Economics 22/8/10: Fundamentals of investing in IRL Inc - IV

This is the last post in the series of four that presents fundamentals comparatives between Ireland, Switzerland and Luxembourg. The first post (here) covered analysis of current account dynamics, the second post (here) dealt with General Government balance, third post (here) highlighted differences in GDP and income. This post deal with residual fundamentals such as inflation, unemployment and population.

In terms of inflation we are not doing too well. Since 2000 Ireland remains expensive. More expensive than Switzerland, despite our massive bout of deflation. This, of course, does not account for the fact that Swiss residents get much better quality public sector services than we do, for less money spent. But that's a matter of a different comparison that I touched upon earlier (here, here and here).

So Chart 12 shows our inflation performance.

Chart 12:

You wouldn't be picking Ireland for your investment if you were concerned with real returns or with effects of inflation on economy's ability to carry debt.

If population growth is really a longer term dividend, we should expect Ireland Inc to overtake Switzerland by now in terms of prosperity (Chart 13). After all, our 1980s and 1970s'-born cohorts are currently at the peak of their productivity. But recall per capita GDP... so far, there isn't really any evidence that growth in population leads to higher growth in GDP once scale effects are taken out of equation.

Chart 13:

Would you have invested in Ireland's debt if you were thinking about Ireland's ability to repay on the basis of lower costs of unemployment and greater proportion of labour force at work? Take a look at Chart 14.

Chart 14:

Well, not really. Swiss and Lux make for a much more compelling case here and not just in the current crisis environment.

So here's our real problem that is not a function of cyclical dynamics, but a structural one. Our employed are carrying much greater burden of providing for the rest of our population than Switzerland (Chart 15).

Chart 15:

Factor in that Irish public sector is larger, in relative-to-population terms than Swiss... and you have an even greater discrepancy in terms of the true earning capacity of the Irish economy.

Which brings us to the issue of productivity and back to the topic of exporters carrying the burden of the entire economy out of the recession. Apart from the construction boom, economy-wide income per person working is lower in Ireland than in either Switzerland or Lux since the 1980s. Even at the peak of the largest real estate bubble known to any other European country in modern history, our 2008 GDP per person employed was still not that much greater than that of Switzerland (Chart 16).

Chart 16:

May be, just may be it was because our wealthy developers all wanted a fine Swiss watch, while no Swiss investors wanted our bungalows in Drogheda or apartments in Tallaght? which is the same as to say - the Swiss are productive to the point of the rest of the world wanting their goods and services. We are productive only to the extent of the rest of the world wanting goods and services produced by MNCs and few indigenous exporters based here. But their productivity is high in gross terms and low in net terms (recall current account analysis in the first post). Unless we can dramatically increase the number of exporters while simultaneously upping the net value added in their operations to Swiss levels, there's no chance external trade can carry this economy out of the recession.

Economics 22/8/10: Fundamentals of investing in IRL Inc - III

This is the third post in the series of four that presents fundamentals comparatives between Ireland, Switzerland and Luxembourg. The first post (here) covered analysis of current account dynamics, the second post (here) dealt with General Government balance. This post will highlight differences in GDP.

Once again, think of an investor making a choice between sovereign debt of three countries. Fundamentals about current account (external surpluses generated by economy - subject of the first post), government balances (second post), economic income and growth (present post), as well as unemployment, population and income per working person (following concluding post) all help underpin the economy ability to repay its sovereign debts.

So far, we have shown that:

1. By external balances metric, Ireland is a much poorer performer than either Switzerland or Lux;
2. By sovereign balances metric, Ireland is a much poorer performer than either Switzerland or Lux

Now, consider GDP metrics. We all heard that we are one of the richest economies in the entire world. Is this really so?

Let me put a caveat here - analysis of GDP figures for Lux is a bit tricky, since Luxembourg official stats exclude all those people who work in Luxembourg but reside outside its borders. So the best benchmark here is Switzerland. Sotake a look at the 'Celtic Tiger' vis-a-vis Switzerland. 2002-2007 growth rates are virtually identical in both. But since 2007 - we have been a basket case, while Swiss have been ticking along nicely, like a fabled clock.

Chart 8:

And this is highlighted in each country share of the world GDP as well: we have 61% of Swiss population and 886% of Lux's population (Chart 9). Yet we have - in absolute terms - 54% of Swiss global share of GDP and 438% of Lux's. PPP-adjusted, our GDP is just 28.8% of Swiss and 400% of Lux's. In current prices-measured GDP, Ireland's GDP is 42.2% of Swiss and 400% of Lux's. So that population growth dividend isn't really working for us so far.

Chart 9:

Per capita GDP in current prices (Chart 10):

Chart 10:

• 2008 peaks in all three countries: Luxembourg=USD118,570.05, Ireland= USD60,510.00, Switzerland= USD68,433.12
• Peaks recovered by: Luxembourg= USD119,048.05 by the end of 2015, Ireland= USD60,729.66 by the end of 2019, Switzerland= USD69,838.79 by the end of 2010.
  

So it will take Ireland 9 more years to regain its income per capita 2007 levels, which were below those of Switzerland to begin with. Note: 2016-2020 forecast was performed assuming no recession between 2010 and 2019.

Of course, we were a stellar performer in terms of GDP growth prior to 2006. That's one fundamental where we did shine. But stripping out construction sector contribution in 2001-2007, we are not that spectacular (Chart 11)...

Chart 11:
The fourth and last post will conclude by making comparisons across other variables, such as inflation, population growth and labour markets.

Melting Down Lenihan Style & Daily Economics 27/03/2009

According to the Irish Times, Brian Lenihan is now admitting that the revenue receipts for March are going to show even further deterioration in the fiscal position. This time around, Lenihan is claiming we will fall to €34bn in receipts, as opposed to the DofF forecast issued in January, assuming receipts of €37bn. Oh, Brian, thou are an incorrigible optimist. Anyone who has read this blog knows that I predicted this much in February (see here). That was then and despite the fact that our Minister Lenihan, with his new advisers from NUI (or 'yes-men' as I would put it), are catching up with my numbers, I have to move the targets once again.

(can someone figure it out what's the value of all these paid economists working for him if they are a month-and-a-half behind this free blog in forecasting?)

So here is my latest forecast - it will be subject to a revision once the actual Exchequer returns come out for March.Notice that I have dropped expected gross tax revenue to €31.4bn (inclusive of non-tax items), consistent with tax revenue of €31bn. I have also computed the General Government Deficit as a function of my forecast for 6.5-7% drop in GDP this year. Thus, 2009 Gen Gov Deficit is now expected to reach 11.8% of GDP and by the end of 2013 this will drop to 7.13%, not 2.5% that DofF predicted in January 2009 estimates. The reason for this later-years discrepancy is to a large extent driven by the short-term debt being issued by the NTMA to finance current spending.

So, Brian, here is a challenge - how soon will you and your advisers get down to my forecast figures? Or, should you want to save some dosh for the taxpayers - you can fire a couple of them and hire myself - I'll do their jobs (obviously) better and for, say, 1/4 of their price?

Now another update - new Eurocoin forecast for Euro-area economic activity is out, so time to update my own forecasts. Here is the chart. Lines in red denote my forecast forward.

External Trade stats for December 2008 are out and things are looking bad. Jan-Dec 2008 imports down 10%, exports down 3% y-o-y.

MNCs lead in declines, with Computer equipment exports down from €12,577m to €9,322m (-26%) and Organic chemicals from €19,641m to €17,853m (-9%). These are real declines, not offset by transfer pricing. In other words - these are jobs under threat or being lost. In other MNCs-led sectors: Chemicals exports increased from €2,664m to €3,483m (+31%), Pharma from €14,749m to €16,704m (+13%) and Professional, scientific & controlling apparatus from €2,109m to €2,779m (+32%). These are transfer-pricing driven, but at least for now, jobs are being supported, if only by our Bahamas-on-the-Liffey tax shelter, if not by superior productivity. How do we know this? Look at imports: Pharma imports up from €2,397m to €2,866m (+20%), Petroleum & relateds from €4,479m to €4,813m (+7%) and Natural gas from
€1,039m to €1,378m (+33%). These are inputs into the sectors where MNCs-led exports still are growing.

Goods shipped to Great Britain decreased from €15,002m to €14,302m (-5%) - evidence that our exporters are absorbing exchange rates changes into their bottom lines - and to Switzerland from €3,251m to €2,555m (-21%). Goods to the United States increased from €15,825m to €16,657m (+5% - also evidence of significant real competitiveness improvements, given still adverse terms of trade conditions), to China from €1,989m to €2,323m (+17%), to Malaysia from €694m to €1,062m (+53%) and to Spain from €3,281m to €3,587m (+9%). These are strong geographical results, showing, amongst other things that we are moving away from intra-EU trade dependency.

Inter-temporally: December 2008 the value of exports was +10% on December 2007, while imports were down -19%. But seasonally adjusted exports were down 4% on November 2008, while imports were down 11%. Preliminary estimates for January 2009 show exports of
€7,014m, down 1% on January 2008 and imports of €3,946m, down 28%. This is (good) mixed result showing that exports in general remain relatively buoyant when compared against domestic economy collapse.

Per separate data from CSO: the volume of output in building & construction decreased by 26.7% in Q4 2008 compared with Q4 2007. The value of production decreased by 24.3% in the same period. This tells me that the anticipated Exchequer savings due to lower cost of construction are unlikely to be significant: volume falls outstripping value falls implies unit cost of construction is up!