26/10/2011: Irish GNP projections under new US tax proposals

Much ignored by irish media so far, the US Congressional proposals to reform corporate tax system are gaining speed and have serious implications for Ireland. In the nutshell, today, US House Ways & Means Committee Chairman Dave Camp described some of his report proposals (see Bloomberg report here), which include:

• Lower corporate tax rate to 25 from 35%
• Exempting 95% of overseas earnings from US tax
• Introducing a tax holiday on repatriated profits

For US MNCs operating in Ireland this will serve as a powerful incentive to on-shore profits accumulated in Ireland. While the full impact is impossible to gauge - it is likely to be significant, running into 50% plus of retained earnings. 

This will, in turn, translate into higher Net Income Outflows from Ireland (see QNA) and thus directly depress our Gross National Product.

I run two scenarios - based on IMF WEO (September 2011) forecasts for Irish GDP, current account and Government expenditure and on historical data from CSO QNA. The baseline scenario assumed that MNCs will expatriate the same share of their profits relative to GDP as they have done before (3 year moving average). The first adjustment scenario adds a 10% uplift on the above scenario and expected growth in GDP to repatriation of profits. The second adjustment scenario adds a 25% uplift. The results are in the charts below.

Pretty dramatic. And this is for rather conservative assumption on increased outflows.

27/03/2011: Annual GDP and GNP - few lessons to be learned

I haven't had time to update QNA numbers on the blog, but here's a nice preview charts of analysis to come.

First annual GDP and GNP:
When I often say that over the last 3 years we've lost a war, I mean it: relative to peak 2007 levels, our real GDP is down 12%, our GNP is down 16%. Our 2010 GNP clocked the level of 2003-2004 average, erasing 7 years of growth. Our GDP is now at the level of 2004-2005.

What about the composition of our GDP and GNP?

The above is just a snapshot. Here are headline figures:

• Agriculture, forestry & fishing sector output in constant prices is now 10% down on 2007 (remember - we were supposedly having a boom in this sector in 2010 according to the various CAP-dependent quangoes, and still the preliminary output came out at a miserly €3,328 million - the lowest in 8 years).
• Industry had a better year, with output rising to €48,111 million, up on €45,841 million in 2009, but still 7% down on 2007.
  
• Building & construction sector shrunk 58% on 2007 levels, posting output worth just €5,754 million in 2010, down on €8,433 million in already abysmal 2009.
• Distribution, Transport and Communications sector shrunk 13% in 2010 relative to 2007. 2010 sector output was €21,509 million against 2009 level of €21,845 million.
• Other services have fared better than other sectors, posting a decline of 6% on 2007 levels. In 2010 the sector brought into this economy €71,828 million against €73,823 million recorded in 2009.
• Public Administration and Defence - the sector that has been allegedly (per our Government and Unions claims) hit very hard by the austerity has managed to "contribute" €6,243 million in 2010 - slightly down on €6,416 million in real euros in 2009. Relative to peak 2007 levels, Public Administration and Defence "contribution" to our GDP/GNP has fallen by a whooping ZERO percent. That's right - zero percent. In 2007 the 'sector' posted GDP contribution of €6,266 million.
• Taxes, net of subsidies, have fallen 31% in 2010 relative to 2007 and 'contributed' just €16,027 million in 2010 compared to €16,807 million in 2009. Tax hikes are working marvels for the Government, then. Keep on the course, Captain!
• Net Factor Income from the Rest of the World has increased steadily from 2007 levels, posting an outflow of -€29,313 million in 2010, up on outflow of -€28,184 in 2009 and a massive 31% above 2007 levels. These outflows represent the GDP/GNP gap that has expanded from 15.17% local minimum in 2006 to 21.67% today.
  

Now, let's take a look at percentage contributions to GDP and GNP from each line of QNA:
So while economy shrunk, Public Administration and Defence grew in overall importance as a share of GDP.

27/01/2011: External trade (goods)

Latest data for Ireland's external trade in goods was released yesterday, showing another month of spectacular trade balance performance in Ireland, albeit with a slight easing in month-on-month activity.
The value of exports in November 2010 rose robust 17% year on year while the value of imports was up by 2%. The trade surplus increased by a spectacular 37% to €4,086mln, marking a third consecutive month when the trade surplus exceeded €4bn. However, seasonally adjusted exports fell 1% in November mom, as did imports, leaving seasonally adjusted trade balance virtually unchanged.

The main drivers of trade balance in the first 10 months of 2010, compared against the same period of 2009 were:

• Medical and pharmaceutical products exports rose 15% or €2,705mln, while imports were down 21%
• Organic chemicals exports up 3% or €429mln.
• Computer equipment exports fell 32% or -€1,724mln, while imports declined 31% or €994mln
• Other transport equipment (inc aircraft) exports fell by 70% or €458mln, but imports fell 31% or -€1,069mln.
• Imports of Petroleum fell 34%,
• Imports of Road vehicles declined by 74%

Now to updated charts showing the above dynamics:
Headline series show two trends - a relatively flat trend (though down-sloping slightly) in exports and a robustly negative trend in imports. Exports and imports in the short run are still performing above the trend and the persistence of performance suggests that the trend is likely to reverse onto positive in exports and flatten out in imports. While continuing to signal strong performance in trade surplus, the trend suggests that future growth in trade balance might be moderating in months to come.

Chart above clearly highlights an emerging problem of deteriorating terms of trade (ratio of exports prices to imports prices). This process has been on-going and is now starting to present a major headwind for exporters.

That said, due to a heavy exposure of our trade to MNCs, volumes of trade have little relationship with the short and medium term pressures on terms of trade:The above suggests that the headwinds will be strongly felt by domestic exporters.

A summary of cumulative changes in exports and trade surplus in 2010 relative to 2007:

Notice weakening performance (relative to pre-crisis conditions) in October and November - something to watch.

Economics 9/8/10: Ireland's Construction PMIs

This morning brought with it another bunch of wonderfully optimistic statements from the Irish 'experts' on business cycles.

Let's take in the facts:

• Ulster Banks’ Irish Construction PMI data released today showed moderating decline in Irish construction activity in July. PMI increased modestly from 44.9 in June to 45.0 in July which still means a contraction in activity.
  
• However, at 45.0 the 'improvement' in terms of slower rate of decline is within margin of error, at least one based on time series residuals (Ulster Bank won't tell us what the real underlying margin of error in PMI surveys for the sector is).
  
• So on the surface, contraction in activity is now "the slowest in three years". Which of course is only a natural statistical property - after 3 years of destruction raging across the sector, you'd get an asymptotic curve to 'stabilization', aka the bottom. This has absolutely nothing to do with any pending improvements.
  
• Residential sub-sector was the weakest, showing accelerating drop-off to 40.8 in July, from 45.4 in June. So housing continues to fall off the cliff.
  
• Commercial and civil engineering sub-sectors posted an 'improvement' in July - with the rate of collapse slowing from 45.8 to 46.0 (another statistically insignificant change) and to 43.6 form 38.4 respectively (clearly a statistically significant number). Again - the 'good news' here is a slowdown in the rate of the fall off, no real improvement.
  

The real spin stuff was, actually, in the interpretations concerning future expectations: "Future sentiment remained strongly positive in July, and improved slightly since the previous month, as over 40% of respondents expect activity to be higher in twelve months’ time."

You see, should the question have been 'Do ou expect any improvement in activity 10 years from now?' the 'improved' sentiment would have probably been even stronger.

Virtually identical analysis was presented by the Ulster Bank itself (here). Ulster Bank chief economist Simon Barry told the Irish Times that "index showed that conditions in the Irish construction sector remained “very tough”, with firms continuing to cut back sharply on their employment levels... [But] 'Looking forward, the July survey picked up a further improvement in confidence among Irish construction firms,' Mr Barry said. The rise in new business would provide “added encouragement”, he noted... 'As heartening as this development is, the increase is very modest indeed and it is probably more an indication of possible stabilisation in the sector at very weak levels rather than a strong recovery anytime soon.'"

This type of interpretation omits a very simple economic reality: after 38 months of contraction, the firms still remaining standing in for the survey are those that survived so far into the downturn. These same firms might have higher expectation of surviving into the near future as well. In other words, the entire PMI survey component suffers from survivorship bias. This bias may (or may not) be significant for several reasons:

1. Surviving firms might be biased on the optimism side because they expect to pick up a greater share of future public spending on construction due to declined competition. In other words, survivors might be looking forward to having an increased market share of a shrinking economic pie. Surely that wouldn't be indicative of 'stabilization'.
2. Surviving firms might also be collectively biased in their responses to the survey, if they have individual incentives to do so. For example, a number of Irish construction firms are currently under continued pressure from their banks. If each one of those firms were to make a signal to their lenders that 'things are going to improve soon, just wait a little longer', the resulting bias can be significant enough to induce higher optimism readings on the survey side. This is a significant enough effect in other sectors using surveys of expected future conditions to invalidate entire indices. One classical example involves surveys of expectations for future direction in Forex markets.
3. Surviving firms might also be selected on the basis of their actual exposure to the Irish market. For example - two leading surviving firms in the Irish construction sector are Kingspan and CRH. CRH derives only 4% of its revenue from Ireland and Kingspan's share of revenue accruing to Ireland is 7%. If firms are indeed selected into survivors group by their lower exposure to the Irish market, the question is then whether the expectations data they report is purely based on their perception of future trading conditions in Ireland or whether it is 'contaminated' by their reading of other markets.
   

What (1) and (3) above really suggest is that before we engage in interpreting the future expectations we need to rigorously check for a number of classical biases that might be present in the data. Only economists unaware of the hazards of interpreting survey based gauges of expectations would make the basic mistake of taking the number at their face value and interpreting them directly.

Alternatively, for a more crude correction, the survey results should not be interpreted independent of the quantitative data from contemporaneous PMI reading. In other words, one can make a conclusion that 'It is likely that in the near term there will be improvements in trading conditions in the sector' only if there are some contemporaneous signals of improvements and only if these signals are statistically strong enough.

This, of course is hardly the case, given that PMIs contemporaneous reading increased by just 0.1 from 44.9 to 45.0 - an increase that appears to be well within the margin of error.

Economics 26/03/2010: National output figures

Held back by work, I am only now catching up with data released this week by CSO, so do stay tuned - these pages will be featuring more analysis in days to come.

First, QNA for Q4 2009 came in, putting annual decline in GDP at 7.1% for 2009 and GNP at a whooping 11.3% (per table below):
This is slightly better than my predicted annual declines of GDP to the tune of 7.3% and GNP to 11.5-11.7%. Nonetheless, as CSO admits, these figures mark historical record of declines.

Throughout the year, I have traced the paths for the main QNA series in charts. A picture, after all, is worth a thousand words. So here they are, updated for the latest figures:

The first chart above shows GDP and GNP time series. Two things are apparent from these figures: first, all three series peaked at the same time - in 2007. This is significant for as we shall see below, the same does not hold for growth rates. Second, notice how factor cost-based GDP is showing more mild downward trend than market prices-based GDP measure? This suggests that deflation (market prices change) has been so far much more significant than declines in factor costs. This does not really bode well for our hopes of improving our competitiveness through this cycle.

Next chart shows components of GDP and GNP:
Notice how two state-supported sectors - public sector and agriculture (the latter supported, of course, via CAP) show no signs of a recession? Both are having jolly good time - courtesy of taxpayers (Irish and European). Also, do keep in mind that some of the public sector activities fall into other categories - e.g. transport was probably supported by the semi-state companies and their ability to ignore recession when it comes to hiking prices and charges (DAA is one good example here). So in real terms, private sector activity in each one of these sub-sectors is down by more than the CSO aggregates suggest.

Next chart illustrates another historic record:
The gap between our MNCs-dominated exporting economy and our domestic economy is now at historic highs - reaching 23% in 2009. This means that almost a quarter of what Ireland claims to produce (GDP) is really an accountancy trick and has nothing to do with this country. Of course, for years we have been conditioned to think that we are filthy rich because our GDP is so high. Oh, how deep the fallacy runs.

Now, think about the core metrics of state solvency deployed in international markets. Take our national debt. At current €77.6bn (per NTMA) it officially stands at just 45.6% of our GDP (46.2% if we are to use more time-consistent estimate from Finance Dublin). In the real world, this figure should reflect our real national income, for we can't seriously expect the foreign MNCs to be responsible for Ireland's debt. So the real figure should be 55.5% of GNP. Almost a 10 percentage points spread.

Now, let's take our current position and take a peek into the future. Suppose we take last 6 years' average growth rates for respective series. How long will it take for our various measures of income (bogus GDP and more honest GNP) to bring us back to the prosperity of 2007?
As chart above illustrates, should our MNCs continue racing ahead as they did up until now, happy days will come back to our shores again in 2018. Of course, relying on our domestic (real) economy to chug along as it did in 2003-2009 period means we will be back to 2007 levels of income some time around 2026. Mister Cowen can keep telling us that things have bottomed out and that all will be well once growth returns. Numbers are a bit more honest here.

What else did the QNA release give us that CSO omitted in its release?

Let's take a look at quarterly frequency:
Notice how both GDP and GNP are running close to (but below) 4-quarter moving averages? This is the third time it is happening in the current crisis and every time it is followed by a renewed pull away from the MA line downward. GNP is seemingly poised to cross over in Q1 2010, posting a possible quarterly gain. Of course, this is just a momentum force, which has to be backed by fundamentals. And the fundamentals are still pretty nasty. But there isn't a hope of even a technical rebound indicated in the GDP line. So:

• Will we see a GDP/GNP gap contracting somewhat in Q1 2010 with GDP starting to show much more weakness than GNP?
• Will GNP loose technical momentum building up and renew its downward slide?

Only time will tell, but, here is an interesting snapshot. Remember the latest QNHS? Q4 2009 marked the return of Construction sector to the leading role in driving unemployment higher. This is collaborated by the following figure:
Activity in construction and building sector shows absolutely no willingness to move above the moving average line. If anything, it is still contracting at a massively rapid rate.

Lastly, let me show you an interesting chart on annual rates of change in the GDP/GNP series:
Notice that in contrast with levels in overall activity (the first chart above), growth rates actually peaked in two different years, with 2007 decline in the growth rate of GNP clearly providing a warning signal for the Government that things might be getting slightly unsteady. Coupled with what was going on at the time in the financial markets (remember, the crisis in financial markets started actually in July 2007), that was a warning shot. I recall interpreting it this way in a couple of my columns - back in Business & Finance and in the Sunday Tribune.

I will cover trade figures contained in QNA release in the later post dealing with overall trade issues, so do stay tuned.

Economics 18/03/2010: A new warning to Ireland

Ireland was put on notice in the EU Commission assessment of fiscal positions going forward. per FT report today: European Commission warned eight countries, including Germany, France, Italy and Spain, Austria, Belgium, Ireland and the Netherlands that their forecasts for fiscal deficits reduction and growth for the next 4 years are basically failing to meet reasonable tests of robustness and that they need to identify exact measures they will take to meet their medium-term deficit reduction targets of 3 per cent or less of gross domestic product.

This is a second round of warnings covering Ireland's budgetary plans after earlier this month the ECB has qualified its assessment of Euro area fiscal consolidation measures with a statement, in the case of Ireland, referring to the lack of clear evidence on the ways in which the target will be achieved (see ECB Monthly Bulletin, 03/2010 page 85).

The warnings - usually a saber-rattler, and nothing more - but this time around it is a serious note. The reason is simple. It now appears that Germany is set against a direct bailout for Greece, pushing instead for joint IMF/Euro area action backed primarily by IMF. Here is the background on this:

Bloomberg reports (here) that Michael Meister, the CDU’s finance spokesman, said: “We have to think about who has the instruments to push for Greece to restore its capital-markets access... Nobody apart from the IMF has these instruments,” and that attempting a Greek rescue without the IMF “would be a very daring experiment.”

Angela Merkel told the German parliament yesterday: “The problem has to be solved from the Greek side and everything that is being considered has to be oriented in that direction.”

This clearly implies that fiscal deficits corrections will have to be pursued by countries in the environment where the markets cannot price in collective risk averaging within the Euro area, which in effect means that spreads between German and PIIGS bonds yields will have to rise and stay elevated through 2014. And this, in turn, means Ireland is now exposed to a potential sever credit crunch on the Government side.

And there is an even greater threat for Ireland, as Irish Exchequer is much more dependent on the good will of German banks than any other Exchequer in the PIIGS club (see chart below, courtesy of http://spaineconomy.blogspot.com/):
Frightening, especially since the chart is expressed in Euros, which of course puts us well ahead in proportional terms of Spain, not to mention Portugal and Greece, for all countries, except Switzerland.

Economics 24/01/2010: Consumer side of the economy equation

Before posting my Sunday Times article, couple of interesting links from elsewhere:

Myles Duffy on Revenue's 2009 figures - here. Good and concise view.

Excellent essay on Google v Apple battle and why Google just might be losing it - here.

Now to my article, as usual, unedited version:

The latest retail sales figures show continued weakness in consumer demand through November 2009 with core sales (ex-motors) up a poultry 0.3% in volume and down 0.3% in value on October. In twelve months to December, Irish retail sector has recorded a massive 8.2% drop in the volume of sales, while the value of good and services sold collapsed 12.9%.

This weakness in retail sales is important for three reasons – both overlooked by the analysts. First, this was a month usually characterised by higher spending in anticipation of Christmas holidays. Second, this was the beginning of the Christmas season that concluded the decade and came after extremely poor 2008 holidays shopping. Penned up demand was great, going into November, but consumers opted to stay away from the shops. Third, even November retail sales were out of synch with forward looking consumer confidence indicators.

Combined, these facts suggest that the retail sector is suffering from a structural change that is here to stay, even if the broader economic activity and consumer confidence were to bounces into positive growth.

This observation is far from trivial. Despite all of our hopes for a recovery based on exports, any growth momentum in the economy can be sustained only on the back of improving private consumption and investment. In Q3 2009, the latest for which data is available, personal consumption of goods and services accounted for 63.5% of our GNP and over 50% of GDP. During the crisis, due to a much deeper collapse in investment, the importance of consumer spending has increased. At the peak of the bubble in 2007, consumption spending amounted to 57% of our national output.

Retail sales form a significant component of the overall consumer expenditure and it is also strongly correlated with other components, especially communications and professional services. These links are highlighted by the anaemic revenues generated by mobile and fixed line service providers, and dramatic declines in demand for insurance.

Thus, overall, retail sales offer some insight into what is going on at the aggregate personal consumption level.

Earlier this week, PwC released an in-depth analysis of emerging trends in Irish retail sector that sound a warning for the future of our consumer economy. The report found that in response to the crisis, some 55% consumers are now reporting lower spending on goods and services, while 65% are saying they are spending more time shopping for value.

Over the last year, only aggressive price cuts kept the volume of sales from reaching the levels of 1999-2000 in real terms. 71% of Irish retailers have increased their promotional activities, while 67% have offered aggressive discounts (63% of retailers plan further realignments of costs in 2010).

In other words, the impact of the current economic crisis on consumer behaviour has been deeper than a normal recessionary dynamic would support. PwC survey has found that 53% of all retailers believed the changes in consumer attitudes to shopping we are witnessing today are long term or permanent in nature.

This permanent nature of change is due to what in a 2004 theoretical paper on household consumption I called ‘learning-by-consuming’ effect. While searching aggressively for better value, the households simultaneously improve their expenditure efficiency and discover that buying cheaper does not always mean sacrificing quality. PwC research confirms my theoretical model by showing that 86% of consumers who shopped for value perceived cheaper goods to be of the same quality as higher priced goods.

The permanence of change in consumer behaviour is worrisome. Barring dramatic improvements in consumer willingness to spend, two negative developments will persist in our economy.

First, any return to growth will be short-lived and prone to sudden reversals with the risk of a double-dip recession.

Second, any recovery absent robust growth in private expenditure will imply further widening of our GDP/GNP gap as MNCs tear away from the lagging domestic economy. Over the long run, this gap will have to be closed either through a massive downsizing of the foreign investment sector (as costs bear down on companies operating here), or via a return of another credit bubble. Neither development would be welcomed.

In the nutshell, we can expect retail price deflation to continue in 2010. According to NCB Stockbroker’s economist Brian Devine, further deflation in 2010 can lead to a statistical bounce in overall retail sales. “With prices declining, consumer confidence stabilizing and consumer attitudes shifting towards value expect the volume of retail sales to grow in 2010,” says Devine. But, “job losses and emigration will weigh on overall consumption and as such we can expect consumption to contract marginally in 2010."

In other words, the prognosis for improved consumer confidence carrying sustained recovery in 2010 is not good.
Should the changes in consumer behaviour be permanent, we can expect consumption to grow at 1.5-3% per annum as wages stabilize and the savings rate begins to decline from its 2009 high of over 11%. And even from this low growth scenario, the risks are firmly to the downside.

Given the expected impact of Nama on mortgage interest rates, credit and deposit rates, it is highly likely that our savings will remain elevated well through the first half of this decade. The ESRI forecasts personal savings rates to stay above 10% through 2013 and close to 8% thereafter. In contrast, over 2000-2007 our savings rates averaged just above 6%. Higher savings, of course, will mean lower consumer spending and private investment. Rising cost of borrowing and credit will add to our woes.

Finally, subdued consumer spending means lower Exchequer revenue through VAT and Excise duties. This is likely to lead to higher tax burden in Budget 2011 and a further downward pressure on consumer spending.
In this environment, the Government simply cannot afford inducing more uncertainty and pressure on already over-stretched households’ balance sheets. Restoration of consumer confidence requires an early and committed signal from the Exchequer that Budget 2011 will not see new increases in taxation. From here on through 2014, all and any fiscal adjustments should take the form of permanent cuts to public expenditure and elimination of tax loopholes, not a series of raids on taxpayers’ incomes.

The Government should also reverse its decision to limit Banks Guarantee coverage of ordinary deposits to Euro100,000 that is scheduled to come into force later this year. Lower guarantee protection will act to increase precautionary savings as well as deplete the already razor thin deposits base in Irish banks. The twin effects of such an eventuality will be greater demand for public capital from our financial institutions, plus lower consumer spending. Does Irish economy need another twin shock just as the recession begins to bottom out?


Box-out: It appears that despite all pressures, the Government is staunchly refusing to carry out a public inquiry into the causes of our banking sector crisis. Instead of confronting with decisiveness this matter of overarching public interest, our Taoiseach has resorted to deflecting all queries with his favourite catch phrase: “We are where we are”. One wonders whether the Government would be as willing to use this phrase if the subject of the proposed inquiry was a series of major transport accidents, or a systemic failure in our health sector. Institutions responsible for over 80 percent of the entire banking sector in the country came close to a collapse and have to be rescued by the taxpayers at a total cost (including Nama) of Euro72-89 billion or 46-57 percent of our annual national output. What else but a fully public inquiry with live television coverage of all hearings can one expect in a democratic society? An inquiry into the systemic failure of our financial system must be not only public, but comprehensive. It should cover all the lending institutions in receipt of state assistance as well all policy-setting, regulatory and supervisory bodies – from the Financial Regulator to the Department of Finance – responsible for ensuring stability of our financial system. This inquiry should have powers to fine those who failed in fulfilling their contractual and/or statutory duties. And it must be conducted by people who have no past (since at least the year 2000) or present connections with the any of institutions called in for questioning. Anything less than that will be an affront to all hard working men and women of this country who are expected to pay for the mess caused by the systemic failures in our banking sector.

Economics 20/01/2010: Long term comparatives for Ireland

Some time ago I promised to publish some long term macroeconomic comparatives for Ireland relative to other small open economies of Europe. Here they are (all data is courtesy of the IMF's Global Economic Outlook dataset with some forecasts adjusted to reflect Government own forecasts in Budget 2010):

First output gap as percent of potential GDP

There is really no doubting who's worse off in this picture. And notice how much more dramatic is our output gap volatility compared to, say, Austria - another small, but more stable economy, despite it having a massive exposure to high growth and high volatility Eastern and Central European countries.

Next, we have GDP per capita.

Several features of the chart are worth highlighting.

Obviously, Iceland is now on the path, per IMF to close the gap between themselves and us in terms of GDP per capita. Dynamics-wise, it is expected to do better relative to Ireland than it ever did in the period since the late 1990s through the bubble. Taking medicine on time and in full, obviously pays for Iceland. Back in 1999 Ireland moved onto a path of GDP per capita in excess of Iceland. In 2009 it moved on the path of GDP per capita converging with Iceland.

Who's doing better here? By the end of 2014, Iceland is expected by the IMF to fully recover from the crisis, reaching peak GDP per capita once again, after a shorter recession than the one enjoyed by Ireland. And Iceland will do so with faster growth in population than Ireland will (see later charts).

Under DofF dreamy assumptions, Ireland too will reach its pre-crisis peak by 2014, but it would have taken us a year longer to get there than Iceland. And this is under DofF assumptions.

Now, I also provide my own forecast - somewhat gloomier than that of the Government - which implies that i do not expect Ireland to reach the pre-crisis peak income per capita any time soon. And this dynamic will be paralleled by a slower growing population.

Also, do remember - our GDP is not a measure of our income (GNP is), while for Icelanders the two measures are more closely related.

Next inflation as measured by CPI:
Do tell me we are just fine with 5% deflation in the current cycle. Not really, folks. In order to get us back to price levels that imply competitiveness, we need a good 40% deflation if not more.

Unemployment - the one that we are being told is getting better now that 'the worst is already behind us' per official Government view:
Again, think Iceland and Greece. Greece is a good one in particular - their unemployment was high since the late 1980s. Ours was low since the mid 1990s and sub-zero since 2001. But, thanks to our 'head-in-the-sand' economic policies during the current crisis - we are now at the top of the league.

Demographics - some say this is our saving grace, the golden 'get-out-of-the-slump' card:
Nothing spectacular that I can spot here. And these are IMF projections that lag in incorporating what we, on the ground already know - the rapid depletion of our foreign workers' population and waves of young Irish people leaving the country.

Let's take a look at employment (as opposed to unemployment) as % of the total population. basically, the higher the number, the lower is the country dependency ratio (in other words, the greater is the number of people working than the number of people they support):
We were doing pretty well - just below Iceland and Switzerland. Post crisis, Iceland will retain its second best position, but we will slide below Lux. Again, this is in the environment where our population will be growing slower than that of Lux...

General Government Balance:
Well, yes - per Brian Lenihan we have taken the necessary steps... Did we? How is fooling who here? Iceland will be ahead of us with default and without a mountain of international bondholders' and depositors' liabilities on the shoulders of its people. We will both, destroy our public finances and our private households' finances as well. All for what? To make sure we do not upset banks bond holders? But wait - these figures do not reflect Nama and its cost. They do not reflect future bank recapitalisations. Were they to do so, our Government Balance would have fallen way beyond 16-18% mark.

But let us take a different look at the same figure:
Now, remember all the talk about Charlie McCreevy being a profligate spender as the Minister for Finance. Actually, not really. Over his tenure - longer than that of his successor, McCreevy presided over relatively mild deterioration in fiscal position. Primary balance under McCreevy in cumulative terms was close to break even. Under Minister Cowen things spun out of hand. Noticeably, Minister Lenihan is doing a much better job than his predecessor, although it is hard to say whether he is doing it because he actually believes in some sort of fiscal discipline or because he simply cannot borrow all the money he would like to borrow.

Current account balance:
For an economy that is staking its survival on exports (and we really do not have much of hope of doing otherwise), we are not looking all too strong in 2010-2014 projections by the IMF. Iceland, in contrast, is looking mighty alright relative to us, having undergone massive devaluation. Again, our deflation at home is simply not enough to compensate for the fact that we cannot devalue the grossly expensive euro.

Let me take you through more comparatives. Back to Government deficits. Now, recall there are two components to deficit - structural (due to chronic overspend) and cyclical (due to a recession).
Again, notice how Greece and Austria are on virtually identical path, although Greece is above Austria. This means that on average, the share of their overall deficit that is structural is relatively the same. If Greeks were to cut their structural deficit relative to its position today, their overall deficit will decline by a lower percentage than the same drop for Ireland. In Ireland's case, we have smaller cyclical deficit than the Greeks do, but greater structural deficits. Relative to Austrians, we are simply a drunken sailor hitting the first pub on the shore.

Take a closer look at the Irish data alone:
In the 1980s through late 1990s - much lower structural deficits than since 1998. Why? I guess Bertie really was a profligately spending socialist of the old variety.

Last chart: just to drive home the same point as before: Note the dramatic deterioration in structural balances under Mr Cowen - throughout his years as Minister for Finance, he was spending not only the money he had (shallower surpluses than his predecessor), but also the money he did not have (deeper structural deficits), leveraging lavishly future generations' wealth. Mr McCreevy, in contrast, really was spending what he had, with structural deficits starting to cause problems in his tenure only around 2002.
And one last point to make - notice how our structural deficit has caught up with its 5-year moving average line. This suggests that even in the Budget 2010 we still did not do enough to reverse longer term trend leading us deeper and deeper into permanent insolvency.

Paraphrasing Fianna Fáil's 2002 general election slogan: "A Little Done, More To Do"...

Economics 30/06/2009: Growth Collapse, Balance of Payments, Travel tax; Public earnings

Above figure shows that our GDP/GNP growth continued to deteriorate dramatically in Q1 2009, with GDP shrinking a whooping 8.5% at constant prices and GNP falling 12%.
Consumer spending in volume terms was 9.1% lower in Q1 2009 compared with the
same period of the previous year. Capital investment, in constant prices, declined by 34.1% in Q1
2009 compared with Q1 2008. Net Exports in constant prices were €2,814mln higher in Q1 2009 compared with Q1 2008.

The volume of output of Industry (incl. Construction) decreased by 10.5% in Q1 2009 compared with Q1 2008. Within this the output of the Construction sector fell by 31.4%, output of Distribution, Transport and Communications was down 10.9% while Output of Other Services was 3.5% lower in Q1 2009 compared with the same period of last year.
Note declines in GVA above - we are not getting any better on value extraction either, with exception of 'other services' sector...

Domestic activity simply collapsed, as evidenced by the expanding GDP/GNP gap. More taxes, please, Mr Cowen!



Today's Fáilte Ireland May traffic figures confirmed the accelerating nature of collapse in air passenger traffic. In May, traffic fell by 15%, following a 10% decline of the first four months to April. Since the Government’s €10 tax was introduced on April 1st, the rate of traffic decline and tourism collapse has accelerated. The most significant fall was in arrivals to Ireland (down 19%). See Balance of Payments figures below for more details. Since the beginning of 2009, Belgian, Dutch, Greek and Spanish governments have all scrapped tourist taxes and/or reduced airport charges to zero. In contrast, our pack of policy idiots in the Leinster House decided that taxing tourists is just fine, as, apparently, they believe that Germans, Italians, Spaniards, Chinese, Americans and other nationals have no choice but travel to this global epicenter of cultural life and history that is Ireland. Time to call for an encore, Mr Lenihan.


Per CSO release today, the gross external debt of all resident sectors (i.e. general government, the monetary authority, financial and non-financial corporations and households) at the end of Q1 2009 stood at €1,693bn, an increase of €32bn on Q4 2008. The increase arose from a combination of exchange rate effects and the availability of new data.
Per CSO, "the liabilities - mostly loans - of monetary financial institutions (i.e. credit institutions and money market funds) amounted to €723bn. This was €56bn lower than for end-December and, at 43% of the total debt, was a smaller share than in the previous quarter. The decrease was due to a large reduction in debt liabilities, particularly short-term loans, and is to an extent reflected by an increase of over €50bn in Monetary Authority liabilities to the European System of Central Banks (ESCB) including balances in the TARGET 2 settlement system of the ESCB." General Government liabilities increased to €60bn driven by long-term bond issues more than offsetting a reduction in short-term money market instrument issues.

In other words - all's grand in the ZanuFF land: the banks are getting better and the taxpayers are getting deeper into debt.


And if debt figures are not bad enough, here are the latest Balance of Payments data - courtesy also of CSO release today: "The Balance of Payments current account deficit for Q1 2009 was €2,530m, over €1.6bn lower than that of €4,175m for the same period in 2008". Sounds good? Not really.

Due mainly to much lower imports:

• Q1 merchandise surplus of €8,020m was over €3.7bn higher yoy;
• The invisibles deficit increased by almost €2.1bn to €10,550m;
• Services (€2,180m) and income (€7,586m) deficits were both about €1bn higher.
  
• Total service exports at €16,050m dropped €360m largely due to insurance and financial services.
  
• Service imports at €18,230m were up over €600m due mainly to higher royalties/licences and miscellaneous business services.
• Tourism and travel receipts (€640m) and expenditure abroad (€1,324m) were down.
  
• The higher income deficit results largely from reduced profits and interest earnings by Irish-owned businesses abroad (€1,808m) along with increased outflows of profits and interest from foreign-owned enterprises in Ireland (€8,631m).
  
• Interest outflows on Government External Debt also increased.
  
• In the financial account, Irish (mostly IFSC) residents redeemed €40bn of foreign portfolio assets and repaid €27.8bn of portfolio liabilities.
  
• Inward direct investment was low at €794m and was similar to outflow.

Not too good for an exporting nation? You bet.


Of course, reasoned our seasoned policy morons, we simply have no alternative to raising taxes everywhere, for the public sector wages must be paid at an increasing rate. Never mind recession and Government promises to cut the public sector excess fat - if anyone had any mistaken beliefs that this Government is serious about tackling our state of public sector insolvency, hold your hope no longer. CSO figures for public sector employment and earnings released yesterday show once again that Brian Cowen is hellbent on robbing the ordinary taxpayers to pay for public sector cronies' privilege to earn lavish wages and perks. Public sector wages rose 3.4% yoy last month and public sector employment was up 1,000. So let's tax and borrow our way to pay public sector wages and pensions, should we? Irish Economic Model (as opposed to a real economic model) at last.