporting lower sales in comparison to a net 72% in the previous survey. To put this in context there has been an eight fold increase in the number of companies reporting reduced sales in comparison to the same period last year. Only 23% of companies expect to increase sales over the next 12 months. Not surprisingly profit levels are badly affected with a massive 73% of companies anticipating a reduction in net profits, while 61% expect revenues to decline over the next 12 months, down from 69% in the previous quarter."

A massive 81% of companies said their sales/order books are down in comparison to last year. But only 33% of companies reported that their stock levels are down for the year, in comparison to 24% in the previous quarter, suggesting that overcapacity is still plaguing this economy and putting more pressure ahead on employment levels.

Credit crunch is also getting worse: "26% of companies have orders, production capacity and markets unserviced for want of working capital."

And new orders are being pressured by existent orders cancellations (implying even more pressure on employment in the short term) as "54% of companies have encountered cancellation of orders in the last quarter." Interestingly (the level of detail supplied in the survey is remarkable), cancellations were from,

• Locally Based Multinationals 16%.
• Export Destinations 7%
• Local Indigenous Firms 77%
  

This means only one thing - domestic economy is still in a free fall and exporters are the last line of defense we have left. It is Stalingrad time for Brians & Mary and they are still in denial that the winter has arrived.

SMEs continue to reduce "investment in their businesses with 32% having done so in comparison to 30% in the previous quarter. 19% indicated they increased investment, down from 25% in the previous 3 months. Only 16% of companies anticipate an increase in investment over the next 12 months."

This puts to an end any arguments the Government might have had about aiding the investment cycle through 'knowledge' economy programmes and tax changes they 'introduced' in December 2008. It ain't working, folks.

Although our Government economists are keen on talking about deflation, "firms continue to experience inflationary pressures, with increases of 5% plus being reported for transport, energy, raw materials, Insurance and waste. However, there is evidence of reductions in wage costs and rents." So in the nutshell - the Government and its cronies in the unionised, state-controlled and priced sectors are still ripping-off consumers and producers, while ordinary workers are taking a pay hit.

Finally, "47% of companies apportion blame to the Government for the current economic crisis, with a significant number of SMEs concerned at the lack of direction being provided."

I don't have much to add to this one.

Economics 19/06/2009: IMF on NAMA and Construction Data

Per Reuters report (here), IMF is about to publish long over-due Consultation Paper on Ireland.

IMF, allegedly, will recommend Ireland "retain the option of including additional types of loans, such as residential mortgages, in its "bad bank" scheme for housing bad debts".

This if proven correct will open NAMA to an additional downside of some €30-40bn in stressed residential property loans, which cannot be foreclosed or enforced for political reason. A costliest form of rescuing the ordinary homeowners, as compared with directly repairing their balancesheets via cash/assets injection. It will completely politicize NAMA. Hence, I will be revising my NAMA cost estimates upward in days to come.

The Indo reports that the IMF had calculated that Ireland's "structural deficit", which excludes the impact of economic fluctuations on revenues and spending, could be as much as 10 percent of Gross Domestic Product (GDP), or 18 billion euros ($25 billion). Brilliant. If proven right, IMF will be bang-on with my estimates from December 2008 and full 1.8 percentage points ahead of DofF numbers.

"It (the IMF) will endorse the widespread view that most of the correction must now come on the spending side, rather than through more tax rises," the Irish Independent wrote. Now, recall that Brian Lenihan and his adviser, Alan Ahearne, told us that no serious analyst was sugegsting, at the time of the Mini-Budget of April 2009 that the Government should focus more heavily on spending cuts, and thus, per Lenihan, huge tax increases in April budget were justified. Of course, many analysts, ncluding myself, replied that this was a lie back at the time. Now, IMF is falling behind our view.

Now, two things worth mentioning before the report is out.

First, a birdie told me that the IMF was 'convinced' by the Government to delay publication of its report until after the local elections.

Second, another birdie told me that the report was less watered down than usual, because the usual 'consultative' process where by the Governments get to vet some of the IMF's recommendations and analysis in rounds of bargaining broke early in April/May.

I am looking forward to this report...

CSO data on Production in Construction and Building sector:
When a picture is worth a 1,000 words...
No signs of 'bottoming out' or 'Green Shoots' above Q1-Q2 2009 are dire and getting worse for the private building sectors. But what about the so-much touted 'Fiscal Stimulus' on our Brian-Brian-Mary 'Public Investment' side?
None! all is dead on Civil Engineering growth side, courtesy of a lie that is our public investment stimulus.
And things are getting much worse with time across the entire Residential and Non-Residential Building sectors.
But do spot an odd one out...