19/3/18: Trump Trade Challenge: An Opportunity for Ireland?

My article on the potential implications of the U.S. trade tariffs on Ireland's economy was published by the Sunday Business Post yesterday. Here is the link: https://www.businesspost.ie/business/constantin-gurdgiev-trump-trade-412065

7/8/2014: Russian response to new sanctions

Sanctions tit-for-tat between Russia and the West keeps going on.

Yesterday, Canada announced new economic and travel sanctions against Russian banks and high-ranking officials to match the latest round of of the EU and the US measures (see: http://trueeconomics.blogspot.it/2014/08/282013-sanctions-v-russia-some-fallout.html).

Canadian Prime Minister Stephen Harper said that: "Export restrictions announced by the European Union with respect to military and military dual-use goods destined to Russia are already in place in Canada. We are also committed to imposing the necessary regulations to enact export restrictions on technologies used in Russia's oil exploration and extraction sector. Those will be implemented in parallel with our allies."

The Russian entities hit by the sanctions are:

• Bank of Moscow
• Dobrolet Airlines
• Russian Agricultural Bank 
• Russian National Commercial Bank
• United Shipbuilding Corporation
• VTB Bank OAO

Canada's list of sanctioned individuals excludes three business owners who are sanctioned by the US and EU, but have extensive business interests in Canada. The full list of entities and individuals impacted by Canadian sanctions is available here: http://www.ctvnews.ca/politics/canada-to-deploy-military-supplies-equipment-to-ukraine-ctv-news-1.1948163

What Russia is doing to mitigate the adverse effects of sanctions?

1) Imports substitution (long-term process) - ramping up production of components usually imported by its own defence industries to replace supplies lost due to sanctions and Ukraine trade disruption. For example:

• Sukhoi jets and other aircraft components imported from Ukraine; 
• Caterpillar & JCB sales in Russia have been falling while those of their major competitors, such as Russian Kamaz and Belorussian Belaz have been rising. This trend continues since 2008-2009. Russian manufacturers share of the domestic market rose more than 30% since 2009, but this is now likely to accelerate, rapidly; and 
• Switching to Russian-manufactured foreign equipment, e.g. Komatsu plant in Yaroslavl

2) Imports switching by substituting new longer term contracts for supply of goods and services in favour countries that are not imposing sanctions. Three examples:

• In aircraft leasing (Dobrolet and Aeroflot) contracts are being moved from Ireland to Hong Kong; 
• Turkey will be the alternative source of supply of fresh fruit and vegetables to Russia, as announced yesterday; 
• Russia has negotiated a major beef deal with Brazil and there are advanced talks on same with Argentina aiming to largely replace European shipments. Russia also announced it will switch to purchasing New Zealand dairy products, especially cheese.
• So Russia is not going for an autarchy in food markets, but rather for switching away from EU and US suppliers.

3) Longer-term exits from the markets:

• In June, Gazprombank raised EUR1 billion at 4% pa in the foreign markets via a bond sale on the Irish Stock Exchange. Gazprombank has one of the largest exposures to international funding markets of all other Russian financial institutions - it has 78 outstanding eurobond issues denominated in a number of currencies. All these will be migrating on maturity to different geographies as long as sanctions continue. It is also highly likely that even once sanctions are listed, Russian banks and corporates are likely to hold back their debt issuance in Western markets.
• Rosneft has a finance arm in Dublin : Rosneft International Finance Ltd. which placed on December 6, 2012 two bond issues totalling $3bn, the oil major said in a statement. The first $1bn issue carries a 3.15% coupon rate and is scheduled to mature on March 6, 2017. The second $2bn issue carries a 4.20% coupon rate and is scheduled to mature on March 6, 2022. The bonds were listed and admitted to trading on the Irish Stock Exchange on December 7, 2012.
• Irish law firms advise a range of Russian companies, including on Russian LPN, bond issues and ECP programmes: AHML, Federal Grid, Gazprombank, VTB, VEB, Rosneft, Uralkali, Norilisk Nickel, EDC, Borets, Metallionvest, Brunswich Railways, RenCredit, Alfa Bank, ABH Financial, Domodedovo Airport, Russian Railways, Promsvyaz and Probusinessbank.(see: http://www.arthurcox.com/practice_area/capital-markets/debt-capital-markets/).
• VTB, via its VTB Eurasia Limited (an Irish company) issued U.S.$2.25bn Perpetual Loan Participation Notes via an Irish branch.

Retaliatory sanctions

In retaliation against Western sanctions, Russian President Vladimir Putin on Wednesday signed a decree limiting the import of agricultural, raw and food products from countries that imposed sanctions against Russia. Moscow banned, for one year (mating duration of Western sanctions) imports of all meat, fish, dairy, fruit and vegetables from the US, EU, Canada, Australia and Norway.

Further sanctions are likely. These are expected to impact:

• Possible bans on breeding stock sales, biotech agricultural inputs sales, as well as
• Possible ban on drinks imports from the EU.

Irish agricultural sales to Russia (see here: http://trueeconomics.blogspot.it/2014/07/1772014-irish-bilateral-trade-in-goods.html) are

• EUR202.2 million in 2013, roughly 52% of Canada's trade of CAD563 million (EUR385 million) agricultural trade with Russia.
• Roughly 1/3 of these sales comes from coffee, tea, cocoa, and products thereof, and another 1/3 from meat & meat preparations
• Beverages - on top of the above - ca EUR12.1 million in 2013 in officially recorded exports. This excludes sales by major international brands which are predominantly imported into Russia via European subsidiaries and distributors. One example is Jameson Whiskey is now leading brand in whiskey sales in Russia since 2012. In 2012/2013 Jameson sales in Russia grew by 23% by volume (http://pernod-ricard.com/files/fichiers/Commun/Documents/RA2012_13_VGB_MiseEnLigne_28102013.pdf)

Conservatively estimating the sales via subsidiaries and distributors, Irish exports to Russia run at around EUR800 million, with roughly 1/3 of these coming from Agriculture, Food and Drinks sectors.

Some estimated 42% plus of these sales come from sectors dominated by Irish indigenous companies with roughly 50% of these accounted for Irish SMEs. There are some really brilliant examples of smaller Irish firms entering Russian markets in recent years and obtaining long term contracts to provide specialist goods and services that are provided from Ireland with zero tax arbitrage component to value added. In other words, when it comes to our trade with Russia, we have much higher indigenous jobs creation and real economic activity generation per euro of exports to Russia than from our exports to other major trading partners.

Few aside facts:

• Russia is the fifth largest (by volume) importer of food in the world (http://www.businessinsider.com/worlds-leading-food-importers-2014-8)
• Russia imported USD43 billion worth of food in 2013
• Russia is the biggest consumer of EU fruit and vegetables
• Russia is the second biggest buyer of U.S. poultry 
• Russia is one of the largest importer fish, meat and dairy in the world
• Russia bought 28% of EU fruit exports and 21.5% of its vegetables exports in 2011
• Russia purchased 8% of US chicken meat exports last year.

Chart via Business Insider:

Net conclusions: sanctions response by Moscow will cost Russian consumers through increased prices. That is beyond any doubt. But the sanctions will be supportive (in the medium term) of improved agricultural production and food sector development in Russia. This effect is similar to the one achieved in the devaluations of the ruble post-1998 crisis. Sanctions by Moscow can have a significant impact on smaller open economies of Europe, like Ireland, with this impact concentrated on smaller domestic indigenous producers. If sanctions are broadened to include drinks, there will be even more substantial declines in Irish exports. It is clear that there will be no winners from the tit-for-tat sanctions wars.

10/3/2014: Industrial Production & Turnover: Q4 2013 & January 2014

CSO released Industrial Production & Turnover figures for January 2014 back last week, and here is an update.

Obviously, we all are familiar with the fact that Manufacturing is booming once again, thanks for PMI signals, but... table above is not exactly cheerful, is it? On an annual production volumes data, activity is down 1.4% and turnover is up only 0.2%. On 3mo basis, production volumes are up just 0.2% and turnover is down massive 5.0%. Ugly...

Let's take the following experiment. Irish industrial production data (monthly series) is pretty volatile. So instead, let's take a look at quarterly data and augment this with the latest available data for running quarter (so for Q1 2014, let's take the only data currently at hand, that covering January 2014). Furthermore, let's look at seasonally-adjusted series to strip out even more volatility. Here are some charts with quick commentary.

Traditional Sectors:

Trend down, but January 2014 is above trend.  Beyond that:

• Current running quarter is 3.44% up on Q4 2013 and Q4 2013 was up 0.35% on Q3 2013 on volume basis. Current year on year is +6.12% on volume basis. So things might be improving.

Manufacturing:

No above luck with Manufacturing: trend down and we are below trend. Beyond that:

• By turnover, current Q1 2014 is down 1.37% on Q4 2013 and Q4 2013 was down 3.47% on Q3 2013. Year on year, current is down 2.40%, while Q4 2013 was down 1.76% y/y.
• By volume, current Q1 2014 is up 0.1% on Q4 2013 and Q4 2013 was down 1.68% on Q3 2013. Year on year, current is down 1.22%, while Q4 2013 was down 0.66% y/y.

Do tell me where those PMIs are now?

Worse, you can't really blame Pharma and Chemicals for this alone. Trend in this sector is down, and we are below trend, but Q1 2014 so far showing a slight uptick"

• By turnover, current Q1 2014 is down 4.36% on Q4 2013 and Q4 2013 was down 10.19% on Q3 2013. Year on year, current is down 10.60%, while Q4 2013 was down 3.54% y/y.
• By volume, current Q1 2014 is up 1.39% on Q4 2013 but Q4 2013 was down 5.98% on Q3 2013. Year on year, current is down 2.05%, while Q4 2013 was down 1.58% y/y.

Things are ugly in Pharma, true. But this is not the sole driver of manufacturing.

Modern Sectors aka MNCs that are, allegedly, supposed to benefit from the global upturn:

Trend down, series below trend, shrinking still:

• By volume, current Q1 2014 is down 0.35% on Q4 2013 but Q4 2013 was down 4.78% on Q3 2013. Year on year, current is down 3.52%, while Q4 2013 was down 1.62% y/y.

Unpleasant. 

10/1/2014: Irish Industrial Production & Turnover: November 2013

Production for Manufacturing Industries for November 2013 in Ireland was up 13.0% on October 2013 and on an annual basis production increased by 15.9%. Turnover rose 1.2% in November 2013 when compared with October 2013 and an annual basis turnover increased by 0.7% when compared with November 2012.

These are big numbers. Which is good news. But they come with huge volatility in the series overall, so better comparative is on 3mo rolling basis. Here things are less pleasant:
- The seasonally adjusted volume of industrial production for Manufacturing Industries for the three months September 2013 to November 2013 was 0.1% higher than in the preceding quarter.
- Year on year All Industries production indices for 3 months period through November were still up robustly by 7.3%
- Turnover was 0.2% lower.

Per CSO: "The “Modern” Sector, comprising a number of high-technology and chemical sectors, showed a monthly increase in production for November 2013 of 13.4%. There was a monthly increase of 0.4% in the “Traditional” Sector."

Good news here is that y/y figures for production are up on a 3mo basis. Chemical and pharmaceuticals sector posted 21% rise. Basic metals a gain of 23.9%. But Food products fell 0.3% and Beverages fell 8.3%. Also, Computer, electronic, optical and electrical equipment production shrunk 16.2%.

Poor news came on q/q dynamics side. For September-November 2013, compared to 3 months period through August 2013, Capital goods production was down 3.6%, Intermediate goods production was up just 0.2%, Consumer goods production fell 1.0% with Durable Consumer Goods output down 30.4% and Non-durable Consumer Goods up 4.8%.

Full details here: http://www.cso.ie/en/media/csoie/releasespublications/documents/industry/2013/prodturn_oct2013.pdf

Summary:

13/3/2013: Irish-Russian Trade & Investment - The Moscow News

Report in Moscow News on Irish-Russian bilateral trade, investment links and current state of growth in economic links between Russia and Ireland:

themoscownews.com/business/20130311/191325204/Russia-and-Ireland-forge-trade-ties-in-busts-wake.html

11/2/2013: Irish Industrial Production & Turnover: December 2012

Still catching up with data updates following a busy week lecturing.

Last week CSO issued data for december 2012 on Industrial Production and Turnover. Here's the detailed breakdown.

On Production volumes side:

• Index of production in Manufacturing Sectors rose to 112.0 in December 2012 up 11% on 100.9 in November 2012. Year on year index is up 2.85% - anaemic, but at least positive. 
• However, compared to December 2007 the index is still down although insignificantly at -1.72%. The issue here is that de facto this means that Irish Manufacturing Sectors are static over the last 5 years. 
• 3mo average through December is down 3.77% on 3mo average through September 2012 and is 7.15% down on 3mo average through December 2011. Thus, longer term dynamics, smoothing out some of the m/m volatility are not encouraging. 
• On shorter end of dynamics, however, things are slightly better: December reading is 112 and it is well-ahead of 6mo MA of 106.75 and 12mo MA of 108.99.
• Index of production in All Industries also improved in December to 108.8 up 1.58% y/y and 8.47% m/m.
• Compared to December 2007 the index is down significantly at -4.26%, which again shows that Industrial activity in Ireland has fallen relative to 5 years ago or at the very least - has not risen.
• 3mo average through December 2012 is 3.83% behind 3mo average through September 2012 and 7.01% below 3mo average through December 2011.
• As with manufacturing, shorter end of dynamics is more positive with December 2012 reading at 108.8 ahead of 6mo MA of 105.12 and 12mo MA of 107.19. 
• Modern sectors activity rose strongly at 9.3% m/m to 120.6 in December 2012, although y/y rise was much weaker at 1.86%. 
• The index is ahead of December 2007 by a marginal 1.82%.
• 3mo average through December 2012 is 7.68% below 3mo average through September 2012 and 9.61% below 3mo average through December 2011.
• Shorter dynamics are not too positive: the current reading of 120.6 is only marginally ahead of 119.82 6mo MA and is below 12mo MA of 124.05. 
• All dynamics in the Modern Sectors show steep falloff in Pharma activity.
• Lastly, Traditional Sectors activity returned to contraction in December, falling to 86.9 (-1.3% y/y and -1.25% m/m). The index is now 15.35% below where it was in December 2007. 3mo average through December 2012 is 1.73% down on previous 3mo period and is 1.37% down on same 3mo average in 2011. Worse than that, after posting a surprise uplift in November, the index is now running only slightly ahead of 6mo MA of 85.5 and 12mo MA of 85.13.
• So on the net, good news is that outside Traditional Sectors time series in volume activity are trending up in last two-three months. Bad news is - we are still off the levels of activity consistent with 2011 and are way off from regaining any sensible growth on 2007.

Chart to illustrate:

On Turnover Indices side:

• Manufacturing Sectors turnover fell from 101.1 in November 2012 to 97.0 in December 2012, down 3.10% m/m and down 10.76% y/y, both steep declines. Compared to the same period of 2007 the index is now down 9.5%. 3mo average through December 2012 is down 4.35% on 3mo average through September 2012 and is down 6.36% y/y.
• This index is pretty volatile m/m but overall, 6mo MA is at 98.93 and 12mo MA at 98.33 - both ahead of December monthly reading.

New Orders sub-index for all sectors is trending flat over the recent months (as per chart above) reaching 96.9 in December 2012, down from 100.1 in November 2012, so the index is down 3.2% m/m and it is down even more significant 10.9% y/y. Compared to December 2007 the index is down 11.6%. On 3mo dynamics the index is down 5.04% period on period and 6.7% y/y.

I will blog separately on dynamics in the phrama sector next.

7/11/2012: A patent cliff or a temporary slide?

In the previous post, looking at the top-line figures for Industrial Production for Ireland, I have promised to look more closely at the dynamics underlying the largest singular exports (goods) driver - the Pharma sector - Basic Pharmaceutical Products and Preparations (BPP&P) sector. Here are some numbers and trends.

An excellent analysis of this is also available from Chris Van Egeraat of NUI Maynooth (link here).

Let's start from the top. Throughout, I use the current figures for September that are subject to potential future revisions.

Production volumes:

• Index of production volume in Basic Pharmaceutical Products and Preparations sub-sector fell from 165 in August to 107 in September - a decline of 35.15% m/m and down 31.76% y/y.
• Compared to 2010, the index is now down 29.47%, compared to the peak value for January 2010-present period the index is down 42.41%.
• Back in September 2011, the index rose 3.36% y/y, so the swing in growth rates is extremely sizable.
• The declines are much shallower if we look at 3mo MA readings which a more likely to be reflective of the longer trends: for the latest 3 months through September 2012, the index average is down 9.27% compared to the 3 months period through June 2012. The index is also down7.02% compared to 3 months period through September 2011 and 5.93% down on its reading for the period through September 2010. Back in 2011, 3 months average through September rose 0.57% y/y. 

Turnover:

• Turnover index fell from 136.4 in August to 105 in September 2012 a decline of 23.02% m/m and 27.44% drop y/y.
• Compared to September 2010, the index is now down 29.72% and compared to the all-time peak activity for January 2010-present period, the index is down 40.10%.
• Back in September 2011 the index posted a decline of 3.15% y/y.
• Again, looking at 3mo averages through September 2012 there was a rise in the index of 2.0% compared to 3mo average through June 2012, but a decline of 8.82% on 3mo average through September 2011. Compared to 3mo average through September 2010, current index reading 3mo average is down 11.85%. This contrasts with index 3 mo average through September 2011 declining just 0.9% y/y.

Chart:

There is clearly a steep drop off in both series. And this falloff has a significant impact on our exports and overall industrial sectors activity. 

However, the series are volatile. For example, for January 2010-present, standard deviation in the turnover index for BPP&P sector is 11.82, against standard deviation for manufacturing sector at 3.41. In terms of volume of activity, index standard deviations are 12.61 and 4.42 for BPP&P sector and manufacturing, respectively.

Nonetheless, the drops in September amounted to 4.6 STDEV in Volume and 2.66 STDEV in Value - both are sizable.

A comparable drop in Volume in November 2011 came in at:

1. Shallower m/m change of 25%;
2. Was on foot of historical high (August 2012 was the third highest reading in Volume terms) and
3. Coincided with a monthly rise, not fall, in the Turnover index activity.

Thus, one has to be cautious when attributing the index moves in September 2012 to either volatility or the specific long-term trend change, such as a patent cliff (again, the note linked above from Chris Van Egeraat is spot on in this point).

However, one must be cognizant of the signifiant positive links between activity in the BPP&P sector and overall Manufacturing activity. Chart below illustrates the strength of that relationship:

One has to be also significantly concerned with the fact that we have coincident drops in Turnover and Volume, so the price effects seem to be going the same direction as the volume of activity. In general, there is virtually no meaningful relationship between sector volume and turnover. Strengthening of the link between turnover and volume can be reflective of a structural slide in the overall activity.

As usual, caution is warranted in interpreting the immediate and provisional figures. However, 'slips' like this do matter - both in terms of their immediate impact on GDP and (less so) GNP, and in the light of what we do anticipate - the reduction in overall sector activity in the near future due to patent cliff.

6/11/2012: Irish Industrial Production & Turnover: September 2012

There has been a massive, extremely disturbing, albeit alltogether not un-predictable fall off in manufacturing activity in Ireland over September 2012. Here's the CSO statement:

"Production for Manufacturing Industries for September 2012 was 13.9% lower than in August 2012. On an annual basis production for September 2012 decreased by 13.7% when compared with September 2011.

The seasonally adjusted volume of industrial production for Manufacturing Industries for the quarter period July 2012 to September 2012 was 4.5% lower than in the preceding quarter.

The “Modern” Sector, comprising a number of high-technology and chemical sectors, showed a monthly decrease in production for September 2012 of 22.4%. The most significant change was in Basic pharmaceutical products and preparations with a decrease of 35.2%.

There was a decrease of 1.3% in the “Traditional” Sector.

The seasonally adjusted industrial turnover index for Manufacturing Industries decreased by 5.7% in September 2012 when compared with August 2012. On an annual basis turnover decreased by 4.5% when compared with September 2011."

More on underlying dynamics:

• Volume of Manufacturing output shrunk 13.73% y/y and 13.88% m/m. Compared to September 2007, index reading is down 13.89%. Q3 2012 reading is down 4.8% q/q and down 2.82% y/y.
• Manufacturing activity (in volume terms) now stands at the levels last seen back in December 2009 and is down 2.6% in 2005 levels.
• 6mo MA through September 2012 is at 110.78, virtually indistinguishable from 12mo MA of 110.98.
• Volume index for All Industries is now at 96.8 - the level last seen between November and December 2009. The index is down 12.71% y/y and 12.64% m/m. Q3 2012 reading is down 4.52% q/q and down 3.10% y/y.
• 6mo MA is now slightly below 12mo MA (108.75 v 109.10).
• The index is at 3.2% below 2005 levels of activity.

• Modern Sectors volume of activity index has fallen to 105.0 in September, down 18.03% y/y and 22.45% m/m. Activity has fallen to the lowest level since November-December 2009 and compared to September 2007 the index reading is down 8.96%. 
• Q3 2012 index is down 5.96% q/q and down 1.60% y/y.
• 6mo MA (127.07) is identical to 12mo MA.
• Traditional sectors fall-off was less steep, but the index of volume of production here suffered second consecutive monthly decline. The index is down 5.01% y/y and down 1.30% m/m to reach 83.5 reading, lowest since January 2012. 
• Traditional sectors volume of production is down 22.53% on September 2007 and down 16.5% on 2005 levels of activity.
• Q3 2012 reading is 1.33% below Q2 reading and down 6.15% y/y.
• 6mo MA (84.93) is below 12mo MA (85.4).

As the result of the above changes, the gap between Modern sectors activity (volume) and Traditional sectors activity has narrowed dramatically to 21.5 ppt in September against 50.8 ppt in August.

Turnover data signaled narrower reductions in activity, suggesting that some MNCs have accelerated transfer pricing in light of higher producer price inflation (as signaled by recent PMIs):

• Manufacturing turnover activity fell to 97 in September, down 4.53% y/y and down 5.73% m/m. 
• Compared to the same period of 2007, turnover is now down 10.08%.
• Q3 2012 reading is up 3.70% q/q and up 0.36% y/y - once again due to improved price inflation.

New orders index reading slipped to 97 in September, down 3.96% y/y and down 6.55% m/m. Compared to same period 2007, the new orders activity is down 11.31%. Q3 2012 new orders average activity was up 3.59% q/q and up 1.44% y/y. 6mo MA, nonetheless is almost flat at 99.35 compared to 100.00 for 12mo MA.

Employment indices have slipped across a broad range of sectors in Q1 2012 - the latest for which data is reported. Modern sector employment fell to 63,500 in Q1 2012 against 67,100 in Q4 2011. Chemicals and pharma sector employment actually rose to 43,800 in Q1 2012 against 43,300 in Q4 2011, while Computers, electronic and optical products and equipment employment fell from 23,800 in Q4 2011 to 19,700 in Q1 2012. Overall industrial employment in Ireland fell from 201,200 in Q4 2011 to 192,700 in Q1 2012.

Volumes of industrial production in Basic pharmaceutical products and preparations fell 31.8% in September 2012 y/y and were down 35.2% m/m. In turnover terms, activity was down 23.1% m/m and down 27.5% y/y.

I will blog on this in more detail later tonight, so stay tuned.

6/10/2012: Irish Industrial Production - August 2012

Per CSO:

• Production for Manufacturing Industries for August 2012 was 0.7% lower than in July 2012. On an annual basis production for August 2012 increased by 0.2% when compared with August 2011.
• The seasonally adjusted volume of industrial production for Manufacturing Industries for the three month period June 2012 to August 2012 was 1.8% higher than in the preceding three month period.
• The “Modern” Sector, comprising a number of high-technology and chemical sectors, showed a monthly increase in production for August 2012 of 5.1% and there was a decrease of 0.9% in the “Traditional” Sector.
• The seasonally adjusted industrial turnover index for Manufacturing Industries decreased by 0.1% in August 2012 when compared with July 2012. On an annual basis turnover increased by 0.2% when compared with August 2011.

Here are some more detailed stats and dynamics:

• Volume of total Manufacturing output was down 3.43% in August compared to same month in 2007 (pre-crisis). 3mo average through August 2012 was up 1.78% on 3mo average through May 2012 and 3.75% ahead of the 3mo average through August 2011.
• August reading for Manufacturing marks the first m/m decline since February 2012.
• Volume of production in All Industries in August 2012 was down 4.68% on same period in 2007. 3mo average through August is 1.75% ahead of 3mo average through May and is 2.72% ahead of 3mo average through August 2011.
• Both Manufacturing and All Industries indicate improved 3mo averages as consistent with modest improvement in output dynamics.
• Volume of activity in Modern Sectors posted the highest reading since October 2011 and the second highest reading since the beginning of comparable series (January 2006). 3mo average through August 2012 is now 1.26% ahead of the 3mo average reading through May 2012 and is 6.59% ahead of the 3mo average through August 2011. Very strong performance in the sector.
• In Traditional Sectors, however, volume of activity fell 14.17% y/y and is now down 20.05% on August 2007 level of activity. 3mo average through August 2012 is down 1.78% on 3mo average through May and is down 4.34% on 3mo average through August 2011.

Chart to illustrate:

• As the result of the above trends, the gap between indices measuring the Volume of production in Modern and Traditional sectors has now widened to 51.5 - the highest reading since the all time record of 56.6 in October 2011.

It is worth noting that Traditional manufacturing sectors are usually associated with higher labour intensity than Modern sectors, implying the disconnection between improvements in overall Manufacturing index (volume) activity and the likelihood of jobs creation acceleration.

Turnover indices:

• Manufacturing sector turnover dipped marginally in August (-0.1% m/m) but is ahead, also marginally, on the annual basis (+0.19%). The index is down 6.9% on August 2007. 3mo average through August 2012 is 5.28% ahead of the 3mo average through May 2012 and is 3.29% ahead of the 3mo average through August 2011.

Lastly, New Orders index:

• New Orders index hit the highest reading in 2012 in August, up 3.4% y/y and 1.16% m/m, although the activity is still down 6.8% on August 2007. 3mo average through August 2012 is 5.5% ahead of 3mo average through May 2012 and 3.9% ahead of the 3mo average through August 2011.

The overall activity in the industrial production is clearly stabilizing at the recovery levels, but as noted above this is solely driven by the activity in Modern sectors.

18/9/2012: Irish exports credit guarantee

Leaves you speechless:

I am hearing that Irish Gov Exports Credit Guarantee Scheme requires +2% fee for participation to be paid by SMEs.

Risk-weighting of such schemes=0%, as this is a de facto re-insurance scheme with Government assuming liability only in third teer in the worst case scenario.

UK equivalent Scheme=-1%.

Thus Irish-UK differential for companies successfully exporting = +3% surcharge to the disadvantage for Irish SMEs.

Really, it appears we do tax our SMEs successes and then call this 'support' policy!

9/9/2012: Ireland's stellar exports performance?

Three charts that put to the test one of our greatest claims to fame - the claim that Ireland is one of the world leaders in exports performance.

Charts above clearly show that Ireland's performance in exports growth was rather spectacular in the 1990s, strong in 2000-2004 period and below average in 2005-2009 period. However, in 2010-2012 period - the very period when, according to our Government we are experiencing dramatic growth in exports - Ireland's exports performance is, in fact, well below the average for our peers.

As the result of this, despite an absolutely massive collapse in imports, Irish current account performance (external balance that is supposedly - per Government and official analysts, and the likes of Brugel think-tank heads - going to rescue us from the massive debt overhang we have) is underwhelming:

15/3/2012: Irish Industrial production & Turnover for January 2012

Industrial production & turnover figures are out for January 2012. CSO headline: "Industrial Production increased by 0.7% in January 2012".behind the headline, things are not so rosy. Here are the details.

Industrial production index for Manufacturing rose in volume terms from 109.6 in December 2011 to 110.3 in January 2012 - that's on of the ca 0.7% increases mom. Series are extremely volatile, so stripping short-term effects:

• Yoy index is down 0.18%
• Compared to same period in 2007 index is down 3.35% - implying that with all records busting exports, industrial production volumes in Manufacturing remain below pre-crisis levels.
• Compared to 2005, manufacturing activity is only 10% up
• Comparing 3mo average for Nov-2011 - January 2012 to 3mo average for Aug 2011-Oct 2011, the index is down 7.5%
• Comparing last 3mo average to same period a year ago, the index is down 2.9%

Still, good news, index did not fall in January.

All Industries index increased from 107.5 in December 2011 to 108.3 inJanuary 2012 - the core 0.74% rise, but:

• Yoy index is down 0.5% and it is down 4.2% on January 2007
• Comparing 3mo average for Nov-2011 - January 2012 to 3mo average for Aug 2011-Oct 2011, the index is down 7.4%
• Comparing last 3mo average to same period a year ago, the index is down 3.2%
• In 7 years, Industrial output rose by just 8.3 cumulative in volume

Modern Sectors fared much better - in monthly terms the index went up 4.9% in January 2012, and year on year the index is up 4.1%. That said:

• Comparing 3mo average for Nov-2011 - January 2012 to 3mo average for Aug 2011-Oct 2011, the index is down 9.5%
• Comparing last 3mo average to same period a year ago, the index is down 3.2%
• In 7 years, Industrial output rose by just 27.2% and since January 2007 the index is up 8.5% cumulative in volume

So some shorter-term pain, but overall, nice performance. Of course the trend (as shown in the chart below) is clear-cut and strong.

Traditional sectors continued to take the beating: down from 88.7 in December to 82.2 in January - a mom drop of 7.4% - the steepest in 4 months. The things are bad:

• Yoy volume of production in Traditional Sectors is down 8.2%
• Comparing 3mo average for Nov-2011 - January 2012 to 3mo average for Aug 2011-Oct 2011, the index is down 6.1%
• Comparing last 3mo average to same period a year ago, the index is down 4.2%
• In 7 years, TraditionalSectors volume fell 18% and since January 2007 the index is down 22.9% cumulative in volume

Relative contribution of Traditional Sectors to the economy compared to Modern Sectors is shrinking and the rate of contraction accelerated in January 2012, as shown in the chart below:

Things are worse on the turnover indices side with price deflation took bites out of the value of our economic activity:

• Manufacturing sectors turnover fell from 107.8 in December 2011 to 98.1 in January - a decline of 9% mom. It is now down 3.8% yoy and 14.3% below January 2007. The index is down 2% on 2005. Over last 3 months the index actually up on average 2.8% compared to 3mo average for August-October 2011 and 5.0% above the index reading a year ago, back in November 2010-December 2011.
• Other broader sector - Transportable Goods Industries turnover also fell mom - down 8.8% and is down 3.9% yoy. The pattern of changes is pretty identical to that in Manufacturing.

Looking forward, New Orders index for all sectors came in at a disappointing 98.5 - the lowest reading since April 2011 and 3.7% below January 2011 levels. The index is down 8.9% yoy and 15.8% on January 2007. The historical trend remains firmly downward, but shorter-range trend since january 2010 is strongly up. 

Yoy, New Orders declined 1.9% in Food Products (mom decline of 5.7% in January), rose 5.0% in Beverages (mom rise of 1.2%) and increased 5.5% in Chemicals and Chemical products (+2.7% mom). There was a huge fall off in New Orders in Basic Pharmaceutical Products and Preparations - down 6.9% yoy and 26.4% mom. Computer, electronic and optical products are down 4.3% yoy and 1.2% mom. Do note the patent cliff sighted above - dramatic - and will translate into trade figures as well. Please keep in mind - Government has been saying they have prepared for this.We shall see once trade data & QNAs come in for H1 2012.

So some headline improvements, but overall, weak data.

12/09/2011: Bilateral trade with Russia - latest data

Speaking at today's Croke Park conference "Finding New Markets: Doing Business in Russia, Central & Easter Europe and the Gulf", organized by Enterprise Ireland and Ulster Bank, I realized that in the rush of recent markets and crises, I forgot to update the charts on our bilateral trade with Russia, to reflect the latest data for May 2011 (released a couple of weeks ago).

Not to be a harbinger of only bad news, here's the latest bilateral trade results. And they are even more impressive, folks, than our overall external trade performance (see the latest data covered here).

The chart above shows truly dramatic gains in Irish exports since the beginning of this year. In May 2011, Irish exports to Russia amounted to €63.3 million against our imports from Russia of €9.2 million, implying the monthly trade balance of €54.1 million - the highest on the record. May was the second consecutive month of records-breaking trade surpluses in our bilateral trade with Russia with April surplus standing at €36.5 million.

In annualized terms, these numbers are also impressive. Using data from January through May 2011 and historical trends for monthly series from 2004 through present, my forecast for Irish exports to Russia for 2011 is to reach €569 million (range of €560-575 million) against projected imports of €115.7 million, to deliver a massive trade surplus of €454 million for the year as a whole.
If delivered, this level of trade surpluses will be more than double achieved in 2010 (€213.1 million) and will be 83% above the trade surplus achieved in 2007.

In terms of international comparatives, Russian market importance to Irish exporters is hard to overestimate. Take the first 5 months of 2011. Against bilateral trade surplus of €231.3 million achieved with Russia (an increase of 162% on same period in 2010), we have:

• Bilateral trade surplus of just €33.4 million with Brazil (with trade surplus falling in the first five months of 2011 by 23.7% compared to the same period of 2010)
• Bilateral trade deficit of €130 million with China (with trade deficit in the first five months of 2011 contrasted by the small trade surplus of €74 million achieved in the same period of 2010)
• Bilateral trade deficit of €86.2 million with India (with trade deficit in the first five months of 2011 showing further yoy deterioration on the deficit of €56.2 million achieved in the same period of 2010)
• Bilateral trade surplus with our traditional trading partners: Australia (€262 million down from €291 million yoy), Canada (€89.9 million down from €123.8 million yoy), Japan (€340 million down from €382.7 million yoy), Turkey (€99 million up on €83 million yoy)

19/07/2011: Irish Trade Stats for May 2011

External trade figures for May (provisional) and terms of trade figures for April are out this week, so time to do some updates.

PS: Please, note - the source for these is CSO and all complaints about numerical values reported/shown arising due to some readers disliking some results for whatever reason - out to them.

• Imports in May 2011 came in at €3,727.9 million in seasonally adjusted terms, which was €1,199.6 million below April figure (-24.35% mom), €154.7 million above the same figure in May 2010 (+4.33%) and €357.5 million below May 2009 figure (-8.75%).
• Exports in May 2011 came in at €7,511.3 million which was €48.8 million below April figure (-0.65%), up €76 million (+1.02%) yoy and up €534.6 million (+7.66%) on May 2009.

• Trade balance in May stood at €3,783.5 million which is €1,150.9 million above April 2011 level (+43.72% mom), but down €78.7 million (-2.04%) yoy and up €892.2 million (+30.86%) on May 2009.

• Terms of trade continued to improve (vis-a-vis external sales with price of exports ratio to the price of imports falling) in April (there is 1 month lag in TT data compared to trade volumes data), posting an improvement for the 4th consecutive month. TT measured index 76.6, down from 77.1 in March and down 8.70 points yoy (-10.20%). Compared to April 2009, this year April reading was down 11.80 points or 13.35%.
  

So mapping the above progression:
The chart above suggests that in 2011 we are potentially entering some structural (and much expected - remember IMF forecast for trade growth for Ireland is about 50% below that attained in 2010) slowdown in the rate of growth in external trade.

Lastly, imports-intensity of exports (a ratio of exports volume to imports) has increased in May from 153.4% in April to 201.5% in May 2011 - an increase of 31.3% mom. At the same time, imports-intensity declined from a year ago by 3.2% although it is up on May 2009 by 18.0%.
So courtesy of CSO:

• "With seasonally adjusted exports remaining static and imports decreasing by 24% (or €1,200m) between April and May, the trade surplus increased by 44% to €3,784m" in mom terms. The improvement, therefore is solely due to decline in inputs imports and further contraction in consumption.
• "On an unadjusted basis, the value of exports in May 2011 (€7,390m) was slightly down (-0.6%) on the May 2010 figure of €7,435m. The value of imports (€3,749m) was up 5% on the May 2010 figure."

In January-April 2011, compared to the same period in 2010 exports increased by 8% to €31,161m:

• Exports of Medical and pharmaceutical products increased by 17% or €1,324m,
  
• Organic chemicals by 14% or €896m
• Overall Chemical and related products category exports rose from €17,347.3m in January-April 2010 to €19,607.7m in the same period of 2011, while imports in this category rose from €2,889.9m to €3,591.9m over the same period of time
  
• Petroleum by 126% or €208m. of course over the same period, petroleum imports rose from €1,410.1m to €1,752.8m
  
• Exports of food and live animals rose from €2,077.1m to €2,465.1m as trade balance in this category rose from €635.4m in the first 4 months of 2010 to €831.0 million in the same period of 2011
  
• Exports of goods to the USA increased by 17% or €1,069m, to France by 18% or €276m and to Switzerland by 25% or €258m. Exports to Belgium fell by 5% or €232m and to Spain by 19% or €225m.
• In the first four months of 2011, 52% of Ireland’s exports went to the USA, Belgium and Great Britain.
  

Over the same period, imports increased by 13% to €17,293m:

• Imports of Other transport equipment (including aircraft) increased by 27% or €401m,
  
• Petroleum increased by 24% or €342m and
  
• Medical and pharmaceutical products by 22% or €251m.
• Goods from Great Britain rose by 19% or €782m, from the United States by 7% or €188m and from Germany by 15% or €167m.
• Over half (54%) of Ireland’s imports came from Great Britain, the USA and Germany in the first four months of 2011.
  

11/07/2011: Real value of the Euro and Irish trade

A new paper from IMF looks at the effects of Euro currency valuations and the effect on competitiveness-trade links for trade within the Euro area and for trade outside the Euro area. The study, authored by Tamim Bayoumi, Richard Harmsen and Jarkko Turunen and titled Euro Area Export Performance and Competitiveness is available from the IMF as a working paper from June 2011, IMF WP/11/140.

The main issue assessed is: "Concerns about export growth within the euro area peripheral countries due to a lack of competitiveness within the euro area are a key policy issue."

The main results are:

1. Long-term price elasticities for exports within the euro area are at least double those for exports outside euro area. In other words, exports outside the euro area are much less responsive, in the long term, to price changes than exports within the euro area. Which, of course, is good news for countries with diversified direction of exports. Ireland is a relatively good performer here, as we re-exports to the US, UK and as our exports to the rest of the world are also growing.
2. (1) above means that traditional real effective exchange rate indexes may overstate the effectiveness of euro depreciation in restoring exports growth in the euro area periphery. Specifically, the study shows that Real Effective Exchange Rate metrics of competitiveness yield highly volatile effects on countries exports. Wholesale Price Indices-based measures provide a better metric for competitiveness within the Euro area and poorer metrics for competitveness for exports outside the euro area. Unit Labour Cost-based competitveness metrics too perform best for trade within the euro area, but are signifcant performance metrics for outside the euro area exports as well. (Note - in my own analysis on this blog, I use consistently only ULC-based metrics). Finally, CPI-based metrics are yeilding totally counter-intuitive results and represent the poorest metric.
3. So, per (2), the pace of deterioration in exports due to appreciation of the euro, depends on the measure of relative prices used.

In particular, the four REER indicators for the peripheral countries "give only partial support to the much-discussed view that external competitiveness deteriorated significantly since the adoption of the euro became likely enough that interest rates started to narrow":

• In Ireland, the CPI-based REER has appreciated by about 20 percent since 1995, while the WPI- and ULC-based REERs have depreciated by about 20-30 percent over this time period.
• Portugal shows similar divergences.
• While Italy’s competitiveness does appear to have eroded, the size of this effect is, frankly, anyone’s guess—while the CPI- and WPI-based measures show only modest appreciation since 1995, the ULC- and XUV-based indicators have appreciated by about 50 and 110 percent, respectively.
• The data for Greece and Spain show a more consistent story, involving steady appreciation of some 10-40 percent on all four measures.

You can read the charts below just as you read my charts on Harmonized Competitiveness Indicators: higher values mean bad things. Higher REERs in the second figure reflect export-related REERs for wthin and outside the Euro area trade.

Figure 1. Real Effective Exchange Rates in Euro Area Countries, 1995 to 2009 , Index 1995 = 100

Figure 2. Real Effective Exchange Rates in Euro Area Countries: Intra/Extra-Euro Area, 1995 to 2009, Index 1995 = 100

"There is surprisingly large variation across our four measures of extra- and (in particular) intra-euro area relative prices—based on wholesale prices, consumer prices, unit labor costs, and export unit values. For some countries, such as France and Ireland, the picture becomes clearer if one ignores the CPI price series that generate unconventional results".


All together, a very interesting study which suggests that in particular for Ireland, intra-Euro area trade has been consistent with continuously depreciating Euro, while extra-Euro trade is consistent with consistently appreciating Euro. Since exports within Euro area are more price-sensitive than exports outside Euro area, this clearly explains, at least to some extent, why nominally appreciating Euro (in Forex markets) had so far little adverse effect on Irish trade outcomes: we benefit from effective real devaluation within the Euro zone and are not signficantly hurt by effective euro appreciation outside the Euro area.

21/06/2011: Bilateral trade between Ireland and Russia

As promised earlier today - the latest updates on bilateral trade between Russia and Ireland, courtesy of the latest CSO release.

Imports from Russia rose from €10.6mln in February 2011 to €15mln in March, down on €18.8mln a year ago. Exports to Russia rose from €39.5mln to €40.6mln mom in March. Q2 2011 Exports now stand at €116.5mln while imports are €39.1mln implying a trade surplus in favour of Ireland of €77.4mln for Q1 2011 - up from €15.9mln a year ago. Overall, trade surplus to Russia for Q1 2011 is now above trade balance for Brazil (€19.1mln), Canada (€68.7mln), Malaysia (€56.7mln), Mexico (€69.5mln), Singapore (€54mln), South Africa (€38.5mln), South Korea (€14.6mln) and Turkey (€57.4mln). It is worth noting that trade with China, India and Taiwan registered trade deficits against Ireland.

Few charts to illustrate (note the annualized projections based on Q1 data - not for the accuracy points, but for the directionality).

So should the performance so far through Q1 continue, this will be another record year for bilateral trade with Russia both in terms of exports from Ireland and in terms of trade surplus.

21/06/2011: Trade Data for April

Per latest CSO data released today: Ireland's seasonally adjusted

• Imports rose from €3,721m in March to €4,914.3m in April (+32%)
  
• Exports decreased from €7,717.6m to €7,530.4m (-2%)
  
• Please note, these figures cover only goods trade

Ireland's trade surplus was €2,616.1m in April 2011, down on €3,758.1m in April 2010 and down on €3,996.6m in March 2011.

January-March 2011 imports rose strongly in:

• Food & Live Animals - from €1,066.1m to €1,248.0m yoy
  
• Crude Materials, Inedible, except fuels - from €152.7m to €189.9m yoy
• Mineral fuels, lubricants and related materials - from €1,347.9m to €1,748.1m yoy
• Animal and vegetable oils, fats and waxes - from €37.7m to €57.5m yoy
• Chemical and related products - from €2,131.3m to €2,524.0m yoy
• Manufactured goods classified chiefly by material - from €802.7m to €922.0m yoy
• Machinery and transport equipment - from €3,203.7m to €3,707.0m yoy
• Miscellaneous manufactured articles - from €1,408.2m to €1,494.0m yoy

Changes in imports in mineral fuels, lubricants and related materials, as well as in chemical and related products is broadly in line with MNCs demand for inputs to deliver increases in exports. Machinery and transport equipment imports increases were characteristic of some replacement of lost (depreciated) capital base in the industry.

Exports increased by 9% to €23,346m in Q1 2011 compared to Q1 2010 with:

• Exports of Medical and pharmaceutical products increased by 18% or €1,065m
  
• Exports of Organic chemicals rose by 15% or €716m.

Exports of Electrical machinery decreased by 6% or €48m.

Lastly, terms of trade deteriorated for Irish exporters from 78.0 (price of exports ratio to price of imports) in February 2011 to 77.1 in March 2011. March reading was the lowest since January 2003 and compares unfavorably to 86.3 reading in March 2010 and 86.6 reading in March 2009.
This, of course, means reduced profit margins for Irish exporters and pressure on tax returns from external trade activities, as well as potential pressure (it will take more than a couple of months of low readings) on employment in the traded sectors. Broadly-speaking (ignoring a slight rise from 80.8 in November 2010 to 80.9 in December 2010), terms of trade have been deteriorating now for 10 months.
So as chart above shows, high exports volumes are coming in at the cost of reduced profit margins. Of course, much of this can most likely be attributed to transfer pricing by MNCs, suggesting that we might see increased emphasis on booking profits via Irish operations. This, n turn, can provide artificial support for GNP in the same way as it did in Q4 2010.