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.

OECD report blasts Irish policies

Now, that the FT busted out the OECD report released today, I can do the same. I gave it a quick preview in this yesterday's post (here) so now let's get down to the details.

Here is what I said about it's findings yesterday:
"...compared to other developed countries around the world, Ireland finds itself as:

• the worst economically governed in the world;
• in deepest trouble when it comes to housing markets declines to date;
• the country that is applying all the wrong (uniquely Irish) remedies to its fiscal problems; and
• the country that is least well positioned to come out of this recession any time soon."

In effect, OECD's report, that does not focus on Ireland alone, provides a somber assessment of Irish Government policies, exposing their complete and total failure in addressing the crisis to date. And here are the actual details per each point.

Point 1: The worst economic governance in the world:
Table 3.4:
So per the above numbers:

• Ireland has the fastest rising debt in the OECD;
  
• Ireland has the worst primary imbalances in the OECD. The US is catching up in 2010 projections, though the cumulative impact of primary imbalances over 2008-2010 will still remain the highest in Ireland (by over 1% point). Furthermore, the US imbalances are sourced from rapid fiscal spending expansion - wasteful, but nonetheless stimulative, while Irish primary imbalances arise from over bloated current expenditure - the purest form of public sector waste of all;
• Ireland has the highest fiscal gap in the OECD in both 2008 outrun and 2010 projections.

Next, move up to Figure 3.3 (below) which shows that we have blown fiscal spending policies not on healthcare or long-term care provisions, but on something else.
Ireland is managing to achieve the third highest projected spending rises through 2050 of all OECD states (after catch-up Korea and Greece), but lions share of that is being consumed by growth in pensions exposure. Why? How else do you think are we supposed to pay for Rolls-Royce pensions provisions in the public sector?

Point 2: Ireland is applying the uniquely wrong measures to addressing our fiscal and economic problems:
This is a point that links to point 1 above, so let us deal with it now. Table 3.2 below gives the data on different measures and their incidences and impact on the sectors of economy as adopted by various OECD governments.
Ireland clearly stands out here as:

• The only OECD country that, unconstrained by the IMF austerity measures, is facing a rising burden of the state (positive net effect of fiscal austerity for 2008-2010 period);
• One of only three OECD countries (Italy and Mexico being in our company) that is raising taxes (and here we are facing tax increases that are 12 times more severe than Italy and over 4 times more severe than Mexico, before the April 7 Mini-Budget hammers us even more);
• One of only two countries (Iceland being another country, but it is constrained by the IMF conditions) to raise individual taxes (our tax increases are twice those of Iceland). What is even more insulting is that our individual tax increases are by far the biggest source of fiscal burden of all other fiscal policies Messr Cowen and Lenihan are willing to adopt;
• One of only 3 countries (the IMF-constrained Hungary, and Italy being the other two) that is raising consumption taxes, with increased consumption tax burden being 5 times greater in Ireland than in Italy;
• A country with the heaviest burden of fiscal policies on households - with combined effect of individual, social security and consumption tax increases of +3.7% - 12 times the rate of tax burden increases in Italy and almost 4 times the rate of total household tax burden increases in Iceland and Hungary;
• Our fiscal expenditure measures are second worst only to IMF-constrained Iceland.
  

Figure 3.2 below illustrates, although one has to remember that Israel scores next to us because it actually has rising tax revenue and is facing the unwinding of some of the exceptional spending that occurs during military campaigns.
Another interesting aspect of the OECD findings relates to the sources of our fiscal imbalances. Figure 3.1 shows these:
Notice that according to the OECD chart, the cyclical component of the debt increases for 2008-2010 is only roughly 26% of the entire debt levels. The ESRI (see here) says it should be around 50%. I estimated (here) that it should be around 21% (here).

Point 3: The scope for recovery:
According to the OECD "On this basis, the countries with most scope for fiscal manoeuvre would appear to be Germany, Canada, Australia, Netherlands, Switzerland, Korea and some of the Nordic countries. Conversely, countries where the scope for fiscal stimulus is very limited would include Japan, Italy, Greece, Iceland and Ireland." We are in a good company here, indeed.

Point 4: Housing troubles:
Finally, Table 1.2 below illustrates my housing crisis point.
Yes, no comment needed here.