16/3/16: ESRI and Imaginary Numbers: Irish Economy Forecast 2016-2017

My article for Sunday Business Post on latest ESRI forecasts for the Irish economy 2016-2017: http://www.businesspost.ie/esri-report-irelands-growth-rate-increasingly-resembles-imaginary-numbers/.

2/3/16: Irish Manufacturing PMI: February

Irish Manufacturing PMI posted a long-anticipated, and relatively mild slip back from a rapid pace of expansion in January (54.3) to shallower growth in February 2016 (52.9).

Despite this fall back, 3mo average Manufacturing PMI for the period through February stood at 53.8, which is above the 3mo average reading through November 2015 (53.6), although well below the 3mo average through February 2015 (56.5).

Per Markit release: “Growth eased in the Irish manufacturing sector in February as new orders increased at the weakest pace since late-2013. Output and purchasing activity also rose at slower rates, but employment bucked the wider trend by increasing more quickly than at the start of the year. The rate of input cost deflation quickened to the fastest since November 2009, with output prices also falling at a sharper pace in response… Where new
orders did increase, panellists often mentioned higher new business from export markets, in turn reflecting new orders from the UK and US. Growth in new export business also slowed, however.”

Good news is: “…the latest solid expansion in production extended the current sequence of growth to 33 months.” Bad news is: much of growth seems to be concentrated in the areas benefiting from weaker Euro, not in the areas of organic expansion.

18/2/16: Fiscal Space By Numbers: Village Magazine January 2016

This is an unedited version of my column for Village Magazine, December 2015.

Two recent events highlight the true nature of the ongoing Irish economic recovery.

Firstly, ahead of the infamous Ireland-Argentina Rugby World Cup match, the press office of the main Irish governing party, Fine Gael, produced a rather brash inforgraphic. Charting projected growth rates in real GDP for 2015 across all Rugby World Cup countries, the graph put Ireland at the top of the league with 6.2 percent forecast growth. “FACT: If the Rugby World Cup was based on economic growth, Ireland would win hands down,” shouted the headline.

Having put forward a valiant performance, Irish team went on to lose the game to Argentina, ending its tour of the competition.

Secondly, within weeks of publication, Budget 2016 – billed by the Government as a programme for the ‘New Ireland’ – has been discounted by a range of analysts, including those with close proximity to the State as representing the return of the fiscal policy of electioneering. Worse, judging by the public opinion polls, event the average punter out there has been left with a pesky aftertaste from the political wedding cake produced by the Merrion Street on October 13^th.

Tasteful or not, the public gloating about headline growth figures and the fiscal chest-thumping that accompanied the Budget 2016 did not stretch far from reality. Official growth is roaring, public finance are in rude health, and the Government is back in business of handing out candies to kids on every street corner. The air is so filled with the sunshine of recovery, the talk about the Celtic Tiger Redux is back on the chatter menu for South Dublin partygoers.

Ireland by the numbers

Irish Government is now projecting full year 2015 inflation-adjusted growth to come in at 6.2 percent followed by 4.3 percent in 2016. Less optimistic, the IMF puts 2015-2016 growth forecasts for the country at 4.9 percent and 3.8 percent, respectively. Still, this ranks Ireland at the top of the advanced economies growth league, with second place Iceland set to grow by 4.8 percent and 3.7 percent over 2015 and 2016, respectively. The only other advanced economy expected to post above 4 percent growth in 2015 is Luxembourg. Which is a telling bit: of all euro area member states, the two most exposed to tax optimization schemes are growing the fastest. Though only one has a Government gushing publicly about that fact. No medals for guessing which one.

The problem is: the headline official GDP growth for Ireland means preciously little as far as the real economy is concerned. The reason for this is the composition of that growth by source and, specifically, the role of the Multinational Corporations trading from Ireland. We all know this, but keep harping about the said ‘metric’ as if it mattered.

Based on the figures for the first half of 2015 (the latest available through the official national accounts), Irish economy grew by EUR6.4 billion or 6.9 percent in terms of real GDP compared to the first half of 2014. Gross National Product, or GDP accounting for the officially declared net profits of multinational companies, expanded by a more modest 6.6 percent over the same period.

Other distortions arising from this structural anomaly at the heart of Irish economic miracle are the effects of foreign investment funds and companies on capital side of the National Accounts. Back in 2014, the European Union reclassified R&D spending as investment, superficially inflating both GDP and GNP growth figures. Since then, our investment has been booming, outpacing both jobs creation and domestic public and private sectors’ demand. In more recent quarters, capital investment has been outperforming exports growth too. Which begs a question: what are these investments about if not a tail sign of corporate inversions past and the forewarning of the changes in the economic output composition in anticipation of our fabled ‘Knowledge Development Box’?

Beyond this, the legacy of the financial crisis adds to artificial growth statistics. Irish ‘bad bank’, Nama, and its vulture funds’ clients are aggressively disposing of real estate loans and other assets bought at a cost to the taxpayers. Any profits booked by these entities are counted as new investment here. Once again, GDP and GNP go up even if there is virtually nothing happening to buildings and sites being flipped by these investors.

And while we are on the subject of the old ways, last month Ireland became a domicile of choice for an upcoming merger between Pfizer and Allergan – two giants of the global pharma world. Despite numerous claims that Ireland no longer tolerates so-called ‘tax-driven corporate inversions’ (a practice whereby U.S. multinationals domicile themselves in Ireland for tax purposes), it appears that  we are back in the same game. Just as we are apparently back into the game of revenue shifting (another corporate tax practice that sets Ireland as a centre for booking global sales revenues despite no underlying activity taking place here), as exemplified by the Spanish Grifols announcement earlier in October.

All of these growth sources also benefit from weaker euro relative to the dollar and sterling, courtesy of the ECB printing presses.

Looking at the national accounts for January-June 2015, Gross Fixed Capital Formation accounted for EUR3.8 billion or almost 60 percent of total GDP growth over the last 12 months, or nearly 3/4 of all growth in GNP.

In simple terms, the real economy in Ireland has been growing at closer to 3.5 or 4 percent annual rate in 2015 – still significant, but less impressive than the 6 percent-plus figures suggest.

Kindness for the Exchequer

Still, the above growth has been kind for the Irish Government. In the nine months though September 2015, Irish Exchequer total tax receipts rose strong EUR2.75 billion, or 9.5 percent year-on-year. Just over 45 percent of this increase was due to unexpectedly high corporate tax receipts that rose 45.7 percent year-on-year. Vat receipts increased EUR742 million or 8.3 percent year-on-year, while income tax posted a more modest rise of EUR677 million up 5.7 percent. While both VAT and Income Tax receipts came in within 1-2 percentage points of the Budgetary targets, Corporation Tax receipts over-shot the target by a massive EUR1.21 billion or 44.2 percent.

As chart below shows, in the first nine months of 2015, Corporation Tax receipts have not only outperformed the previous period trend for 2007-2014 and the historical average for 2000-2014, but posted a massive jump on the entire post-crisis ‘recovery’ period.  Both the levels of tax receipts and the rate of annual growth appear to be out of line with the underlying economic performance, even when measured by official GDP growth.

CHART: Corporation Tax: Cumulative Outrun, January-September, Euro Millions

Source: Data from Department of Finance

                              

This prompted the by-now-famous letter from the outgoing Governor of the Central Bank, Professor Patrick Honohan to the Minister for Finance in which Professor Honohan politely, almost academically, warned the Government that a large share of the current growth in the economy is accounted for by the “distorting features” – a euphemism for tax optimising accounting. Per letter, “Neglecting these measurement issues has led some commentators to think that the economy is back to pre-crisis performance”.

Professor Honohan’s warning reflects the breakdown in sources of growth noted earlier, with booming multinationals’ activity outpacing domestic economic expansion. The same is confirmed by the recent data from labour markets. For example, whilst official unemployment in Ireland has been declining over the recent years, labour force participation rates have remained well below pre-crisis averages and are currently stuck at the crisis period lows.  In simple terms, until very recently, jobs creation in Ireland has been heavily concentrated in a handful of sectors and professional categories.

Of course, this column has been saying the same for months now, but for Irish official media, the voice of titled authority is always worth waiting for.

The Revenue attempted to explain the Exchequer trends through October, but the effort was half-hearted. Per Revenue, the UER800 million breakdown of Corporation Tax receipts outperformance relative to target can be broken into EUR350 million of the “unexpected” payments; EUR200 million to “early” payments; and EUR200 million to ‘delayed’ repayments. Which prompted a conclusion that the surge in tax receipts was “sustainable”.

Turning back to fiscal management side of accounts, Irish debt servicing costs at end of 3Q 2015 fell EUR296 million or 5.9 percent compared to January-September 2014. The key driver of this improvement was refinancing of the IMF loans via market borrowings and, of course, the ECB-driven decline in bond yields. Neither are linked to anything the Government did.

Spurred by improving revenue side, however, the Government did open up its purse. Spending on current goods and services (excluding capital investment and interest on debt) has managed to account for just under one tenth of the overall official economic growth in the first half of 2015. In other words, even before the Budget 2016 was penned and the print of improved revenues was visible on the horizon, Irish austerity has turned into business-as-usual.

Talking up the future

As the result of the tangible – albeit more modest than official GDP figures suggest – economic recovery, Budget 2016 unveiled this month marked a large scale U-turn on years of spending cuts and tax hikes.  Even though the Government deficit is still running at 2.1 percent of GDP and is forecast to be 1.2 percent of GDP in 2016, the Government has approved a package of tax cuts and current spending increases worth at least EUR3 billion next year. The old formula of ‘If I have it I spend it’ is now replaced by the formula of ‘If I can borrow it I spend it’.

Which means that in 2016, Ireland will run pro-cyclical fiscal policy for the second year in a row, breaking a short period of  more sustainable approach to fiscal management. Another point of concern is the fact that this time around, just as in 2004-2007, expansionary budgeting is coming on foot of what appears to be one-off or short-term boost to Exchequer revenues. Finally, looking at the composition of Irish Government spending plans, both capital and current spending sides of the Budget and the multi-annual public investment framework include steep increases in spending allocations of questionable quality, including projects that potentially constitute political white elephants and electioneering.

In short, the Celtic Tiger is coming back. Both – the better side of it and the worst.

17/2/16: EU Commission Analysis of the Irish Economy Own Goal

In a recent assessment of the economic outlook for Ireland for 2016, the DG for Economic and Financial Affairs of EU has heaped praise on the country (see full list of country-specific assessments here: http://ec.europa.eu/economy_finance/eu/forecasts/2016_winter_forecast_en.htm?utm_source=e-news&utm_medium=email&utm_campaign=e-news132). Much of it - justified.

However, a glaring miss in the analysis was a truthful representation of the balance of sources for growth in the economy.

Per EU Commission: “The Irish economy grew again strongly in the third quarter of 2015 although more moderately than earlier in the year. …However, survey indicators point to … GDP growth for 2015 as a whole to 6.9%. In 2016 and 2017, the moderation in GDP growth is expected to continue towards more sustainable rates of about 4% and 3% respectively.”

All of which is fine.

Then the assessment goes on: “While the recovery started in the external sector, domestic demand is now driving GDP growth. It expanded by more than 8% (y-o-y) in the first nine months of 2015, with household consumption growing by 3.5% and investment by over 25%.” I covered the latest figures for Irish national accounts in a series of posts here: http://trueeconomics.blogspot.com/2015/12/131215-irish-national-accounts-3q-post.html, and in particular, domestic demand growth drivers here: http://trueeconomics.blogspot.ie/2015/12/111215-irish-national-accounts-3q-post.html. And as I noted in my analysis, the problem is that Domestic Demand printed by CSO no longer actually reflects purely indigenous economy activity.

EU assessment hints at this: “…as developments in some companies and sectors are boosting investment and imports in the economy. Multinationals have been transferring a number of patents to Ireland. In the first nine months of 2015, these transfers generated a growth in investment in intellectual property of over 100% (y-o-y) and an equivalent increase in services imports. In 2016 and 2017, the fees for the use of these patents are expected to benefit the current account balance and lead to more company profits being booked in Ireland. Conversely, the purchase of airplanes by international leasing companies based in Ireland collapsed in the third quarter of 2015, leading to a large fall in equipment investment. Excluding intangibles and aircraft, core investment was strong, growing by over 11% (y-o-y) in the first three quarters of 2015, despite the delayed recovery in construction activity. The growth in core investment is forecast to continue more moderately in 2016 and 2017.”

All of which goes to heart of the argument that so-called domestic demand-reported ‘investment’ is heavily polluted by MNCs and aircraft purchases. In other words, stripping out effects of MNCs on domestic demand, actual growth has once again been heavily (around 1/2) concentrated in the external (MNCs-led) sectors. And worse, going forward, transfers of patents signal that Irish economy is likely to become even more unbalanced in the future, with tax arbitrage inflows from the rest of the world to Ireland making us ever more dependent on remaining a corporate tax haven in the face of globally changing taxation environment.

Politically correct public communications from the EU Commission won’t put it this way, but we know that behind the scenes, our shenanigans, like the introduction of the ‘Knowledge Development Box’ tax loophole are unlikely to go unnoticed… especially when it leads to a 100% growth in patents offshoring.

9/2/16: Currency Devaluation and Small Countries: Some Warning Shots for Ireland

In recent years, and especially since the start of the ECB QE programmes, euro depreciation vis-a-vis other key currencies, namely the USD, has been a major boost to Ireland, supporting (allegedly) exports growth and improving valuations of our exports. However, exports-led recovery has been rather problematic from the point of view of what has been happening on the ground, in the real economy. In part, this effect is down to the source of exports growth - the MNCs. But in part, it seems, the effect is also down to the very nature of our economy ex-MNCs.

Recent research from the IMF (see: Acevedo Mejia, Sebastian and Cebotari, Aliona and Greenidge, Kevin and Keim, Geoffrey N., External Devaluations: Are Small States Different? (November 2015). IMF Working Paper No. 15/240: http://ssrn.com/abstract=2727185) investigated “whether the macroeconomic effects of external devaluations have systematically different effects in small states, which are typically more open and less diversified than larger peers.”

Notice that this is about ‘external’ devaluations (via the exchange rate channel) as opposed to ‘internal’ devaluations (via real wages and costs channel). Also note, the data set for the study does not cover euro area or Ireland.

The study found “that the effects of devaluation on growth and external balances are not significantly different between small and large states, with both groups equally likely to experience expansionary [in case of devaluation] or contractionary [in case of appreciation] outcomes.” So far, so good.

But there is a kicker: “However, the transmission channels are different: devaluations in small states are more likely to affect demand through expenditure compression, rather than expenditure-switching channels. In particular, consumption tends to fall more sharply in small states due to adverse income effects, thereby reducing import demand.”

Which, per IMF team means that the governments of small open economies experiencing devaluation of their exchange rate (Ireland today) should do several things to minimise the adverse costs spillover from devaluation to households/consumers. These are:

1. “Tight incomes policies after the devaluation ― such as tight monetary and government wage policies―are crucial for containing inflation and preventing the cost-push inflation from taking hold more permanently. …While tight wage policies are certainly important in the public sector as the largest employer in many small states, economy-wide consensus on the need for wage restraint is also desirable.” Let’s see: tight wages policies, including in public sector. Not in GE16 you won’t! So one responsive policy is out.
2. “To avoid expenditure compression exacerbating poverty in the most vulnerable households, small countries should be particularly alert to these adverse effects and be ready to address them through appropriately targeted and efficient social safety nets.” Which means that you don’t quite slash and burn welfare system in times of devaluations. What’s the call on that for Ireland over the last few years? Not that great, in fairness.
3. “With the pick-up in investment providing the strongest boost to growth in expansionary devaluations, structural reforms to remove bottlenecks and stimulate post-devaluation investment are important.” Investment? Why, sure we’d like to have some, but instead we are having continued boom in assets flipping by vultures and tax-shenanigans by MNCs paraded in our national accounts as ‘investment’. 
4. “A favorable external environment is important in supporting growth following devaluations.” Good news, everyone - we’ve found one (so far) thing that Ireland does enjoy, courtesy of our links to the U.S. economy and courtesy of us having a huge base of MNCs ‘exporting’ to the U.S. and elsewhere around the world. Never mind this is all about tax optimisation. Exports are booming. 
5. “The devaluation and supporting policies should be credible enough to stem market perceptions of any further devaluation or policy adjustments.” Why is it important to create strong market perception that further devaluations won’t take place? Because “…expectations of further devaluations or an increase in the sovereign risk premium would push domestic interest rates higher, imposing large costs in terms of investment, output contraction and financial instability.” Of course, we - as in Ireland - have zero control over both quantum of devaluation and its credibility, because devaluation is being driven by the ECB. But do note that, barring ‘sufficient’ devaluation, there will be costs in the form of higher cost of capital and government and real economic debt.It is worth noting that these costs will be spread not only onto Ireland, but across the entire euro area. Should we get ready for that eventuality? Or should we just continue to ignore the expected path of future interest rates, as we have been doing so far? 

I would ask your friendly GE16 candidates for their thoughts on the above… for the laughs…

4/3/16: Irish PMIs for January: Growth Is Up at Year Start

Irish Manufacturing and Services PMIs for January were published earlier this week and are worth looking into as a signal for the underlying economic activities at the start of 1Q 2016.

Irish Manufacturing PMIs rose for the second month in a row in January, reaching 54.3 from 54.2 in December. This is the highest level of activity since July 2015 and confirms some reversal of PMIs dynamics from slower growth recorded from August 2015 through November. Of course, when we are talking about ‘slower growth’ we are talking about still very high rates of expansion as singled by PMI. 3mo average through January 2016 is at blistering 53.9, which is up on scorching 53.7 3mo average through October 2015 and down on scorching 56.1 3mo average through January 2015. These telephone numbers compare extremely well against the historical average of 51.0 and even post-crisis average of 53.0.

Per Markit: “Business conditions in the Irish manufacturing sector improved solidly at the start of 2016, as had been the case at the end of 2015. A sharp and accelerated expansion in new orders was the key driver of strengthening conditions, with output and employment also continuing to rise. Lower raw material costs led to the sharpest fall in input prices in three months, while output charges decreased for the first time since last October… The health of the sector has now strengthened in each of the past 32 months.”

Notably, per Markit: “The decrease in output prices ended a two-month sequence of inflation” which is suggesting that Irish producers are now contributing to downward pressures in Euro area markets.

Meanwhile, Irish Services PMI also rose robustly in January, reaching 64.0 against 61.8 in December 2015. Again, these are unbelievably strong  numbers that raise some serious questions about the survey methodologies and/or coverage, but more on this later. 3mo average Services PMI for Ireland was at 61.5 in 3 months through October 2015 and rose to 63.1 in 3mo period through January 2016, up on already unbelievable 62.2 for the 3 months through January 2015. Historical average of 54.9 - again, extremely strong by any measure - is in the dust.

Per Markit, Services PMI “signalled the sharpest expansion in services output since June 2006. Activity has now risen in each of the past 42 months. Companies expect further improvements in economic conditions over the coming 12 months to lead to growth of activity. Business sentiment picked up slightly at the start of 2016. The rate of expansion in new business also quickened in January, and was the joint-fastest since August 2000. New orders have risen continuously throughout the past three-and-a-half years. As has been the case throughout the past four-and-a-half years, new export business rose in January. Moreover, the rate of expansion accelerated from that seen in December. … Consequently, employment rose at a substantial pace during January and one that was sharper than seen in the previous month. A further sharp rise in input costs was recorded in January, as the effect of higher wages and salaries outweighed the downwards impact of lower fuel costs. The rate of inflation across the service sector ticked up marginally, remaining above the series average.”

As per chart above, both Services and Manufacturing sectors are now in a massive expansion, with rates of growth in the underlying activity well in excess of those historically anchored in the pre-crisis period. Services divergence toward higher growth is still being contrasted by lagging growth in Manufacturing, but signs of possible catching up in Manufacturing to the upside are also present.

Per chart above, we can confirm new growth trend in Services and the potential for sustained growth acceleration in Manufacturing (albeit no new trend yet).

Per chart above, both sectors of the Irish economy are operating at the margins of economy’s potential (judging by historical trends). This is hard to interpret as an organic shift in potential rates of growth, so most likely, we are going to witness some growth moderation in months ahead.

Still, current performance raises serious questions as to where this data is coming from. It has long been suspicion of this author that the surveys dynamics have been driven by multinational enterprises operating in both sectors. We have no confirmation of this nor denial of this from Markit and we do not know the quality of their coverage across two sectors. However, one has to be aware of the simple fact - as shown on this blog in the past, survey results have been (in the past) deeply out of line with actual underlying activity registered in the sectors. Currently, both Services and Manufacturing indices are running fairly closely correlated with the reported activity in these sectors, but past low correlations with GDP and GNP and sectoral value added metrics suggests that the survey base can be skewed in favour of unweighting MNCs.

2/2/16: Irish Examiner on Electioneering and Fiscal Policy Space

Irish Examiner article on fiscal policy space entertained by various political parties with a couple of comments of my own: http://www.irishexaminer.com/ireland/opposition-claims-fine-gael-and-labour-figures-on-the-economy-just-dont-add-up-379637.html.

26/1/16: 'More than 1,000 jobs per week' Government Claims v Reality

One senior TD and a Junior Minister with position relating, indirectly, to employment and the labour market has just posted an interesting statement. A part of the statement goes thus: “we used the Action Plans for Jobs process to drive job creation, creating more than a 1000 jobs a week”.

Now, let’s raise two points. One philosophical, another purely arithmetic.

Philosophically, I am not aware of any Government that claims creation of jobs. Technically, public jobs are either created by the Civil Service or another Public body, as opposed to the Government itself. Practically, any jobs creation, in public or private sector is enabled by the economy (people working in, investing in, paying taxes in and interacting with public and private sectors) and not by the Government. Thus, Government may facilitate jobs creation by enacting supportive legislation or providing legislative and/or regulatory strategy, or not impede one, but it cannot create jobs. Minister can act as PR middle(wo)men and announce jobs created, but that is about as close to jobs creation as they ever get.

Aside from this, there is a simple matter of arithmetic.

Recall that the current Government came into power at the end of 1Q 2011. Let us suppose the Government really got down to ‘creating jobs’ by 1Q 2012. Which means the Government has been at its jobs game for roughly 14-15 quarters through 3Q 2015 or, at the lower end 3 years and a half. That means that the Government should have created “over” 182,000 jobs in that period. This benign to the Minister claim, because if we are to look at the record of the entire duration of the Government, his claim would have equated to roughly 221,000 jobs created.

Let us note that 1Q 20912 was the lowest point in employment levels during the crisis, so comparatives to that base should improve Government position: prior to 2Q 2012 jobs were being destroyed in the economy, past the end of 1Q 2012 they were being added.

Keep the two numbers in your mind: we are told that the Government has ‘created’ either more than 182,000 or more than 221,000 jobs over its tenure, depending on where one starts to count.

Now, consult CSO QNHS database - the source of official counts for numbers in employment. Between the end of 1Q 2012 and 3Q 2015 (the latest for which we have data), total employment rose 158,000. But wait, these are not all jobs. 4,500 of that increase is in the category of Assisting Relative. And 121,200 of these additions are employees, including schemes. Beyond this, the above increase also includes 30,100 new (added) self-employed with no employees.

It is hard to assume that the Government can claim it 'created' self-employment jobs where there is not enough activity to hire staff, or that it increased the need to help relatives.

So put things together in a handy table:

Numbers speak for themselves. By the very best metric, Government is more than 1/2 year shy of the lowest end of the claim of 'more than 1,000 jobs created per week'. It is more than 1/2 year shy of the claim that there were '1,000 jobs created per week'.

This Government deserves credit for helping sustain conditions for the recovery. Some of these conditions trace to the policies put in place by its predecessor and continued by the present Government, some are down to Troika and implemented by this Government, some are undoubtedly facilitated by the efforts of the current Government. The economy is recovering and, by some metrics, very robustly. And jobs are being created by the economy (yes, by entrepreneurs, enterprises, their employees and their clients and investors, but not by the Government).

This is not to take away from the positives the Government should rightly claim. But it is to point out that some of the outlandishly bombastic claims are not quite warranted.

10/1/16: My 2004 article on Irish property bubble

Per friend's reminder, here is an article of mine from November-December 2014 Business & Finance magazine, showing the dangerous levels of house prices overvaluation in Ireland relative to underlying fundamentals:

6/1/16: Irish Manufacturing, Services & Construction PMIs: 4Q 2015

Time to update Irish quarterly PMI readings for 4Q 2015. Please note: the following refer to average PMI readings per quarter as supplied by Markit.

Irish Manufacturing PMI averaged 53.7 in 4Q 2015, down slightly on 54.7 in 3Q 2015 and the lowest quarterly reading since 4Q 2013 (jointly tied for that honour with 1Q 2014). The quarterly average has now declined in every quarter since the period peak in 4Q 2014.  Still, at 53.7 we have rather solid growth signal as is. On y/y basis, Manufacturing PMI is now down 5.1% after falling 2.6% in 3Q 2015 and rising 0.7% in 2Q 2015. 4Q 2015 marks tenth consecutive quarter of above 50.0 readings for the sector, with all of these readings being statistically above 50.0 as well. The trend in growth is down.

Irish Services PMI slipped from 62.6 in 3Q 2015 to 61.8 in 4Q 2015, down 1.3% q/q after posting a 1.4% rise q/q in 3Q 2015. On annual basis, the PMI fell 0.11% having previously risen 0.91% in 3Q 2015 and falling 0.48% in 2Q 2015. This marks 20th consecutive quarter of above 50.0 readings in the sector. In level terms, 61.8 signals robust growth in the sector, so it is a positive signal, albeit over time consistent with quite a bit of volatility and no strongly defined trend.

Irish Construction sector PMI (through November 2015) for 4Q 2015 stood at 55.9, down from, 57.1 in 3Q 2015 and marking the second consecutive quarter of index declines. Q/Q index was down 7.95% in 3Q 2015 and it was also down 2.16% in 4Q 2015. Y/Y, index was up 1.42% in 2Q 2015, down 7.6% in 3Q 2015 and down 12.4% in 4Q 2015. Volatile movements in the series still indicate downward trend in growth in the sector.

Chart above summarises the sub-trends, with Services trending very sluggishly up, while Manufacturing and Construction trending down.

As shown in the chart above, my estimated Composite measure, relating to PMIs (using sectoral weights in quarterly GDP figures) posted moderation in growth rate in 4Q 2015.  Composite Index including construction sector stood at 54.4 in 4Q 2015, down from 55.5 in 3Q 2015, hitting the lowest reading since 3Q 2013. This marks second consecutive quarter of declining Composite Index. Index is now down 1.9% q/q having previously fallen 3.8% q/q in 3Q 2015. In y/y terms, Composite Index was up 0.8% y/y in 2Q 2015, down 3.5% y/y in 3Q 2015 and down 6.52% y/y in 4Q 2015. While levels of Index suggest relatively robust growth in the economy across three key sectors, there is a downward trend in the growth rate over time.

So in the nutshell, Irish PMIs continue to signal robust growth, albeit the rate of growth appears to be slowing down along the new sub-trend present from 1Q 2015 on.

Two charts to highlight relationship between PMI signals and GDP and GNP growth rates (data through 3Q 2015).

10/12/15: Irish National Accounts 3Q: Part 1: Sectoral Growth

CSO released data for national accounts for Ireland, so in the next few posts I will be covering headline results. As usual, starting with sectoral accounts, showing decomposition of growth by sector. All data is based on seasonally unadjusted figures, allowing for y/y comparatives and expressed in real terms.

Agriculture, Forestry and Fishing sector contribution to GDP:

• Real activity in Agriculture, Forestry and Fishing sector rose strong 16.0% y/y in 3Q 2015 a rate of growth that was more robust than 9.97% expansion recorded in the sector in 3Q 2014. This is the fastest pace of y/y growth in 3 quarters, and especially welcoming given that 2Q 2015 growth came in at negative -2.87% y/y. Overall, Agriculture, Forestry and Fishing sector contributed EUR210 million to GDP growth in 3Q 2015, which amounts to 7% of total 3Q 2015 expansion in GDP y/y. On a cumulative 3 quarters basis, Agriculture, Forestry and Fishing sector expanded its activity by EUR200 million or +5.67% y/y, which is well below same period 2014 growth that stood at EUR502 million and +16.58%. 
• One key conclusion from the above figures is that Agriculture Forestry and Fishing has expanded robustly over both 3Q 2015 and on the cumulative basis over the first nine months of 2015. Which is good news.

Industry sector contribution to GDP:

• Overall Industry, including construction posted expansion of 16.08% y/y in 3Q 2015, which compares favourably to 5.15% growth in 2Q 2015 and to 4.23% growth y/y in 3Q 2014. Industry contribution to GDP growth over the first nine months of 2015 stood at EUR3.519 billion up 10.17% y/y. This is an improvement on the sector contribution over the first nine months of 2014 which stood at EUR2.25 billion (+6.95% y/y).
• Within Industry sector, Transportable Goods Industries and Utilities sub-sector activity rose 17.83% y/y in 3Q 2015 - a pace of growth well ahead of 5.51% growth in 2Q 2015 and 3.70% in 3Q 2014. Over the first nine months of 2015, Transportable Goods Industries and Utilities sub-sector added EUR3.412 billion to our GDP (+10.97% y/y), which vastly outstrips EUR1.913 billion added by the sub-sector to the economy over the first nine months of 2014. 
• So, our second core conclusion from these data is that Transportable Goods Industries and Utilities sub-sector - dominated strongly by MNCs - has been growing at unbelievably high rates of 10.97% y/y over the first 3 months of 2015. This is consistent with sector activity more than doubling in less than 7 years - a rate of expansion that consistent with a rapidly growing emerging economy, rather than with a mature economy. The Transportable Goods Industries and Utilities sub-sector was responsible for 54.3% of total growth in GDP over 3Q 2015 and 39% of total growth in Irish GDP over the period of 1Q-3Q 2015. Again, these are simply incredible figures, suggesting high degree of distortions from MNCs accounting practices and, potentially, exchange rates changes.
• Building and Construction sub-sector of Industry showed much more modest rates of growth, with 3Q 2015 y/y expansion at 3.49%, better than 1.52% growth recorded in 2Q 2015, but less than 7.8% growth in 3Q 2014. Construction sector contributed 1.47% to the overall gains in Irish GDP over 3Q period. For the first nine months of 2015, cumulative y/y growth in Building and Construction sub-sector output amounted to just EUR108 million (+3.09% y/y) which is three times slower in terms of the rates of growth recorded in the sub-sector over the same period of 2014.
• Our third core conclusion, therefore, is that traditional activity - proxied by Building and Construction sub-sector is growing in Ireland at rates probably closer to 3.5-4 percent - appreciable and positive, but not as massive as 6.8% growth recorded by the sectoral GDP (GDP at factor cost).

Distribution Transport Software and Communication (DTSC) sector activity:

• Distribution Transport Software and Communication sector activity grew at 8.28% y/y in 3Q 2015, which is slower than 11.2% growth recorded in 2Q 2015, but faster than 7.52% growth penned in 3Q 2014. The sector contributed EUR1.05 billion to GDP expansion in 3Q 2015 which amounts to 35.1% of the total growth in the GDP at factor cost. On the 9 months cumulative basis, Distribution Transport Software and Communication sector activity grew by EUR3.38 billion (+9.7% y/y) in 2015 compared to 2014.
• Once again, robust rates of growth in the sector are most likely reflective of the shifting MNCs strategies relating to tax optimisation, plus, potentially, the effects of exchange rates changes.

Public Administration and Defence sector contribution to GDP at factor cost:

• Public Administration and Defence sector activity shrunk 0.97% y/y in 3Q 2015, which is shallower contraction that -4.37% decline y/y in 2Q 2015 and -2.58% drop y/y in 3Q 2014. On a 9 months basis, Public Administration and Defence sector activity reduced our GDP at factor cost by EUR167 million (-3.59%). 
• 3Q 2015 contraction in sector activity was the shallowest in 5 quarters.

Other Services (including Rent) sector activity:

• Other Services (including Rent) activity rose 3.84% y/y in 3Q 2015, having previously posted 4.35% expansion in 2Q 2015 and 5.23% growth in 3Q 2014. 
• The sector contributed 22.9% of total growth in GDP at factor cost in 3Q 2015. 

As chart above shows, GDP at factor cost posted rates of growth above 2012 - 3Q 2015 average in every quarter since Q1 2014. Also, since 1Q 2015, rates of growth have been running above pre-crisis period average (Q4 2002-Q4 2007).

All of this is good, with positive dynamics in trends:

However, growth by sources remains unbalanced and most likely reflects skew in favour of MNCs-led sub-sectors:

Key conclusions are:

• Irish sectoral growth shows strong aggregate figures, with GDP at factor cost expansion over the first nine months of 2015 amounting to EUR8.831 billion (+6.91%) year on year, which is stronger than growth recorded over the same period of 2014 (EUR5.852 billion or +4.80% y/y).
• Sectoral contribution to growth show continued evolution of unbalanced economy skewed in favour of MNCs-led sectors, with Transportable Goods Industries and Utilities sector accounting for 38% of total growth recorded over the first nine months of 2015 compared to the same period of 2014, followed by Distribution Transport Software and Communication (38% share of total growth) and Other Services (including Rent) (+24% share). (Note: these shares add up to more than actual GDP at factor cost due to the ways in which CSO computes GDP at factor cost totals)
• All indications are that despite the MNCs bias in the figures, domestic activity did improve and is currently running at higher rates than in 2Q 2015 and over the first nine months of 2014.

Stay tuned for more analysis. 

3/12/15: Irish Services & Manufacturing PMIs: November 2015

Markit released Irish PMIs for November. Here are the highlights:

Services Sector PMI for Ireland stood at 63.6 in November - a significant uplift on October 60.1 reading and the highest reading since September 2006. 3mo average through August 2015 stands at 62.9 while 3mo average through November 2015 is at 62.0. Irish Services sector activity has now been running PMIs above 60.0 (signalling an exceptionally high levels of growth) every month since February 2014. Which, basically, makes these numbers either unbelievable or reflective of heavy biases toward MNCs-led activities in the survey. Not that Markit seems to be concerned and certainly not its paying partners in releasing the survey - Investec.

Manufacturing Sector PMI for Ireland moderated marginally to 53.3 in November from 53.6 in October, pushing 3 mo average through November to 53.6 which is somewhat lower than 55.0 recorded over 3 months through August 2015 and 56.2 3mo average through November 2014.

As the chart below shows, Services and Manufacturing PMIs have both continued to signal strong growth in the economy, albeit the trends in two series have now diverged, starting around February 2015 when Manufacturing PMI trend turned toward toward signalling shallower rates of growth, while Services PMI trend turned more volatile and onto a relatively moderate upward path.

24/11/15: Over-skilled & Under-Employed: Welcome to the Brave New World of Europe

Irish policymakers are keen telling us that jobs creation has been robust and of high quality in recent years. Which, thus, begs a question: why does OECD data show Ireland as having one of the most severe mismatches between workforce skills and employment?

Apparently, based on OECD data, Irish economy is not exactly offering jobs on par with our fabled skills. And, apparently, based on OECD data, our illustrious workforce holds a big untapped potential for productivity gains that are not being realised by the inflows of MNCs and FDI and domestic economy jobs creation to-date.

OECD doesn't quite offer an Ireland-specific explanation of this paradox, but it does offer an insight as to why the same phenomenon plagues virtually all of Europe:

Apparently, the quality of firms (or their systems for allocating Human Capital or both) in Europe is just not up to par. It turns out that the Irish disease of underemployment is a European disease.

This is especially tragic, given that we have a huge over-skilling present in the economy - in basic terms, our skills levels are too high for what our economy is capable of absorbing:

Few years ago, I quipped in my Sunday Times (now defunct) column that we are heading for Unemployed PhDs crisis. It looks like we have arrived.

So welcome to the Brave New World where years in education and training and years of on-the-job experience count for zilch when it comes to affording pensions, savings and investments.

24/11/15: Captured Economics and the Victim State

Per Simon Wren-Lewis: “…Perhaps the problem at the heart of the Eurozone is that economic policy advice in Germany has been effectively captured by employers' interests, and perhaps the interests of banks in particular.” (source here)

For one caveat: economics as profession has been largely captured by the state.

The European states are, of course, themselves have been captured by corporatist interests, including (but not limited to) those of big businesses and banks. One can make a similar argument about other (non-European) states too. Which makes the capture of economists by business only a part of that more corroded chain, and not an exclusive part. Otherwise, how can one explain that it is State-employed economists and State-aligned economists (with State boards positions and State research contracts) that so vocally defend the very same corporate welfare that Simon Wren-Lewis seems to correctly worry about?

My view on the subject was covered here: http://trueeconomics.blogspot.ie/2015/10/301015-why-economists-failed-whats-up.html.

In simple terms, enough whitewashing the State as a victim of business interests - instead, time to see the State as a willing participant in a corporatist system that allows capture of policy development and implementation mechanisms and institutions by vested interests that define the State.

20/11/15: For all that growth thinking, say 'Thanks' to the U.S. for leveraging up

While leadership of Ireland ponders the fortunes of our 'globally connected' (yet somehow always exceptional) economy, here is an actual global picture of who drove Europe's (and Ireland's) 'exporting economy' model of economic expansion.

The chart below plots current account imbalances by region as % of global GDP from 1980 through today.

Source here.

Since 1983, there has been only one, that i right, one year (1991) when the U.S. did not run a current account deficit. By converse, since 1994, there have been just four years when the EU run a statistically noticeable current account deficit.

Thus, leveraging of the U.S. economy, including through trade, household demand and corporate tax 'optimisations' was the consistent driving force behind the miracle of European growth (and global growth in general) since at least 1983. Since 2011 - the coincidentally very year of Irish recovery - U.S. deficits and growing deficits from the ROW have been coincident with rising surpluses for the EU.

Table below (compiled using IMF WEO database data) shows cumulated current account balances from 1980 through 2015 for the main groups of economies and the U.S. expressed in billions of euro:

For the readers' convenience, I shaded U.S., Euro area and EU positions. This shows just how dramatic was the acceleration in U.S. deficits position since 1997 compared to 1980-2015, and how symmetrically significant was the acceleration in the EU surpluses.

In a way, all strategy of 'national development policies' talk aside, brutal reality of the years ahead is that unless someone else picks up the U.S. leveraging game, there is little scope for the externally-driven economic models of Europe in the future.

Irish exceptionalist insiders should pause for some thought... perhaps on their way to a fancy state sponsored lunch at the Castle...

4/11/15: Irish Services & Manufacturing PMIs: October

Irish manufacturing and services PMIs have been released by Markit, covering October.

On Manufacturing PMI side, there has been some improvement in growth conditions in the manufacturing sector, with faster growth in new business, offset by softer production growth. IrishManufacturing PMI posted a reading of 53.6 in October, down marginally on 53.8 in September. Per Markit: “Business conditions have now strengthened in each of the past 29 months. The rate of expansion in manufacturing production continued to ease in October, the third successive month in which a slowdown has been recorded. The latest rise was the weakest since February 2014, but higher sales, in a number of cases from export markets, supported continued output growth.” In other words, MNCs activity is once again the suspect key driver for continued growth in the sector, not that Markit would say so outright.

On a 3mo average basis, 3mo average for the period through October stood at 56.1 - a hefty rise on the 3mo average through July 2015 that registered 53.7 and almost in line with 56.5 3mo average through October 2014. Over the last 6 months through October, the index average was down 1.5 points on the 6mo average through April 2015.

Meanwhile, on Services PMI side, October marked another month of rapid growth, although the rate of growth eased somewhat from dizzying highs of September. October Services PMI stood at a hefty 60.1, down on jaw-breaking 62.4 reading in September 2015. On a 3mo average basis, 3mo average through October 2015 was 62.7, up on 3mo average through July 2015 (61.5) and above the 3mo average through October 2014 (61.2).

Per Markit: “Although [October reading] signalled the weakest expansion in activity since February 2014, the rate of growth remained elevated as higher new business continued to lead to rising output.
Business sentiment remained strongly positive, with panellists predicting that new orders would continue to increase over the coming year, leading to further growth of activity. Improvements in wider economic conditions were also mentioned by those panellists forecasting higher output. That said, sentiment dipped to the weakest since August 2014. The rate of growth in new business eased further in October and was the weakest since March.”

As chart above shows, both services and manufacturing sectors continue to perform well ahead of historical comparatives, but on-trend in terms of growth balancing between two sectors. “Excess’ growth in Manufacturing, evident in October 2013 and 2014 data has eased, while accompanying moderation in growth in Services was somewhat weaker. Again, all indications are - exporting sectors are driving growth, dominated by MNCs, though domestic internal demand is also supporting expansion.

30/10/15: Why Economists Failed & What's Up With Irish Banking Reforms?..

Earlier this week I gave a small presentation to a group of academics and researchers from Holland on two topics:

1. Why majority of economists did not foresee the Global Financial Crisis? and
2. What is the state of play with Irish banking sector reforms?

Here are my slides from the talk: