Showing posts with label National accounts. Show all posts
Showing posts with label National accounts. Show all posts

Friday, September 2, 2016

2/9/16: Investment in Italy: Banks, Capital and Firms Structures


In my course on the enterprise and financial risk last semester, we talked about the peculiar (or idiosyncratic) nature of Italian firms across a number of matters:

  • Relationship banking;
  • Firm governance: family ownership, equity distribution and aspects of firm strategy and operations;
  • Firm capital structure (leverage risks in particular);
  • Firm dividend policy choices, etc.


Now, let’s add to that literature something new. A recent paper from the Banca d’Italia, titled “Investment and investment financing in Italy: some evidence at the macro level” by Claire Giordano, Marco Marinucci and Andrea Silvestrini (Banca d’Italia Occasional paper Number 307 – February 2016) looks at the evolution of the Global Financial Crisis and the Great Recession across the Italian economy in terms of credit fundamentals.

As noted by the authors, “following the outbreak of the global financial crisis, the euro area experienced a large fall in gross fixed capital formation, both in 2008-09 and during the sovereign debt crisis. This drop was dramatic in the countries more exposed to tensions in government bond markets. In Italy, in particular, total real investment has suffered a loss of around 30 per cent since 2007, the pre-crisis peak, reverting to its lowest levels since the mid-1990s. Weak investment also remained a key drag on GDP growth in 2014, although more recent quarterly data on capital accumulation point to a slight increase over the first three quarters of 2015 relative to the corresponding period in 2014.”

In a typical European fashion, investment in Italy must equal debt. In part, as I usually cover in my courses on risk and corporate financial strategies, this is tied to the reluctance of the family-owned firms to release equity. And in part, it is a part of a broader European debt disease. Independent of the reasons, per authors, the worthy corner to check for key investment-crises interlinkages is the credit supply.

“The depressed growth of investment is in contrast with the substantially muted aggregate financing costs, which stem from the low interest rate environment resulting from the strongly expansionary stance of monetary policy in the euro area. In this context, one scenario is that investment demand will remain too low to absorb financial savings, inducing a persistent state of an excess supply of funds in capital markets.” In other words, Italians are discovering secular stagnation: interest rates are too low because investment is too low (and may be, also the other way around).

With that in mind, the authors proceed to show that “medium-term gross fixed capital formation trends in Italy may be summarised along the following lines”:

Pre–2007 capital expansion “was broad-based, both across institutional sectors and asset categories, although less marked for households”, and Post-2007 “exceptional downturn …affected all sectors and components, yet to a different extent. In particular, focusing on the most recent period, the decline in general government and non-financial corporations’ expenditure, cumulatively undertaking about two thirds of total investment in Italy, was sizeable (approximately 25 per cent), yet slightly more contained than the concurrent drop in household investment spending.”

Overall, “the total-economy investment rate in Italy currently stands at its lowest levels since data became available in the mid-1990s; current government and non-financial corporation investment rates are comparable only to those recorded in 1995; the household rate is even lower. From the asset side, in recent years construction investment, in both residential dwellings and non-residential buildings, which represents half of total expenditure, was the hardest-hit item, excluding transport equipment expenditure (small and volatile), whereas ICT investment and the accumulation of intangible assets weathered the recent double-dip recession better.”

But the age of lower interest rates is having another impact on Italian credit markets. This impact is aggressive rolling over of maturing loans amidst deteriorating credit quality of borrowers. As the result, two things can be documented in Italian credit market experience since 2008 bust:

Firstly, overall, the trend toward longer debt maturity is present in household, corporate and government debt sectors (charts below). Secondly, this is doing nothing to repair credit quality on banks balance sheets.





Which is rocking, for now, as low interest rates are keeping debt burden down and allowing leverage to rise. But the problem is that with longer maturity of debt, we are looking at higher long term susceptibility to debt servicing costs. Last time that happened, Italy became on of the PIIGS. Next time it will happen… oh, ok… we shall just wait and hope Mario Draghi says true to his Italian roots long enough for the miracle to happen.

Saturday, August 1, 2015

1/8/15: Irish 1Q 2015 Growth: The Real Economy Side


Having previously looked at


now, let's take a peek at the Domestic Demand component of GDP - the bit that covers Private Consumption, Government Current Expenditures and Gross Fixed Capital Formation.

Looking at real data, not seasonally adjusted:

Personal Expenditure on Goods and Services by Irish households posted 3.78% growth year-on-year in 1Q 2015. This is faster than 4Q 2014 growth of 3.00% and faster than 1Q 2014 y/y growth of 1.56%. The rate of growth is also faster than four-quarters' average of 2.54%. So this is good news. In fact, this is the fastest rate of growth in Personal Expenditure since Q1 2008 and fifth consecutive quarter of y/y growth.



Net Expenditure by Central and Local Government on Current Goods and Services was up 5.91% y/y in 1Q 2015, which is slower than 9.54% y/y growth reordered in 4Q 2014, but faster than 1.46% growth in 1Q 2014. Current rate of growth in Government spending is slightly ahead of the four quarters average of 5.65%.

This is the second fastest rate of Government spending growth since 2Q 2007 and marks 8th consecutive quarter of positive growth in spending, full three quarters longer positive run than for Personal Expenditure. To compare the two series: austerity from 1Q 2013 on implies a rise in Government current (ex-investment) spending of 7.5%, while recovery in the economy means Personal Consumption rising by 5.4% over the same period.



Gross Domestic Fixed Capital Formation (aka a proxy for Investment - proxy because it includes questionable stuff, like aircraft, as well as some of the MNCs-valued investments) was up 4.03% y/y in 1Q 2015 which is miles lower than 20.3% growth registered in 4Q 2014 when scores of punters rushed out to buy property, and when REITs continued to replace vultures in doing the same. Over the last 4 quarters, average rate of growth in Fixed Capital Formation was 12.77% and even back in 1Q 2014 this activity expanded by 10%, so 1Q 2015 was a major slowdown in activity, albeit it remained positive. This might be a healthy sign of structural normalisation in what has been becoming a somewhat overhyped property market, but it can also be a short-term blip. Overall, 1Q 2015 was the slowest y/y growth quarter since the onset of the 'recovery' in the investment markets here in 3Q 2013 and the first quarter in the period when growth rates fell below 10% mark (albeit 1Q 2014 actual expansion was 9.979%).


With the above, Final Domestic Demand (probably the closest we have in the National Accounts to a realist measure of our economic performance) posted a healthy y/y expansion:



As the above chart shows, Final Domestic Demand rose 4.22% y/y in 1Q 2015, slower than 7.51% growth recorded in 4Q 2014 but faster than 3.61% growth in 1Q 2014. Over the last 12 months, average annual rate of growth in the Domestic Demand was 5.31% which makes 1Q 2015 performance relatively less spectacular. Still, 4.22% growth rate is a healthy one.

And it is consistent with the longer term trends:


As chart above shows, upturn in the Final Domestic Demand took place (on trend) around 3Q 2013 and it is gaining some momentum. However, unlike the GDP series - posting full recovery (on rolling 12mo basis) to pre-crisis peak back in Q3 2014, Final Domestic Demand (domestic economy proxy) is still 11% below the pre-crisis peak. So while our MNCs-inclusive economic performance has regained pre-crisis peak, our domestic economy remains quite below the pre-crisis levels of activity.

Table below summarises source of growth in real GNP:



As shown above, single largest contributor to growth in GNP in 1Q 2015 (annual rate of growth) was Net Trade Balance (Exports less Imports) growth in which accounted for 33.81% of the total expansion in GNP. Personal Expenditure was the second largest contributor to growth with 28.83% share. Overall, growth in Final Domestic Demand (domestic economy proxy) was responsible for 55.4% of total growth in GNP over 1Q 2015 compared to 1Q 2014. Interestingly, inventories (Value of Changes in Stocks) accounted for almost 1/5th of total growth in GNP.

Friday, July 31, 2015

31/7/15: Irish 1Q 2015 Growth: Quarterly Growth in GDP and GNP


Having looked at sectoral growth contributions for 1Q 2015 and trends in annual (y/y) growth rates in GDP and GNP, let's take a look at quarterly (q/q) growth rates.

On a quarterly basis:

  • GDP at constant prices was up 1.365% q/q in 1Q 2015, which is up on 1.235% growth recorded in 4Q 2014 and on 1.206% growth in 1Q 2014. So we have acceleration in quarterly growth in GDP. We now have five consecutive quarters of positive GDP growth with rates of growth all statistically above zero. Good news.
  • GNP, however, posted a decline in q/q growth of -0.762% in 1Q 2015, which contrasts with 3.43% growth q/q in 4Q 2014 and with 1.554% growth q/q in 1Q 2014. This is the first negative growth quarter for GNP after four consecutive quarters of expansion.


Chart above also shows how dramatically higher volatility in GNP growth figures has been in recent years. Over the entire history of the current series (from 1Q 1997), quarterly GDP growth volatility (measured by standard deviation) stood at 2.0076. This fell to 1.42225 over the period from 1Q 2011. So volatility in GDP growth declined over the recent period compered to historical. The opposite happened with GNP, which had historical volatility of 2.24441 and volatility since 1Q 2011 of 2.6658. So volatility increased for GNP.

Let's look at business cycle data. First, chart below shows contractions and expansions based on GDP q/q growth figures alone:


Next, using both GDP and GNP figures:


The two charts above reinforce the argument that we do indeed have a pretty robust recovery, with 4-5 out of the last 5 quarters on solid expansion trend based on both GDP and GNP, five on basis of GDP alone.

So on the net, the results on a quarterly basis are weaker than on the annual basis, with GNP posting an outright contraction. One consolation is that GNP decline of 0.762% q/q in 1Q 2015 is much shallower than Q4 and Q2 2013, as well as all other cases of declines from Q3 2008 on.

However, negative growth in GNP is worth looking closer at, which I shall do in subsequent posts, so stay tuned.

31/7/15: Irish 1Q 2015 Growth: Annual Growth in GDP and GNP


As promised in yesterday's post, I am continuing to cover the latest data on Irish National Accounts for 1Q 2015. In the first post, I looked at GDP at Factor Cost - the sectoral activity feeding into GDP headline numbers.

This time around, let's take a look at real GDP and GNP trends.

First - y/y growth  rates:

  • Sectoral activity (measured by the GDP at Factor Cost) added some EUR2.47 billion to the real GDP increase in 1Q 2015 compared to 1Q 2014. This resulted in total real GDP growth of 6.51% y/y in 1Q 2015, up marginally on 4Q 2014 annual rate of growth of 5.98% and significantly higher than 1Q 2014 annual rate of growth of 4.13%.  This is strong performance and the good news. 
  • From the top headline number, we now have third consecutive quarter (from 3Q 2014) when 4 quarters cumulative output is in excess of pre-crisis peak levels in real (inflation-adjusted) terms. Which is very good news too. Ironically, on GNP side, we now have four consecutive quarters of cumulated 4Q output in excess of pre-crisis peak. Overall, 1Q 2014 marks the seventh consecutive quarter of positive y/y GDP growth.
  • Meanwhile, GNP posted 7.27% growth y/y in 1Q 2015, which was, imagine that, slower than 9.00% expansion recorded in 4Q 2014, but faster than 4.30% growth in 1Q 2014. 
  • Normally, we would be exceptionally happy with this rate of GNP growth, but since 2013, GNP figures carry substantial 'pollution' from accelerated tax optimisation schemes known collectively as contract manufacturing. Still, faster growth in GNP than GDP suggests that a lot of growth this quarter is coming from organic, real growth on the ground, although we cannot tell how much exactly.
  • Overall, we now have the seventh consecutive quarter of y/y growth in GNP, which is good.



As long-term trends go, the chart below illustrates ongoing recovery in GDP and GNP


As far as the obvious point goes: there is a strong trend recovery in both series, which (sadly, I have to repeat this) is good news. One interesting thing to note is that trend for GNP recovery leads trend for GDP recovery. The reason for this is less pleasant than we like to think: instead of increasing contribution to activity from domestic economy, much of this lead is driven by changes in MNCs tax optimisation schemes, under which:

  1. External activity is being booked into Ireland under 'contract manufacturing' schemes; and
  2. Many profit-generative activities by MNCs are turning into cost-centre activities (booking higher costs into Ireland).

The latter point can be seen by looking at the relationship between GDP and net factor payments abroad, illustrated below in the form of declining share of GDP accounted for by profits & royalties repatriation abroad. This trend is likely to continue and accelerate as MNCs get to more aggressively use our latest tax 'innovation' - the knowledge development box.


Thus, the chart above gives us some, very indirect, indication of how dodgy are our GNP statistics becoming. Though, more on that in subsequent posts.

In addition to the net income outflows, the chart above shows the trend of declining GDP/GNP gap. Current 1Q 2015 GDP/GNP gap is at 18.07%, against the average over 2013-present of 17.28% and a 3mo average of 15.58%, which suggests two driving factors: higher GDP activity and increased outflow of booked profits, alongside exchange rates effects. The latter factor is important as it further compounds multiple distortions in the data from the MNCs.

In summary, evidence continues to show strong growth performance both in GDP and GNP in real terms, with some lingering questions as to the nature of this growth in relation to the MNCs activities here.

Stay tuned for quarterly growth analysis.

Thursday, April 23, 2015

23/4/15: Why is Investment Weak?


Despite all the QE and accommodative monetary policies, despite all the state funding directed toward new lending supports, and despite unorthodox measures aimed at inducing the banks to lend into the economy, the following took place in the advanced economies over the course of the Great Recession:
1) financing conditions globally have first tightened (during the Global Financial Crisis) and then eased, in majority of the advanced economies reaching the levels of stringency comparable to pr-crisis peak;
2) cost of borrowing fell on pre-crisis levels across all advanced economies with exception of a handful of countries; and
3) investment remains weak.

Want to see the problem illustrated?



Banerjee, Ryan and Kearns, Jonathan and Lombardi, Marco J., (Why) is Investment Weak? (March 2015, BIS Quarterly Review March 2015: http://ssrn.com/abstract=2580278) ask: What explains this apparent disconnect?

Per authors, "The evidence suggests that, historically, uncertainty about the future state of the economy and expected profits play a key role in driving investment, and financing conditions less so. As a result,
investment after the Great Recession appears to have been broadly in line with what could have been expected based on past relationships. A stronger recovery of investment would seem to depend on a reduction in economic uncertainty and expectations of stronger future growth."

As I argued in the paper on the European Capital Markets Union (CMU) proposal here: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2592918 - you might think that lack of investment is because markets for credit supply are dysfunctional. But you can also think of the demand side: if there is no growth prospect ahead, why invest in new capacity? And taking the second view, the prescription for solving the problem is: growth. Which requires improved prospects for investors, entrepreneurs, SMEs and, above all else - households.

Thursday, January 23, 2014

23/1/2014: A Troubled Recovery: Sunday Times, January 12


This is an unedited version of my Sunday Times column from January 12, 2014.


To some extent, the forward-looking data on the Irish economy coming out in recent months resemble the brilliant compositions of Richard Mosse – Ireland's leading artist at the venerable La Biennale di Venezia, 2013 (http://www.richardmosse.com/works/the-enclave/). Mosse show in Venice comprised sweeping photographic landscapes of war-affected Eastern Kongo rendered in crimson and pink hues of hope.

In our case, the rose-tinted hues of improving recent data are colouring in hope over the adversity of the Great Recession, now 6 years in the running. Beneath it all, however, the debt crisis is still running unabated.


This week, Purchasing Manager Indices (PMIs), published by Markit and Investec, signaled a booming Q4 2013 economy. Services PMIs averaged 59.7 over the last quarter of 2013, well above the zero-growth mark of 50. Alas, the Services PMI readings have been showing expansion in every quarter since Q1 2010, just as economy was going through a recession. The latest Manufacturing PMIs averaged 53.6 over the Q4 2013, implying two consecutive quarters of growth in the sector. Sadly, manufacturing activity, as reported by CSO was down substantially year on year through October. Things might have improved since then, but we will have to wait to see the actual evidence of this. Past history, however, suggests this is unlikely: PMIs posted nine months of growth in the sector over the twelve months through October 2013, CSO's indicator of actual activity in the sector printed seven monthly declines. Rosy forward outlook of PMIs is overlaying a rather bleak reality.

But the story of fabled economic growth is not limited to the PMIs alone. Property markets were up in 2013, boosted, allegedly, by the over-exuberance of international and domestic investors, and by the penned up demand from the cash-rich, jobs-holding homebuyers. No one is quite capable of explaining where these cash riches are coming from. Based on deposits figures, Irish property buyers are not taking much of cash out of the banks to fund purchases of South Dublin homes. They might be digging money out of the fields or chasing the proverbial leprechauns’ riches or doing something else in order to pump billions into the property markets. Still, residential property prices are up year on year. Alas, all of these gains are due to Dublin alone: in the capital, residential real estate prices rose 14.5 percent over the last 12 months. In the rest of the country they fell 0.5 percent.

Fuelled by rising rents (up 7.6 percent year on year) and property prices, the construction sector also swelled with the stories of a rebound. Not a week goes by without a report about some investment fund 'taking a bet on Ireland's recovery' by betting long on real estate loans or buildings, or buying into development land banks. Thus, Building and Construction sector activity in Q3 2013 has reached the levels of output comparable with those last seen in Q4 2010. Not that it was a year marked by robust activity either, but growth is growth, right? Not exactly. Stripping out Civil Engineering, building and construction activity in Ireland is currently lingering at the levels compatible with those seen in H2 2011. Worse, Residential Building activity was down year-on-year in Q3 2013. Meanwhile, in line with other PMI indicators, Construction PMI, published by Markit and Ulster Bank, suggests that the sector has been booming from September 2013 on. Again, more data is required to confirm this, but CSO's records for planning permissions show declines in activity across the sector.

The truth is that no matter how desperately we seek a confirmation of growth, the recovery to-date is removed from the real economy we inhabit. As the Q3 2013 national accounts amply illustrated, the domestic economy is still slipping. In the nine months of 2013, personal consumption of goods and services fell EUR734 million in real (inflation-adjusted) terms, while gross domestic capital formation (a proxy for investment) declined EUR381 million. Thus, final domestic demand - the amount spent in the domestic economy on purchases of current and capital goods and services - fell EUR1.3 billion or 1.4 percent. In Q2 2013 Irish Final Domestic Demand figure dipped below EUR30 billion mark for the first time since the comparable records began back in Q1 2008, while Q3 2013 reading was the third lowest Q3 on record.

Beyond Q3, the latest retail sales data for November 2013, released this week, was also poor. Even stripping out the motor trades, core retail sales were basically flat on 2012 levels in both volume and value.


With domestic economy de facto stagnant and under a constant risk of renewed decline, Ireland remains in the grip of the classic debt deflation crisis or a balancesheet recession.

The usual canary in the mine of such a crisis is credit supply. Per latest data from the Central Bank, volumes of loans outstanding in the private economy continued to fall through November 2013. Average levels of credit extended to households fell almost 4 percent in Q4 2013 compared to 2012 levels. Loans to non-financial corporations fell some 5 percent over the same period.

Total private sector deposits are up marginally y/y for Q4 2013, but household deposits are down. Thus, recent improvements in the health of Irish banks are down to retained profits and tax buffers being retained by the corporates. Put differently, the canary is still down, motionless at the bottom of the cage.

In this environment, last thing Ireland needs is re-acceleration in business and household costs inflation. Yet this acceleration is now an ongoing threat. Courtesy of the 'hidden' Budget 2014 measures Irish taxpayers and consumers are facing an increases in taxes and state charges of some EUR2,000 per household. Health insurance, water supplies, transport, energy, and a host of other price increases will hit the economy hard.

And after the Minister for Finance takes his share, the banks will be coming for more. The cost of credit in Ireland has been rising even prior to the banks levies passed in Budget 2014. In 3 months through October 2013, interest rates for new and existing loans to households and non-financial corporations were up on average some 19-23 basis points. Deposits rates were down 71 bps. Based on ECB latest statistics, the rate of credit cost inflation in Ireland is now running at up to ten times the euro area average.

In other words, we are bailing in savers and investors, while squeezing consumers and taxpayers.


These trends largely confirm the main argument advanced in the IMF research paper, authored by Karmen Reinhart and Kenneth Rogoff and published last December. The paper argues that in response to the global debt crisis, the massive wave of financial repression is now rising across advanced economies. The authors warn that economic growth alone may not be enough to deflate the debt pile accumulated by the Governments in the advanced economies prior to and during the current crisis. Instead, a number of economies, including are facing higher long-term inflation in the future, and lower savings and investment. The menu of traditional measures associated with dealing with the debt crises in the past, covering both advanced and developing economies experiences, includes also less benign policies, such as capital controls, direct deposits bail-ins, as well as higher taxes and charges.

Ireland is a good example of the above responses. Since 2011 we have witnessed pension funds levies and increases in savings and investment taxes. We also have witnessed state-controlled and taxed sectors pushing prices ever higher to increase the rate of Government revenue extraction. Budget 2014 banks levy is another example. Given the current state of banking services in Ireland, the entire burden of the levy is going to fall onto the shoulders of ordinary borrowers and depositors. Insurance sector was bailed-in, primarily via massive increases in the cost of health cover and reduced tax deductibility of health-related spending.

As Reinhart and Rogoff note, historically, debt crises tend to be associated with a significantly lower growth and are marked by long-run painful adjustments. The average debt crisis in the advanced economies since the WWII lasted 23 years – much longer than the fabled ‘lost decade’ on reads about in the Irish media.

All of which goes to the heart of the today’s growth dilemma in Ireland: while macroeconomic performance is improving, tangible growth anchored in domestic economy is still lacking. The good news i: foreign investors rarely look at the realities on the ground, beyond the macroeconomic headlines. The bad news is: majority us live in these realities.



Box-out: 

This column's mailbox greeted the arrival of 2014 with a litany of sales pitches from various funds managers. All were weighing heavily on ‘hard’ performance metrics, with boastful claims about 1- and 5-year returns. While appearing to be ‘hard’, these quotes present a misleading picture of the actual funds’ performance. The reason for this is simple: end of 2008 – beginning of 2009 represented a bottom of the markets collapse.

Over the last 10 years, annual returns to the S&P500 index averaged roughly 5 percent. This is less than one third of the 15.5 percent annualised returns for the index over the last 5 years. In Irish case, the comparatives are even more striking. Five-year annualised rise in ISEQ runs at around 12 percent. Meanwhile 10-year returns are negative at 1.2 percent.

Since no one likes quoting losses, the industry is only happy to see the dark days of the early 2009 falling into-line with the 5 year metric benchmark: the lower the depth of the depression past, the better the numbers look today.

The problem is that even the ten-year returns figures are often bogus. The quotes, based on index performance, usually ignore the fact that the very composition of the markets has changed significantly during the crisis. This is especially pronounced in the case of ISEQ. In recent years, ISE witnessed massive exits of larger companies from its listings. Destruction of banking and construction sector in Ireland compounded this trend. Put simply, investors should be we weary of the industry penchant for putting forward five-year returns quotes: too often, there's more wishful marketing in these numbers than reality.

Tuesday, November 12, 2013

12/11/2013: Clawing out of the Great Recession...


In all of the excitement of the 'recovery' and the 'exit' and the 'regained independence' and all other newsworthy flow of PR material around, it is hard to keep track of where we are today as compared to the days before the Celtic Garfield sighed for the last time in his deep sleep... And yet, just a few numbers will do...

The latest data we have so far is for Q2 2013, which also gives us H1 2013... Here's the comparative to Q2 and H1 2007:

Yes, in nominal terms (that is in terms of actual countable euros), our GDP is still 15.3% below that in H1 2007 and or GNP is even worse - at 17.53% discount on H1 2007.

The score card for more recent performance is more encouraging but still weak:


So here's a medical analogy: a patient had a heart attack. A patient has progressed from being classified as being in an 'extremely critical' condition (2008 - 2010) to 'critical' (Troika 2010 - H1 2012) to 'critical but stable' (H1 2012 - H1 2013). It's a long way before we get back to a 'discharge' state... but we are starting to claw out.

Friday, August 30, 2013

30/8/2013: How's that 'credit supply' to the economy promise going?

On foot of my analysis of the credit extended to Irish Private Sector Enterprises and to SMEs (see PSEs analysis here and SMEs analysis here), I was asked if I can pool together the two datasets to provide a summary of the 'Government performance table' on both.

Here it is. All changes are referenced to Q2 2011 in levels (Euro millions) and the colour codings are: bold green marks expansion on Q2 2011, bold red - contraction.


As you can see, only two sectors of the economy experienced an overall increase in credit levels: Manufacturing and Human Health & Social Work.

As I noted in the previous post: Truth be told, neither this nor any other Government can stop the deleveraging in the Irish private sector economy and this deleveraging will have more adverse impact on SMEs than on larger enterprises. But, truth be told, the Irish Government is not exactly keen on this truth and is insisting that it can 'unlock' credit flows... Two years in, we are still waiting...

Thursday, August 29, 2013

29/8/2013: Credit to SMEs in Ireland: Q2 2013

Earlier today, I debunked the myth that we are experiencing any sort of significant uptick in private sector enterprise investment on the foot of poor credit supply figures for Irish private sector enterprise. You can read my analysis on this here: http://trueeconomics.blogspot.ie/2013/08/2982013-credit-to-private-enterprises.html. However, let us recall that the current Government came into the office rattling sabres on the high goals of setting banks straight on SMEs credit.

How are we doing on this front?

Here's a handy summary for Q2 2013 changes in credit outstanding to the SMEs (green bold marks sectors where there has been any improvement - either quarterly or annual):


Spotting any significant improvements in access to credit? Me neither.

What about longer trends? Here are the charts:


Total credit is down.


Manufacturing credit is up and off the bottom levels, but the overall levels are tiny, minuscule, irrelevant to the aggregate economy. Primary sectors credit is down over longer time range and flat since ca Q2 2011.


No love from the banks for property, construction, and now less love for financial intermediaries too.


No need to describe what's going on in wholesale, retail and hospitality sectors.


Education faring better, but at insignificant levels of activity to start with. Health is at the bottom of the empty swimming pool and not even flapping arms...


Even the 'white knights in shining armour' that are exports drivers and generators and the darlings of our development agencies: business services and ICT are starving of credit.

So run by me again: what are the banks doing to respond to the Government loud calls to do their bit for the economy, to support recovery etc? Oh, here's a table showing what happened in SME credit per sector since Q2 2011 (in bold red - sectors that saw decline in credit, in bold green - those where there was an increase in credit):

Truth be told, neither this nor any other Government can stop the deleveraging in the Irish private sector economy and this deleveraging will have more adverse impact on SMEs than on larger enterprises. But, truth be told, the Irish Government is not exactly keen on this truth and is insisting that it can 'unlock' credit flows... Two years in, we are still waiting...

29/8/2013: Credit to Private Enterprises in Ireland: Q2 2013

Credit supply figures for credit extended to Irish businesses are out and make a depressing reading, once again.

Taken from the top, here's the summary of all latest (Q2 2013) changes:

I marked in green bold only those observations where there has been any sort of a positive movement either y/y or q/q. There are only five such subsectors: Water, Sewage & Waste Treatment, etc (although q/q the sector is again down on credit), Transport & Storage (although the sector is down y/y), Information & Communication (solid y/y rise, with a big question as to whether the credit increase is accounted for by the Eircom going back into leveraging up), Education (solid y/y gain, weak q/q growth) and Health and Social Work (down q/q, but up y/y).

We hear much about the fabled revival of fortunes in the construction sector and property investment sector. I am afraid there is none visible in the credit supply data:



Unless Russian oligarchs with suitcases of cash are rolling into town, where's the fabled 'pick up of building activity' being funded from? Mars? Or cash piles of our farmers?

Total credit is still shrinking, most critically, in the sectors excluding Financial Intermediation and Property:

Credit in Primary Industries and Manufacturing has flat-lined some 33-39 months ago and is showing no life since, which is sort of suggests that the PMIs (Manufacturing) 'boom' is a signal of skewed PMI metric, capturing more of the MNCs than of domestic activity:


When it comes to the 'brighter' spot of Transport - credit pick up is off extremely weak position:


In short, as credit is linked directly to investment activity, the above suggests continued deep-freeze in the economy through H1 2013. There seem to be no signs of revival so far, albeit caveats to this apply - this is just one indicator and it is an indicator that does not tell us much about new loans issuance as opposed to old loans expirations/maturing etc. Still, to get investment-driven growth, we need credit figures to rise. Not fall...