10/07/2011: Irish Trade Stats: some interesting points

Here are some interesting end-of-year numbers for 2010 in terms of our external trade. Note - these are from OECD stats via ST Louis Federal Reserve database, so slightly off compared to CSO data. All are reported in Euro, unless otherwise specified.

First, consider the flows of trade and trade balance:
There is a clear regime shift in the data since 2009 with a rise in trade surplus. This confirms that Irish net external trade has entered a recovery stage post-crisis in 2009, not in late 2010-early 2011 as the IMF officials claimed recently. The second thing the chart highlights is the dramatic rise in trade balance in 2009-2010, even compared to the strong performance pre-2002. In fact, we reached beyond our trend (for 1997-2010 period) back in 2009.

This might suggest validity to the 'exports-led recovery' thesis, except for two issues:

1. Two years are hardly a trend, especially if coincident with extremely robust global trade recovery post-crisis, and
2. The trade balance is only relevant to Irish economy as a whole if we actually get to keep it here - in other words, if it accrues to companies with really sizeable investment and employment activities here. Note that in the chart above, the last two years have actually seen a negative relationship between growth in the economy and growth in the trade balance.
   

The latter issue is easy to see if we net out of the trade balance the remittances of profits and payments abroad, as done in the chart below:
Notice the decline in Net Factor Income from Abroad (NFIAF) in 2009-2010 period. This is linked directly (more closely than in the case of GDP and GNP changes) to our trade balance:
In other words, what gets produced here in terms of trade surplus gets remitted out of here. As we become more open to trade - as shown below - by any metric possible, we get more open to exporting profits and surpluses accumulated in the economy.
This is similar to an analogy of draining water out of a sinking boat with a coal bucket - when you scoop up water, the bucket is full, by the time you turn it overboard, the bucket is empty...

Some interesting correlations to that effect - all for data from 1997 through 2010, so small sample bias obviously is there:

• Trade balance correlations with GDP and GNP are 0.613 and 0.543, but with NFIFA it is -0.866
• NFIFA itself is correlated with GDP and GNP at -0.904 and -0.861.

So NFIFA has more sgnifcant links to GDP and GNP than our trade balance. In other words, the propensity of our MNCs to take out profits from Ireland has more effect on our GDP and GNP than the trade balance. The recovery, therefore, if it were to be driven by external trade, has less to do with our Exports and Imports, than with profits expatriation decisions by MNCs.

21/06/2011: Trade Data for April

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

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

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

January-March 2011 imports rose strongly in:

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

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

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

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

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

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

07/06/2011: Irish Trade in Goods & Services

Having completed a new dataset on Irish trade - for both Goods and Services - here's the latest data we have.

Please, note, CSO does not report monthly stats for trade in services, which form a significant share of our exports and influence our trade balance and current account. Instead, CSO's monthly series make a claim about 'trade' without explicitly identifying that this 'trade' only covers goods. That identification, instead is buried in the 'fine print' methodology pages.

Ok, to the numbers. Given the vast size of Irish economy, the latest data on overall trade we have comes from QNA and covers Q4 2010. By the end of Q4 2010:

• Exports from Ireland stood at €40.073bn, down 1.35% qoq and up 11.67% yoy. Annual increase in Q4 2010 was €4.187bn, making Q4 2010 the highest level of exports in Q4 of any year since 1997.
• Lowest level of exports during the current cycle (since 2007) was reached in Q3 2009, implying that growth in exports returned in Q4 2009. Highest level of exports were reached in Q 3 2010.
  
• Imports stood at €34.546bn, up 8% qoq and 12.99% yoy
• Trade balance as of the end of Q4 2010 was a positive €5.527bn, down 35.98% qoq and up 4.05% yoy (+€215mln).
• Ireland's quarterly trade balance bottomed out in Q1 2008 and grew since then, peaking at €8.633bn in Q3 2010.

Charts below illustrate:

06/06/2011: Putting IMF's comment against data

According to the report by RTE: "The acting Managing Director of the International Monetary Fund has said Ireland's economic recovery programme 'appears to be on track'... However it still requires what he described as 'forthright action by the Irish authorities to re-establish the basis for sustained growth.' Mr Lipsky said there were positive signs in the Irish economy, such as a return to export growth. However Mr Lipsky described Ireland's economic recovery as 'a difficult challenge'." [emphasis is mine]

One cannot expect RTE news to critically challenge Mr Lipsky on his pronouncements, but... can someone ask Mr Lipsky what did he mean by the 'positive signs in the Irish economy, such as a return to export growth'?

Here are two charts showing that export growth did not return to Ireland any time recently, but in fact was here for some months before IMF showed up in Dublin and certainly well before this year.
So let's give Mr Lipsjy a quick briefing:

• Irish exports reached their recession bottom at the annual value of €82.238 in 2009. Hence the growth in Irish exports returned in 2010 when annual exports value rose to €89.427bn.
• In terms of annual trade balance, local minimum occurred in 2007 when Irish trade balance stood at €25.740bn. Since then, every year throughout the crisis our trade balance grew, reaching €43.785bn in 2010.
• In monthly time series, our exports reached the bottom of the cycle in December 2009.
• Relative to 2003-present trend, March 2010 was the month when Irish exports have fully recovered from the recession. That is full 8 months before IMF waltzed into Dublin and full 14 months before Mr Lipsky discovered our return to export growth.
• In terms of Trade Surplus, Irish external trade has 'returned to growth' back in January 2009, when our monthly exports exceeded long-term trend.
• Lastly, if we are to take Mr Lipsky's phrase on its face value, the return to growth in our exports dates back to January 2010 (17 months before Mr Lipsky's statement recognizing the phenomenon) and our trade balance (monthly series) returned to growth in January 2008.
  

27/01/2011: External trade (goods)

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

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

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

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

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

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

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

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

Economics 24/12/10: Forecasting 2010 Trade performance

As a follow up for the previous post, here are my forecasts for levels of Exports, Imports and Trade Balance as well as Terms of Trade for Ireland for 2010 - using monthly data:
Overall, Terms of Trade deterioration in October 2010 stood at -5.12% on the best reading for 2007-to date.

Economics 22/8/10: Fundamentals of investing in IRL Inc - II

This is the second post in the series of four that presents fundamentals comparatives between Ireland, Switzerland and Luxembourg. Post I (here) covered analysis of current account dynamics. The present post will deal with General Government balance.

Now, let's check IRL's sovereign solvency position. Chart 5 illustrates:

Chart 5:

Again, if you are an investor hoping to get repaid on your bonds, you wouldn’t really go for Ireland as a place to park your money. Except during 1996-2001 and 2003-2007. But then, get out as fast as you can in 2007. All in, Ireland Inc hasn't paid its bills since 2007.

Let's see if the Government has been running operations consistent with long term attractiveness to sovereign investors. To do so, suppose we invested in the bonds written against General Government balances. Since timing matters, let us take two scenarios: investing €1.00 in 1980 and investing €1.00 in 1995, holding to 2010 or 2011.

So cumulative returns on countries sovereign balances from 1980 are (Chart 6):

• 2010: Ireland=28.5%, Switzerland=32.2%, Lux=43.3%. Ireland gap to best performer = -14.8%
  
• 2011: Ireland=25.4%, Switzerland=31.9%, Lux=41.1%. Ireland gap to best performer = -15.7%
• 2010-2011 gap deterioration for Ireland = -0.9%
  

Chart 6:

Chart 7 shows cumulative returns from 1995 are:

• 2010: Ireland=-12.2%, Switzerland=-1.1%, Lux=-3.85%. Ireland gap to best performer=-11.1%
• 2011: Ireland=-11.1%, Switzerland=-0.9%, Lux=-5.1%. Ireland gap to best performer=-10.2%
• 2010-2011 gap improvement for Ireland = +0.9%
  

Chart 7:

So a portfolio of 50:50 split between 1980 investment and 1995 investment written against Irish Governments' fiscal positions since 1980 would have lost to investor 12.95% by 2010 and 2011, compared to a similar allocation into other two countries.

Economics 22/8/10: Fundamentals of investing in IRL Inc - I

Few months ago, while speaking as a guest on RTE's Frontline, I confronted two of our 'surrender to Brussels' politicians with a suggestion that a country can do just fine outside the 'Yes, Commissioner' world of European convergence consensus. In return, one politician - from the opposition side of the Dail - rushed to conclude that when advocating greater sovereignty on economic policies I was talking about the UK. My reply was that I had in mind more the path of the country like Switzerland.

In the light of the ongoing sovereign crisis, and with all the talk about bond markets unwillingness to underwrite our economy, I decided to return to the same issue. Here are major comparatives in investment (bonds-related) fundamentals in Ireland vis-a-vis Switzerland and Luxembourg.

I do this in a series of 4 posts. The first one deals with current account dynamics, the second one will deal with Government finances, the third one will show comparatives for GDP, and the fourth one will conclude by making comparisons across other variables, such as inflation, population growth and labour markets.

All data is based on IMF's World Economic Outlook, updates for April and July 2010, which covers period from 1980-2015. Some additional forecasts (beyond 2015) were performed by myself, alongside some additional variables computations.

I chose the two countries for several reasons:

1. Both are core European countries;
2. One of these is outside the EU, another is inside the same tent as Ireland;
3. With a caveat concerning some of aggregate accounting issues with Luxembourg's data, all three have roughly similar economies characterized by: (a) no significant natural resources of their own, (b) small size of population and land mass, (c) heavy reliance on exports, (d) open nature of economies, (e) 'more Boston than Berlin' aspirations in tax policies, (f) being a bit of a thorn in the softer side of Brussels, and so on

So here are few charts and comments. In most cases, I take on the position of a rational investor in sovereign bonds, willing to hold these to maturity. In other words, what matters to me in most of these charts is the answer to the following question: "Given country A fundamentals compared to countries B and C, what is the likelihood that country A can generate sufficient net income to cover its debt obligations?"

Chart 1:
If our expected current account surplus of 2010 were to be used to pay down our debt, how long would it take? The answer to it is 'forever'. Our net surplus from trade and investments from the entire world was negative €4.03bn throughout the 2000s. In the 1990s, our average current account surplus was just €1.108bn, in 2010 our expected surplus in the only year when current account was positive in the 200s - the year 2010 - will be only €849mln. At the same time, our debt currently stands at €86.83bn and rising with interest bill on this well in excess of €4.56bn annually at latest 10 year bond auction yields. In other words, exporting our way out of the recession will not even cover our entire interest bill.

Here's an interesting observation. Irish Government thinks that exports will carry Ireland out of the recession. However, there is an argument to be made that value added in our exports is not really that impressive once the inputs costs are taken out.

Chart 2:If you were an investor thinking about Ireland's fundamentals, you wouldn't have much hope of getting a positive return on your investment, if net exports were your underlying security, except in the period 1992-2000.

This, one can argue, might be true of our manufacturing exports, where we import often expensive inputs and where transfer pricing (on inter-company sales) further contributes to lower net value added. But what about our services trade? Well, the current account data shows that during the last decade, when services trade really started to take off in Ireland, our net external balance was negative. So something is not adding up and I will take a look at this in the forthcoming posts.

But for now, we do have impressive exporters, yet our current account performance has been exceptionally weak, compared to Switzerland and Luxembourg - two countries that are equally as reliant on imported inputs as Ireland.

It is worth noting also that in the case of Switzerland, their exports composition includes significant pharma and high tech manufacturing exports as well. It just appears that they manage to do trade better...

In fact, a bet made on Ireland Inc based on its external economic performance back in 1980 would have been a disastrous one as Chart 3 below illustrates. An investor betting on our external balance would have 48.1 cents on every euro invested. Based on IMF forecasts, by 2015 this loss can be expected to widen to 48.9 cents. At the same time, identical bet on Luxembourg would have netted a gross return of over €5.11 by now, and a projected gain of €9.20 by 2015: a spread in return relative to Ireland of €5.59 by 2010 and €9.69 by 2015.

Chart 3:
The differences are even more dramatic when we look at comparison to Switzerland: a bet of €1.00 on Swiss external balance made in 1980 would have netted investor €8.145 by 2010 and is expected to yield €13.434 by 2015, implying the spread between investment in Ireland and Switzerland of €8.626 in 2010 and €13.923 in 2015.

Obviously, the earlier analysis is sensitive to the time frame for investment chosen (Chart 4).

Chart 4:
Suppose a bet €1.00 was made on Ireland Inc based on its external economic performance back in 1995. An investor betting on our external balance would have grossed 0.393 cents on every euro invested by today and can be expected to gross a loss of 1 cent by 2015. An identical bet on Luxembourg would have netted a gross return of 11.23 cents by now, and a projected gain of 13.305 cents by 2015. The differences are slightly less dramatic when we look at comparison to Switzerland: a bet of €1.00 on Swiss external balance made in 1995 would have netted investor 9.54 cents by 2010 and is expected to yield 11.88 cents by 2015. Oh, and there wouldn't be any risk of getting these returns expropriated by the Government tax policy changes.

(Second post to follow)

Economics 24/06/2010: Irish exports & trade stats

Trade stats are out today for Ireland. Here are few illustrations and trend discussions.
Clearly, exports have rose in April, after a seasonally adjusted decline in March. We are now again above the trend line, and since January 2009, the trend line is flatter than over the entire sample, which means exports performance remains relatively strong. However, this does not mean things are great. April 2010 exports are down 9.9% on April 2009 and up only 2.22% on April 2008. They are down 6.6% on April 2007. Exports were down 7.7% in March 2010 in year on year terms. So despite flashing above the long run trend line, exports are still under pressure.

Imports have posted significant rise. Imports increased by 8% between March and April 2010.

In Q1 overall, exports fell from €21,911m to €20,789m down -5%. This was driven by:

• Organic chemicals falling by 17%, Computer equipment by 42% and Other transport equipment (including aircraft) by 85%, offset by
• Exports of Medical and pharmaceutical products increase of 8% and Metalliferous ores increase of 75%.
  

Over the same period, imports decreased from €12,527m to €11,030m, down -12%:

• Computer equipment decreased by 54%, Other transport equipment (including aircraft) by 42% and Electrical machinery by 11%.
• Imports of Petroleum increased by 25%, Medical and pharmaceutical products by 19% and Road vehicles by 30%.
  

Trade balance remained flat in April relative to March:
Trade balance is now below long-term trend line. Between April 2009 and April 2010 trade balance fell a whooping 25.7%, much larger drop than the decrease between March 2009 and March 2010 -9.5%. However, trade balance is extremely healthy compared to 2008 - up 38.4% on April 2008.

Terms of trade stats are not updated from December 2009:
But, due to our exports reliance on imported inputs (see my earlier post on IMF statement today), there is basically no relationship between Ireland's terms of trade and our exports activity:
Geographic snapshots for top 30 countries by volume of exports in Q1 2010:
US down, UK down. Total EU exports down. Euro zone down in double digits. All double-digit gains are in the smaller trading partners (less than 1% of total trade volumes).

Economics 25/02/2010: Exports under pressure

A quick note on Ireland's trade flows for December 2009 - published yesterday.

As I warned earlier, the stellar performing Chemicals (inc Pharma) sector is now starting to retreat. Exports of Chemicals are down 9.54% in November and, per CSO statement, went further down in December. Machinery and Transport Equipment is down 38.9% in November (year on year).

Charts below illustrate the problems and showing the trends:
Overall, exports are down and the trend is also down - there goes a hope of exports-led recovery (not that it makes any sense, to be honest, given the global trends for trade). Imports are again heading South - suggesting two things:

• a renewed pressure on consumer demand side; and
• continued weakness in imports of intermediate inputs by the MNCs (signaling potential further declines in exports as a result).

Trade balance is not improving despite imports fall-off. There is a clear flattening out of the upward trend, suggesting that we are now close to exhausting the stage when collapsing demand drove trade balance up. It is down to exports from here on to influence the trade balance and the signs are pretty poor.
Chart above shows that the adverse changes in exports are not coincident with changes in terms of trade which continue to improve since Summer 2009. However, as the next chart clearly indicates, we are now away from the historic relationship between exports and terms of trade:
This implies that decline in exports we are experiencing is driven by other factors. Might it be a longer term pressure on MNCs activities in Ireland? Global trade flows changes? Or both?

Either way, there is no sign of exports-led growth. Irish exporters have performed miraculous well in 2009, compared with the rest of this economy. But one cannot hinge all hopes, as the Government is doing, on exporting sectors. Even more importantly, one cannot take exports performance for granted (as our Government is doing as well) - we need coherent strategy to get exporting back onto its feet.

Economcis 18/01/2010: Sunday Times 10/01/2010

The following article was published in the Sunday Times on Janaury 10, 2010. This is an unedited version.


Since the beginning of the current crises, through the abandoned economic policy programme of December 2008, to Budget 2010 our Government has been paying lip service to Irish exporters. The rhetoric, however, never matched the reality when it came to providing support for the sector.

Irish aggregate exports have performed in exemplary fashion through the downturn despite a number of very severe external shocks and some new internal bottlenecks affecting the sector.

Per latest CSO data, total Irish exports declined by only 1% in 2009: from 155.4 billion to €153.9 billion. In the mean time, Irish GDP has fallen by an estimated 7.5% and GNP collapsed by a massive 10.4%. And the role of exports in this economy continues to grow. In 2008, Ireland exports amounted to 99.5% of GNP, contributing 0.9% to our economic growth – the highest contribution in the year. Last year, the value of our exports rose to 116% of GNP, with exports accounting for an estimated 2.7% of the decline in GDP. Once again the best performance of all components to growth.

This stellar performance came at the time when external environment was rapidly deteriorating – in terms of both demand and overall trading conditions.

Over the course of 2009 as goods exports flows from 67 developed and middle-income economies have contracted by 23%, Irish merchandise exports were down only 1%. Two sub-sectors – pharmaceuticals and medical devices – have posted robust growth of 12% and 4% respectively over the course of 2009. Excluding these two sub-sectors, merchandise exports from Ireland (down 16% year on year) were still more resilient than overall world trade.

Credit and banking crisis had a direct impact on our trade. In the first half of 2009, Irish exports of services have experienced a severe contraction due to the collapse in international financial services activities. Only a strong performance by the business services and above-average performance by computer services have allowed for some recovery from this shock, with the value of overall services exported from Ireland falling just 1% to €68.4 billion over the course of full year.

Much has been written about devaluation of the dollar and sterling. The deterioration in our terms of trade vis-à-vis the rest of the world was indeed dramatic, contributing to a severe fall off in exports to the UK and Northern Ireland. Irish exporters also faced a significant shift in purchasing by the UK retailers away from Ireland. This was particularly noticeable amongst food and drink exporters – the sector that has the largest penetration by our indigenous companies.

Another factor much overlooked amidst financial markets turmoil was the drying up of the export credit facilities from the banks. Irish Exporters Association, other bodies and a number of economists, including myself, have for two years advocated the need for putting in place a meaningful programme of Government export credit guarantees. Per international data on trade credit flows, such programmes operate in some 57 countries These programmes are usually viewed as being low cost or even revenue-neutral. The risk to the Exchequer from guaranteeing a short-term credit for signed contracts for shipments is minimal if properly implemented and structured.

Initially, the Government has promised to allocate funding for the programme back in October 2008. By January 2009, its scale was cut to a meagre 1.5% of our indigenous exports. The plan was finally shelved just two weeks before Budget 2010 day. In place of trade credit supports, the Minister for Enterprise Trade & Employment has offered Irish exporters a promise to look into providing and ‘employment subsidy’ scheme. The Minister never explained what such a scheme can do for the exporters, nor how she arrived at the conclusion that a long-term jobs subsidy undertaking is less risky than a short-term export credit insurance. Of course, evidence from our European counterparts shows that jobs subsidies have virtually no positive impact on sustainable employment even at the time of robust jobs creation.

On December 1, just as Brian Lenihan was putting final touches to his Budget speech that contained sugary references to Irish exporters, the UK Government announced an extension to the Fixed Rate Export Finance facility through a specially-designated Export Credits Guarantee Department (ECGD). ECGD which also provides “insurance against non-payment risks and guarantees for bank loans to buyers of UK goods”, allows exporters to provide medium and long-term finance to their overseas buyers at fixed rates of interest. The rates charged under the scheme are established through the OECD, and are adopted by all major export credit agencies worldwide. These schemes are more risky than short term credit insurance rejected by the Irish Government.

Of course, the irony has it, Minister Lenihan also contributed to the exporters woes by placing a new charge on transport costs in the Republic and internationally via the Carbon Tax. This Government has already introduced one export-impacting tax back in October 2008. The so-called travel tax of €10 per departing passenger has now been linked to declining Exchequer revenue and the damages done to Irish tourism, hospitality and transport exports by a group of international transport economists, through my own analysis and Government-appointment panel of industry experts. With Carbon Tax we now have two measures that explicitly threaten our exports.

These policy contradictions set the stage for 2010.

Overall, 2009 marked the worst year on record for domestic food and drink exporters, as well as computer hardware and other manufacturers. Given that these sectors account for over 50% of the total exports-supported employment in the country, there is increasing urgency for enacting some meaningful support policies aimed at sustaining our export activities and employment. The idea that we first let companies sink on the lack of trade finance and then provide them with subsidised unskilled labour through employment support schemes run by our fabulously ineffective Fas, as the Government is suggesting, makes absolutely no sense.

Another significant concern for 2010 relates to the lagging imports by MNCs-dominated sub-sectors, such as pharma, medical devices and computer hardware. These sectors import majority of material inputs into their production from abroad and low imports relative to exports here suggest two possible trends.

Firstly, increased volumes of exports from some of these sectors in 2009 are most likely driven by record transfer pricing bookings through Irish operations. This is normal for any international operation in a recession, when companies scale back on capital investment and ramp up their tax optimization operations. While such developments have benefited Ireland in 2008-2009, continuation of these activities is not assured in 2010. Should there be a restart of global investment cycle (with some signs already pointing to improved capital investment in the BRIC economies and Asia), the incentives to book artificially inflated profits through Ireland will decline in relative importance.

Second, lagging imports growth shows that the MNCs might be unsure about the need to maintain high levels of inventories in Ireland. This in turn indicates the relative fragility of the expanded exports levels for these companies and puts overall Irish exports further at risk.

Lacking any real policy supports for the exporters, the Irish Government has resorted to the tactics of deflection and evasion. For example, in December 9, Minister for State with responsibility for international trade, Billy Kelleher TD was forced to defend the Government unwillingness provide exports credit insurance scheme proposals by referring in the Senad to Nama, banks recapitalization and even the nationalization of the Anglo Irish Bank.

In 2010, even the expected return to global growth in trade volumes is unlikely to push Irish exports beyond 2% annual growth mark, according to the latest forecasts from the Irish Exporters Association released this week. And even this forecast is predicated on continued improvements in Irish economic competitiveness and no further adverse changes in the euro position vis-à-vis other major currencies.

Instead of empty rhetoric, our exporters deserve a real chance to drive this economy out of the slump. Hoping that Nama will solve all of our problems simply won’t do.

Box-out:

Per latest CSO release, in Q3 2009, the gross external debt of all resident sectors in Ireland stood at €1,637bn or €51bn down on the Q2 2009 level. But, per same CSO release, the liabilities of Ireland-based monetary financial institutions (aka our financial system inclusive of IFSC) were virtually unchanged quarter on quarter at €691bn with their share of total debt rising from 41% in Q2 2009 to 42% in Q3. Similar dynamic took place in Other Sectors – comprising insurance companies and other financial enterprises, plus non-financial companies – where debt as of Q3 2009 stood at €618 billion or 38% of the total, up from 37% in Q2 2009. Direct investment sectors liabilities rose over the quarter by 2 billion and General Government increased. This implies that virtually all of the quarterly decrease in our indebtedness came from the Central Bank funds changes. This is why excluding the Central Bank and Government liabilities, total economy debt rose from 1.513 trillion in Q2 2009 to 1.508 trillion in Q3 2009.

But what the CSO and the media reporting on the figure didn’t tell us is since Q3 2007, the overall debt levels in Other Sectors rose by a cumulative of 15.6%, in Direct Investment sector by 9.3%, and our total debt rose by 8.33%. Only banks have so far managed to de-leverage in Ireland (down 9.8% on Q3 2007) thanks to the taxpayers’s cash. Which brings us to a sad but inevitable conclusion – while banks use our money to write down their bad debts, is it any surprise that the real debt burden in the Irish economy is not declining?

Economics 23/12/2009: Couple more points on Ireland's trade data

Wading through CSO latest data, table below shows just how important the MNCs are to our trade and GDP:
Absent MNCs-led sectors in our economy, we would be running massive deficits even accounting for the wholesale collapse of consumer imports. And note that as our own economy is shrinking, net contribution of MNC's own trade balance to our GDP is rising in importance.

Let's look at geography:

1. Overall exports are declining faster in September than they were over the last 9 months
2. Exports to Great Britain, EU overall, and Euro area are falling faster in September 2009 than over the first 9 months of 2009
3. Exports to France are falling slower in September 2009 than over the first 9 months of 2009
4. Exports to Germany, Italy, the Netherlands, Spain and Sweden are falling faster in September 2009 than over the first 9 months of 2009
5. Exports to Australia, China, Japan, Switzerland, and the USA are significantly improving over September 2009 relative to the first 9 months of 2009 – a strange result, given these exports are subject to dollar – euro exchange rate fluctuations.

And another way of looking at it is through the trade balance by country:
And one caveat - the cases where dramatic improvements in trade balance do not match those in exports are, of course, reflective of the collapse in imports.

Economics 22/12/2009: On-line advertising, Mortgages Arrears and Exports

Few interesting bits of news.

Chart below (courtesy of Economist, hat tip to Ronan Lyons) shows the sorry state of affairs in the 'knowledge' economy. Online advertising is an instrumental indicator for the extent of e-commerce in the country. Although rising this year (the only area of advertising holding up in this recession), our online advertising is lagging that of other countries.
In fact, we are languishing at the bottom of the league table - next to South Africa and way off from the peer group of advanced economies. One can only speculate as to the causes of this underperformance, but here are the potentials:

• conservative attitude by advertisers (anecdotal evidence suggests that Irish advertisers are yet to seriously commit to the web even in the context of market research);
• lack of infrastructure (my own experience shows that even having two connections to 'broadband' - with one through optical cable to boot - at home does not guarantee that you can sign onto the web);
• lack of competitiveness (years of roaring Celtic Tiger have resulted in lazy and uncompetitive attitude by retailers);
• inability to offer tax free shopping on the web (American retailers use the web to reduce the cost of goods to consumers by availing of the 'no sales tax' clause which allows them to ship goods tax free from one state to another);
• lack of anything to sell (with indigenous brands squarely concentrated in the area of butter, cheese, milk, crisps and the likes - what's there to advertise to the global web-based market place?)

Whether these are the real reasons or not, the signs are not good for Ireland's efforts to enter information age.


On finance side - the FR issued new data on mortgage arrears today (the details are here). You've heard the main headlines by now (note: the actual data was released once again in the same un-usable pdf format as the one employed by the DofF - another sign of information age illiteracy, one presumes).
Table above summarises FR's data. Given that we have no time series to compare against, the only thing one can say is that the data above, as bad as it might appear, is lagged by some 6-12 months in the case of court proceedings and by around 1-2 months in the case of arrears. This suggests that as time elapses, the above numbers will rise substantially.

Other reasons to expect significant increases in distressed mortgages:

• hike in the mortgage rates in January-February 2010 as the banks go on offensive to rebuild profit margins after Nama is fully operational (nothing to hold them back once taxpayer cash is flowing in); and
• over time, as redundancy payments and savings are exhausted, more households will fall into distress.

The only net positive in today's news is that after 29 months of financial crisis, FR finally decided to collect data on mortgages distress. Where were they over the last two years, one might inquire.


External trade data released today by CSO is showing that our (seasonally adjusted) exports were down 14% in October, relative to September 2009. back in September, exports rose by a robust 11% compared to August.

Imports fell by 7% in October 2009 relative to September and were down 1% in September
compared with August.

The value of exports in September 2009 was stable compared with September 2008 (down just €35 million from €64,469 million) and the value of imports was down 25%.


Computer equipment exports fell 25%, Electrical machinery by 28%, Industrial machinery by 33%. In contrast, medical and pharmaceutical products increased by 22%, Organic chemicals
by 11%, and Professional, scientific and controlling apparatus by 14%. The MNCs, in other words, were still firing on all cylinders in the pharma and pharma-related sectors, and medical devices.

Goods to Great Britain decreased by 15%, Germany by 21%, Northern Ireland by 22%, but goods to Belgium increased by 30% (a transit port for much of our trade with the rest of the world), the United States by 14% and Japan by 10%. So, apparently, there is little evidence of lasting adverse effects of the dollar devaluation on Irish exports then? Not so fast - remember that MNCs book transfer pricing through exporting to the US, and the strong Euro is just the added ingredient they need to cover the tracks.

Charts below show the trends (these are not seasonally adjusted, but the trends are exactly identical to those in the seasonally adjusted series) - falling exports and collapsed imports.
Of course, the trade balance is rising which is due to the facts that

• as consumers we are worse off today than we were a year ago (consumer-related imports are down),
• as exporters our MNCs are really, really good, and
• transfer pricing is rampant (driven by the rising gap between imports of inputs and exports of outputs).
  

I leave it to the readers to make a call if these are the signs of an economy in a recovery.

Economics 30/04/09: Crime, Dive Reg, Trade Stats & Cars Regs

Crime stats are out today and there are surprises. In particular, a big surprise is the lack of up-tick in property-related crimes in Q1 2009.
The first picture illustrates crime stats for broad categories 1-5: all down, except for sexual offences and kidnappings etc. Nasty stuff, but at least some good news on murder, homicide, assaults etc.
The second chart shows categories 6-12, most are property related and all are down except for robbery7, extortion and hijacking. Given the current economic climate, this is surprising as crime rises in general as recession intensifies. Anecdotal evidence - like local authorities representatives in my area - are telling me that in the last 2 months some 23 burglaries took place in Ringsend, Irishtown and Sandymount area. This is a huge increase. But we shall see if this is matched in the Q2 2009 stats for the rest of the country. For now, however, except for the state robbing us blind, other criminals are staying out of our pockets... or are not being caught...


Live Register is out and is worth a closer look. The pace of increases in LR is abating, but remains furious. The first observation is expected, given massive increases in previous months. We are seeing a technical correction, not an inflection. January-April 2009 we have added 96,000 of freshly un- and under-employed to welfare rolls. Same period 2008 it was 'just' 28,000. April monthly rise was 15,800 or 52% down on the record-breaking January increase of 33,000. Now, this might be some sort of 'good' news for some spin masters, but if April pace continues to the end of the year, we are looking at 515,000 unemployed by January 1, 2010. DofF Supplementary Budget figures estimate unemployment to close off at 12.6% in 2009. Yeah, right...

Below is a chart with data up to date and my forecasts. First forecast is basically a repeat of last years rates of rise for the following months. The rest of 2009 monthly average for this case is 4.88% - much lower than the 4-months average to date which is 7.34%. One slight departure - in this scnario I assume that December 2009 rise in Live Register will be lower than that for December 2008. Just to be nice... The second forecast is Adverse Scenario, corresponding to the next 8 moths of 2009 running along the rates of increases in the previous 8 months (since September 2008 through April 2009), with January record rise being moderated by roughly 1/2. The average monthly rate of increase for this scenario for the months of May-December 2009 is 5.87%, still below the current running average of 7.34%.

A worrying thing about this is that, as you have probably noticed - both scenarios yield LR figures well above 515,000. Benign scenario produces end of year unemployment rate of 16.7% or 568,842 on the Live Register, and adverse scenario provides for 18% unemployment with 613,200 on the Live Register...

These are plotted in the chart below.

Finally, it is worth mentioning that April saw an increase in the females rate of signing onto the LR, relative to males. 41% of new claimants signing up are now women, the largest proportional increase since May 2008. This is likely a sign that:

• white collar jobs are now evaporating at a faster pace, thanks to the Government heroic efforts to support the 'knowledge' economy;
• redundancy payments are wearing thin (with families beginning to run out of redundancy payments cash and thus being forced to sign members onto LR); and
• tax bills for formerly two-earner households are rising, necessitating more women to sign onto the register.

Trade stats for January and February showed an increase in trade surplus - at a 7 year high now - driven by the declines in imports. February exports were up 6% - good news, imports rose as well up 4% in monthly terms. Table below illustrates.
Per CSO release January figures for 2009 when compared with those of 2008 show that:

• Electrical machinery exports decreased by 51%, imports fell by 24% - MNCs are shrinking their production levels;
• Power generating machinery imports increased by 49%, while electricity imports were up 101%;
  
• Computer equipment exports were down 22%, imports fell 35% - ditto for MNCs;
  
• Edible products by 34% - domestic exporters are suffering here;
  
• Industrial machinery fell by 44% for exports and by 34% for imports, specialized machinery imports fell 56%, iron and steel imports down 43% - more MNCs cuts and these are savage;
• Medical and pharmaceutical products exports increased by 15%, which means imports also rose by 6% - MNCs in this sector are firing on all cylinders and transfer pricing is abating - a cyclical component due to accounting timing;
  
• Organic chemicals increased 10% for exports and but fell 22% for imports - again foreign firms cut production while drawing down surplus inventories;
  
• Other transport equipment (including aircraft) exports rose by 610%, while imports fell 43% (one wonders if this was due to fire sales of old aircraft and helicopters as Celtic Tiger developers are starting to shrink their consumption);
• Imports of road vehicles down 71% - say by-by to VRT and VAT receipts and thank you to the Greens and VAT increases;
• Telecom equipment imports fell 26%;
  
• Exports to China decreased by 39%, to Great Britain by 13%, to Germany by 14% and to Malaysia by 44%
• Exports to the United States increased by 5%, to Belgium by 4%, to Bermuda by €70m and to Switzerland by147%.
• Imports from Germany decreased by 43%, the United States by 25%, Great Britain by 19%, China by 29% and Norway by 55%.
• Imports from Argentina increased by 29%, Poland by 10%, Indonesia by 47%, India by 12% and Egypt by 55%.

Chart below shows the extent of imports destruction in Ireland since the beginning of 2008. There is, of course, very little imports-substitution, so any decline in imports demand is a direct hit for our retail sector and no gains to domestic producers.
And imports losses are, of course, lost production by our MNCs and therefore a future loss of exports... and jobs.


New vehicles registrations site (that's right - a new dynamic face of CO with low-res masthead, but much better analysis of data is here) is full of interesting stats - primarily concerning the decline in motor trade since Brian, Brian & Mary decided to horse around with new VRT, increase VAT and rob households of their cash. You can see these for yourselves. But what got me thinking are the longer run trends. Here are some charts:
First, look at all vehicles registered in Ireland. Despite a dramatic fall-off in numbers, long-term moving average shows a clear twin-peaks pattern with sales peaking in and around 2000 - the vanity demand (given our license plates), followed by the fatter peak in 2007 - the SSIAs demand. There is no serious justification for asking for some emergency measures, e.g a scrappage scheme, for the sector as no amount of subsidy will bring us back to the boom days of 2005-2007. There is a room to argue against the VRT, but not on the grounds of some car sales jobs protection.
Second, look at the relationship in sales of new and used vehicles. A 'vanity' dip in sales of second hand vehicles around 2000 was followed by a much more sensible realisation in 2006-2007 that there is no need to pay through the nose for new cars. Gradually, we built up a knowledge curve that our own Irish-based dealers are:

• taking fatter profit margins that those in the UK; and
• providing no better service in return.
  

Hence, more people migrated to buying cars abroad and once there, they were buying used cars. This should have been a good news for the environmentalists (buying a used car implies no added CO2 emissions associated with manufacturing). But it was not, so the tax-hungry Greens followed the tax-hungry FF and hiked VRT levies on all cars. If there is a room for economically justifiable tax reduction - it is in cutting VRT on used cars. Why? Environmental reasons aside, when an Irish person buys a used car from the UK, the cost to this economy of the finds diverted to imports (as opposed to, say, domestic investment) is much lower than when they buy a new car from an Irish showroom.
Chart above dispels the myth of the 'Killer SUV-driving Yummy-mummies' on our roads. Remember the slew of articles in 2007 telling us that we should be ashamed of driving big 4x4s and that Blackrock and South Dublin Yummy-Mummies were out in tens of thousands on our roads for school runs, driving an ever bigger SUVs? Irish Times, as always a guardian against consumerism, led this yellow journalism pack. Now, see the share of vehicles with 2000cc or bigger engines that are on our roads? It is negligible! In fact, chart below illustrates this point in detail.
At no time did vehicles with engines in excess of 2,400CC represent more than 4.5% of the total vehicles numbers registered.
Lastly, the chart above shows how out of touch are our public sector purchasing managers with reality. 2008 recorded an absolute record in new vehicles registrations by the public sector, just as the economy was spinning into a recession. Well done lads.