24/5/15: Markets, Patterns and Catalysts: Irish Growth Story

Some of my slides from last week's presentation at the All-Ireland Business Summit, covering three key themes:

The Current State of the Irish Economy "The Market Section"

The New Normal of rising global risk "The Pattern"

A Policy Path to Growth "The Catalysts"

16/4/15: QE and Negative Rates: It's So Good, It Hurts...

Here is an unedited version of my article for Manning Financial on the upcoming pain in the global markets from the Central Banks activism.


With spring sunshine, the glowing warmth of the overheating bonds markets is bringing about the scent of optimism to the macro-analysts' desks. On March 19th, the NTMA issued EUR500 million worth of 6mo notes with a yield of -0.01%. With a few strokes of the 'buy' keys, the markets welcomed Ireland to the ever-expanding club of nations that enjoy the privilege of being paid to borrow from private investors.

In a way, this is the story of Ireland's recovery distilled to a singular event: with the Government borrowing costs at their historical lows, the memory of the recent crises is fading fast from the pages of our newspapers. Alas, the drivers of this recovery are illusory. All are temporary, none are structural or sustainable, in the long run. In fact, the current markets reprieve is concealing the real dangers for domestic investors – dangers of new asset bubbles and potential future losses.

Take a look at the euro area sovereigns at large.

After years of austerity, 2015 is shaping up to be a year of broadly-speaking neutral public spending. In other words, as the euro area Governments' debt remains sky high, public deficits are unlikely to shrink by any appreciable amount. Why bother with reforms, when you can be paid by the markets to borrow? Aptly, as the chart below shows, European economic policy uncertainty remains at crisis period averages, well above the safety range of pre-crisis years.


European Policy Uncertainty Index  (including period averages confidence intervals)

Source: data from PolicyUncertainty.com


Although the Government is usually quick to claim credit for the massive improvements in Irish yields, in reality, Dublin has little to do with these. At every point from Q3 2011 through today, large scale declines in the Government cost of borrowing came courtesy of the ECB. The latest gains are no exception: the ECB has just launched a sizeable bonds-buying programme and with it, the quantum of negative yield debt in the global markets has gone from roughly USD3.6 trillion in January to USD4.2 trillion by mid-March. As of now, 19 percent of the Global Bond Index-listed debt is trading in negative rates territory.

This, by far, represents the largest long term challenge for investors and the greatest risk to the global economies. Expansionary monetary policy pursued by the central banks around the world, including the ECB aims to push up economic growth and reduce the risks of deflation. It also attempts to repair the monetary policy transmission mechanism: that cheap ECB-supplied liquidity is being lent by the banks to companies and households in the forms of new credit.


TANGIBLE RISKS

However, from the investors’ perspective, this monetary activism can end up backfiring. For a number of reasons.

Firstly, as shown in Chart 2 below, monetary policy-driven credit expansion is propelling stock markets and debt markets valuations to all-time highs across the advanced economies with absolutely no tangible connection to real fundamentals, such as growth in economic activity, household incomes, employment, and even capital investment. By the very definition of the financial bubbles, current monetary policies activism is inflating returns expectations unanchored in reality.

Secondly, monetary expansion means that households and firms struggling with debt are given a short-run reprieve from facing the true costs of their borrowings. But the day of reckoning awaits in the future. This means that households and corporates are likely to continue engaging in precautionary savings even as the Central Banks drop rates and bonds markets bid the cost of issuing debt down. Meanwhile, households and companies with low debt exposures are likely to save more to offset declines in their returns on deposits. Taken together, these factors are likely to further suppress domestic demand, while setting us up for a major crisis once the cost of debt starts rising in the future.

Thirdly, negative yields are, like all bubble-generating factors, self-reinforcing in their nature. With central banks increasingly charging commercial banks for deposits, banks prefer buying bonds even in the presence of the negative yields. This means that negative policy rates are reinforcing the dysfunctional monetary mechanism, locking in more liquidity into government bonds and driving yields on government paper further down. The resulting increases in bonds prices incentivise commercial banks to gamble on future capital gains by buying even more bonds. This spiral of demand for government debt depresses banks future profitability as investors bid bonds prices up and loads more risk of significant future losses that will materialise once QE policies begin to unwind.

Another pesky side effect of this is the banking sector stability. Negative interest rates on Central Bank deposits lead to lower deposit rates for banks' customers. Banking sector loans-to-deposits ratios rise, making banks more dependent on the shadow banking system for funding and more levered. Interestingly, in the U.S. at least one large bank, J.P. Morgan has already announced that it will be charging customers for large deposits up to 5.5 percent annual fee.

Fourthly, negative rates and yields are increasing the probability of monetary policy misfires - a scenario where one or several Central Banks around the world can tighten policy too fast and/or too early, completely derailing economic recovery. This problem is global and contagious. Investment grade government bonds are effectively substitutes for each other in majority of investment portfolios. As the result, negative yields in the euro area today are keeping yields low in other advanced economies. This is already causing discomfort in the U.S. where dollar rise relative to other currencies is being driven by a combination of two factors: the expected mismatch between U.S. and euro area policy rates, and investors' fear of Fed policy errors over the next 3-6 months.

Fifthly, the demand for negative yield bonds appears to be setting the unsuspecting investors for a fall. In a recent research note, the investment bank Jefferies discovered that much of the demand for such paper comes from indexed funds. Investors in these extremely popular funds simply have no idea that the strategy the funds pursue is not designed for the world where top-rated bonds are paying negative yields. And as funds start posting losses, the same investors are likely to rush for safety into other asset classes – namely equity. Yet, with equities already at historical highs, the safety-minded investors will be left with buying even more assets at bubble valuations.

Sixthly, negative yields on Government bonds are a disaster waiting to happen for insurance, asset management and pension sector as they create huge risks at the heart of these companies long-term investment portfolios. As insurance companies and pensions funds chase the yield, premia will have to rise, risks embedded in pensions portfolios will jump and returns on longer term contracts will fall. As the result, some financial analysts are warning of not only economic, but also political consequences of the monetary policy activism.

The bankers' regulatory body, the Bank for International Settlements is not amused. In a recent statement, Claudio Borio, the head of the BIS monetary and economic department said it is simply impossible to tell how investors, consumers, voters and the governments are going to react to the negative yields and interest rates. "…technical, economic, legal and even political boundaries may well be tested. The consequences should be watched closely, as the repercussions are bound to be significant, on the financial system and beyond," Mr Borio said.


IRISH INVESTOR PERSPECTIVE

From Irish investors point of view, the risks arising from the euro area negative rates and yields environment are significant.

In a study published in 2005 (http://www.bis.org/publ/work186.pdf), BIS researchers found asset price busts, especially those associated with large property markets adjustments, to have much more painful economic impacts than deflation. The study covered all advanced economies over the period from 1873 through 2004 and included analysis of deflation effects on Government debt and growth. The same results were on firmed by another BIS study published earlier this year (http://www.bloomberg.com/news/articles/2015-03-18/the-central-bank-of-central-banks-says-keep-calm-about-deflation).


Global Markets, Irish Problems

Source: Author own calculations based on data from CSO, Central Bank of Ireland and Bloomberg

As of today (see Chart 2), Ireland is still experiencing property prices that are 38 percent below the pre-crisis peak (in Dublin 39 percent), private debt that is, once controlled for sales of mortgages, and Nama and bank loans to non-banking investors, stuck around mid-2005 levels, and growth predominantly driven by the multinational corporations' tax optimisation strategies. In this environment, negative rates are masking the extent of the problems still present in the economy, while euro devaluation, coupled with exports growth concentration in the MNCs-led sectors, are creating a false impression of improved productivity and competitiveness.

For domestic investors, this means that both equity, corporate and government debt markets  in Ireland and across the euro area are simply out of touch with macroeconomic reality on the ground. The global Central Banks-led policies are pushing our traditional investment and pensions portfolios into the high risks, low returns corner, commonly associated with financial assets bubbles. While some speculative exposure to the US and Emerging Markets assets is always welcome, the bulk of investment allocation today should be focused on conservative view of key risks presented by the negative rates and yields environment. Tax planning, portfolio cost minimisation, low gearing and high liquidity of investment allocations should take priority over pursuit of short term yields and capital gains.

10/4/15: Irish Construction Sector Performance: a European Perspective

Irish Construction Sector has been a positive contributor to GDP over the second half of 2014, prompting some - in fact many - media outlets to herald the return of the Men in Hard Hats. You can be excused for wondering, as to how many men (and women) in hard hats are out there working today, given there is little visible activity on the ground, but the numbers do not lie. Or so they say.

Here is the latest data from the Eurostat giving construction sector activity in terms comparable across the EU states.

Actual activity for all building and construction sectors in Ireland over Q4 2014 was running some 53.2% below the average activity levels recorded in 2000-2002. Over the course of 2014, average activity in the sector in Ireland was 53.2% below the same activity over 2000-2002. Both metrics ranked Ireland as the third worst-performing construction sector in the group of euro area 15 economies.

Having risen to 111.20 in Q4 2010, the index of overall construction activity in Ireland was at the highest level since Q4 2009, but below any quarter for the period of Q1 2000-Q4 2009.

Things are even worse in the case of building activity (ex-civil engineering), where Ireland ranks second worst, on par with Portugal in the EU28. Here, Q4 2014 reading is 63.5% below 2000-2002 average and full year 2014 average reading is 69% lower than 2000-2002 average. Once again, the index is currently reading at the highest level since Q4 2009, but as above, this reading is well below any quarterly reading between Q1 2000 and Q4 2009.

Here is a chart showing relative performance to EU and EA:

Two things to note in the above:

1. EU and EA uplift in Q4 2014 has been more pronounced than that for Ireland. 
2. The trends are now not exactly converging, with EU and EA both pushing up, while Ireland's upward momentum appearing to be weakening once again from H1 2014 on.

One aside question is: with the above evidence at hand, can anyone explain a huge rise in the reported 'investment' in commercial property in 2014? Other than buy-to-flip strategies of the vulture funds, where is all this 'investment' going?

15/7/2014: Construction Sector PMI: Q2 2014

June PMI for Construction industry were out this week. Good discussion of some monthly data on this topic here.

Here are quarterly averages through Q2 2014:

• Total Activity index is up 3.6 points to 61.2 in Q2 2014 compared to Q1 2014. The index is up significantly - by +18.8 points - on Q2 2013.
• On average we have fourth consecutive quarter of growth in the sector activity and in three of these quarters, the index was statistically significantly above 50.0 expansion mark.
• Based on these figures we are in a confirmed recovery in the sector and in Q2 2014 this accelerated substantially. Which is good news.
• Housing Activity sub-index rose to 61.9 - marking rapid growth - and is now up 2.8 points on Q1 2014 and 17.1 points on Q2 2014. Again, we are into fourth consecutive quarter of above 50 readings and, as above, this is the third consecutive quarter of statistically significant readings above 50.0.
• Commercial Activity sub-index rose to 61.5, up 2.8 points on Q1 2014 and 20 points on Q2 2013. Same dynamics over the last four quarters as in the case of the Total Activity index and Housing Activity sub-index.
• Civil Engineering index is a drag on overall growth picture, averaging 44.9 over the Q2 2014, up 4.2 points on Q1 2014 and up 12.1 points on Q2 2013, but still below the 50.0 line. This is expected, as the Government continues to destroy public investment at an alarming rate.

Chart to illustrate:

13/3/2014: Building & Construction: Weak Growth on Trend in Q4 2013

Yesterday, CSO published data on production volumes and values in Irish Building and Construction Industry covering the period through Q4 2013. Here are the details:

All Building & Construction:

• Value of production in All Building & Construction in Ireland rose 11.77% y/y following a 20.67% rise in Q3 2013. This marks 5th consecutive quarter of increases in Value.
• Value of production in All Building & Construction is now up 39.79% on Q2 2011, but is still down 71.74% on pre-crisis peak. It is 47.2% above the crisis period low.
• Value index is now back at the levels last seen in Q4 2009-Q1 2010, but still significantly lower than in any quarter between Q1 2000 and Q4 2009
• Volume of production in All Building & Construction in Ireland rose 10.97% y/y in Q4 2013 having posted a 20.0% rise in Q3 2013. This marks 5th consecutive quarter of no decreases in Volume, and a third consecutive quarter of increases.
• Volume of production in All Building & Construction is now up 36.68% on Q2 2011, but is still down 72.9% on pre-crisis peak. It is 45.1% above the crisis period low.
• Volume index is now back at the levels last seen in Q4 2009-Q2 2010, but still significantly lower than in any quarter between Q1 2000 and Q4 2009.

The trend up in the overall activity shown above is decomposed as follows for value and volume:

Key drivers for Value Index:

• Building ex-Civil Engineering activity rose in Value by 28.4% in Q4 2013 compared to Q4 2012, accelerating previous increases and posting the third consecutive quarter of positive growth. Nonetheless, increases are taking place from very low levels, with index still down 78.26% on peak.
• Residential building value activity posted a rise of 15.04% in Q4 2013 on Q4 2012, which is an increase on 8.8% rise posted in Q3 2013. Residential construction remains a major laggard, however. The index is up on 27.7% on its crisis period lows and is still down 91.5% on pre-crisis peak. Value in the sector is at around Q1 2011.
• Non-residential building rose 36.27% in value between Q4 2012 and Q4 2013 and the index is now 75.9% above its crisis period low. Compared to pre-crisis peak, the index is down 'only' 29%. Non-residential building is a major driver of the upward dynamics in the overall Value index.
• Civil engineering continued to shrink, with Value of activity in this sub-sector down 11% y/y in Q4 2013 and index down 35.8% on peak. However, previous gains in the index meant that Q4 2013 reading was 81.5% above crisis-period lows.

Key drivers for Volume Index:

• Building ex-Civil Engineering activity rose in volume by 27.5% in Q4 2013 compared to Q4 2012. Nonetheless, increases are taking place from very low levels, with index still down 79.1% on peak.
• Residential building value activity posted a rise of 14.1% in Q4 2013 on Q4 2012 and the index remains a major laggard: up only 25.8% on its crisis period lows and is still down 91.8% on pre-crisis peak.
• Non-residential building volume rose 35.4% between Q4 2012 and Q4 2013 and the index is now 75.2% above its crisis period low. Compared to pre-crisis peak, the index is down 'only' 30.7%. Non-residential building is a major driver of the upward dynamics in the overall volume index.
• Civil engineering continued to shrink, with volume of activity in this sub-sector down 11.6% y/y in Q4 2013 and index down 37.2% on peak. As with value, previous gains in the index meant that Q4 2013 reading was 64.7% above crisis-period lows.

So core conclusions:

• Increases in sector activity point to a very sluggish upward trend in Building and Construction by Value and Volume. This trend is confirmed in Q4 2013, but the sector continues to struggle to show appreciable level gains.
• Increases in Value and Volume are driven primarily by Non-Residential construction ex-civil engineering, with Residential building lagging in terms of growth rates, but still posting some gains.
• Civil engineering sub-sector is the weakest of all, posting y/y declines in Q4 2013.

5/10/2014: Why the News of Budget 2014 'Easing' Is a Daft Idea

The reports are out about the IMF 'agreeing' to Government taking shallower adjustment in Budget 2014 are so far not based on IMF statements of record. In its latest review, published yesterday and amended to reflect the latest data, IMF clearly states that we still need a full EUR5.1bn adjustment to be taken over 2014-2015.

Irish Times reports undisclosed sources claiming that the IMF is now not opposing a shallower adjustment in 2014 in exchange for steeper adjustment in 2015. http://www.irishtimes.com/business/sectors/financial-services/imf-agrees-to-easing-of-3-1bn-target-1.1550925 This might be so. But there are several things you should consider before taking this as some unambiguous positive for Budget 2014.

Firstly, if true, this means that Ireland 'easing on austerity' in Budget 2014 to accelerate into 2015 adjustment will be equivalent to a household taking a 1 year mortgage relief in the form of reduced principal repayment relief (sort of a 'interest plus partial principal payment') that has to be recovered in full comes the following year. Even Irish Central Bank would not suggest this would be a meaningful relief to the borrower. In a sense, Irish Government will be taking a gamble if it reduces the EUR3.1 billion adjustment target - if growth undershoots the Budget 2014 projects or revenues slack or unexpected expenditure increases take place or any other possible risks arise, we will face more austerity in 2015 and possibly into 2016. All for a short-term small 'relief'?

Secondly, there are more reasons for being sceptical about the latest Government 'breakthrough':

1. Relief to be gained from such a transaction is not worth much - at most EUR300-400 million 'savings' to be immediately swallowed up by the 'black hole' of Government 'investment' - I wrote about this in my Sunday Times column on September 22nd. 
2. Much of this is unlikely to impact directly in 2014 due to time lags.
3. Much of the 'investment' will go to funding building activities in politicised constituencies. Remember primary care centres locations selection fiasco? The modus operandi that produced them is still here with us. 
4. The 'savings' will be terminated in 2015 as EUR5.1bn required total adjustment will have to erase fully the 'savings' generated in reduced adjustment for 2014. In short - we will get more waste, more future pain; and
5. Relief comes at a price of increased uncertainty into the Budget 2015 just at the time when we are heading into even more uncertainty of having to fund ourselves in the markets (keep in mind - our 2014 borrowing requirements are largely already covered by NTMA pre-borrowing, so real uncertainty over funding will coincide with the need for larger fiscal adjustment in 2015). This uncertainty is likely to result in Troika monitoring extending into 2016 and beyond, instead of Ireland gaining any meaningful clearance from Troika cover with 2015 fiscal adjustment. I covered this in the said Sunday Times article as well.

Oh, and one more little point: there is absolutely nothing new in the IMF taking such a position on Irish budget. IMF operates on the basis of longer-term targets and greater flexibility in adjustment than our EU 'partners'. IMF has signalled on a number of other occasions the same. 

So what exactly does the IMF 'support' for Budget 2014? Not much at all so far. And the risks from it, as noted above, are almost codified.

"The review had preliminary discussions on fiscal consolidation in Budget 2014. The Irish authorities are firmly committed to meeting the 5.1 percent of GDP ceiling on the deficit in 2014. They note some room to meet this ceiling with a smaller consolidation effort than the €3.1 billion (1.8 percent of GDP) set out previously, but have deferred a decision on the amount of adjustment in 2014 until closer to Budget 2014. [IMF] ...staff stressed the importance of delivering the planned cumulative consolidation in 2014–15 of €5.1 billion (2.9 percent of GDP). Under the revised macroeconomic projections, this amount of cumulative consolidation is also consistent with reaching a deficit within the EDP target of less than 3 percent of GDP by 2015." 

Note any statement about a 'relief'? I don't see one... But: "In this context, it was agreed that the authorities will publish Budget 2014 on October 15 with fiscal targets until 2016 fully in line with the 2010 Council Recommendation under the EDP, including the required fiscal consolidation effort until 2015, and national fiscal rules (proposed structural benchmark, MEFP)." Meanwhile, "the specific consolidation effort for 2014 will be discussed with the EC, ECB and IMF staff taking into account budgetary outturns in the first three quarters of 2013 and further information on growth developments and prospects." 

The IMF reiterates the same position of serious ambiguity on Budget 2014 and strict clarity on 2014-2015 adjustments targets throughout the entire Review. The Fund also clearly states where the thrust of 'savings' should be delivered: "An expenditure-led consolidation remains appropriate, including improved targeting of social supports and subsidies while protecting core public services and the most vulnerable."

23/9/2013: A summary of changes in the Irish GDP: 1970-2012

Summary of the changes in Irish GDP composition over 1970-2012 period (all in current market prices terms):

I marked in red bold those components that perform at their worst historical comparative in 2010-2012 period and in green bold those that perform at their historical best, as per their contributions to GDP.

Notable aspects of the above table:

1. The 'greedy decade' of the 2000s was actually distinguished by the lowest share of the economy accruing to personal consumption of goods and services - the Range Rovers of South Dublin didn't really cause the bust, folk...
2. Government spending rose, as a share of economy, in 2010s compared to 2000s and reached above the levels recorded in the 1990s, albeit still below the disastrous years of the 1980s.
3. Gross fixed capital formation has been demolished in the 2010s by the crisis, although its peak during the excesses of the 2000s was still lower than in the 1970s.
4. Exports of goods and services outstripped imports of goods and services, resulting in the net exports hitting their peak in the 2010s. Some 46 percent of our net external trade went out of the window as profits expatriated by the MNCs (and that is after we also account for profits on-shored into Ireland by Irish companies and investors).
5. Oh, and the fabled EU subsidies - well, these have been drained (note, these subsidies are reflected here gross, without accounting for EU taxes paid).

18/9/2013: Building & Construction Sector: Some Cautiously Positive Signs in Q2 2013

CSO released today Q2 data for production indices in Building & Construction. Here are some headline numbers:

Value of Production Indices:

• All building & construction production rose 4.23% q/q and is up 11.98% y/y. The Index is up 7.11% on Q2 2011, but is still down 76.64% on peak. Note: Q2 2012 was the absolute low. The index is now on the rise since Q3 2012 so we have nine months of increases. The rate of increase is significant, but the rise is from a very low level of activity to start with.
• Building ex civil engineering is up 8.2% q/q and 11.24% y/y. The series are down 3.88% on Q2 2011 and down 82.54% on peak. Note: Q2 2012 was the absolute low. The index is now on the rise only since Q1 2013 so we have to be cautious with interpreting any increases to-date.
• Residential building activity rose 2.25% q/q and is up 8.33% y/y. The activity level is now exactly at the level it last recorded in Q1 2012. The index is still down 92.0% on peak and is now up 8.3% on absolute low. This marks the second consecutive quarter of increases, which suggests that we are getting closer to calling a turnaround. The index is still down 10.78% on Q2 2011.
• Non-residential building activity is up 10.95% q/q and 13.22% y/y, but only 0.16% on Q2 2011. Relative to peak, activity is down 50.77%, but it is up 13.22% on absolute low. The series are volatile and we have only one quarter of increase consecutively, which means we should read this change with caution.
• Civil engineering activity is slightly down -0.13% q/q, but still up 12.59% y/y. Activity is now 31.79% ahead of Q2 2011 and the series are down 44.63% on peak and up 59.23% on absolute low. Timing of these series changes is more consistent with public spending and thus quarterly changes are not exactly very useful. 

Volume of Production Indices:

• All building & construction production rose 1.7% q/q and is up 11.16% y/y. The Index is up 4.37% on Q2 2011, but is still down 77.17% on peak. The index is now on the rise since Q3 2012 or nine months of consecutive increases. This suggests that price effects had a positive boost to value numbers shown above, but overall trend up is sustained on both volume and value sides.
• Building ex civil engineering is up 8.0% q/q and 10.76% y/y. The series are down 5.91% on Q2 2011 and down 83.54% on peak. The index is for just one quarter, so the same caution expressed about the value index applies to volume.
• Residential building activity rose 1.25% q/q and is up 8.0% y/y. The index is still down 92.2% on peak and is now up 10.96% on absolute low. This marks the second consecutive quarter of increases.
• Non-residential building activity is consistent with the value index performance, same as for civil engineering activity is slightly down -0.13% q/q, but still up 12.59% y/y. Activity is now 31.79% ahead of Q2 2011.

Overall: some positive news on total index and very cautiously positive news on ex-civil engineering data. Residential activity showing positive upside, but non-residential series are still bouncing along the bottom. Non-residential activity is showing some cautiously positive developments.

Charts to illustrate:

25/6/2013: Planning Permissions in Ireland: Q1 2013

The latest data on Planning Permissions was released by the CSO under a rather cheerful headline: "Dwelling units approved up 24.7% in Q1 2013" which prompted me to start writing a positive note. However, having updated the database, I could not believe my eyes. Not until the third bullet point in the release do you get the sense as to what is really going on in the sector - the fact confirmed by looking at CSO data, rather than reading the CSO release which focuses the top points of analysis on positive side of select sub-components of the overall sector performance. So here are the facts, as conveyed to us by the data itself.

In Q1 2013, total number of planning permissions granted in Ireland for all types of construction stood at 3,275, which is 1.35% down on Q4 2012. This marks de-acceleration of seasonally-driven 17.96% q/q decline recorded in Q4 2012. However, on an annual basis, allowing for some seasonality controls, overall number of planning permissions granted in Q1 2013 was down 2.76%, which contrasts against an annual increase recorded in Q4 2012 of 1.13%.

In summary, things are not going well at all. Q1 2013 marks an absolute historic low for any quarter since Q1 1975! That's right: we hit an absolute historic low in 37 years and CSO release says things are 'up' by focusing on sub-series before it reports in the text the actual aggregates.

In charts below, I marked current sub-period (since Q1 2010) low against historic low before the current crisis. Take a look.

Note: in Q1 2013,

• Total number of planning permissions hit a historic low (as mentioned above)
• Total number of permissions for dwellings stood at 862, the second lowest after the historic low of 832 hit in Q4 2012.
• Total number of permissions for 'other new construction ex-dwellings' stood at 785, which is above the historic low of 636, but still marks a decline q/q.
• Number of permissions for extensions hit a historic low.
• Number of Alterations, conversions, renovations etc hit a historic low. 

Again, I find little to cheer in the above...

13/6/2013: Irish Construction Sector Activity Post Some Better News: Q1 2013

Some good news for Irish construction sector (not as impressive as German stuff, but... much more welcome, given the sector dynamics so far through the crisis).

Per CSO: "The volume of output in building and construction was 4.4% higher in the first quarter of 2013 when compared with the preceding period.

• This reflects increases of 6.8% and 1.2% respectively in residential building and non-residential building. 
• There was a decrease of 0.7% in the volume of civil engineering.  The change in the value of production for all building and construction was +1.9%. 
• On an annual basis, the volume of output in building and construction increased by 10.7% in the first quarter of 2013.  
• There was an increase of 9.5% in the value of production in the same period. 
• The annual rise in the volume of output reflects year-on-year increases of 26.8% and 2.4% respectively in civil engineering and non-residential building work. 
• Output in residential building decreased by 2.5%"

Now, graphs and a summary table for more detailed analysis:

7/6/2013: Goodish news on capital investment in Ireland in Industry

Given the volatility in capital sales and acquisitions in Ireland, based on quarterly data, it might be premature to say much about the trends for capital investment in 2013 so far, but nonetheless, at least we are having some good news to go along with the sunshine outside.

Per CSO: "Capital acquisitions in industry in the first quarter of 2013 were €661.3m, compared with €580.8m in the first quarter of 2012. Among the main contributors to capital acquisitions were the following sectors:

• Basic pharmaceutical products and preparations with €102.5m.
• Computer, electronic and optical products with €92.9m.
• Capital sales in the first quarter of 2013 were €89.9m, compared with €218.3m in the first quarter of 2012. 

The main contributors to capital sales were the following sectors:

• Other manufacturing with €33.8m.
• Basic pharmaceutical products and preparations with €27.1m."

You can see the data here http://www.cso.ie/en/releasesandpublications/er/cai/capitalassetsinindustryquarter12013/#.UbBltyuglF8 but, as usual, this blog should add some value to the reader. Hence, below is the chart showing Q1 figures for 2011-2013 in terms of net capital acquisitions (new investment) in the industry:

And the good news is (conditioning on the above comment on volatility): 

• Net capital acquisitions rose in Q1 2013 compared to Q1 2011 and Q1 2012
• The rise in net capital acquisitions was marked and significant in 2012-2013 period
• Rise in new investment has been much broader based across various sectors in Q1 2013 than in Q1 2012, although the MNCs-dominated sectors of Computer, electronic & optical equipment and Pharma have been the two largest contributors to the increases in capital investment in 2012 and 2013.

4/4/2013: Irish Planning Permissions 2012 data

Per data released on March 22 by CSO, Irish Planning Permissions for Construction have continued to collapse in 2012. Full year data shows that:

• In 2012 total number of all types of planning permissions issued in the state stood at 14,407 - an all-time record low (with records starting in 1992), down 9.91% on 2011. 2010-2011 rate of contraction was 15.11% and 2009-2010 rate of decline was 27.64%, so naturally for such steep drops in previous years, the rate of annual declines is moderating. 
• From the pre-crisis peak, number of planning permissions is now down 76.90%
• Planning permissions for dwellings fell to 3,643 in 2012, down 23.58%, having fallen 24.89% in 2010-2011 and 38.85% in 2009-2010. Compared to peak, the permissions are down 86.76% to a new historical low.
• Planning permissions for other new construction rose in 2012 to 3,407 from 2,964 in 2011, a rate of increase of 14.95% y/y that follows declines of 7.52% in 2010-2011 and 29.01% in 2009-2010. Relative to peak, 2012 level of permissions for other new construction are down 82.4% against absolute minimum reached in 2011 when these were down 84.72% relative to peak.

In square footage terms, planning permissions issued

• Fell 21.56% y/y for all types of new construction (these are now down 86.67% on peak, hitting a new historical low);
• Fell 39.48% y/y for dwellings (these are now down 90.89% on peak, hitting a new historical low);
• Fell 7.44% y/y for other types of new construction (these are now down 86.78% on peak, hitting new historical low);
• Rose 0.52% for extensions (these are now down 68.87% on peak, having hit the bottom at -73.41% on the peak in 2011).

At certain point in time (soon, one assumes given the rates of decline on peak already delivered), a broom shed construction somewhere in West Meath will qualify as an uplift in the market....

14/03/2013: Irish Construction & Building Sector Activity 2012

Latest index for Irish Building and Construction Production volumes and value is out today, confirming what I wrote about on the foot of new planning permissions data (here), namely that Construction and Building sector continued to shrink in 2012 and there is little hope beyond some public spending projects uptick for the already devastated sector.

Top headline numbers for full year 2012 (these are imputed from Q1-Q4 2012 data):

• Value index for all production activity in Building and Construction sector declined from 25.9 in 2011 to 24.7 in 2012 (using base of 2005=100). This means all activity in value terms has hit another historical low for the series and is running at less than 1/2 of the level of activity in 2000 when the index was reading 53.5.
• 2012 was the sixth consecutive year of declines in the sector activity by value and volume. 
• Peak sector activity was registered in 2006 with index reading of 109.7, which implies a decline from peak through 2012 of 77.5% in value terms.
• Value sub-index for Building excluding Civil Engineering has dropped from 20.9 to 18.2 between 2011 and 2012 (decline of 12.8% y/y) and is down 83.2% on peak attained in 2006.
• Residential Building value sub-index is down to 8.6 in 2012 from 10.2 in 2011, marking a decline of 92% on peak (2006).
• Non-residential building sub-index for value is down to 55.2 from 61.7 in 2011 and is 53.9% below peak levels attained in 2008.
• Civil engineering value sub-index was up in 2012 to 66.0 from 58.6 in 2011 (+12.6% y/y) but is down 49.3% on peak attained back in 2007. 

Similar story is traceable across the volume of production indices.

Charts to illustrate (note, charts are referencing a different base - instead of 2005=100 these have been rebased to 2000=100 for more clear compounded effect illustration):

11/3/2013: Property tax and the markets for property investment

The Irish Government is about to bring in a property tax covering only residential property and excluding land holdings. This is the market for real estate investment that the Government is about to hammer even more:

All permissions for new residential construction are down 87.6% in 2012 (based on estimated full year figure using actual data through Q3 2012) relative to peak. The levels are so low, we are at a historical low now and 2012 was down on 2011. Declines in permissions were recorded every year since 2008. For dwellings - full houses - planning permissions are down whooping 91.8% in 2012 compared to peak attained back in 2005!

Overall planning permissions are down 77.5% on peak. Again, historical series low in 2012 (based on estimate):

This is the same Government that has attempted to 'revive' the property markets via various tax breaks in 2011-2012. Talking about 'policy consistency' then...

14/1/2013: Irish Savings Rates - Q3 2012

Data for Irish Savings rates for Q3 2012 has been released by the CSO (see release here). Instead of rephrasing the release, lets take a look at the underlying data (link to data is provided on page 1 of the release).

First off: household savings and consumption expenditures, seasonally-adjusted:

Per chart above (all in current market prices, so no inflation adjustment, but seasonally-adjusted)

• Disposable income rose in Q3 2012 to EUR23,002 million - up EUR486mln (+2.16%) q/q after expanding EUR385mln (+1.74%) in Q2 2012. This is good news. Year-on-year, income is up EUR1,158mln (+5.30%) and this follows up on EUR823mln increase y/y in Q2 2012 (+3.79%).
• Historical comparatives for total disposable income are also looking good. Average income since Q1 2008 was EUR22,984mln, so we are close to that in the latest figures. We are also ahead 2010 average (EUR22,198mln), 2011 average (EUR21,693mln), but below 2008 average (EUR25,061mln) and 2009 average (EUR23,310mln).
• Final consumption expenditure in Q3 2012 stood at EUR19,319mln up EUR64mln (+0.33%) q/q partially reversing decline of -EUR77mln (-0.40%) q/q in Q2 2012. Year-on-year, consumption spending was up EUR217mln in Q3 2012 (+1.14%) after posting a y/y decline of -EUR165mln (-0.85%) in Q2 2012.
• In longer range averages terms, latest consumption reading is just about at the average level for 2012 (EUR19,302mln), slightly below 2011 average of EUR19,362, and below 2008 average (EUR22,264mln), 2009 average (EUR19,836mln) and 2010 average (EUR19,532mln).
• Gross household savings stood at EUR3,684mln in Q3 2012, up EUR423mln (+12.97%) q/q and this follows EUR463mln rise (+16.55%) in Q2 2012. Year-on-year, household savings rose EUR942mln (+34.35%) in Q3 2012 after posting a EUR988mln (+43.47%) y/y rise in Q2 2012/
• So far, Q1-Q3 2012 average savings run at EUR3,248mln - ahead of all annual averages, save for 2009 when they reached EUR3,475mln.

Saving ratios:

• As the result of the above, the household savings ratio (ratio of gross savings to total disposable income) rose from 14.48% in Q2 2012 to 16.02% in Q3 2012. This represents an increase of 1.53ppt q/q (following a 1.84% rise q/q in Q2) and a y/y rise of 3.46ppt (down from the y/y rise of 4.00% in Q2 2012).
• Longer-term comparatives suggest the return of strong precautionary savings motive (as shown in the chart below). More specifically, adjusting for growth variation in Irish GDP, longer-term savings ratio consistent with economic recovery for Ireland should be in the range of 8.6-11.9%. We are now well above that range. More significantly, even taking shorter period deleveraging pressures in 2008-present crisis, the savings ratio averages at around 14.10%, lower than the current 16.02%. 2012 average savings ratio through Q3 is 14.38% against 2008-2011 average of 11.9%. By all metrics, Q3 2012 looks like a return of the precautionary savings motive for households.

However attractive it might appear to make an argument that savings ratio is too high amongst Irish households, one must consider the fact that our households are:

1. Under immense pressures to deleverage out of extremely high debt ratios (an objective consistent with banks stabilisation objective of the Government and with Troika concerns about debt levels, as well as with the goal of restarting household investment cycle)
2. Household savings = banks deposits and I doubt there is out there a single Irish politician brave enough to suggest we need less of the latter
3. Current act as the main driver for supporting gross national savings from complete and total collapse. Do recall that national savings = national (domestic) investment (ex-FDI). And do recall that in Ireland, SMEs are funded by domestic savings (at least equity, non-debt funding component). Which means that were we to have meaningful investment activity here, we need to encourage and support, not discourage and tax, savings.

On this note, let's take a look at seasonally unadjusted data for aggregate savings in the economy:

The chart above shows clearly that:

• Total savings in the economy declined to EUR7,320mln in Q3 2012 (down EUR559mln or 7.09%) q/q, but rose EUR1,747mln (+31.35%) y/y. In Q2 2012 there was an annual rise of 28.71% or +EUR2,199mln.
• Excluding financial corporations, the real economy's savings fell EUR452mln (-8.05%) q/q in Q3 2012, but a re currently up EUR1,851mln (+55.84%) y/y, against Q2 2012 annual rise of EUR910mln (+19.3%).
• The chart above shows that once we exclude financial corporations, savings actually are running much closer to long-term trend and that the trend is moving up, toward rising savings once again. This upward trend was established around Q1-Q2 2011 and as we shall see shortly is not necessarily signalling a major departure from the long-term established trends (se chart below).

The decomposition of savings into sectors shows that:

• Household savings rose modestly q/q in Q3 2012 (absent seasonal adjustment) and are up significantly y/y (+26.6% in Q3 2012), although that rise was well-matched by 26.0% increase in Q2 2012.
• General Government continued to dis-save (accumulate debt) in Q3 2012, shrinking national savings by EUR2,331mln (more than 9 times the rate of dissaving, as the rate of saving in the households). Year on year, the Government has managed to post EUR423 increase in dissaving (+17.2%).
• Financial Corporations also showed dis-saving in Q3 2012 or EUR107mln compared to Q2 2012 and EUR104mln (4.6%) compared to Q3 2011.
• Non-Financial Corporations posted savings of EUR4,930mln in Q3 2012, up EUR1,606mln (+48.3%) on Q2 2012 and up EUR1,215mln (+32.7%) on Q3 2011. 
• Thus, savings increase in Non-Financial Corporations outpaced savings increase amongst the Households by the factor of almost 6 in quarterly terms and by 1.2 in annual terms. If the Irish Government (and some analysts) are concerned with high savings rates, they are better off targeting companies accounts not household ones. But I doubt they are likely to start calling for a savings tax on MNCs.

Two charts below show long-term trends in savings components by sector. I reproduce two charts to show best-fit models and comparable models.

The charts above very clearly show that since about mid-2005, long term trend in Government savings diverged from those for Non-Financial Corporations and Households. Specifically, National savings became positively dependent on Households and real Companies and negatively impacted by the Government. In other words, current high Household savings rates are a saving grace for the economy that suffers from extreme pressures of Government deleveraging.

The third chart above clearly shows that Households contribution to total savings in the economy counter-moved with Government contributions, supporting the overall savings activity. In fact, correlation between Government savings and Household Savings averaged remarkable -0.91 in the period 2002-present and statistically-indistinguishable -0.89 since Q3 2006 through present. Over the same period of time, correlation between Government savings and Non-Financial Corporations savings runs at slightly lower -0.88 historically and -0.86 since Q3 2006.

5/1/2013: Irish Market M&A and ECM activities in 2012

Per Experian release (from yesterday) covering the latest M&A (mergers and acquisitions) and ECM (flotations, rights issues and placements) data for the Republic of Ireland, 2012:

• During 2012, there were 294 transactions announced in Ireland, down on 2011 total of 307 deals (-4.2% y/y). However, the value of transactions rose 1% from €28.343bn in 2011 to €28.596bn in 2012.
• The most active sector for M&A in 2012 were: Materials & Equipment Wholesale (just over 20% of all transactions), Professional & Business Activities (15.5%) and Computer Activities (15.2%). The largest value deals were in Banking, Credit & Leasing (€10.5bn), and Electrical Manufacturing (€10.2bn).
• Ireland represented ca 3% of the total volume of all European transactions and 3.9% of their total value.
• There were 29 large deals announced in 2012 in the over-€120mln category, "up by 20.8% from the 24 transactions recorded for 2011". "…The aggregate value of large deals was up by 1.38%, from €25.25bn in 2011 to €25.597bn in 2012. The largest deal completed in the Republic of Ireland in the year was the acquisition by US industrial engineering group Eaton Corp of Dublin-based Cooper Industries Plc, for €8.971bn."
• Deal volume in the mid-market (€12-€120mn) segment in 2012 "stayed level on 64 deals. Values declined to €2.237bn in 2012 – representing a fall of 3.8% over deals worth €2.325bn 2011. The largest completed deal in the mid-market saw real estate investor Kennedy Wilson acquire the Irish Headquarters of State Street Corp for €106.9mln in November; this was the US firm’s second large acquisition of the year in the Irish property sector, it having acquired the Alliance Building, a 210-unit residential property in Dublin, for €40mln in June."
• "Deal flow in the small market (under €12m) value segment fell from 47 transactions in 2011 to 44 transactions for 2012, a decline of 6.4%. However the aggregate value of deals saw a 9.2% increase; there were €232mln worth of small transactions in 2012, up from €212mln in 2011. The largest completed deal in 2012 saw diversified building materials group CRH Plc acquire Anchor Bay Construction Products Ltd, an English company that provides reinforcement, formwork and waterproofing products to the construction industry, for €11.97mln. This was one of fourteen acquisitions made by the acquisitive Irish company in 2012".

12/10/2012: Irish Savings Myths

Last night at the Dublin Chamber dinner, Taoiseach Enda Kenny made a rather common, but egregious in its nature statement that Ireland has the highest savings rate in the OECD at 12% GDP. Speaking before him, the President of the Dublin Chamber, Patrick Coveney, made a similar statement, but referenced 14% savings rate. Both speakers were identifying a high savings rate as being an impediment to consumer spending and recovery.

In addition to the above, the Chambers President made another startling juxtaposition. In his speech he said that:

1. Savings are too high and we need to 'do something' to reduce these;
2. Investment is too low
3. In the future, investment (via bank lending) will remain low.

Let me deal first with the last set of claims. In the Irish economy, savings are used to pay down debts (thus supporting deleveraging of the households and companies, and preventing collapse of our banks) and invest in economic activity. Reducing the debt-repayment component of savings would require a default/restructuring of private debts. The remainder of our savings goes to finance investment (direct equity & direct lending to businesses) and deposits in the banks (which in turn normally finance lending). So which part of our savings would Patrick Coveney like to cut? The banks bit (precipitating collapse of the banks) or the investment bit (precipitating further decline in investment)?

I am not even going to ask Mr Coveney as to what he might suggest that the Government should do to cut our savings rate. Impose huge wealth taxes, or go straight to a large-scale expropriations of 'excessive' savings? Both will do wonders to Ireland's reputation abroad, let alone to the dynamics of future investment at home.

Instead, lets move on to the myths both speakers were keen on repeating - the myths of our allegedly massively high savings rates. All of the data below is taken from the IMF WEO database.

Let us rank Ireland's gross savings rate compared to all other advanced economies (higher rank means lower savings rate):

Contrary to what our Taoiseach and Mr Coveney were saying, Ireland's savings rate in 2010-2014 is estimated by the IMF to be... the 5th lowest in the sample of 33 advanced economies around the world. May be it is the highest in the Euro zone? Oh, no - it is actually the fourth lowest in the Euro zone.

So what about this year then? Oh, that would be exactly the same as for the 2010-2014 average:

But wait, you might say, surely we are saving as an economy more today than in the past? Oops...

As above shows, during the 1980-2011 period, average savings rate in Ireland stood at 18.63% of GDP. In 2012 it will be 10.82% of GDP. In 2011 it was 10.59%, in 2010 11.53% and so on. Not even close to the historical average! And not close to our peers all of whom have much higher rates of savings: Israel at 18.94%, Finland at 19.84%, Belgium at 21.38%, Austria at 25.23%, Netherlands and Hong Kong at 26.29%, Luxembourg at 26.57%, and so on.

And yes, Mr Coveney, savings and investment are linked in Ireland:

And the gap between savings and investment in Ireland - explained in part by the banks claims on our savings via loans repayments:

... well that gap is currently at the advanced economies average and it was below that average during the crisis so far. 

In other words, there is no 'excess' savings in Ireland. As this economy continues to struggle with the banks debts (ah, the Chambers dinner was sponsored by one of the Pillar Banks) our savings-investment gap is forecast to rise above the advanced economies average in 2013-2017. That is the illustration of the Taoiseach's famous dictum that he won't have 'defaulter' written on his forehead. So clean forehead for our Taoiseach means no investment for businesses. Simples...