10/8/19: Irish Debt Sustainability Miracle(s): ECB and MNCs

As a part of yesterday's discussion about the successes of Irish economic policies since the end of the Eurozone crisis, I posted on Twitter a chart showing two pivotal years in the context of changing fortunes of Irish Government debt sustainability. Here is the chart:

The blue line is the difference between the general Government deficit and the primary Government deficit, which captures net cost of carrying Government debt, in percentages of GDP. In simple terms, ECB QE that started in 2015 has triggered a massive repricing of Eurozone and Irish government bond yields. In 2012-2014 debt costs remained the same through 2015-2019 period, Irish Government spending on debt servicing would have been in the region of EUR 49.98 billion in constant euros over that period. As it stands, thanks to the ECB, this figure is down to EUR 27.94 billion, a saving of some EUR 4.41 billion annually.

Prior to 2015, another key moment in the Irish fiscal sustainability recovery history has been 2014 massive jump in real GDP growth. Over 2010-2013, the economic recovery in Ireland was generating GDP growth of (on average) just 1.772 percent per annum. In 2014, Irish real GDP growth shot up to 8.75 percent and since the start of 2014, growth averaged 6.364 percent per annum even if we are to exclude from the average calculation the bizarre 25 percent growth recorded in 2015. Of course, as I wrote on numerous occasions before, the vast majority of this growth between 2014 and 2019 is accounted for by the tax-optimisation transfer pricing and assets redomiciling by the multinational corporations - activities that have little to do with the real Irish economy.

30/7/18: Ireland's employment data: Official Stats vs Full Time equivalents

Based on the most current data for Irish employment and working hours, I have calculated the difference between the two key time series, the Full Time Equivalent employment (FTE employment) and the officially reported employment.

Let’s take some definitions on board first:

• Defining those in official employment: I used CSO data for “Persons aged 15 years and over in Employment (Thousand) by Quarter, Sex, and Usual Hours Worked”
• Defining FTE employment, is used data on hours per week worked, using 40-44 hours category as the defining point for FTE. 
• A note of caution, FTE is an estimated figures, based on mid-points of working time intervals reported by the CSO.

Based on these definitions, in 1Q 2018, there were 2.2205 million people in official employment in Ireland. However, 51,800 of these worked on average between 1 and 9 hours per week, and another 147,300 worked between 10 and 19 hours per week. And so on. Adjusting for working hours differences, my estimated Full Time Equivalent number of employees in Ireland in 1Q 2018 stood at 1.94223 million, or 278,271 FTE employees less than the official employment statistics suggested. The gap between the FTE employment and officially reported number of employees was 12.53%.

I defined the above gap as “Employment Hours Gap” (EHG): a percentage difference between those in FTE and those in official employment. A negative gap close to zero implies FTE employment is close to the official employment, which indicates that only a small proportion of those in employment are working less then full-time hours.

All the data is plotted in the chart below

Per chart above, the following facts are worth noting:

1. In terms of official employment numbers, Ireland’s economy has not fully recovered from the crisis. The pre-Crisis peak official employment stands at 2.2522 million in 3Q 2007. The bad news is: as of 1Q 2018, the same measure stands at 2.2205 million.
2. In terms of FTE employment, the peak pre-Crisis levels of employment stood at 1.9261 million in 3Q 2017. This was regained in 3Q 2017 at 1.9444 million. So the good news is that the current recovery is at least complete now, after a full decade of misery, when it comes to estimated FTE employment.

The improved quality of employment as reflected in better mix of FT and  >FT employees in the total numbers employed, generated in the recent recovery, is highlighted in the chart as well, as the gap has been drawing closer to zero.

One more thing worth noting here. The above data is based on inclusion of the category of employees with “Variable Hours”, which per CSO include “persons for whom no usual hours of work are available”. In other words, zero-hours contract workers who effective do not work at all are included with those workers who might work one week 45 hours and another week 25 hours. So I adjust my FTE estimated employment to exclude from both official and FTE employment figures workers on Variable Hours. The resulting change in the EHG gap is striking:

Per above, while the recovery has been associated with a modestly improving working hours conditions, it is now clear that excluding workers on Variable Hours’ put the current level of EHG still below the conditions prevailing in the early 2000s. More interestingly, we can see a persistent trend in terms of rising / worsening gap from the end of the 1990s through to the end of the pre-Crisis boom at the end of 2007, and into the collapse of the Irish economy through 2012. The post-Crisis improvement in Employment Hours Gap has been driven by the outflows of workers from the Variable Hours’ to other categories, but when one controls for this category of workers (a category that is effectively ‘catch-all-others’ for CSO) the improvements become less dramatic.

Overall, FTE estimates indicate some problems remaining in the Irish economy when it comes to the dependency ratios. Many analysts gauge dependency ratios as a function of total population ratio to those in official employment. The problem, of course, is that the economic capacity of someone working close to 40 hours per week or above is not the same as that of someone working less than 20 hours per week.

Note: More on dependency ratios next. 

8/8/17: Did Irish Household Spending Fully Recover from the Crisis?

I have recently seen several research notes claiming that in 1Q 2017, Ireland has finally fully recovered from the shock of the Great Recession. These claims were based on consumer demand regaining its pre-crisis peak.

What do the facts tell us about this claim? That it is a half-truth.

Consider the following chart plotting consumer demand (consumer expenditure on goods and services) computed on an aggregate 4 quarters running basis. I use official CSO data for both expenditure figures and population figures. And I compute per-capita expenditure on the basis of these statistics.

In 1Q 2017, aggregate household expenditure on goods and services stood at EUR96.16 billion against pre-crisis peak of EUR94.118, using constant prices to account for official inflation. Incidentally, there is nothing new in the claim of recovery on that basis, because Irish households' aggregate spending on goods and services has surpassed pre-crisis peak in 2Q 2016.

The problem with the aggregate expenditure figure is that population changes. So the chart above also shows per-capita real expenditure, expressed in 1,000s of constant euros. Here, the matters are a bit less impressive. Per capita household expenditure on goods and services in Ireland peaked pre-crisis at EUR21,508.75. At the end of 1Q 2017, this figure was EUR 20,574.71.

There is another problem with analysts' celebrations of the 'end of the lost decade'. Aggregate household expenditure peaked (pre-crisis) in 1Q 2008, so it took 32 quarters to recover that peak. Per-capita household expenditure peaked in 2Q 2008, which means we are 35 quarters into the crisis and counting. Neither comes up to a full decade.

Finally, there is a really big problem. This one relates to what a 'recovery from the crisis' really means. In the above, we implicitly assume that a recovery from the crisis is return to pre-crisis peak. But there is a major problem with that, because our current state of life-cycle incomes, savings and debt in part reflect decisions made under the assumptions that operated back in the pre-crisis period. In other words, our income, savings, investment, career choice and debt carry a 'memory' of the times when (pre-crisis) trends did not incorporate any expectation of the crisis.

What does this mean? It means that psychologically, materially and even economically, the end of the crisis is when the economy returns to where it should have been were the pre-crisis trend extended into the present. To make this comparative more robust, we should also recognise that, in part, the pre-crisis trend should have omitted at least some of the most egregious excesses of the bubble years.

Let's do that exercise, then. Let's take pre-crisis trend in household expenditure (aggregate and per-capita) for year 3Q 2000-2004 (eliminating the explosive years of 1997-2000 and 2005-2007) and see where we are today, compared to that trend.

On trend, our aggregate personal expenditure should have been around EUR111.7 billion marker in 1Q 2017. It was EUR96.16 billion. This hardly reflects a recovery to the pre-crisis trend.

Also on trend, our per capita expenditure should have been around EUR24,140 in 1Q 2017. It was EUR20,575. This hardly reflects a recovery to the pre-crisis trend.

As some of my friends in Irish stuffbrokerages have been known to remark in private: "Shit! Damn numbers." Indeed... the recovery will have to wait... but, lads, you know you can do these calculations yourselves, right? You are paid six figure salaries and bonuses to do them. Or may be you are not. May be, you are paid six figure salaries and bonuses not to do these calculations...

10/10/15: IMF’s Macro Data and That “Iceland v Ireland” Question, again

Recently, I posted some data from the IMF Fiscal Monitor for October 2015 comparing fiscal performance of Iceland and Ireland and showing the extent tp which Iceland outperforms Ireland in terms of fiscal deficits and Government debt metrics. You can see the full post here.

Now, consider economic performance, especially of interest given recently strong performance by Ireland in terms of GDP, GNP and even Domestic Demand growth rates.

So let’s take a look at IMF's latest economic data and revisit that "Iceland v Ireland" question.

Let;s first take a look at the real GDP per capita, setting peak pre-crisis levels of 2007 (for both countries) as 100 index reading and tracing evolution of the real GDP per capita. Both countries are expected to regain their pre-crisis GDP per capita levels in 2015, with Iceland reaching 0.17% above the pre-crisis peak and Ireland reaching 0.29% above the same measure.

We are not going to dwell on the gargantuan (20%+) GDP/GNP spread or the fact that Irish Domestic Consumption per capita is nowhere near pre-crisis peak (see here). In pure real GDP per capita terms, Iceland is doing as well or as badly as Ireland so far.

The same applies to GDP per capita expressed in current prices and adjusted for differences in exchange rates and price levels (the Purchasing Power Parity adjustment). Iceland is at 112.9 index reading in 2015 forecast, Ireland at 113.1 index reading. For 2016, Iceland is forecast to be around 117.5, Ireland at 117.8. Neck-in-neck.

However, when it comes to the labour market performance, the close proximity between two countries vanishes.

Unemployment rate in Iceland rose from 2.3% in 2007 to a peak of 7.525% in 2010 and is expected to be at 4.3% in 2015, falling to forecast rate of 4.1% by 2016-2017 before rising to 4.4% in 2020. Ireland is faring much worse. Our unemployment rate was double Iceland’s in 2007 - at 4.67% and this peaked in 2012 at 14.67%. Since 2012, the rate fell, with 2015 outlook set at 9.58% - more than double Iceland’s rate, falling gradually to 6.9% in 2020 - more than 50 percent higher than Iceland’s.

Employment rate also tells the story of Iceland’s outperformance. And worse - dynamically, this outperformance is set to continue deteriorating for Ireland. In 2007, Iceland’s total employment ratio to total population was 57.5% against Ireland’s 49% - a gap of 8.5 percentage points. This year, per IMF projections Iceland’s employment ratio will be around 55.8% against Ireland’s 42.2% - a gap of 13.6 percentage points. In 2016 (the furthers forecast by the IMF), Iceland’s employment rate is projected to be 56.5% against Ireland’s 42.7% - a gap of 13.8 percentage points.

Since the beginning of the crisis, Irish policymakers extolled the virtue of our open economy and exports as the drivers for economic recovery. Aptly, we commonly regard ourselves to be a powerhouse of exporting activities. Which means that we should be leading Iceland in terms of our external balances performance. Reality is a bit more mixed. Iceland’s current account deficit stood at a whooping 22.8% of GDP in 2008 on foot of strong ‘imports’ of capital into the banking system. Ireland’s was more benign at 5.73% of GDP. However, since the peak of the crisis, both countries achieved massive improvements in their current account balances, with 2014 ending with Iceland posting a current account surplus of 3.41% of GDP and Ireland posting a current account surplus of 3.62% of GDP. However, in 2015, IMF forecast for current account balance shows Iceland pulling ahead of Ireland, with current account surplus of 4.61% of GDP against Ireland’s 3.2% of GDP. This gap - in favour of Iceland - is expected to persist (per IMF) through 2020.

Table below summarises the sheer magnitude of positive adjustments to pre-crisis and crisis worst points of performance on all metrics above, through 2015 for both countries:

In summary: 

• In absolute terms, both Ireland and Iceland have made big adjustments on low points of performance pre-crisis and at the peak of the crisis through 2015. 
• Iceland clearly outperforms Ireland in labour market terms. 
• Ignoring the caveats on composition of Irish GDP, Ireland and Iceland perform basically in similar terms in terms of economic activity recovery. 
• In terms of external balances, Iceland currently leads Ireland, after having lagged Ireland through 2012. 
• Iceland solidly outperforms Ireland in fiscal metrics of Government debt and deficit dynamics.

The evidence above is sufficient to reject the claims that Ireland outperforms Iceland in recovery.

7/6/15: Greece: How Much Pain Compared to Ireland & Italy

Today, I took part in a panel discussion about Greek situation on NewstalkFM radio (here is the podcast link http://www.newstalk.com/podcasts/Talking_Point_with_Sarah_Carey/Talking_Point_Panel_Discussion/92249/Greece.#.VXPx-AJaDJQ.twitter) during which I mentioned that Greece has taken unique amount of pain in the euro area in terms of economic costs of the crisis, but also fiscal adjustments undertaken. I also suggested that we, in Ireland, should be a little more humble as to citing our achievements in terms of our own adjustment to the crisis. This, of course, would simply be a matter of good tone. But it is also a matter of some hard numbers.

Here are the details of comparatives between Ireland, Italy and Greece in macroeconomic and fiscal performance over the course of the crises.

Macroeconomic performance:

Fiscal performance:

All data above is based on IMF WEO database parameters and forecasts from April 2015 update.

The above is not to play down our own performance, but to highlight a simple fact that to accuse Greece of not doing the hard lifting on the crisis response is simply false. You can make an argument that the above adjustments are not enough. But you cannot make an argument that the Greeks did not take immense amounts of pain.

Here are the comparatives in various GDP metrics terms:

12/12/2014: That Invisible Irish 'Trickle Down' Recovery: Consumers' View

In recent posts (see all five of them linked here: http://trueeconomics.blogspot.ie/2014/12/12122014-qna-q3-2014-irish-external.html) I covered in detail the latest official stats on Irish economic recovery/growth. The picture these figures present is of basically static domestic economy, with questionable quality 'exports-led recovery'.

So what's can one add to the above? Ah, just a couple of recent surveys.

Remember, the political meme is that the recovery is charging ahead and is trickling down to ordinary families and into the real economy. Which, naturally, suggests that households should be feeling better. If not fully 'great', at the very least better… So do they?

We can look at consumer confidence indicators from the ESRI to check. Alas, these are bearing negative relation with actual domestic demand. Still, on a shorter note, core retail sales have been rising recently - in volume - and a starting to show some life in value. Chart below illustrates just how weak the 'real recovery' has been despite the sentiment - as measured by ESRI - has been allegedly at all time highs:

But there are other surveys to look at.

Based on Amarach data: in April 2014, 41% of Irish people thought Ireland is a great place to live in. By November 2014 this rose to 56%.But less than half of us felt that there are
opportunities in Ireland for those who are prepared to seek them out (49% in November, still, a rise on 42% in April 2014). So the 'recovery' is not exactly the one where opportunities for betterment are being presented, even if we control for effort.

Good news is - people are getting more optimistic: in November, 56% of surveyed felt that better times lie ahead for the Irish economy, up on 48% in April. Hopium is a powerful drug, especially when dispensed in massive doses of Government-paid-for PR via all channels of traditional media. Allegedly, quality of life in Ireland is ranked as being high by a rising proportion of people too: from 48% in April to 56% in November, although we have no idea what this means, really, this should translate into a feel-good factor of sorts. Right? Well, let's give it a pause and think - the above are all issues relating to 'us' as a collective. Let's see what surveys said about personal.

View: "I feel angrier about austerity now than I have ever felt before." If things are so good at collective levels, surely they should good at personal level too? In November 2014, 49% of surveyed agreed with the above statement and only 16% disagreed. Wow! All the recovery and the goodies from the Budget 2015 and those feeling angrier with the state of our policies is outstripping those who do not by more than 3:1.

Confirming the above, 59% of Irish people felt that economic pressures are making them  depressed. Only 24% disagreed. 39% of Irish people felt that the economy (not the economists) is having a negative impact on their personal health. 29% disagreed. When asked of they feel being successful/very successful in managing their finances, 56% of us agreed back in September 2013, 50% agreed in April 2014 survey and 50% in November 2014 survey. So things are not getting better in terms of our perceived financial health over time. They are getting worse.

Do the people plan to 'vote' with their money for the recovery? Don't hold your breath, folks. Only 16% of us said they will loosen the purse strings a bit next year. 49% said they won't.

Here are some numbers on how we feel about the state of our financial affairs, not as a nation or as Troika

Well, the last line in the table above is telling.

But may be the above data is suspect? Well, why not check with the 'Optimists par excellence' from the ranks of Big 4 'consultancies'? Let's take a look at Deloitte. Surely they can see the optimism around?

Check out their H2 2014 Consumer Review. Here are the snapshots:

We feel, predominantly, no better about all major points of economic well-being today:

And we want to save more, spend less and borrow less:

So where's that 'trickle down' optimism contagion from all the feel-good policies the Government allegedly lavishing upon us all? Spot one beyond those jobs-for-life-and-pensions-for-free walls of the Government 'think tanks', if you can…

16/11/2014: The Sunny Side of the Stormy Irish Recovery

My article on the state of the Irish economy published by the ZeroHedge: http://www.zerohedge.com/news/2014-11-13/irish-eyes-are-smiling-should-they-be

2/11/2014: Ireland's Recovery: Economic Hopium for the Masses

My column for this month's Village magazine is out : http://www.villagemagazine.ie/index.php/2014/10/economic-hopium-for-the-masses/ covering the underlying currents in Ireland's 'miraculous' recovery in Q2-Q3 2014.

16/10/2014: Ireland's Real Recovery Metrics: Try Avoiding that Over-Confidence Trap

So 7 years into the crisis, and Ireland is 'securing' the 'robust recovery' according to the Government. Securing? Well, here's the chart based on IMF latest projections for real GDP growth in 2014 (never mind, GDP is not that great metric for Ireland, but that's all we have to compare across the economies as of now).  The data is on per-capita basis and the index reflects 100=value of real GDP per capita in the year of pre-crisis peak.

So how is Ireland faring?

Ah, as of 2014, with 'robust recovery' being 'secured' we are the third worst-off economy in the Euro area, with GDP per capita in real terms down 11.9 percent on pre-crisis peak and 7 years (longer-tail of the range) duration of the crisis. Two economies worse off than our 'robustly recovering' one are: Greece and Cyprus. And of these, only Greece is as long into the crisis as Ireland.

But, I hear you say, things are improving in Ireland faster than anywhere else... Shall we take a look?

The rate of improvement is measured by the slope of the line. By this measure, Ireland in 2014 is indeed improving faster than anyone else, except the recovery is close to or on par with Latvia, Slovakia and Malta. But here's a kicker: 2014 rate of improvement in Ireland is similar to the rates of improvement attained in the past during this crisis by:

• Latvia in 2011, 2012, 2013 and 2014
• Finland in 2009 and 2010
• Malta in 2010, 2013 and 2014
• Slovakia in 2009, 2010 and 2014
• Germany in 2010 and 2011
• Austria in 2011

So our 'unique today' is not as unique as we would like it to be, both today and historically over the crisis period.

Time to be a bit more humble, perhaps? Just to avoid falling into over-confidence fallacy?

1/10/2014: Irish Manufacturing PMI: September

Irish Manufacturing PMI released by Investec/Markit today signalled de-acceleration of growth in September.

• Headline Manufacturing PMI declined from 57.3 in August to 55.7 in September. The reading is still ahead of July 55.4 and remains statistically significant above 50.

September correction does not represent a shift in the trend, which remains solidly up:

• 12mo MA is at 54.7 and September reading is ahead of that. Current 3mo MA is at 56.1 and well ahed of previous 3mo MA of 55.5. 3mo MA through September is solidly ahead of the same period readings in 2010-2013.

Investec release provides some comments on the underlying series sub-trends, but I am not inclined to entertain what is not backed by reported numbers.

On the balance, it appears that Manufacturing sector retain core strengths and that expansion continues. This marks thirteenth consecutive month of PMI readings above 50 (statistically significant) and 16th consecutive month of PMI reading above 50 (notional).

1/9/2014: Irish Manufacturing PMI: August 2014

Irish Manufacturing PMIs released by Markit and Investec today show very robust and accelerating growth in the sector in August. These are seasonally adjusted series, and given this is a generally slower month for activity, acceleration is more reflective of y/y trends than m/m. Nonetheless, the PMI hit 57.3 in August, up on already blistering 55.4 in July, marking the highest PMI reading since December 1999.

Per release: "…output and new orders each rose at sharper rates. This encouraged firms to up their rates of growth in input buying and employment. Meanwhile, input prices fell for the first time in over a year and firms lowered their output charges."

This marks fifteenth consecutive monthly rise in Irish Manufacturing PMIs.

New orders and export orders are up (allegedly, as we have no data given to us by the Markit/Investec), but part of the sharp rise was down to firms working through backlog of orders, so that forward backlog of orders fell. This can lead to moderation in growth in months ahead 9note: moderating growth is not the same as contraction, so there is no point of concern on that front).

Full release here: http://www.markiteconomics.com/Survey/PressRelease.mvc/8ce17d65c9e14a54911931a09076cfbb

Couple of charts:

The above shows that Manufacturing PMI in Ireland is strongly breaking out of the post-crisis period averages, pushing the average toward longer-term levels observed in pre-crisis period. Thus, by PMI metric, Irish Manufacturing should have already fully recovered from the effects of the crisis. Alas, of course, we can see from the latest QNHS data that this is not the case when it comes to employment levels in the sector: http://trueeconomics.blogspot.ie/2014/08/3182014-changes-in-employment-by-sector.html In fact, Industry (ex-Construction) employment has been shrinking, not growing.

Chart below shows the shorter-term trends, distinguishing three periods in recent history:

Despite very robust rates of growth, overall PMIs expansion in the second period of recovery (second shaded block) have been slower than in the first period of recovery. But the trend is for solid recovery, nonetheless.

So lots of good news overall, but we will need a confirmation of this from actual production data, exports data and employment data in months to come. Let's hope the PMIs are signalling more than subjective optimism.

2/8/2014: Irish Manufacturing PMI: July 2014

Markit and Investec released Irish Manufacturing PMI this week. The numbers are pretty good:

• Headline PMI stood at 55.4 in July 2014, against 55.3 in June.
• 12mo average is at 54.0 and 3mo average is at 55.2. Readings above 54.3 are strong, so that's good news. Previous 3mo period average was 54.8 and both current 3mo average and previous are strongly above same period averages for 200-2013.
• No comment from me on the rest of the index components as Investec no longer publishes any actual readings. Press release is here: http://www.markiteconomics.com/Survey/PressRelease.mvc/28b6c4cab7b94cef8d7f0b557c894220

Couple of charts: Index deviations from 50.0 and snapshot to current period, highlighting two periods of growth gains:

Dynamically, the data is showing significant reductions in volatility in recent months, with standard deviations trending around pre-crisis averages.

Top takeaways: improved trading conditions in the sector seem to be linked to overall gains in the external outlook in key exporting markets, which means Irish manufacturing remains locked into exogenous demand (subject to possible shocks) and remains anchored to the fortunes of the MNCs (subject to longer term risks to production relocations). Good news on short-term dynamics, but Ireland still lacks over-arching strategy for the sector.

1/7/2014: Irish Manufacturing PMI: June 2014

June Manufacturing PMI for Ireland (released by Markit and Investec) posted a small gain, rising to 55.3 from 55.0 in May. 3mo MA is now at 55.5 and this is above the previous 3mo MA through March 2014 which stood at 53.7. 12mo MA is at 53.7 which implies that we have positive growth in manufacturing over the last 12 months. 3mo MA through June 2014 is above same period averages for 2010-2013.

Chart to summarise the series:

We are now on an upward trend from April 2013 and series are running above 50.0 marker thirteen months in a row:

And expansion remains statistically significant and well ahead of the 'recovery' period average:

All are good signals. Too bad Markit would not release more detailed sub-indices numbers, which prevents me from covering trends in Employment, Profit Margins and New Orders data.

One caveat: rate of improvement in June (m/m) was just 0.3 points, which is below 12mo average of 0.4 points and 3mo MA of m/m changes in the index are now -0.1 points, which is a slowdown on 3mo MA through March 2014 (+0.7 points) and on 3mo MA through June for 2013 and 2012.

5/6/2014: Irish Manufacturing & Services PMIs: May 2014

Both, Irish Services and Manufacturing PMIs are now out for May 2014 (via Markit and Investec Ireland) and it is time to update my monthly, quarterly and composite series.

In this post, let's first cover the core components in monthly series terms:

1. Manufacturing PMI eased from 56.1 in April to 55.0 in May - a decrease that reduced the implied estimated rate of growth in the sector. Still, Manufacturing index is reading above 50.0 (expansion line) continuously now since June 2013. 3mo MA through May is at 54.8 - solid expansion and is ahead of 3mo average through February which stood at 53.1. So expansion accelerated on 3mo MA basis. The current 3mo MA is ahead of 2010, 2011 and 2013 periods readings. Over the last 12 months there have been only 3 months with monthly reductions in PMIs: November 2013 (-2.5 points), January 2014 (-0.7 points) and May 2014 (-1.1 points).
2. Services PMI eased only marginally from 61.9 in April to 61.7 in May - this implies that services sector growth barely registered a decline and remained at a blistering 61-62 reading level. Services index is reading above 50.0 (expansion line) continuously now since July 2012, helped no doubt by a massive expansion of ICT services MNCs in Ireland, which have little to do with the actual economic activity here. 3mo MA through May is at 60.0 - solid expansion and only slightly below 3mo average through February which stood at 60.3. The current 3mo MA is ahead of 2010, 2011 and 2013 periods readings. Over the last 12 months there have been 5 months with monthly reductions in PMIs, all sharper than the one registered in May 2014.

Here are two charts showing historical trends for the series:

The two series signal economic expansion across both sectors in contrast to May 2012 and 2013:

In line with the above chart, rolling correlations between the two PMIs have firmed up as well over recent months, rising from 0.33 in 3mo through February 2014 to 0.5 for the 3mo period through May 2014.

We will not have an update on Construction sector PMI (Markit & Ulster Bank) until mid-month, so here is the latest data as it stands:

• In April 2014, Construction sector activity index rose to 63.5 from 60.2 in March 2014. This marks second consecutive month of m/m increases. In the last 12 months, there have been 7 monthly m/m rises in the index and index has been returning readings above 50 since September 2013.

Core takeaways:

• Both services and manufacturing sectors PMIs are signaling solid growth in the economy,
• Jointly, the two indices are co-trending well
• Caveats as usual are: MNCs dominance in the indices dynamics and shorter duration of statistically significant readings above 50.0 line: Manufacturing shows only last three consecutive months with readings statistically significantly in growth territory; while Services index producing statistically significant readings above 50 for the last 6 months.
• Last caveat - weak relationship remains between actual measured activity in the sectors and the PMI signals: http://trueeconomics.blogspot.ie/2014/05/1552014-pmis-and-actual-activity.html

Next post will cover quarterly data and composite PMI.

17/5/2014: Growth Forecasts: What Matters and What Doesn't

This is an unedited version of my Sunday Times article from April 20, 2014.



Nothing sums up frustrations of the policymakers and general public with economics as well as the famous quote from the US President, Harry S. Truman: “Give me a one-handed economist, all my economists say is ‘on the one hand …and on the other hand…”

Quips aside, human choices and activities - the fundamental forces driving all economics - are unpredictable and painfully complex to model and measure. But beyond behavioural intricacies, complex nature of modern economic systems implies that data we use in analysis is often rendered non-representative of the realities on the ground.

Take for example the concept of the national income. Economists define this as a sum of personal expenditure on consumer goods and services, net expenditure by Government on current goods and services, domestic fixed capital formation, changes in stocks and net exports of goods and services. Combined these form Gross Domestic Product or GDP. Adding Net Factor Income from the Rest of the World (profits and dividends flowing from foreign destinations into Ireland, less payments of similar outflows from Ireland) gives us Gross National Product or GNP.



All of this seems rather straightforward when it comes to an average country analysis. By and large the overall changes GDP and GNP are closely linked to other economic performance indicators, such as inflation, investment, employment and household incomes.

Alas, this is not the case for a tiny number of small open economies with significant share of international activities in their total output, such as Ireland. In such economies, both GDP and GNP can be severely skewed by tax optimisation and global rent-seeking strategies of multinational enterprises. Faced with large share of domestic accounts distorted by tax arbitrage, economists are left to deal with high degrees of uncertainty when forecasting national output and employment. Even past data becomes hard to interpret.

In recent months, various analysts published a wide range of forecasts and predictions for Irish economy for 2014-2015. Consider just three sources of such forecasts: Department of Finance, the ESRI and the IMF.

Budget 2014 projections, forming the basis of our fiscal policy predicted average annual real GDP growth of 2.15 percent, with underlying real GNP growth of 1.7 percent. These projections were based on the assumed annual growth of 1.5 percent in personal consumption, and 6.35 percent growth in investment. These projections were also in-line with IMF forecasts.

Around the same time, ESRI was forecasting GDP growth of 2.6 percent for 2014 and GNP growth of 2.7 percent, well ahead of the Department of Finance outlook. ESRI forecasts were much more skewed in favour of domestic investment and personal consumption.

Fast-forward six months to today. In its latest analysis, IMF lowered its forecast for our GDP growth to 1.7 percent for 2014, leaving unchanged their outlook for 2015. The Fund forecast for GNP growth remained unchanged for 2014 and was raised for 2015.

ESRI has shifted decidedly into even more optimistic territory. The Institute's latest predictions are for GDP expansion of 3.05 percent on average in 2014-2015. GNP growth forecast is now at 3.6 percent. ESRI's rosy projections are based on expectations of a massive 10 percent growth in investment, with private consumption expectations also ahead of previous projections.

Finally, this week, Department of Finance upgraded its own forecasts, lifting expected 2014-2015 growth to 2.4 percent for GDP and 2.5 percent for GNP. Domestic demand growth is now expected to average 2.4 percent through 2015, and investment growth is expected to run at a head-spinning rate of 13.9 percent.

Everyone, save the IMF, is getting increasingly bullish on Irish domestic economy, which, in return, spells good news for employment and household finances.



The problem is that all of these forecasts give little comfort to anyone seriously concerned with the impact of economic growth on the ground, in the real economy.

Even the ESRI now admits that we cannot forecast this economy with any degree of precision. More significantly, the Institute recognises that our GDP figures are no longer meaningful when it comes to measuring actual economic performance. Instead, the ESRI claims that GNP is a better gauge of the real state of the Irish economy.

In truth, the proverbial rabbit hole does not end there: Irish GNP itself is still heavily skewed by the very same distortions that render our GDP nearly useless.

The ongoing changes in our exports and imports composition are throwing thick fog of obscurity over our net exports, which account for 22.6 percent of our GDP and 26.7 percent of our GNP – not a small share.

Since 2012, expiration of international patents in the pharmaceutical sector, triggered billions in lost exports revenues and shrinking trade surplus. In colloquial terms, Irish economy is now running weak on expired Viagra.

Just how much the patent cliff depresses our GDP and GNP is a mater of dispute, but we do know that pharma accounts for about one quarter of our total exports and one eighth of the gross value added in economy despite employing very few workers here. The patent cliff was responsible for a massive 1.25 percent drop in our labour productivity across the entire economy last year. But, as ESRI analysis previously shown, the overall effect of patents expirations on our GDP (and by corollary on GNP) is extremely sensitive to the assumptions relating to where pharma companies book their final profits. Profits booked in Ireland yield significant adverse impact. Profits channeled through Ireland to offshore destinations have negligible impact.



Which brings us to the second force contributing to rendering both GDP and GNP growth largely irrelevant as measures of our economic wellbeing.

Based on data through Q4 2013, since the bottom of the Great Recession in 2010, our net exports of goods and services rose EUR10.6 billion, driven by EUR14.4 billion in new exports of services offset by the decline of EUR3.05 billion in exports of goods. Ireland’s exports-led recovery was associated with a massive shift toward ICT exports.

Much of this trade was associated with little real activity on the ground.

Consider for example tax revenues. In 2010-2013, for each euro in added net exports, the Exchequer revenues increased by less than 3.3 cents. Back in 2000-2002 period the same relationship was more than six times higher. Of course back then both the MNCs and domestic companies were in rude health or on steroids of cheap credit and patents protection, depending on how a two-handed economist might look at the numbers. Still, the core composition of our exports was more directly connected to real production and value creation taking place in this country.

This can be directly witnessed by looking at other metrics of current activity, such as Purchasing Manager Indices published by Markit and Investec Ireland. Since Q1 2010, both Services and Manufacturing PMIs have been consistently signaling a booming economy. Meanwhile, GDP posted an average annual rate of growth of just 0.22 percent. Employment in industry ex-construction is down 21 percent on pre-crisis peak, employment in professional, scientific and technical activities is down 4.3 percent and employment in information and communication sector is down 1.1 percent.

The new crop of multinational corporations driving growth of GDP and GNP in Ireland is much more aggressive at tax optimisation than their predecessors. Which means that they also tend to use fewer domestic resources to deliver real value added on the ground.



All of which suggests that gauging true extent of economic growth in Ireland is no longer a simple matter of looking at either GDP or GNP figures. Instead, we are left with other aggregate measures of the real economy, such as: non-agricultural employment and the final domestic demand – a sum of private and public consumption and gross fixed capital formation.

By the latter metric, this economy has managed to deliver 6 consecutive years of uninterrupted annual declines in activity. In 2013, inflation-adjusted domestic demand fell by some EUR366 million on previous year. Cumulated losses since 2008 now stand at EUR32 billion or almost 20 percent of our GDP. Good news is that the rate of declines has been de-accelerating every year since 2009. And in H2 2013 demand rose 1.75 percent year on year. Bad news is that in real terms, our final domestic demand is currently running at the levels just above those recorded in 2003. In other words, we are now into the eleventh year of the ‘lost decade’.  At H2 2013 rate of growth, it will take Ireland until 2026-2027 to regain pre-crisis levels of domestic economic activity.

Meanwhile, employment figures are painting a slightly more optimistic picture, albeit these figures too are not free of methodological problems. In Q4 2013, non-agricultural employment in Ireland stood at 1,793,000, with H2 figures on average up 1.91 percent or 33,550 on the same period of 2012. To-date, non-agricultural employment numbers are down 13 percent or 266,550 on pre-crisis levels. However, when one considers total population changes in Ireland since the onset of the crisis, the ratio of non-agricultural employment to total population is currently at 39 percent, which is the level below those recorded in Q4 2000.


To the chagrin of the Irish policymakers and general public, our economy is, like an average economist, two-handed. On the one hand, our employment and total demand figures show an economy anemically bouncing close to the bottom. On the other hand, a handful of MNCs are pushing our GDP and GNP stats up with profits from their operations in far flung places retired here. Harry Truman really had it easy compared to Enda Kenny.

Box-out

The latest data from the Central Bank covering retail interest rates confirms two key trends previously highlighted in this column.

The first one is the rising cost of borrowing compared to the underlying European Central Bank policy rate. In January-February 2014, average retail rates on new loans for house purchases were priced 3.32 percent higher than the ECB rate. A year ago the same margin was 2.89 percent. For non-financial corporations, average margin rose from 4.58 percent to 5.03 percent for loans under EUR1 million, and from 2.42 percent to 3.1 percent for new loans over EUR1 million. Lending margins over the ECB rate in January-February 2014, averaged two to three times the margins charged in the same period of 2007 at the peak of credit bubble.

The second trend relates to the spread between rates paid by the banks on deposits and interest charged on loans. Since October 2011, Irish households consistently faced deposit rates that are by some 2 percentage points lower than the average annual cost of new loans for house purchases. In January-February 2014 this gap widened by some 0.27 percent compared to the same period of 2013. The spread is now running at double the rate recorded at the peak of the pre-crisis credit boom. The same holds for interest rates differential between loans and deposits for non-financial corporations which is now at the second largest levels since January 2003 when the data reporting started.

In short, credit today is historically more expensive, while deposits are cheaper. Irish banking sector continues to extract emergency rents out of the real economy with no easing in sight.

8/5/2014: Irish Manufacturing & Services PMIs: April 2014

Irish Manufacturing and Services PMIs were out for April both showing aggregate gains, both not reported sufficiently in terms of data coverage to make any verifiable statements about composition of these gains.

Let's start from Manufacturing figures first:

• April 2014 PMI reading was at 56.1 - which is well above statistically significant bound of expansion. 
• 3mo MA through April is now at 54.8, some 1.9 points above 3mo MA reading though January 2014 and 5.5 points ahead y/y. Both good indicators of improving growth in the sector.

On Services side:

• April 2014 PMI reading was at blistering 61.9 - which is strongly above statistically significant bound of expansion. 
• 3mo MA through April is now at 60.0, basically flat on 3mo MA reading though January 2014 (60.13) and 2.8 points ahead y/y. Both good indicators of continued strong growth in the sector.

However, 3mo MA on 3mo MA changes are not spectacular in Services sector, as the chart below shows. This might simply be due to already sky-high readings attained in recent months.

Both indices show expansion in the economy (a changed from same period 2013) and as the chart below shows, correlation between the two indices is running strong (both co-move currently).

So based on top-level data, things are improving. The caveats are as usual:

1. We have no idea what is happening on the underlying side of the above stats as Investec & Markit no longer make available sub-indices information
2. Much of the PMIs-signalled activity is not coinciding with actual activity on the ground over the medium term (although some indications are that once we are firmly on growth trend path, the two sets of data - CSO and PMIs - will start comoving again).

In short, just as sell-side stockbrokers reports and Consumer Confidence Indicator, PMIs are least useful in telling the real story just when the demand for such story is most acute. 

19/4/2014: If Only Forecasts Were Falling Ripe from Trees...

Here we go, folks… ESRI's latest thoughts on Irish economy... and they are earth-shattering.

Let's take a few pointers from the wise:


1) "Ireland could face a debilitating period of stagnation – characterised by high unemployment, falling prices and low growth – if recovery in Europe falters".

"Could"?! 2013 marked a year of contracting GDP and total demand. We now have six consecutive years of falling total demand (sum of domestic investment and spending by consumers and government). Unemployment is already sky-high, long term unemployment is a hinge problem. Prices are not quite falling, but growing at near-zero rate, and stripping out State controlled sectors, goods and services (something ESRI misses on every occasion, like a clock)we have deflation. So all of this "could" happen?


2) "…Prof Fitzgerald said deleveraging by households could continue for “some considerable time” if recovery stalled in the rest of the EU, resulting in a return to stagnation in Ireland."

Can someone explain to me why would deleveraging of the households (repayment of massive debts accumulated during the Celtic Garfield years) suddenly end if "the rest of the EU" were to post robust growth? Is it possible that growth in Germany will start paying Irish mortgages down? Or consumer demand in France picking up can moderate the size of our credit cards bills? How?

Irish exporting sectors employ a small fraction of our households. Irish exports are geared not toward wages payments, but MNCs profits. Pick up in our exports is unlikely to drive household earnings up (easing debt/income ratios or repayment funds available to households - two conditions necessary for new credit creation) in short or medium term.

3) But wait, according to the ESRI, the core threats to the economy are not debt, but the EU growth and housing markets (more specifically: excess demand in the property markets in Dublin and Cork that are at a risk of not being satisfied in poor credit conditions). So in the nutshell, ESRI thinks that if we start building more houses and Germans start buying more BMWs, our economic growth will take off like a rocket.

Confusing symptoms for causes, ESRI is worried about the Japanese scenario for Ireland. But let's take a look at plausibility of the ESRI logic:

• Japan is a fully sovereign economy with own monetary and fiscal policies (both of which Ireland lacks)
• Large population and domestic demand (which Ireland lacks)
• Indigenous (as opposed to tax-maximising MNCs) exports 
• Set smack in the middle of the most dynamic growth cluster in the world (Asia Pacific) as opposed to the growth-shy Europe (remember, a pick up in growth in the euro area implies annual growth of 2-2.2 percent; a pick up of growth in Asia Pacific means annual growth of 5-7 percent). 

The real problem with Japan's economy is actually pretty similar to that of Ireland's:

• pre-1960s Japan's growth was driven by a period of post-WW2 rebuilding, 
• between 1960s and 1980 it was driven by the rapid catching up with the advanced economies, 
• thereafter until 1990s - by a massive property and credit bubble. 
• So stagnation, property crash and low inflation/deflation were not the causes of the malaise in Japan, but its symptoms. The real malaise for Japan is identical to the one we have in Ireland - lack of catalyst for future growth. 
• In Japan this problem is exacerbated by adverse demographics. In Ireland - by lack of monetary and fiscal policies room. Ireland is 2 decades behind Japan in household and corporate and banking deleveraging. 

So go figure: can growth in the EU and housing supply improvements in Ireland do enough for Dublin?

Ok, take it from a different angle: 1991-2007 marked massive growth around the world. Japan stagnated. 1991-2007 marked massive monetary and fiscal expansion in Japan. Japan stagnated. 1991-2007 marked significant deleveraging of Japanese economy. Japan stagnated. That is 18 years of stagnation and deflation under the global conditions more favourable than Ireland faces today, with full economic policies kit available to Japan, not available to Ireland, and with indigenous exporting engine much mightier than that of Ireland.

Is ESRI having a clue? Of course it does. It can clearly see that once things get really good, things will be really good: "Conversely, Prof FitzGerald believes if the euro zone recovery picks up pace this year and in 2015, and is accompanied by an increase in domestic demand, Ireland could see a more rapid reduction in the numbers unemployed and a return of the public finances to a small surplus over the period 2017-2019."

Ah, now we talking. And if we discover a pot of gold and a chest of diamonds at the end of that proverbial rainbow, just to the North of the fabled riches of oil, gas, uranium, rare earth metals, and Bord Bia certified caviar... then we can afford pensions for the ESRI boffins too. 

2/4/2014: Irish Manufacturing PMI: March 2014

We now have Manufacturing PMI for Ireland for Q1 2014, so here are couple updated charts:

Few notable things in the above:

1. PMI now solidly above the 'statistical significance' range for the first time since October 2013. Also, March 2014 marks eighth consecutive month of PMI ahead of its post-crisis average (from January 2011).
2. The post-crisis average is still lower than pre-crisis average.
3. PMI continues to trend up with new short-term trend running from around June 2013.
4. 12mo average is at solid 52.1 and 3mo average through March (Q1 2014) is at 53.7 which is basically identical to 3mo average through December 2013 (Q4 2013) which is 53.6. 
5. Q1 2014 average is above same period reading for 2011 (49.8) and 2012 (50.1), but it is below same period 2010 average (56.1).

Key takeaway: solid PMI reading for Irish manufacturing - a good thing. As I noted before, Manufacturing PMI has stronger link to our GDP and actual industry output than Services PMI, so this is a net positive for the economy.

6/3/2014: A New Property Building Boom for Dublin? Not So Fast...

This is an unedited version of my Sunday Times column from March 2, 2014.


Much has been written about the alleged turnaround in the Irish house prices and property markets fortunes. With first-time buyers reportedly priced out of the market by the cash-rich investors, the commentary has been focusing on the need to deliver new supply of properties to the markets. Enter the wave of recent calls on the Government to create incentives to restart a new building boom.

Alas, new construction can do preciously little to alleviate the property markets pressures. Instead of calling for more construction permits, those interested in delivering a sustainable long-term recovery should be focusing on the resale markets. Given the causes of the current under-supply of and uneven distribution of demand for second-hand properties, it is hardly surprising that this requires dealing with the problems of legacy debts and the structure of the Irish mortgages pool.


The latest data published this month shows that the overall levels of new mortgages issued to the first-time and mover purchasers in 2013 came in at a disappointingly low level of EUR2.3 billion – the second lowest since the records began in 2005. This is almost nine times lower than at the pre-crisis peak, and around half the average levels of lending recorded in 2008-2012.

Yet, by all accounts, there is a build up of demand for properties within the first-time buyer segment of our population. This assertion is supported by empirical evidence.

In 2005-2008 average number of first-time buyer mortgages issued in Ireland stood at 7,062 per annum. In 2011-2013 the number was 1,202.  Even if we accept that half of the pre-crisis mortgages were issued to households with unsuitable risk and financial profiles, since the onset of the crisis, penned up demand for FTB mortgages has cumulated to some 9,342 or EUR 1.65 billion.

As the result of the penned up demand, rents are up, especially in Dublin and major urban areas, where jobs are now being created and where jobs destruction during the crisis peak was less pronounced. The most recent Daft.ie data showed that Dublin rents were rising at 11% a year at the end of 2013, the fastest rate of inflation since mid-2007. This implies that Dublin rents are now almost 18% above the crisis period trough. Meanwhile, outside the urban areas, jobs remain scarce and long-term unemployment is running at higher levels. Thus, excluding Dublin, rents are either stagnant or growing at significantly slower rates.

Property prices are also confirming the ongoing bifurcation in the markets between Dublin and the rest of the country. Dublin residential property prices are now 18 percent higher than at the crisis period trough. Excluding Dublin, property prices are up just 2.6 percent compared to crisis period low.

However, looking at the peak-to-present changes, residential property prices in Dublin are 49.2 percent below their peak. Excluding Dublin, the figure is 46.8 percent.



Thus, data on rents, property prices and volumes of transactions, suggest that to-date, Dublin property market has been driven by the delayed convergence to national trends. Beyond the on-going catching up, however, the property market in Ireland will remain dysfunctional.

This mis-match between demand and supply drivers will likely push the property prices even higher in Dublin over the next 24-36 months. However, absent any significant improvement in the underlying household finances, this price inflation will start flattening out in years ahead.

The reason for this conclusion is the presence of two concurrent drivers of the market.

Firstly, Dublin's demographic and economic fundamentals suggests that equilibrium prices should be somewhere around 30 percent below their pre-crisis peak. This would require prices for Dublin houses to rise by roughly a third on their current averages. Apartments prices should gain some 25 percent over the next 2-3 years to deliver equilibrium level pricing at around 45 percent below the pre-crisis peak.

Secondly, we are also witnessing separation of prices from underlying household incomes and credit supply. Ongoing long-term changes in employment and earnings push purchasing power toward urban centres and are turning rural communities into focal points of emigration for younger and more skilled workers. At the same time, the financial position of established and middle-age Irish households remains severely constrained. The overhang of legacy mortgages debts, lower after-tax earnings and continued jobs insecurity are all weighing on the credit supply, depressing the funding available for house purchases.

Parallel to these trends, we are witnessing gradual increases in the cost of funding mortgages. Based on the data from the Central Bank, retail rates on loans for house purchases over 1 year fixation in Q4 2013 averaged 4.5 percent, or almost 1 percentage point above their Q4 2009 levels. Were the ECB return its policy rates to their historical averages, current lending margins would require new mortgages interest costs in 6.5-7 percent range

Mean-reversion in the interest rates will mean that the majority of the first-time buyers in the market will not be able to secure a mortgage sufficient to cover house purchases without relying on large (ca 30 percent of the property value) down payments. Another problem is that with the cost of funding rising disproportionately for adjustable rate mortgages, keeping legacy tracker mortgages becomes more attractive to current homeowners. This, in turn, implies reduced willingness to trade up or down, depressing supply of existent properties to the market.

Supply of properties in the market is further adversely impacted by the nature of banks' solutions to the arrears crisis. Irish banks 'permanent' restructurings of arrears predominantly involve increasing the levels of debt carried by the households.

The cost of suppressing foreclosures and debt write-downs in the existent mortgages pool is the severely constrained ability of households to trade in the property markets. On the demand side, the knock-on effect is that younger households cannot rely on their parents to fund their down payments for FTB purchases.


The above problems also contribute to tighter supply of new homes to the market, especially in Dublin.

In 2013, new dwellings completions and commencements were running below those recorded in 2011-2012, based on data through Q3 2013. The overall weakness in the residential construction activity is confirmed by the CSO-reported indices. With data covering the period through Q3 2013, both value and volume of residential buildings construction and the number of planning permissions granted in Ireland are down year on year.  Estimates suggest that since the onset of the crisis penned up demand for first-time and mover purchasers has totaled around 25,000-32,000 dwellings. At current rate of new buildings completion, this is equivalent to up to 15 years of new construction supply.

Lack of funding from the zombified banks means that developers and builders cannot launch new projects. In addition, uncertainty about the future tax status of vacant sites and completed properties, as well as the dominant position of Nama in controlling access to land and development finance, are weighing heavily on potential new supply.

But beyond these supply constraints lies an even bigger problem: we simply cannot expect to build any meaningful quantity of new family homes in the areas where we need them.

In Dublin, new construction implies either building apartments blocks or redeveloping existent neighborhoods to increase density. Apartments are hardly in demand by the growing families beyond serving as a first step on the property ladder. In other words, no matter how much our planners dream about building a mini-Manhattan on the Liffey, Dublin property buyers still want individual homes with own gardens. Just as they did so at the times when property prices were double their current levels.

Demographics also stack up against us in the hope of significantly expanding apartments ownership. After 6 years of depressed volume of transactions, the new generation of First-Time Buyers is older and has larger families than their predecessors in the early 2000s. The one- and two-bedroom apartments developments that we used to produce in the past are no longer suitable for them. Furthermore, the city infrastructure – schools, crèches, shopping and family amenities – that accompanies these developments is not fit for purpose in Dublin City.

On the other hand, redevelopment of existent tracks of housing is a costly proposition that requires rapid inflation in selling prices for new homes. Crucially, it demands high turnover in the market to secure suitable redevelopment sites – something that we are unlikely to witness anytime soon. The very same constraints that hold back supply of second hand homes to the market are also holding hostage large-scale redevelopment projects.


This means that for Ireland to generate significant enough uplift in buildings supply we need to incentivise developers to build suitable apartments and for buyers to opt for these apartments. Even assuming we are successful, the resulting uplift in supply will be unlikely to enough downward pressure on property prices inflation in Dublin. In contrast, to support non-speculative demand and to free the supply of properties, we need to restructure our pool of mortgages away from tracker loans, reduce overall debt levels for current borrowers and improve after-tax incomes across the workforce. Until we do, the polarization of Irish property markets between Dublin and the rest of the country will continue.

Calling for more new construction is a naïve exercise in seeking a quick panacea to a very complex and dynamic malaise permeating every corner of our property markets.

BOX-OUT

In recent written answers to questions by Michael McGrath, TD, Minister for Finance, Michael Noonan, TD stated that the Irish State has received €10.24 billion in various proceeds from the banks since 2008. At the same time, the State shares in AIB, Bank of Ireland and Permanent TSB are currently valued at €13.35 billion. These numbers prompted some commentators to suggest that the net cost to the State of rescuing banks currently stands at EUR40.5 billion down from the originally paid-in EUR64.1 billion. Alas, this accounting misses some major points. Firstly, there is cost of funding. Based on current interest rates, the total costs of funds made available for banks recapitalisations is some EUR1.5 billion annually, with full expenditure at the peak of the capital injections running at more than double that. Tallying up these costs cuts the gross receipts by around EUR7.2 billion. Secondly, the EUR13.35 billion estimated value of the banks shares held by the Exchequer is nothing more than an estimate. Selling AIB and Ptsb shares will be an uphill battle. Even realising the value of the Bank of Ireland equity without destroying the bank's balance sheet is a hard task. Adding insult to the injury, the 'repayments' by banks claimed by Minister Noonan came at the expense of the economy at large. Instead of writing down unsustainable mortgages, restricting viable businesses' loans and supplying credit to the economy, the banks were tasked by the State to sell non-core assets to pay down state funds. Any wonder why the credit keeps shrinking, while Minister Noonan keeps talking about the need for banks to support the economy?

10/2/2014: Irish Services & Manufacturing PMI, January 2014

While on the topic of PMIs (see Construction PMIs update here: http://trueeconomics.blogspot.ie/2014/02/1022014-ulster-bank-construction-pmis.html), let's update also Manufacturing and Services PMIs data.

Services:

• January Services PMI index slipped slightly to 61.5 from 61.8 in December 2013. The deterioration was not material from statistical point of view, so the index remains effectively at the high level for the last 12 months.
• 3mo MA through January 2014 was 60.1 - above 56.2 in the same period through January 2013, and ahead of 3mo MA through November 2013. This is good news as it allows for some correction in monthly series volatility.
• The series are above their crisis-period trend and are still trending up.
• The index is now above 50.0 since August 2012 - a solid performance, with the rates of growth being on average above 60.0 since at least July 2013.

Manufacturing: 

• January Manufacturing PMI index also moderated to 52.8 from 53.5 in December 2013, with this moderation being significant, albeit shallow.
• On a 3mo MA average, index is at 52.9, which is ahead of 51.4 in the same period of 2013 and is ahead of the 3mo MA through November 2013.
• The index readings have rested above 50.0 nominally since June 2013, although they are significantly (statistically) above 50.0 for a shorter period of time, from somewhere around September 2013.

Overall, January posted slowdown in both indices growth, and 3mo MA for growth rates in the index is now negative for Manufacturing, and moderately positive for Services.

Longer-range good news is highlighted in the next chart, showing that in January 2014, levels of two PMIs were consistent with expansion across both sectors, contrasting the situation in January 2012 and January 2013.

Top level conclusion: The numbers show a good start to 2014, but Manufacturing remains a weaker point for the economy. Given monthly volatility in the indices, we need to see more data from PMIs to call the 2014 trends


As usual, the caveats apply: I have no data on sub-components of both PMIs - the core information that is no longer being made public by Investec and Markit (the publishers of the two series). Unfortunately, this means I no longer cover the two organisations' analysis of the components as these are unverifiable and statistically no longer testable.