12/8/20: Post-Covid Economy: The Winds of Change

 

Yesterday, I gave a talk about the state of the global, European and Irish economies at the Omnipro event in Dublin. Here are my slides from that talk:

5/1/17: Gwan Ya Beaut... Irish PMIs ≠ Irish GDP

Some years ago, I have shown that Irish measures of economic activity - when collected at sectoral levels - have virtually nothing in common with Irish GDP and GNP. Given recent revisions to economic growth and the National Accounts, including the absurd levels of notional GDP and GNP growth recorded in 2015 and in parts of 2016, it is worth to revisit the same issue.

So here is the data: the best advanced indicator data on Irish economic activity that we have is the set of Purchasing Managers Indices (PMIs) released by Markit for three key sectors of the economy: Construction, Manufacturing and Services. Markit are doing pretty much an honest job surveying companies to determine if they are experiencing uptick or decline in their activities. And they are doing this every month. Yes, there are issues with data quality due to what appears to be a strong pro-MNCs bias in the surveys. And yes, Markit are refusing to fully investigate the matter and to test data formally for such biases. And yes, Markit are still not willing to share with me their data, including the actual final data set of PMIs (I have to collect these manually, every month).

But, for all the above problems, Markit is the only source of leading economic indicators for Ireland.

So next is the question: do rates of growth signalled by PMIs actually relate to the rates of growth recorded in the economy (GDP and GNP)?

Let’s take a look, using CSO’s official National Accounts data.

The above shows whatever is happening in Manufacturing. Nope, growth rates signalled by PMIs are not correlated with growth rates in GDP or GNP.  Changes in Manufacturing PMI signals account for only 9.3% of variation in GNP and 6.4% variation in GDP. You wouldn’t be asking Manufacturing sector for its view if you wanted to gauge Irish aggregate economy. 

The above shows what is happening in Services. Again, growth rates signalled by Services PMIs are not correlated with growth rates in GDP or GNP.  Changes in Services PMI signals account for only 12.6% of variation in GNP and just under 8% variation in GDP. You wouldn’t be asking Services sector for its view if you wanted to gauge Irish aggregate economy either.

Why are both sectors signals come out utterly useless when it comes to signalling growth in either GDP or GNP? We have no idea. But my speculative view is that in reality, even large MNCs can’t organically establish their own ‘contributions’ to Irish GDP because whilst purchasing managers and related executives on operations side might know what their divisions are doing and how much more or less business they are handling, the same managers have no idea what value in the end will be attached to their divisions work by the finance lads on the Mother Ship. In other words, real operations managers have no clue how much their companies are booking in revenues or profits because these revenues and profits have only tangential connection of Irish operations. Tax arbitrage is such a naughty thingy, you see, when it comes to collecting data.

Not that Markit (or a vast array of Irish stuff brokers so keen on using its data to ‘interpret’ ‘buy everything’ signals for Irish assets) mind… Gwan, ya beaut... buy some stocks, will ya?

10/9/15: 2Q 2015 National Accounts: External Trade

In the first post of the series covering 2Q national Accounts data, I dealt with sectoral composition of growth, using GDP at Factor Cost figures.

The second post considered the headline GDP and GNP growth data.

The third post in the series looked at the Expenditure side of the National Accounts, and Domestic Demand that normally more closely reflects true underlying economic performance,

Now, consider extern trade.

• Exports of Goods and Services were up 13.56% y/y in 2Q 2015 previously having risen 14.17% y/y in 1Q 2015. Over the last 4 quarters, growth in exports of goods and services averaged 14.2% y/y.
• Most of growth in exports of Goods and Services is accounted for by growth in Goods exports alone. These rose 16.36% y/y in 2Q 2015 after rising 16.86% y/y in 1Q 2015. Average y/y growth rate in the last 4 quarters was 18.38%. In other words, apparently Irish exports of goods are doubling in size every 4 years. Which, of course, is simply unbelievable. Instead, what we have here is a combination of tax optimisation by the MNCs and effects of currency valuations on the same.
• Exports of Services also grew strongly in 2Q 2015, rising 10.34% y/y, having previously grown 10.94% in 1Q 2015 and averaging growth of 9.94% over the last 4 quarters. Again, these numbers are beyond any reasonable believable uptick in real activity and reflect MNCs activities and forex valuations.
• Imports of Goods and Services rose 16.9% y/y in 2Q 2015, an increase on already fast rate of growth of 15.46% in 1Q 2015. Unlike exports side, imports side of goods and services trade was primarily driven by imports of services which rose 21.8% y/y in 2Q 2015 (+20.7% y/y on average over the last 4 quarters) as compared to 9.0% growth y/y in imports of goods (+13.5% y/y on average over last 4 quarters).

As the result of the above changes,

• Trade Balance in Goods and Services fell in 2Q 2015 by 1.8% y/y, having previously recorded an increase of 7.4% y/y in 1Q 2015. Combined 1H 2015 trade balance is now up only EUR399 million on same period 2014 (+2.26%).
• Trade Balance in Goods registered 26.9% higher surplus in 2Q 2015, and was up EUR6.206 billion in 1H 2015 compared to 1H 2014 (+28.4%). Trade Balance in Services, however, posted worsening deficit of EUR5.584 billion in 2Q 2015 against a deficit of EUR2.174 billion back in 2Q 2014. Over the 1H 2015, trade deficit in services worsened by EUR5.806 billion compared to 1H 2014 (a deterioration of 136% y/y).

CONCLUSION:

1. Irish external trade continued to show strong influences from currency valuations and MNCs activities ramp up, making the overall external trade growth figures look pretty much meaningless. 
2. Overall Trade Balance, however, deteriorated in 2Q 2015, which means that external trade made a negate contribution to GDP growth. 
3. Over the course of 1H 2015, the increase in overall Irish trade balance was relatively modest at 2.26% with growth in goods exports net of goods imports largely offset by growth in services imports net of services exports.

Stay tuned for more analysis of the National Accounts.

10/9/15: 2Q 2015 National Accounts: Domestic Demand

In the first post of the series covering 2Q national Accounts data, I dealt with sectoral composition of growth, using GDP at Factor Cost figures.

The second post considered the headline GDP and GNP growth data.

Here, let's consider the Expenditure side of the National Accounts, and most importantly, Domestic Demand that more likely reflects true underlying economic performance, removing some (but by far not all) tax activity by the MNCs.

As before, I will be dealing with y/y growth figures throughout the post.

Remember: Final Domestic Demand is a sum of Personal Expenditure, Government Expenditure, and Gross Fixed Capital Formation. Adding to that change in stocks gives us Total Domestic Demand, while adding net exports to Total Domestic Demand and subtracting outflows of factor payments to the rest of the world gives us GDP.

• In 2Q 2015, Personal Expenditure on Goods and Services rose 2.83% y/y, having previously risen 3.71% in 1Q 2015. The rate of growth in 2Q 2015 was, therefore, slower than in 1Q, but faster than in 2Q 2014 (2.28%). Overall, Personal Expenditure added EUR599 million to the economy in 2Q 2015 compared to the same period in 2014, a drop in positive contribution from EUR784 million added in 1Q 2015. Nonetheless, the figures for Personal Expenditure are healthy.
• Net Expenditure by Government on current goods & services rose 1.73% y/y in 2Q 2015, which marks a slowdown on 5.45% rate of growth recorded in 1Q 2015. Rate of growth recorded in 2Q 2015 was also lower compared to 2Q 2014 when Government expenditure rose 3.92% y/y in real terms. This marks 2Q 2015 as the first quarter since 1Q 2013 in which Government expenditure rose slower than Personal expenditure.
• Gross Domestic Fixed Capital Formation posted a massive 34.2% rise y/y in 2Q 2015, compared to already rapid growth of 9.2% recorded in 1Q 2015. It is worth noting that these figures include investments by MNCs tax-registered in Ireland (e.g. tax inversions et al) and vulture funds and other foreign investors' purchases of domestic assets. Over the last 4 quarters, Gross Domestic Fixed Capital Formation growth averaged 18.44%. This line of expenditure contributed EUR2.977 billion to GDP growth in 2Q 2015 and in H1 2015 total contribution was EUR3.781 billion.
• As the result of the above, Final Domestic Demand rose 10.07% y/y in 2Q 2015 - a massive rate of increase, especially compared to 5.34% growth recorded in 1Q 2015 and 6.4% growth recorded in 2Q 2014.

However, despite all the Nama sales and vultures investments, tax inversions and organic growth, Irish Final Domestic demand remains below the levels attained prior to the crisis, albeit the gap is now at only 5.62%:

Chart below shows the extraordinary uplift in Gross Fixed Capital Formation:

We have no idea what drove this uptick, but were Gross Fixed Capital Formation growth running at 1Q 2015 pace in 2Q 2015, this line of expenditure contribution to GDP would have been EUR2.175 billion lower, and overall GDP growth would have been less than 2.1% y/y instead of 6.7%. This just shows how volatile Irish figures are and how dependent they can be to a single line change of unknown nature.

CONCLUSIONS: 

1. Overall, Irish economy posted moderate growth in Personal Expenditure and Government Expenditure in 2Q 2015. Slightly negative news is that growth in 2Q 2015 was slower in these two categories than in 1Q 2015.
2. Gross Fixed Capital Formation posted an unprecedented rate of increase y/y rising 34.2% in 2Q 2015. There is absolutely no clarity as to the sources or nature of this growth, especially considering that traditional investment areas of Building & Construction have been growing at just 1.5% y/y in 2Q 2015. Stripping out growth in this area in excess of 1Q 2015 already rapid expansion would have generated much lower, more realistic growth figure for GDP and for Domestic demand.
3. Final Domestic Demand expanded strongly on foot of Fixed Capital Formation, rising 10.1% y/y in 2Q 2015 almost double the 5.3% rate of growth recorded in 1Q 2015.
4. One area of potential concern is the impact on Domestic Demand (via Gross Fixed Capital Formation) from the MNCs activities via MNCs inverted into Ireland. There are multiple examples of such inversions across various sectors all having potential implications on how we treat investment by such firms in National Accounts. Another area of concern is treatment of capital investments by some financial firms, such as aircraft leasing firms and, increasingly, vulture funds and REITS.

Analysis of external trade flows is to follow, so stay tuned.

10/9/15: 2Q 2015 National Accounts: GDP and GNP Growth

In the previous post covering 2Q national Accounts data, I dealt with sectoral composition of growth, using GDP at Factor Cost figures.

Here, consider the headline GDP and GNP growth data.

First, year on year figures:

• As noted earlier, GDP at factor cost rose 6.52% y/y in 2Q 2015, having previously expanded 6.77% y/y in 1Q 2015. This means that sectoral growth slowed down slightly in 2Q 2015 compared to 1Q 2015, although the slowdown was not very large. Still 2Q 2015 growth was faster than 2Q 2014 growth (6.31%). These are good news. In 2Q 2015, GDP at constant factor cost contributed EUR2.833 billion to overall GDP and over the course of 1H 2015 cumulative y/y contribution was EUR5.576 billion.
• Taxes rose 5.13% y/y in 2Q 2015, having previously grown at 8.06% y/y in 1Q 2015. There is quite a bit of seasonal and within-year timing variations in these series, so we can look at 1H 2015 effects instead. 1H 2015 cumulative taxes contribution to GDP was EUR687 million, which EUR995 million contribution over 1H 2014.
• Subsidies made a positive contribution to GDP growth (or rather - less negative) in 1Q 2015 of EUR58 million, followed by a positive contribution in 2Q 2015 at EUR83 million. Overall, subsidies reduction (subsidies enter as negative into GDP) was EUR141 million in 1H 2015 compared to 1h 2014a swing of EUR321 million in terms of GDP growth in 2015-2014 compared to 2014-2013 periods.
• GDP at constant market prices rose 6.67% y/y in 2Q 2015, down on 7.17% growth recorded in 1Q 2015. So GDP growth was fast in 2Q, but slower than in 1Q. Surprisingly, to some media observers, GDP growth in 2Q 2014 was also higher at 7.0% as compared to 2Q 2015.
• Outflows of profits abroad (MNCs expatriation net of Irish companies repatriation of profits from abroad) jumped in 2Q 2015, moderating overall GNP growth. In 2Q 2015, net factor income for the rest of the world reached EUR8.039 billion compared to 1Q 2015 at EUR7.383 billion and 2Q 2014 at EUR7.013 billion (more on this later).
• As the result, Irish GNP at constant market prices grew strong 5.28% y/y in 2Q 2015, which is nonetheless well below 8.07% growth recorded in 1Q 2015 and below blisteringly high rate of growth of 10.71% recorded in 2Q 2014. Over 1H 2015, GNP expanded by EUR5.2 billion compared to H1 2014, but this growth was slower than the rate of growth recorded in H1 2014 compared to H1 2013 (+EUR5.469 billion).

Again, given markets' surprise at Irish growth (compared to market expectations), here is a chart with a simple polynomial trend in GDP and GNP growth rates:

As chart above shows, both GDP and GNP growth surprised to the downside on trend, not to the upside. Which, again, begs a question: what models are being used to forecast Irish economic performance?

Now, consider GDP/GNP gap:

In 2Q 2015 GDP/GNP gap in Ireland stood at 18.95% - the highest since 2Q 2013 and well above the period average, as illustrated in the chart above. Net factor income outflows ratio to GDP was 15.94% - also the highest reading since Q2 2013. Both, higher gap and higher ratio signal (imperfectly) MNCs activity acceleration built into Irish growth figures, albeit we cannot connect these gaps to specific quarter when activity was actually registered.

Table below summarises y/y growth rates in 2Q 2015 and 1H 2015:

Table below summarises q/q growth rates in 1Q 2015 and 2Q 2015, as well as 2Q 2014:

Summary:

• GDP at constant prices rose 1.87% q/q in 2Q 2015 which marks a marginal slowdown on 1Q 2015 growth of 2.13%. 
• GNP at constant prices rose 1.91% in 2Q 2015 compared to 1Q 2015, reversing the loss of 0.17% recorded q/q in 1Q 2015. Which is also a good outrun.
• In annual growth terms, however, both GDP and GNP came in with slower growth y/y in 2Q 2015 than in 1Q 2015. That said, growth in GDP was very high at 6.67% y/y and growth in GNP was solid and more realistic 5.28% y/y,
• Headline figures, therefore, reflect strong performance, but as noted in the previous note, much of this performance is driven by MNCs-dominated sectors activity.

Stay tuned for the expenditure side of the National Accounts in a later post.

10/9/15: 2Q 2015 National Accounts: Sectoral Growth Analysis

So Irish National Accounts data for 2Q 2015 was released today. Brace yourselves for series of blog posts here and a torrent of congratulatory waffle across the media.

Starting, as I always do, with sectoral composition of growth, using GDP at Factor Cost figures. All referenced here are in real terms (inflation-adjusted) and seasonally unadjusted so we can look at what matters most: annual rate of growth (y/y).

And we are off:

• Agriculture, Forestry and Fishing sector contribution of GDP in 2Q 2015 was EUR1.341 billion (yeah, that's right… just that much). And this figure represents a decline of 1.18% y/y. Ugh… growth it ain't. But good news is, sector output grew 5.57% y/y in 1Q 2015, so for the year to-date we are still up cumulative EUR32 million in the sector (+1.44%). Still, a year ago in 2Q 2014 the rate of growth in the sector was 23.8%.
• Industry (inclusive of Building & Construction) output contribution to GDP was EUR13,711 billion. Aha… more than ten times that of Agriculture Forestry & Fishing sector. But never mind, we don't call Ireland the Widgets Island… So the sector grew 4.36% y/y in 2Q 2015 which adds to 10.52% growth in 1Q 2015. Healthy numbers all even though 2Q was a slowdown. And a year ago, in 2Q 2014 things were even more heated - then sector grew at 14.7% y/y. But 1H figure is pretty healthy all around: up EUR1.739 billion in 1H 2014 (+7.18%).
• Take some decomposition of growth in Industry. Transportable Goods Industries and Utilities sub-sector (aka Pharma MNCs Central) grew at a hefty rate of 11.2% in 1Q 2015 and this fell to 4.64% y/y growth in 2Q 2015. Again, sub-sector growth was weaker in 2Q 2015 than in 2Q 2014 (+14.71% y/y). However, Transportable Goods Industries sub-sector was the biggest contributor to growth in 2Q 2014 of all Industries, but more on this below. Meanwhile, Building & Construction sub-sector expanded by 4.41% in 1Q 2015 and this sub-sector managed to grow only 1.52% in 2Q 2015. For all the ink expended by irish media pushing revival of the Construction sector stories in recent months, 1H 2015 cumulative y/y growth in the sub-sector was just EUR64 million (+2.87%). Still, growth is growth, right? 
• Distribution, Transport, Software and Communications sector (aka non-Pharma MNCs Central) was the booming one this quarter. In 1Q 2015 this sector expanded output by 9.64% and in 2Q 2015 this rose to 11.40% y/y. Yes, folks, things are doubling in this sector faster than every 7 years (pretty soon, all Beemers in the world will be made in Drogheda and all Mercs will be stamped out in Wexford). Back to numbers: this sector is now almost as large as the entire Industrial sector in Ireland at EUR12.398 billion 2Q 2015 contribution to GDP. Over 1H 2015 the sector added EUR2.335 billion in growth to the GDP, more than any other sector in the economy and its output was up 10.52% y/y.
• Public Administration and Defence sector continued to shrink in 2Q 2015, falling 4.05% y/y after having posted a 5.45% contraction in 1Q 2015. The sector managed to subtract from GDP growth some EUR147 million (-4.74%) y/y over 1H 2015.
• Other Services, including rents, sector was up steady 4.35% y/y in 2Q 2015 having previously grown 4.42% y/y in 1Q 2015. Over 1H 2015, compared to 1H 2014, the sector contribution to GDP expanded by EUR1.48 billion (+4.39%).

Here is a chart illustrating evolution of GDP art Factor Cost:

The above shows that GDP at factor cost grew by 6.52% y/y in 2Q 2015 down slightly on 6.77% growth in 1Q 2015, but still fast. GDP at factor cost expanded by EUR5.576 billion in 1H 2015 compared to 1H 2014 (+6.64%). Very fast. Which is good news.

Trends are illustrated in the chart below:

As chart above shows very clearly, level of GDP at factor cost came in as a slight surprise above the simple polynomial trend line, but growth rate in GDP has both moderated in 2Q 2015 compared to 1Q 2015 and came at below the trend line. Which begs a question: what are all those analysts who underestimated GDP growth use for a model?.. But never mind - forecasting Irish economy is a hazardous task.

Now, here's an interesting bit:

As the chart above shows, lion's share of growth in 2Q 2015 came in from the MNCs-dominated sectors:

• Industry (ex-Building & Construction) contributed almost 1/5 of the entire growth
• Distribution, Transport, Software and Communications sector (aka non-Pharma MNCs Central) contributed whooping 45%; and
• Other Services contributed 26%.

Everything else mattered not.

The same picture, pretty much, holds for 1H cumulative growth contributions:

Summary: so what has been happening over 2Q 2015 and 1H 2015? 

1. Yes, we have growth and fast growth at it. Mostly, it is broadly-based across various sectors. 
2. But dominant sectors that act as two leading (by a mile) sources of growth are  Industry (ex-Building & Construction) dominated by Pharma and Chemicals, plus Distribution, Transport, Software and Communications sector, dominated by non-Pharma MNCs. Interestingly, last year, 1H 2014 growth y/y involved much shallower expansion of output in Distribution Transport Software and Communication sector (+4.62% against this year's +10.53%), which possibly signals amplified tax optimisation and exchange rates effects of MNCs activities in the sector. 
3. Growth was much stronger in domestic sectors a year ago than in 1H 2015: Agriculture (+20.87% y/y in 1H 2014 against +1.44% in 1H 2015) and Building & Construction (+12.5% y/y in 1H 2014 against +2.87% y/y in 1H 2015) sectors.
4. Y/Y 2Q 2015 growth was slower than 1Q 2015 across all sectors other than Distribution, Transport, Software and Communications sector. Annual contraction rate moderated slightly in Public Administration sector in 2Q 2015 compared to 1Q 2015.

We can't say much about quality of growth beyond that... But stay tuned for more detailed analysis of National Accounts data later.

4/6/15: Irish Growth Fudge: Village, May

My most recent article for the Village Magazine [May 2015] is now available on-line: http://www.villagemagazine.ie/index.php/2015/05/1-not-5-growth-in-2014/

Covering the problems with Irish growth accounting.

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.

24/3/15: There's no number left untouched: Irish GDP, GNP and economy

According to Bloomberg, US companies are stashing some USD2.1 trillion of overseas cash reserves away from the IRS: http://www.bloomberg.com/news/articles/2015-03-04/u-s-companies-are-stashing-2-1-trillion-overseas-to-avoid-taxes?hootPostID=ffda3e167ae0ebabc3da4188e9bd22de

Ireland is named once in the report in a rather obscure case. Despite the fact we have been named on numerous other occasions in much larger cases. But beyond this, let's give a quick wonder.

1) Last year, exports of goods in Ireland leaped EUR89,074 million based on trade accounts with Q1-Q3 accounts showing exports of EUR66,148 million compared to the same period of 2013 at EUR65,381 million - a rise of 1.01% or EUR767 million. Full year rise was EUR2,075 million. So far so good. Now, national accounts also report exports of goods. These show: exports of goods in Q1-Q3 2013 at EUR69,731 million and exports of goods in Q1-Q3 2014 at EUR78,835 million, making y/y increase of EUR9,104 million. Full year 2014 - EUR108.989 billion a rise of EUR15.98 billion y/y. The discrepancy, for only 3 quarters, is EUR8,337 million or a massive 6.1% of GDP over the same period. For the full year it is EUR19.92 billion or 11% of annual GDP. Much of this difference of EUR19.92 billion was down to 'contract manufacturing' - yet another novel way for the MNCs to stash cash for the bash… IMF estimated the share of contract manufacturing to be at around 2/3rds of the annual rise in Q1-Q3 figures. Which suggests that around EUR7.4 billion (once we take account of imports of goods) of Irish GDP rise in 2014 was down to... err... just one tax optimisation scheme. That is EUR7.4 billion of increase out of EUR8.275 billion total economic expansion in the MiracleGrow state of ours.

2) Last month, Services activity index for Ireland posted a massive spike: overall services activity rose 12.59% y/y, the dynamic similar to what happened in Q2-Q3 last year with goods exports (Q1 2014 y/y +8.2%, Q2 2014 y/y +12.9% and Q3 2014 y/y +17.9%). Even more telling is the composition of Services growth by sectors: wholesales & retail trade sector up 8.83% (a third lower than the overall growth rate), transportation and storage - ditto at 8.4%, admin & supportive services +2.91%. Accommodation and food services posted rapid rise of 14.03% and professional, scientific & technical activities rose 13.97%. Meanwhile, tax optimisation-driven information & communication services activity was up 21.15%. What could have happened to generate such an expansion? Anybody's guess. Mine is 3 words: "knowledge development box" - a non-transparent black-box solution for tax optimisation announced as a replacement for the notorious "double-Irish" scheme. So let's suppose that half of the services sectors growth is down to MNCs and will have an effect on our 'exports'. In Q3 2014 these expanded by 13.4% y/y and in Q2 by 10.8% - adding EUR5,560 million to exports. January data on services activity suggests, under the above assumption, roughly the same trend continuing so far, which by year end can lead to a further MNCs-induced distortion of some EUR11 billion to our accounts on foot of Services sectors exports.

Take (1) and (2) together, you have roughly EUR21-22 billion of annual activity in the export areas of services and goods sectors that is likely (in 2015) to be down to MNCs washing profits through Ireland through just two schemes.

Then there are our factor payments abroad - what MNCs ship out of Ireland, in basic terms. As our total exports of goods and services been rising, the MNCs are taking less and less profit out of Ireland. Chart below sums these up. While profitability of MNCs is rising - a worldwide trend - Ireland-based MNCs remittances of profits are falling as percentage of exports. 2008-2012 average for the ratio of net remittances to exports is 18%, which suggests that even absent any uplift in profit margins, some EUR27.5 billion worth of profits should have been repatriated in Q1-Q3 2014 instead of EUR22.16 billion that was repatriated - a difference of EUR5.36 billion over 3 quarters or annualised rate of over EUR7.1 billion. Factoring in seasonality, the annualised rate jumps to closer to EUR8 billion.

On an annualised basis, for full year 2014, exports of goods and services from Ireland rose y EUR23.28 billion year-on-year, while net exports rose EUR3.784 billion. Meanwhile, profits repatriations (net) rose only EUR719 million. Aptly, for each euro of exports in 2013, Ireland's national accounts registered 74.2 cents in net factor payments abroad. In 2014 this figure hit historical low of 69.1 cent.

My guess is, MNCs have washed via Ireland close to EUR30 billion worth of profits or equivalent of 17.1% of 2013 full year GDP and close to 16.5% of 2014 GDP. Guess what was the GDP-GNP gap in 2013? 18.5 percent. And in 2014? 15.4%. Pretty darn close to my estimates.

Let's check this figure against aggregate differences in 2008-2014 GDP and GNP. The cumulated gap between the two measures, in nominal terms, stands at EUR201.3 billion, closer to EUR204 billion once we factor in seasonality in Q4 numbers to the estimate based on Q1-Q3 data. The above estimate of EUR29.97 billion in 'retained' profits implies, over 7 years a cumulated figure of EUR209.8 billion, or a variance of EUR827-1,200 million. Not much of a margin of error. I'll leave it to paid boffins of irish economics to complete estimates beyond Q3 2014, but you get the picture.

And now back to points (1) and (2) above: how much of the Irish growth in manufacturing and services - growth captured by one of the two exports accounts and by the likes of PMI metrics and sectoral activities indices is real and how much of it is an accounting trick? And what about other schemes run by the MNCs? And, finally and crucially, do note that contract manufacturing and knowledge development box types of tax optimisation schemes contribute to both GDP and GNP growth, thus completing the demolition job on Irish National Accounts. There is not a number left in this economy that is worth reading.


Update: we also have this handy graphic from the BusinessInsider (http://uk.businessinsider.com/us-corporate-cash-stashed-overseas-2015-3?r=US) charting the evolution of U.S. MNCs stash of cash offshore:

Ah, those U.S. MNCs err... FDI... mattresses...

11/12/2014: QNA Q3 2014: Sectoral Activity

Here is the first post on QNA detailed analysis, covering sectoral distribution of activity in Q3 2014.

Note: I covered top level results here: http://trueeconomics.blogspot.ie/2014/12/11122014-q3-2014-irish-growth-broadly.html

Based on seasonally unadjusted data expressed in constant prices (real terms).

Overall all sectors output amounted to EUR40.868 billion in Q3 2014 which is 3.44% higher than in Q3 2013. This marks a significant slowdown on Q2 2014 growth that clocked at 6.53% y/y, but is marginally above Q1 2014 y/y growth at 3.23%.

For the first nine months of 2014, output of all sectors is up 4.41% compared to the same period in 2013. A very healthy number, albeit moderated by the following factors:

1. ESA2010 application is boosting (superficially) business activity relating to R&D allocations, now counted as investment; 
2. Ongoing shift in MNCs patterns of activity here, including (but not limited to) outsourcing of production; and
3. Ongoing shift of the externally trading economy in favour of ICT services, heavily reliant on profit shifting and tax optimisation.

Agriculture, Forestry & Fishing sector output stood at EUR989 million in Q3 2014, which is down 1.59% y/y - the worst performance since Q2 2013. In Q2 2014 y/y growth in the sector was massive 12.43% and in in Q1 2014 it was 3.74%. Over the first nine months of 2014, activity in the sector expanded 5.47% y/y.

Industry, including Construction, output stood at EUR10.281 billion in Q3 2014, which is up 1.96% y/y - a slowdown on Q2 2014 growth rate of 6.47% but an improvement on Q1 2014 decline of 4.97%. Over the first nine months of 2014, activity in the sector expanded only 1.11% y/y, which is weak. Meanwhile, Building & Construction sub-sector output stood at EUR895 million in Q3 2014, which is up 7.31% y/y - a slowdown on Q2 2014 growth rate of 9.54% and on Q1 2014 growth of 9.73%. Q3 2014 growth is the weakest since Q1 2013. Over the first nine months of 2014, activity in the sector expanded 8.76% y/y, which is ok-ish, given abysmally low levels of overall activity. Current level of activity is comparable to Q1-Q3 1997.

Distribution, Transport, Software & Communications output stood at EUR10.832 billion in Q3 2014, which is up 6.39% y/y - a healthy reading. Nonetheless, Q3 growth represents a slowdown on Q2 2014 growth rate of 11.46% and on Q1 2014 growth of 10.67%. Over the first nine months of 2014, activity in the sector expanded by a hefty 9.4% y/y, which is a good news.

Public Administration and Defence output stood at EUR1.572 billion in Q3 2014, which is down 1.26% y/y, against Q2 2014 growth rate of 3.75% and on Q1 2014 growth of 3.67%. Over the first nine months of 2014, activity in the sector expanded by 2.02% y/y in real terms.

Other Services (including rents) output stood at EUR17.622 billion in Q3 2014, which is up 3.67% y/y, against Q2 2014 growth rate of 2.69% and on Q1 2014 growth of 3.85%. So this sector showed acceleration in y/y growth rates. Over the first nine months of 2014, activity in the sector expanded by 3.48% y/y in real terms.

Summary of changes y/y is shown below in the table.

In summary: only one sector of the economy posted higher rates of growth in Q3 2014 compared to Q2 2014. Two sectors of the economy posted declines in activity y/y against four sectors that posted increased activity. This contrasts with all sectors posting growth in Q2.

Stay tuned for further analysis of QNA figures later tonight.

21/8/2014: Economy in a 'Not me, but maybe you?..' recovery

This is an unedited version of my column for the Village Magazine, June-July 2014 (date of filing: May 24, 2014)


There has been a uniformly singular analysis of the fallout from the European and local elections last week, the leitmotif of which is the view that the voters have vented their frustration and disappointment with the policies the coalition government. Majority of these policies, relate to the economy. Going into elections, candidate after candidate insisted on recounting the successes of the Fine Gael and Labour in reversing the pains of economic crisis: tens of thousands of jobs created, economy stabilised, property markets and investment on the upside and households finally facing into the prospect of tax cuts in the Budget 2015. Save for the contracting pharma sector – suffering from ills of the patent cliff unrelated to Ireland and the Government – things are getting brighter by the minute.

The voters bought none of these claims. Still, the question remains unanswered: has the economic decline been reversed during the years of coalition management?

It is a difficult question to tackle. So let us try and face up to the core facts with a measure of cold statistics.

In very broad terms, the economy can be broken into private consumption, Government consumption, private investment, public investment, and net exports (exports less imports) of goods and services. Everything, excluding net exports, taken together is known as the Final Domestic Demand. Adding to the demand net exports provides for the Gross Domestic Product. Adding to GDP inflows of payments on Irish investments abroad net of outflows of payments on foreign investments in Ireland gives the Gross National Product.

In the economy severely distorted by MNCs tax arbitrage and where foreign companies account for the entire trade surplus (the positive measure of net exports), the Domestic Demand is the measure of economic activity that most accurately measures what takes place in the country. It excludes the pharma sector and the ICT services exporters who are pushing massive accounting revenues and profits into our national balancesheet.

The simple statistical fact is that final domestic demand rose in Q4 2013 by EUR630 million compared to Q4 2012, although for the full year 2013 it was down EUR366 million, once we adjust for inflation. This means that 2013 was the sixth consecutive year of declines in domestic demand, but it also means that toward the year end things started to look a little sunnier.

Looking at the composition of our demand, both public and private consumption fell in 2013. These declines were moderated by a rise in gross domestic capital formation (or in more simple terms, investment), which rose EUR710 million year-on-year. Much of this ‘upside’ was Nama and IDA attracting foreign investors to Dublin. In other words, it had little to do with our real economy.

While on the topic of property investments: house prices and commercial real estate valuations did rise through 2013 in Dublin and trended down in the rest of the country. But since the on-set of 2014, things have gone slightly off the rails. National property prices index peaked at 70.0 in December 2013 and have slipped to 69.1 by March 2014. In Dublin, this decline was even more pronounced - from the local peak of 68.5 at the end of 2013 to 67.2 in February and March 2014. Building and construction activity picked up in 2013, with index of activity by value of construction up from 94.3 in Q4 2012 to 105.4 in Q4 2013 and volume up from 95.7 to 106.2 over the same period.

Here's the kicker, however: much of the above growth related to completions of already started projects and retrofits. Planning permissions for new construction, stripping out alterations, conversions and renovations fell year on year in Q4 2013 and were down over the full year. The pipeline of building permissions into the near future looks dire.

In contrast, contribution of industry, excluding building and construction to GDP was down EUR1.1 billion in 2013. Overall, of the five broad sectors of the economy contributing to our GDP, three posted decreases in activity compared to 2012 and two recorded increases.

Here's an interesting comparative. As Chart 1 below clearly shows, since the current Government came to power in Q1 2011, our real GDP in constant factor cost terms grew on average by less than 0.76% per annum. In the recovery of the 1990s this rate of growth was around 14 times faster. Agriculture, Forestry and Fishing; Industry; Distribution, Transport Software and Communication; and Public Administration and Defence – four out of five broad sectors of the economy are down over 3 years of Government tenure. Only Other Services (including Rent) sector was up. No prizes for guessing which sector is dominated by internet giants pumping tens of billions of revenues and profits earned elsewhere around the world into Ireland to be recycled to tax havens.

Things are even worse when we consider domestic economy excluding external trade. Personal Expenditure on Consumer Goods and Services shrunk 3% in the tenure of this Coalition, falling at an annual rate of 1%, Net Expenditure by Central and Local Government on Current Goods and Services is down at an annual rate of decline of 2.4%, while Gross Domestic Fixed Capital Formation fell at an average annual rate of almost 2.3%.

So by all metrics, save the one that covers Google & Co, the Coalition record to-date is hardly impressive.

Which leads us to another question: what is there to look forward to in the economy between now and the next general election?

Assuming the current Coalition remains in power through its term, there are some positive signs on the led-grey economic horizon. The data on these positives is not exactly convincing, but still, some signs are better than none.

Little as they matter in current environment with no established economy-wide trend and a lot of volatility, the Purchasing Manager Indices for Manufacturing and Services continue to move deep in the growth territory. Investment remains sluggish, with credit in the economy continuing to shrink and cost of loans continuing to rise gradually. But non-traditional sources of funding are showing signs of growth: investment funds, private equity and even some direct peer-to-peer lending.

As banks shift defaulting mortgages into 'restructured' portfolios of loans, numbers of new mortgages approvals, although volatile, are on a gentle upward slope. However, average value of mortgages approved continues to trend down.

Retail sales are faring much worse: value of retail sales in Q1 2014 remained static on Q4 2013 and is up only 0.6% y/y. Volume is up 0.2% q/q and is now 2.6% above Q1 2013 levels. Which means that deflation is still cutting into retail sector earnings, and with this trend, new hiring is still off the agenda of Irish retailers. However, encouragingly, retail sales have finally started to move in line with consumer confidence in recent months, although gains in retail sales still severely lag behind the confidence indicator, as the chart below shows.

Meanwhile, on the exports side, external demand for Irish goods and services might be improving at last, although you won't be able to tell this from the hard data, for now. The growth in global demand is yet to translate into indigenous exports growth for a number of reasons. Chiefly, growth in global trade volumes has shifted toward trade between middle income and emerging economies, away from advanced economies. This pattern of trade dis-favours Ireland. MNCs based here predominantly service the US and Europe, with the rest of the world being supplied from other countries. Our own exporters are having hard time getting a strong foothold in the merging markets. In 12 years since 2002, Irish exports to markets outside the EU and North America stagnated, as a share of our total exports at a miserably low 15-17%, as the chart below illustrates.

Growing our indigenous exports will require serious rebalancing of our sales and marketing efforts toward the markets outside our familiar geographies. The good news is that we have a ready base for such a push. Our competitive advantages are in the sectors where proximity to MNCs resulted in Irish indigenous startups gaining experience, intellectual property and access to early stage supply contracts, e.g. auxiliary services in international finance, ICT and biotech. The challenge, however, is to continue generating exports-oriented startups, while forcing more indigenously firms to export. The former requires financing and business development supports that are very scarce on the ground, especially for companies not clients of the Enterprise Ireland. The latter is a challenge no one has been able to tackle to-date.

Majority of companies operating in the Irish economy are engaged in reselling foreign goods and services without any serious value added to them. In order to push these firms into exporting, they need to identify potential ways for adding value to imported goods and services and then identify the markets and the path for entering these markets, where this value-added can generate sales. Parallel to this, Irish firms are facing an uphill battle to increase productivity of their capital and workforce to make certain that any value added is not consumed by the internal inefficiencies. While during the crisis, Irish economy regained some share of its competitiveness lost during the Celtic Garfield years of 2001-2008, these gains were achieved predominantly through two channels: productivity growth due to on-shoring of large-scale ICT services providers (Google, Amazon, etc), and due to massive jobs destruction in less-productive sectors, such as construction and retail, and other domestic services. Which, incidentally, shows that our Government’s claims of competitiveness gains are barely scratching the surface in terms of revealing the underlying trends in this economy. Stripping out the MNCs with their tax arbitrage, Irish economy is more competitive today than it was in 2004-2006 only because we are no longer employing builders and not adding more convenience shops to every street corner of every town. This is hardly a form of productivity gains that can make our products more competitive on supermarkets’ shelves in Canada or our services supplied to an Indonesian investment bank.

The final drag on the prospects for exports-led growth relates to skill sets required. These skills rest predominantly outside the current vast pool of the unemployed. Despite the claims of 70,000 new jobs created by the Government, data from CSO shows that in Q1 2014, there were only 49,500 fewer unemployed in Ireland than in Q1 2010, of which 14,314 came from higher numbers in state training programmes, such as JobBridge. Meanwhile, numbers of those in unemployment for over 1 year – the period commonly associated with long-term losses in skills and employability – declined by only 20,800 in 3 years of the current Coalition rule. If in Q1 2011 when this Government came to power, 57.5% of all unemployed were jobless for longer than 12 months, in Q1 2014 this proportion rose to 60.5%. Demographically, numbers of older workers (age 45 and older) without jobs rose by 5,900 during the tenure of the Coalition, and number of older workers out of jobs for more than 12 months is now up by 7,000.

While the Government has been successful in reversing the trend in rising unemployment, the progress to-date has been relatively weak compared to the enormous task at hand. Irish economy has been creating new jobs that suit skills and career progression of the younger workers – jobs that require excellent command of foreign languages, coding, technical services that cannot be easily taught to those of older age. Majority of new jobs being created are at the earlier stage of careers, meaning that they are basically of no use to mortgaged and indebted middle-age households with children and ageing parents. In addition, these starter-level jobs are not likely to improve pensions prospects for those currently unemployed, especially those of age above 45, when savings for retirement must be ramped up aggressively.


All of the above problems as well as opportunities are closely interlinked and reach across all groups and segments of our society and all sectors of our real economy. They require not just a policy response, but a coherent, long-term and comprehensive strategy. So far, such a strategy remains wanting. The Coalition might deserve credit for doing the hard thing over the last three years, but it still an open question whether it deserves the credit for doing the right thing.

2/7/2014: Irish PMIs Q2 2014: Services, Manufacturing, Construction & Composite Index

In two previous posts I covered Services PMI (here) and Manufacturing PMI (here) for Ireland for June 2014.  June data provides us also with Q2 average levels of activity as measured by PMIs, so let's cover this here.

Q2 2014 Manufacturing PMI averages came in at 55.5, marking the fourth consecutive quarter of readings above 50.0. Q1 2014 Manufacturing PMI averaged at 53.7. Q2 2014 average is now the highest of any quarter since Q1 2011.

All of this indicates that Industry contribution ex-Construction to the GDP should posting growth over H1 2014. And this is good news.

Services Q2 2014 PMI came in at 62.1 - rapid pace of growth - up on 59.9 in Q1 2014 and significantly up on 54.3 in Q2 2013. Again, these are strong indicators of growth in the sector in H1 2014 

And this growth accelerated in Q2 compared to Q1: in Q1 2014 y/y expansion in Services PMI was 10.4% and in Q2 2014 it rose to 14.4%, also in Q1 2014 Manufacturing PMI rose 7.2% y/y and in Q2 this rate of growth was 12.4%.

Finally, Construction PMI (we have these with one month lag, so Q2 figures are based on April-May averages, firmed up substantially, reading 61.9 in Q2 2014 compared to 57.6 in Q1 2014 and 42.4 in Q2 2013. Year on year rates of growth a massive: 28.8% in Q1 2014 and 45.8% in Q2 2014.

All in, the data for Q1 appears to be in line with growth registered in QNA realised today (more of this later) and Q2 is encouraging in so far as it shows acceleration in growth on Q1.

3/4/3014: In the eye of a growth hurricane? Irish National Accounts 2013

This is an unedited version of my Sunday Times article from March 23, 2014


Russian-Ukrainian writer, Nikolai Gogol, once quipped that "The longer and more carefully we look at a funny story, the sadder it becomes." Unfortunately, the converse does not hold. As the current Euro area and Irish economic misfortunes aptly illustrate, five and a half years of facing the crisis does little to improve one’s spirits or the prospects for change for the better.

At a recent international conference, framed by the Swiss Alps, the discussion about Europe's immediate future has been focused not on geopolitical risks or deep reforms of common governance and institutions, but on structural growth collapse in the euro area. Practically everyone - from Swedes to Italians, from Americans to Albanians - are concerned with a prospect of the common currency area heading into a deflationary spiral. The core fear is of a Japanese-styled monetary policy trap: zero interest rates, zero credit creation, and zero growth in consumption and investment. Even Germans are feeling the pressure and some senior advisers are now privately admitting the need for the ECB to develop unorthodox measures to increase private consumption and domestic investment. The ECB, predictably, remains defensively inactive, for the moment.


The Irish Government spent the last twelve months proclaiming to the world that our economy is outperforming the euro area in growth and other economic recovery indicators. To the chagrin of our political leaders, Ireland is also caught in this growth crisis. And it is threatening both, sustainability of our public finances and feasibility of many reforms still to be undertaken across the domestic economy.

Last week, the CSO published the quarterly national accounts for 2013. Last year, based on the preliminary figures, Irish economy posted a contraction of 0.34 percent, slightly better than a half-percent drop in euro area output. But for Ireland, getting worse more slowly is hardly a marker of achievement. When you strip out State spending, taxes and subsidies, Irish private sector activity was down by more than 0.48 percent - broadly in line with the euro area’s abysmal performance.

Beyond these headline numbers lay even more worrying trends.

Of all expenditure components of the national accounts, gross fixed capital formation yielded the only positive contribution to our GDP in 2013, rising by EUR 710 million compared to 2012. However, this increase came from an exceptionally low base, with investment flows over 2013 still down 28 percent on those recorded in 2009. Crucially, most, if not all, of the increase in investment over the last year was down to the recovery in Dublin residential and commercial property markets. In 2013, house sales in Dublin rose by more than EUR1.2 billion to around EUR3.6 billion. Commercial property investment activity rose more than three-fold in 2013 compared to previous year, adding some EUR1.24 billion to the investment accounts.

Meanwhile, Q4 2013 balance of payments statistics revealed weakness in more traditional sources of investment in Ireland as non-IFSC FDI fell by roughly one third on 2012 levels, down almost EUR6.3 billion. As the result, total balance on financial account collapsed from a surplus EUR987 million in 2012 to a deficit of EUR10 billion in 2013.

Put simply, stripping out commercial and residential property prices acceleration in Dublin, there is little real investment activity anywhere in the economy. Certainly not enough to get employment and domestic demand off their knees. And this dynamic is very similar to what we are witnessing across the euro area. In 2013, euro area gross fixed capital formation fell, year on year, in three quarters out of four, with Q4 2013 figures barely above Q4 2012 levels, up just 0.1 percent.

At the same time, demand continued to contract in Ireland. In real terms, personal consumption of goods and services was down EUR941 million in 2013 compared to previous year, while net expenditure by central and local government on current goods and services declined EUR135 million. These changes more than offset increases in investment, resulting in the final domestic demand falling EUR366 million year-on-year, almost exactly in line with the changes in GDP.

The retail sales are falling in value and growing in volume - a classic scenario that is consistent with deflation. In 2013, value of retail sales dropped 0.1 percent on 2012, while volume of retail sales rose 0.8 percent. Which suggests that price declines are still working through the tills - a picture not of a recovery but of stagnation at best. Year-on-year, harmonised index of consumer prices rose just 0.5 percent in Ireland in 2013 and in January-February annual inflation was averaging even less, down to 0.2 percent.

The effects of stagnant retail prices are being somewhat mitigated by the strong euro, which pushes down cost of imports. But the said blessing is a shock to the indigenous exporters. With euro at 1.39 to the dollar, 0.84 to pound sterling and 141 to Japanese yen, we are looking at constant pressures from the exchange rates to our overall exports competitiveness.

We all know that goods exports are heading South. In 2013 these were down 3.9 percent, which is a steeper contraction than the one registered in 2012. On the positive side, January data came in with a rise of 4% on January 2013, but much of this uplift was due to extremely poor performance recorded 12 months ago. Trouble is brewing in exports of services as well. In 2012, in real terms, Irish exports of services grew by 6.9 percent. In 2013 that rate declined to 3.9 percent. On the net, our total trade surplus fell by more than 2.7 percent last year.

Such pressures on the externally trading sectors can only be mitigated over the medium term by either continued deflation in prices or cuts to wages. Take your pick: the economy gets crushed by an income shock or it is hit by a spending shock or, more likely, both.

Irony has it some Irish analysts believe that absent the fall-off in the exports of pharmaceuticals (the so-called patent cliff effect), the rest of the economy is performing well. Reality is begging to differ: our decline in GDP is driven by the continued domestic economy's woes present across state spending and capital formation, to business capital expenditure, and households’ consumption and investment.


All of the above supports the proposition that we remain tied to the sickly fortunes of the growth-starved Eurozone. And all of the above suggests that our economic outlook and debt sustainability hopes are not getting any better in the short run.

From the long term fiscal sustainability point of view, even accounting for low cost of borrowing, Ireland needs growth of some 2.25-2.5 percent per annum in real terms to sustain our Government debt levels. These are reflected in the IMF forecasts from the end of 2010 through December 2013. Reducing unemployment and reversing emigration, repairing depleted households' finances and pensions will require even higher growth rates. But, since the official end of the Great Recession in 2010 our average annual rate of growth has been less than 0.66 percent per annum on GDP side and 1.17 percent per annum on GNP side. Over the same period final domestic demand (sum of current spending and investment in the private economy and by the government) has been shrinking, on average, at a rate of 1.47 percent per annum.

This implies that we are currently not on a growth path required to sustain fiscal and economic recoveries. Simple arithmetic based on the IMF analysis of Irish debt sustainability suggests that if 2010-2013 growth rates in nominal GDP prevail over 2014-2015 period, by the end of next year Irish Government debt levels can rise to above 129 percent of our GDP instead of falling to 121.9 percent projected by the IMF back in December last year. Our deficits can also exceed 2.9 percent of GDP penciled in by the Fund, reaching above 3 percent.

More ominously, we are now also subject to the competitiveness pressures arising from the euro valuations and dysfunctional monetary policy mechanics. Having sustained a major shock from the harmonised monetary policies in 1999-2007, Ireland is once again finding itself in the situation where short-term monetary policies in the EU are not suitable for our domestic economy needs.


All of this means that our policymakers should aim to effectively reduce deflationary pressures in the private sectors that are coming from weak domestic demand and the Euro area monetary policies. The only means to achieve this at our disposal include lowering taxes on income and capital gains linked to real investment, as opposed to property speculation. The Government will also need to continue pressuring savings in order to alleviate the problem of the dysfunctional banking sector and to reduce outflows of funds from productive private sector investment to property and Government bonds. Doing away with all tax incentives for investment in property, taxing more aggressively rents and shifting the burden of fiscal deficits off the shoulders of productive entrepreneurs and highly skilled employees should be the priority. Sadly, so far the consensus has been moving toward more populist tax cuts at the lower end of the earnings spectrum – where such cuts are less likely to stimulate growth in productive investment.

We knew this for years now but knowing is not the same thing as doing. Especially when it comes to the reforms that can prove unpopular with the voters.

Box-out: 

This week, Daniel Nouy, chairwoman of the European Central Bank's supervisory board, told the European Parliament that she intends to act quickly to force closure of the "zombie" banks - institutions that are unable to issue new credit due to legacy loans problems weighing on their balance sheets. Charged with leading the EU banks' supervision watchdog, Ms Nouy is currently overseeing the ECB's 1000-strong team of analysts carrying out the examination of the banks assets. As a part of the process of the ECB assuming supervision over the eurozone's banking sector, Frankfurt is expected to demand swift resolution, including closure, of the banks that are acting as a drag on the credit supply system. And Ms Nouy made it clear that she expects significant volume of banks closures in the next few years. While Irish banks are issuing new loans, overall they remain stuck in deleveraging mode. According to the latest data, our Pillar banks witnessed total loans to customers shrinking by more than EUR 21 billion (-10.3 percent) in 12 months through the end of September 2013. In a year through January 2014, loans to households across the entire domestic banking sector fell 4.1 percent, while loans to Irish resident non-financial corporations are down 5.8 percent. One can argue about what exactly will constitute a 'zombie' bank by Ms Nouy's definition, but it is hard to find a better group of candidates than Ireland's Three Pillars of Straw.