10/5/21: Ireland PMIs for April: Rapid Growth and Inflation Signals

Ireland's PMIs have accelerated across all two key sectors of Services and Manufacturing in April, while Construction Sector continued to post declining activity (through mid-April).

Irish Manufacturing PMI rose from 57.1 in March to 60.8 in April as larger multinationals boosted their activities and increased pass-through for inflation. This marks third consecutive month of increasing PMIs for the sector. Meanwhile, Irish Services PMI rose from 54.6 in March to 57.7 in April, marking second consecutive month of above 50 PMIs readings. 

In line with the above developments, official Composite PMI rose from 54.5 in March to 58.1 in April. 

Irish Construction Sector PMI, reported mid-month, was at 30.9 (significantly below 50.0, signaling strong rate of contraction in activity) in mid-April, a somewhat less rapid rate of decline relative to mid-March reading of 27.0. All in, Irish Construction Sector PMI has been sub-50 for four consecutive month now.

In contrast to Markit that publishes official Composite PMI, I calculate my own GVO-shares weighted index of economic activity across three sectors: my Three Sectors Index rose from 55.0 in March 2021 to 58.3 in April. 

In terms of inflation, Services PMI release states that "Cost pressures remained strong in April, linked by survey respondents to labour, insurance, fuel, shipping and UK customs. The rate of input price inflation eased slightly from March's 13-month high, however. To protect profit margins, service providers raised their charges for the second month running. The rate of charge inflation was the strongest since February 2020, albeit modest overall." The indications are that Irish services firms are operating in less competitive environment than their global counterparts, with stronger ability to pass through cost increases into their charges. However, this feature of Irish data most likely reflects the accounting complexity within major multinationals trading through Ireland. 

Similar situation is developing in Manufacturing: "Supply chains remain under severe pressure, with longer delivery times owing to new UK Customs arrangements, transport delays and raw materials shortages. These factors, combined with strengthening demand, are leading to a heightening of inflationary pressures. Input prices increased at their fastest pace in ten years, while output prices rose at a series-record pace."

All in, we are witnessing signs of continued inflationary pressures across a number of months now, with even multinationals - companies using Ireland as primarily a tax and regulatory arbitrage location for their activities - feeling the pressures. This is an indication that inflation is building up globally and, as time drags on, starting to feed through to final prices of goods and services.

7/4/21: Ireland PMIs for March: Growth and Inflation Pressures

 

Ireland PMIs for 1Q 2021 are out this week, so let's take a closer look at monthly activity data. 

• March services PMI came in at a surprising 54.6 - up on 41.2 in February and 36.2 in January. Given the country is in a phase 5 lockdown, and there has been little change on that in recent months, the new reading is a bizarre one. Per Markit: "Three out of four monitored sub-sectors registered higher business activity in March. The strongest rate of expansion was in Financial Services, followed by Business Services and Technology, Media & Telecoms respectively. Activity in Transport, Tourism & Leisure declined for the eighth month running, but at the slowest rate since last August." A lot of hope-for vaccines and 'getting back to normal' as well as exports rise behind these figures. Services PMI is now at its highest reading since February 2020.
• March Manufacturing PMI also performed well, rising to 57.1 from 52.0 in February. Manufacturing index has been more volatile in the pandemic than Services, so this rise is less of a surprise, given the global economic recovery and demand for Irish exports.
• We do not have full March data for construction sector PMI, which is reported mid-month, so all we do have is mid-March reading of 27.0. 

Official Composite PMI published by Markit was pretty upbeat in march 2021, rising to 54.5 - signaling strong growth, having previously posted 47.2 in February and 40.2 in January 2021. My own, Three Sectors Activity index - a weighted average of three sectors PMIs based on their share of gross value added - rose even more sharply: from 41.8 in January and 45.0 in February to 55.0 in March. If Construction sector PMI were to come in on-trend mid-April, the Three Sectors Index will be closer to 55.1-55.2 range.

As an aside, it is worth noting that Irish economic activity is showing similar trend to global activity when it comes to inflationary pressures (see: https://trueeconomics.blogspot.com/2021/04/5421-heating-up-inflationary-risks.html). Per Markit: "March data indicated soaring cost pressures. The Composite Input Prices Index posted a record one-month gain and signalled the fastest rate of inflation since July 2008. Cost pressures were much stronger at manufacturers than service providers." In other words, even small open economies with massive distortions coming from the multinationals' financial and tax engineering sides are now showing signs of heating up inflation. 

26/6/20: Trade Restrictions: European Companies

BOFIT newsletter out today highlights the scale of restrictive trade measures applicable to the EU exporters across a number of significant markets:

Of eleven countries included, three managed to lower trade and investment barriers applying to the EU companies over 2017-2019 period, two countries had unchanged barriers, and six showed increasing barriers to trade and investment. In a way, this reflects a shift away from trade and investment globalization focus on the last three decades toward more regionalized and even protectionist policies.

COVID19 pandemic is likely to accelerate this trend.

1/9/19: 'Losin Spectacularly': Trump Trade Wars and net exports

U.S. net exports of goods and services are in a tailspin and Trump Trade Wars have been anything but 'winning' for American exporters. You can read about the effects of Trade Wars on corporate revenues and earnings here: https://trueeconomics.blogspot.com/2019/07/31719-fed-rate-cut-wont-move-needle-on.html. And you can see the trends in net exports here:

This clearly shows that 'Winning Bigly' is really, materially, about 'Losin Spectacularly'. Tremendous stuff!

31/7/19: Fed rate cut won't move the needle on 'Losing Globally' Trade Wars impacts

Dear investors, welcome to the Trump Trade Wars, where 'winning bigly' is really about 'losing globally':

As the chart above, via FactSet, indicates, companies in the S&P500 with global trading exposures are carrying the hefty cost of the Trump wars. In 2Q 2019, expected earnings for those S&P500 firms with more than 50% revenues exposure to global (ex-US markets) are expected to fall a massive 13.6 percent. Revenue declines for these companies are forecast at 2.4%.

This is hardly surprising. U.S. companies trading abroad are facing the following headwinds:

1. Trump tariffs on inputs into production are resulting in slower deflation in imports costs by the U.S. producers than for other economies (as indicated by this evidence: https://trueeconomics.blogspot.com/2019/07/22719-what-import-price-indices-do-not.html).
2. At the same time, countries' retaliatory measures against the U.S. exporters are hurting U.S. exports (U.S. exports are down 2.7 percent in June).
3. U.S. dollar is up against major currencies, further reducing exporters' room for price adjustments.

Three sectors are driving S&P500 earnings and revenues divergence for globally-trading companies:

• Industrials,
• Information Technology,
• Materials, and 
• Energy.

What is harder to price in, yet is probably material to these trends, is the adverse reputational / demand effects of the Trump Administration policies on the ability of American companies to market their goods and services abroad. The Fed rate cut today is a bit of plaster on the gaping wound inflicted onto U.S. internationally exporting companies by the Trump Trade Wars. If the likes of ECB, BoJ and PBOC counter this move with their own easing of monetary conditions, the trend toward continued concentration of the U.S. corporate earnings and revenues in the U.S. domestic markets will persist. 

25/5/16: Does the Global Trade Slowdown Matter?

The transition from the Global Financial Crisis, to the Great Recession and to currently fragile recovery has been marked not only by weaker structural growth across the economies and by massive outflows of funds from the emerging markets, but by a dramatic decline in world trade growth. Another stylised fact is that since the onset of the recovery, growth in global trade volumes has been also lagging behind growth in GDP terms.

This has been a puzzling phenomena, inconsistent with the previous recessions. Factually, global trade grew at or below 3 percent in 2012-15, which is below the pre-crisis average of 7 percent (over 1987-2007) and less than the growth of global GDP.

One recent paper (see full citation below) by Neagu, Mattoo and Ruta (2016) attempted to explain this transition to the new global growth environment of relatively subdued global trade growth. Here is a quick summary of their paper.

As chart above shows, there has been a major slowdown in growth in world trade volumes. Per Neagu, Mattoo and Ruta (2016), “proximate explanations of the trade slowdown link it to changes in GDP and, hence, to the fallout of the Global Financial Crisis. While weak global demand matters for trade growth as it depresses world import demand, cyclical factors are not the only determinants of the trade slowdown.”

In simple terms, trade is growing slower than GDP not only because GDP growth is slow itself, but “also because the long-run relationship between trade and GDP is changing. The elasticity of world trade to GDP was larger than 2 in the 1990s and declined throughout the 2000s.” So in simple terms, a 1% change in world GDP used to be associated with 2% change in world trade volumes. It no longer is.

“Among the leading causes of this structural change in the trade-income relationship is a shift in vertical specialization. The long-run trade elasticity increased during the 1990s, as production fragmented internationally into global value chains (GVCs), and decreased in the 2000s as this process decelerated.” In other words, logistic revolution of the 1990s is now over and the low-hanging fruit of improving cost margins on production outsourcing and enhancing delivery efficiencies has been picked, leaving little new momentum to drive growth in trade flows over each unit of increase in global income.

Per Neagu, Mattoo and Ruta (2016), “Economists disagree regarding the implications of the trade slowdown for economic growth (and welfare). Some believe that the slowing down of global trade has no real consequences for economic growth. For instance, commenting on the global trade slowdown, Paul Krugman noted that “The flattening out is neither good nor bad, it’s just what happens when a particular trend reaches its limits”. Others take the opposite view. For instance, in a speech as governor of the Central Bank of India, Raghuram Rajan concluded that “We are more dependent on the global economy than we think. That it is growing more slowly, and is more inward looking, than in the past means that we have to look to regional and domestic demand for our growth.”

According to the authors, “both views have elements of truth but neither may be completely right. On the one hand, the impact of the trade slowdown should not be overstated. Most economies are more open today than they were in the 1990s. In so far as openness per se is associated with dynamic benefits, trade will continue to foster growth. On the other hand, there is a risk of understating the implications of the trade slowdown. If the expansion of trade growth in the 1990s contributed to countries’ economic growth, one may suspect that the flattening of this trend will imply that the contribution of trade to the growth process will be lower.”

So, in summary, then: “Trade is growing more slowly not only because growth of global gross domestic product is lower, but also because trade itself has become less responsive to gross domestic product.”

Neagu, Mattoo and Ruta (2016) go on “to try to investigate the economic consequences of the recent trade slowdown.” The authors focus “…on two channels through which the changing trade-income relationship documented in the literature may affect countries’ economic performance.” These are:

1. “The demand-side Keynesian concern is that sluggish world import growth may adversely affect individual countries’ economic growth as it limits opportunities for their exports.”
2. “The supply side (Adam) Smithian concern is that slower trade may diminish the scope for productivity growth through increasing specialization and diffusion of technologies. In particular, a slower pace of GVC expansion may imply diminishing scope for productivity growth through a more efficient international division of labor and knowledge spillovers.”

So what do they find?

Firstly, “preliminary evidence is mixed”:

• “On the demand side, we find that the elasticity of exports to global demand has decreased for both high-income and developing economies in the 2000s relative to the 1990s.”
• “We also find that the sensitivity of domestic growth to export growth is higher, and has increased more over time, for developing economies compared to high-income economies.”
• Both of “these results, however, hold only when we measure exports in traditional gross terms.”
• “When we use value added exports, which are more relevant for the demand-side mechanism, the change in estimated elasticities is smaller and not statistically significant (although a qualification is that value added trade data are available for a shorter period and fewer countries).”

Secondly, the authors “…try to assess the Smithian concern by focusing on the growth implication of a slowing pace of GVC growth”:

• “…estimates indicate that increasing backward specialization has a positive impact on labor productivity growth…” 
• Quantifying “the growth in labor productivity due to the growth in backward vertical specialization”, the authors find that “while this share is not large, as productivity growth is explained by many factors beyond vertical specialization, its contribution has decreased by half in recent years, suggesting that the trade slowdown is a contributing factor of the decrease in productivity growth.”

In the above, note the change from blue lines (positive link between the degree of vertical specialization and productivity growth) to red lines (negative link).

In short, things are pretty bad: both factors - demand slowdown and trade slowdown - are cross-related and linked. Both are reinforcing each other, yielding growth slowdown across both supply side and demand side margins. And the side effect is: the two effects being correlated also at least in part captures productivity slowdown - aka, secular stagnation dimension.



Neagu, Cristina and Mattoo, Aaditya and Ruta, Michele, "Does the Global Trade Slowdown Matter?" (May 13, 2016). World Bank Policy Research Working Paper No. 7673. Available at SSRN: http://ssrn.com/abstract=2779830

17/5/16: Euro Area Exports of Goods Down in 1Q 2016

Euro area trade in goods data for 1Q 2016 is out today and the reading is poor.

On annual basis (not seasonally-adjusted figures), extra-EA19 exports of goods were down in 1Q 2016 to EUR485.8 billion from EUR492.0 billion a year ago, a decline of ca 1% y/y. Imports - sign of domestic demand and investment - dropped 3%. As the result, EA trade balance for goods trade only rose from EUR46.8 billion in 1Q 2015 to EUR53.9 billion in 1Q 2016.

Out of the original EA12 countries, Ireland was the only one posting an increase in extra-EA19 exports in 1Q 2016 compared to 1Q 2015 (+3%), while the largest decrease was recorded by Greece (-20%) and Portugal (-17%).

On a seasonally-adjusted basis (allowing for m/m comparatives), exports extra-EA19 fell from EUR167.3 billion in February 2016 to EUR165.1 billion in March 2016, reaching the lowest point in 12 months period. Due to an even sharper contraction in imports, trade balance (extra-EA19 basis) rose to EUR22.3 billion from EUR20.6 billion.

More details here: http://ec.europa.eu/eurostat/documents/2995521/7301989/6-17052016-AP-EN.pdf/70c12e75-2409-44f5-9403-fdb3eb816d1a 

13/12/15: Irish National Accounts 3Q: Post 6: Exports and MNCs

In the previous 6 posts, I covered:

1. Irish National Accounts 3Q: Sectoral Growth results;
2. Irish year-on-year growth rates in GDP and GNP;
3. Quarterly growth rates in Irish GDP and GNP; 
4. Irish Domestic Demand (Household Consumption, Government Spending and Public and Private Investment)
5. Irish external trade; and
6. Evolution of per-capita metrics and the dynamics of the crisis.

So let’s get down to the last post on the matter of Irish National Accounts for 3Q 2015: the subject of Irish economy’s dependency on MNCs… err… exports that is.

Real Exports as a share of Irish real GDP stood at 120.1% in 3Q 2015, the second highest proportion on record, down from 123.0% in 2Q 2015 which was record-breaking level. Similarly, Nominal Exports as a share of nominal GDP fell from 127.2% in 2Q 2015 (highest on record) to 122.7% (second highest).

This is a remarkable set of numbers, driven predominantly by the activities of MNCs in Irish economy, and a number that is a signifier of all that is wrong with our National Accounts. Unlike countries that serve as a basis for production, Ireland serves as a basis for both some production of goods and services, but also as a platform for large scale tax optimisation. Vast majority of our exports are accounted for by MNCs trading from here, with large share of activity not taking place here, but being booked into Ireland from abroad. This distorts actual levels and value of production, but it also distorts the metrics of this economy’s openness to trade.

As the result on much of the MNCs activities, profits derived in Ireland by MNCs can go four ways:

1. They can be booked into tax havens (in which case they register as outflows from Ireland or Irish imports);
2. They can be booked in Ireland as profits and retained here (in which case they accrue to our National Accounts);
3. They can be registered here and then repatriated abroad (in which case they register as outflows of factor income); and
4. They can be booked into here and then expatriated, but remain on our books, as long as the MNCs is domiciled here (e.g. company created as an Irish entity via inversion).

We have zero ability to tell how much exactly do MNCs derive in profit from activities here and tax optimisation through here. But we do have a number that partially captures (3) above. This is provided by Net Factor Income Outflows to the Rest of the World and here is the chart showing how it evolved over time relative to Exports:

Do note that over 2011 - present period, average net outflow of factor payments abroad has fallen as a share of Exports from 17.5% in the period of 1Q 2002 - 4Q 2010 to 15.1%, the lowest period average on record. In other words, during the last 4 and 3/4 years MNCs operating from Ireland have been expatriating fewer profits abroad than in other periods in history. Question is: what happens to these retained profits over time? Obviously, these MNCs have absolutely no interest in re-investing these profits in Ireland (there is neither the scale for such reinvestment, nor the need). This suggests that either these profits are being parked until such a time as when they can be expatriated for the purpose of funding MNCs investments around the world, or the MNCs overall switched to declaring lower profits as a share of their exports.

Truth is - we do not know what is going on, though we do know that something is afoot.

Overall, however, Irish economic miracle’s dependence on MNCs-driven exports growth is growing, whilst transparency of MNCs operations here (at least as far as the National Accounts go) is declining. Happy FDI days are upon us… as long as the U.S., OECD, EU, and the rest of the host of states and organisations hell-bent on ending the free for all tax optimisation by corporates aren’t looking…

12/12/15: Irish National Accounts 3Q: Post 5: External Trade

In the first post of the series, I covered Irish National Accounts 3Q: Sectoral Growth results. The second post covered year-on-year growth rates in GDP and GNP, while the third post covered quarterly growth rates in GDP and GNP. The fourth post covered Domestic Demand.

Now, consider external trade side of the National Accounts.

Irish Exports of Goods & Services stood at EUR62.52 billion in 3Q 2015, a rise of 12.4% y/y, after posting growth of 13.5% y/y in 2Q 2015 and 15.5% growth in 3Q 2014. Over the last four quarters, Irish Exports of Goods & Services grew, on average, at a rate of 13.4%, implying doubling of exports by value roughly every 5.5 years. If you believe this value to be reflective of a volume of real economic activity taking place in a country with roughly 1.983 million people in employment, you have to be on Amsterdam brownies. Over the 12 months through 3Q 2015, Irish economy has managed to export EUR235.67 billion worth of stuff, or a whooping EUR27.828 billion more than over the same period a year before. That’s EUR118,845 per person working at home or at work in Ireland.

Now, moving beyond the total, Exports of Goods stood at EUR34.062 billion in 3Q 2015, up 16.07% y/y - a doubling rate of 4.5 years. Exports of goods were up 16.03% y/y in 2Q 2015 and 16.9% in 3Q 2014, so over the last 12 months, average rate of growth in Exports of Goods was 18.01%. In other words, Irish Exports of Goods (physical stuff apparently manufactured here) are running at a rate of increase consistent with doubling of exports every 4 years.

Exports of Services are still ‘lagging’ behind, standing at EUR28.458 billion in 3Q 2015, up 8.2% y/y in 3Q 2015, having previously risen 10.5% in 2Q 2015. Both rates of growth are below 13.9% heroic rate of expansion achieved in 3Q 2014. Over the last four quarters, average rate of growth in Irish Exports of Services was 8.6%, to EUR107.29 billion.

However, in order to produce all these marvels of exports (and indeed to sustain living and consumption), Ireland does import truck loads of stuff and services. Thus, Imports of Goods and Services overall rose to EUR52.788 billion in 3Q 2015, up 18.9% y/y and beating 16.5% growth in 2Q 2015 and even 18.75% growth in 3Q 2014. Over the last four quarters average rate of growth in Imports of Goods and Services was impressive 17.6%.

Some of this growth was down to increased consumer demand. Imports of Goods alone rose 5.1% y/y in Q3 2015, compared to 8.1% in 2Q 2015 and 16.7% in 3Q 2014 (over the last four quarters, average growth rate was 10.1%). Imports of Services, however, jumped big time: up 27.9% y/y in 3Q 2015, having previously grown 21.8% in 2Q 2015 and 20.2% in 3Q 2014 (average for the last four quarters is 22.6%). Of course, imports of services include imports of IP by the web-based and ICT and IFSC firms, while imports of goods include pharma inputs, transport inputs (e.g. aircraft leased by another strand of MNCs and domestic tax optimisers) and so on.

Both, exports and imports changes are also partially driven by changes in the exchange rates, which are virtually impossible to track, since contracts for shipments within MNCs are neither transparent, more disclosed to us, mere mortals, and can have virtually no connection to real world exchange rates.

All of which means that just as in the case of our GDP and GNP and even Domestic Demand, Irish figures for external trade are pretty much meaningless: we really have no idea how much of all this activity sustains in wages & salaries, business income and employment and even taxes that is anchored to this country.

But, given everyone’s obsession with official accounts, we shall plough on and look at trade balance next.

Ireland’s Trade Balance in Goods hit the absolute historical record high in 3Q 2015 at EUR15.602 billion, up 32.4% y/y and exceeding growth rate in 2Q 2015 (+27.5%) and 3Q 2014 (+17.2%). Meanwhile, Trade Balance in Services posted the largest deficit in history at EUR5.87 billion, up almost ten-fold on same period in 2014, having previously grown by 154% in 2Q 2015.

Thus, overall Trade Balance for Goods and Services fell 13.4% y/y in 3Q 2015 to EUR9.732 billion, having posted second consecutive quarter of y/y growth (it shrunk 0.51% y/y in 2Q 2015).

As chart above shows, overall Trade Balance dynamics have been poor for Ireland despite the record-busting exports and all the headlines about huge contribution of external trade to the economy. On average basis, period average for 1Q 2013-present shows growth rate averaging not-too-shabby 5.1% y/y. However, this corresponds to the lowest average growth rate for any other period on record, including the disaster years of 1Q 2008 - 4Q 2012 (average growth rate of 24.3% y/y).

28/6/2014: Exports and Pollution Intensity: Swedish Evidence

A new paper published by CESIfo attempts to understand what mechanisms lead to the empirically-observed negative relationship between harmful CO2 emissions by firms and firm's exports.

Forslid, Rikard and Okubo, Toshihiro and Ulltveit-Moe, Karen Helene paper titled "Why are Firms that Export Cleaner? International Trade and CO2 Emissions" (May 24, 2014, CESifo Working Paper Series No. 4817. http://ssrn.com/abstract=2458293 "…develops a model of trade and CO2 emissions with heterogenous firms, where firms make abatement investments and thereby have an impact on their level of emissions."

Theoretical model "shows that investments in abatements are positively related to firm productivity and firm exports. Emission intensity is, however, negatively related to firms' productivity and exports. The basic reason for these results is that a larger production scale supports more investments in abatement and, in turn, lower emissions per output."

The authors then show that "the overall effect of trade is to reduce emissions. Trade weeds out some of the least productive and dirtiest firms thereby shifting production away from relatively dirty low productive local firms to more productive and cleaner exporters. The overall effect of trade is therefore to reduce emissions."

Lastly, the authors "test empirical implications of the model using unique Swedish firm-level data. The empirical results support our model."

5/4/2014: Is Russian Trade Performance Really That Weak?

Here is another look at trade performance by various countries, this time based on BBVA synthetic index.

First: components of the index (darker colours mark stronger connectedness between trade and domestic economy):

Last: summary of the synthetic index rankings:

So core lesson here is that Russian economy performs right bang in the middle, set between UK and Australia… not bad. But when we look into the underlying drivers for this performance, technology is a weak driver, value retention by primary materials exporters is a major positive driver, specialisation patterns are nowhere to be seen and relevance to the economy is overall much weaker than we could have expected…

5/4/2014: Mystery of exports-growth interconnections

An interesting piece of research from BBVA Research (April 2014) titled "The multifaceted world of exports: How to differentiate between export-driven strategies" dealing, in part, with explicit links between trade and growth across a large sample of countries (Ireland, unfortunately is not included, presumably because our exports are so massively dominated by the transfer pricing by the MNCs that even investment banks don't want to touch our data).

So one very important issue considered in the paper is the overall relevance of exports.

In summary: "Small and medium-sized East Asian economies lead on trade openness among emerging countries, while China outperforms in terms of the domestic connection of exports (i.e. related production generated by other industries). Latin American economies are below average in terms of openness, with Mexico additionally showing a very limited connectivity of trade, which is also the case of Indonesia. Poland outperforms in Emerging Europe as a more open exporter than Turkey and with better domestic connections than Russia."

Chart below summarises: (Fig 5)

Noteworthy feature of this chart is that with strong input from financial services, the UK is virtually indistinguishable from Russia and Canada. The curse of the City seems to be as bad as the curse of oil.

Couple other interesting takeaways:

1) Manufacturers tend to show more close links between exports and value added to the domestic economy (confirming my analysis from the PMIs for Ireland): "Domestic value-added in exports represents around 50% in manufactured goods, while this ratio is much higher for other activities, in which domestic natural resources, intermediation and labour intensity play a very important role. Among emerging economies, East Asian countries lag significantly behind in aggregate value-retention, while some commodity producers import a high share of final goods, which eventually drain the value-added generated at home due to the lack of manufacturing industries."

Chart below summarises: (Fig 8)

2) Diversification is a requirement for smaller open economies: "Product concentration is high for commodity exporters, as well as for specialised manufacturers, while China is the only emerging country with the global capacity to fix market conditions (not only from the supply side but also from the demand side). Saudi Arabia has that ability too for one very important sector: oil. In the case of small economies, for which world market power is much more limited, diversification is the remaining option for shelter from external turbulence."

I wrote about de-diversification of Irish trade that has been on-going with the switch in growth drivers from manufacturing toward ICT exports. But this is of far lesser concern or extent that what BBVA are noting for commodities-based economies. In some ways, we can even think of enhanced diversification happening in Ireland as pharma sector dominance is being eroded. Thus, the only concern in terms of future development is just how much concentration of trade will take place on foot of ongoing expansion of ICT services. For now, this is less of a structural problem than of the short term issue relating to distortions to our GDP and GNP.

3) Apparent technological content is not enough for success: This is a major kicker from our domestic point of view, as most of recent growth in our external trade came from expansion of technologically-intensive sectors. "Many emerging manufacturing countries have a significant share of exports with technological content rated as medium or high. However, none of them has a genuine surplus, as the majority of economies either also import a significant share of these products or just copy the technology or play an assembly role. On the other hand, India records a surplus in tech trade, with exports mainly comprising computer services."

Chart below summarises: (Fig 11)

20/12/2013: Q3 GDP: Is There a Domestic Recovery?

In previous posts, I covered:
1) top-level data on GDP and GNP growth in q3 2013 (here: http://trueeconomics.blogspot.ie/2013/12/19122013-good-gdp-gnp-growth-headlines.html)
2) expenditure components of GDP and GNP (here: http://trueeconomics.blogspot.ie/2013/12/19122013-qna-q3-2013-expenditure-side.html), and
3) 3-quarters aggregates changes in GDP and GNP (here: http://trueeconomics.blogspot.ie/2013/12/20122013-how-real-is-that-gdp-and-gnp.html)


Now, onto the Domestic Demand.

With both GDP and GNP now severely skewed by the transfer pricing going on in the ICT Services sectors in Ireland, it is no longer reasonable to look at either GDP or GNP for the signs of underlying activity gains in the real Irish economy. Instead, we should consider a combination of all three: changes in GDP, GNP and Final Domestic Demand. Final Domestic Demand is defined as a combination of:

• Government spending on goods and services (other than investment goods)
• Government and private investment in the economy, and
• Private household consumption of goods and services

Unlike Total Domestic Demand, Final Domestic Demand excludes stocks built up by businesses.


First, looking at the Q1-Q3 aggregates comparatives based on data that is not seasonally-adjusted and is expressed in constant euros. In Q1-Q3 2013, final domestic demand in Ireland fell 1.41% compared to the same period in 2012 (down EUR1,293 million y/y). Final Domestic Demand is now down 2.89% on the first three quarters of 2011 and is down 21.6% on the same period of 2007.

In other words, over Q-Q3 2013, on aggregate, there is still no recovery in the domestic economy in Ireland.

Second, let's take a look at q/q changes in the GDP, GNP and Final Domestic Demand. For this purpose, we consider seasonally-adjusted constant euros series.

In Q3 2013, Exports of goods and services fell 0.80% q/q on seasonally-adjusted basis. The decline was shallow compared to 4.63% rise in Q2 2013, but it replicates the pattern of 'quarter up, quarter down' established since Q3 2012.

Overall, since Q1 2011 (in other words since the 'adjustment programme' or 'bailout' started) Irish exports of goods and services were up over 6 quarters and down over 5 quarters. Exports-led recovery stacks ups s follows:

• In 1997-2007 average quarterly growth in exports of goods and services in Ireland stood at 2.445%;
• In 2008-present that rate was 0.281% and
• In 2011-present it is 0.4988%

In other words, massive increases in ICT services exports over the period of the crisis are not strong enough to generate significant uplift momentum in exports growth.

GDP at constant market prices rose 1.502% q/q in Q3 2013, marking a second consecutive quarter of growth. In Q2 2013 the rise was 1.023%. Since Q1 2011, GDP rose on a quarterly basis in 7 quarters and was down in 4 quarters. Overall recovery comparatives are:

• In 1997-2007 GDP growth average 1.630% on a quarterly basis;
• Over 2008-present the average is -0.353% and
• Over Q1 2011-present the average is +0.358%

So there is a longer-term recovery on average, based on GDP, but it is weak, consistent with annualised rate of growth of just 1.44%.

GNP at constant market prices rose 1.580% q/q in Q3 2013, marking the first quarter of growth. In Q2 2013 the GNP contracted 0.133%. Since Q1 2011, GNP rose on a quarterly basis in 6 quarters, it was flat at zero in one quarter, and was down in 4 quarters. Overall recovery comparatives are:

• In 1997-2007 GNP growth averaged 1.522% on a quarterly basis;
• Over 2008-present the average is -0.302% and
• Over Q1 2011-present the average is +0.171%

So there is a longer-term recovery on average, based on GNP, but it is weak, consistent with annualised rate of growth of just 0.68%.

Final Domestic Demand at constant market prices rose 2.412% q/q in Q3 2013, marking the second quarter of growth. In Q2 2013 the FDD was up 0.218%. Since Q1 2011, Final Domestic Demand rose on a quarterly basis in 7 quarters, and was down in 4 quarters. Overall recovery comparatives are:

• In 1997-2007 FDD growth averaged 1.621% on a quarterly basis;
• Over 2008-present the average is -0.961% and
• Over Q1 2011-present the average is -0.175%

So there is no longer-term recovery on average, based on Final Domestic Demand, with FDD contracting on average at an annualised rate of 0.70%. There is, however, good news of FDD rising for two consecutive quarters, clocking cumulative growth of just 2.64% over 6 months or 5.34% annualised. The problem is that the levels from which this growth is taking place are low.

As shown above, overall recovery is not yet taking hold in the domestic economy, although there are some gains recorded in the domestic demand that are encouraging and have been sustained over 2 consecutive quarters.

20/12/2013: How Real Is that GDP and GNP Growth in Ireland? Q3 data

In previous two posts, I covered top-level data on GDP and GNP growth in q3 2013 (here: http://trueeconomics.blogspot.ie/2013/12/19122013-good-gdp-gnp-growth-headlines.html) and expenditure components of GDP and GNP (here: http://trueeconomics.blogspot.ie/2013/12/19122013-qna-q3-2013-expenditure-side.html).

Now, let's take a look at 3-quarters aggregates. The reason why looking at 3 quarters aggregates makes sense is that q/q changes are volatile, while y/y changes are only reflective of quarter-wide movements in activity. 9-months January-September 2013 data comparatives to a year ago provide a better visibility as to what has been happening in the economy so far during this year.

All analysis below is based on seasonally unadjusted data in constant prices terms.

In 3 quarters (Q1-Q3) of 2013, Personal Consumption of Goods and Services fell 1.22% when compared to the same period in 2012. The series are down 1.93% on Q1-Q3 2011. In level terms, personal consumption is down EUR734 million for the first 9 months of 2013 compared to a year ago.

Expenditure by Central and Local Government on Current Goods and Services was down 0.96% for the 9 months January-September 2013 compared to the same period of 2012 and is down 5.03% on same period in 2011. In level terms, Government spending on goods and services is down EUR178 million in Q1-Q3 2013 compared to a year ago.

Gross Domestic Fixed Capital Formation for the nine months January-September 2013 has fallen 2.90% compared to the same period a year ago (in level terms, -EUR381 million). Compared to the same period in 2011, gross fixed capital formation is now down 4.42%. When we talk about 'big increases' in investment, keep in mind, Q1-Q3 cumulated Gross Fixed Capital Formation was down 55% on the same period for 2007.

Exports of Goods and Services for the nine months January-September 2013 were down 0.8% on the same period a year ago (-EUR1,013 million), but up 0.84% on the same period of 2011. This hardly shows 'robust growth' in exports. Exports composition has shifted once again in favour of Services. Goods exports shrunk over the last nine months by 4.51% compared to same period 2012 (-EUR2,809 million) and are now down 8.29% on Q1-Q3 cumulative for 2011 and down 2.47% on Q1-Q3 2007 too. Meanwhile, exports of services rose 2.77% in Q1-Q3 2013 compared to a year ago (+EUR1,796 million) as per 'Google-tax effect' and these are now up 10.69% on Q1-Q3 2011 and up 21.29% on Q1-Q3 2007. At the rate we are going, pretty soon Barrow Street GDP will exceed that of South Korea, which will make Poly's Pizza more economically important than Geneva.

Sarcasm aside, Imports of goods and services (another driver - via their collapse - of positive GDP and GNP news) are down 0.93% y/y in Q1-Q3 2013 (-EUR908 million) and are down 1.35% on same period 2011. Compared to Q1-Q3 2007 imports of goods and services are down massive 9.49% - the effect that contributes significantly to upside of GDP. Goods imports alone are now down 33.3% on Q1-Q3 2007 and these were down 4% (-EUR1,419 million) on Q1-Q3 cumulative for 2012.

So, let's add few things. In 9 months January-September 2013, relative to the same period of 2012:
1) Personal consumption fell EUR734 million
2) Government consumption fell EUR178 million
3) Domestic Gross Fixed Capital formation fell EUR381 million
4) Exports of Goods and Services fell EUR1,013 million
5) Imports of Goods and Services fell EUR908 million, and
6) Stocks of goods rose EUR503 million.

(1)-(4) subtracted from GDP growth, (5) and (6) added to GDP growth. Which means that the only two positive contributions to growth in our GDP came from: imports decline and stocks of goods held by businesses rise. This is hardly a good news, as both sources of growth are really not about increased/improved activity in the economy.

Thus, GDP at constant market prices fell over the period of Q1-Q3 2013 compared to Q1-Q3 2012 by 0.58% (or EUR706 million). Notice the word 'fell' - whilst there were rises in GDP in Q3 and Q2 in q/q basis, overall so far, 2013 total output in the economy is below that registered for the same period in 2012.

GDP is also down 0.04% on same period 2011 and is down 6.82% on the same period in 2007.

Let me know if you are spotting any positive growth in the above.

Next, the difference between GDP and GNP is formed by the Net Factor Income from the Rest of the World. This also fell in Q1-Q3 2013 compared to the same period of 2012 - down 14.37% y/y (or -EUR3,378 million), which 'contributed' a positive swing to the GNP in the amount of almost EUR3.38 billion. The reason for this? Well, growth-generating fall-off in activity in the phrama sector meant that MNCs were booking lower profits via Ireland and this, allegedly, has a positive effect on our economy… err… on our GNP.

GNP, propelled by stocks accounting tricks, hocus-pocus of transfer pricing and continued decline in imports rose 2.69% in Q1-Q3 2013 compared to Q1-Q3 2012 (up EUR2,670 million = decline in GDP of -EUR706million plus decline in factor payments of +EUR3,378 million). Seriously, folks, this is beginning to look like a joke!

Based on the same physics of transfer pricing miracles, Irish GNP is now 4.16% ahead of Q1-Q3 reading for 2011.

Recap: On expenditure side of the National Accounts, growth in 2013 is not exactly real (for GNP) and not present (for GDP).

Analysis of Total Domestic Demand (aka domestic economy) is to follow. Before then, charts to illustrate the above:

19/12/2013: QNA Q3 2013: Expenditure Side and External Trade

QNA results came in strong at the headline levels for Q3 2013. These were covered here: http://trueeconomics.blogspot.ie/2013/12/19122013-good-gdp-gnp-growth-headlines.html

Now, let's take a look at the GDP decomposition by expenditure line. I am referencing throughout non-seasonally adjusted series for y/y comparatives. All in constant prices.

Year on year, personal expenditure on goods and services fell 0.98% in Q3 2013 and the series were up 0.79% on Q3 2011. This is not a good result, but it is an improvement on -1.52 y/y contraction recorded in Q2 2013.

Net Expenditure by Central & Local Govt. on Current Goods & Services rose 0.68% y/y in Q3 2013, after having posted a contraction of -1.73% in Q2 2013. Compared to Q3 2011, net expenditure by Government was down -3.25% in Q3 2013.

Gross domestic fixed capital formation jumped significantly in Q3 2013 up 8.30% y/y albeit from low levels. The series are now up 18.68% on Q3 2011. In Q2 2013, fixed capital formation rose 1.42% y/y, so Q3 2013 data shows some serious improvement.

Exports of Goods and Services (net of factor income flows) rose 0.58% y/y in Q3 2013 and are up only 0.94% on Q3 2011. This is poor given how much we have staked on an exports-led recovery. Worse news: in Q2 2013 exports grew 1.09% y/y, so we are seeing continued slowdown in the rates of growth.

Exports of Goods fell 2.37% y/y in Q3 2013 on foot of a decline of 1.61% in Q2 2013. Exports of goods are now down 7.64% on Q3 2011.

Exports of Services meanwhile picked the slack from Exports of Goods contraction. Exports of Services grew 3.32% y/y in Q3 2013 having previously posted growth of 3.63% y/y in Q2 2013. In other words, strong growth in Q3, but slower than in Q2. Compared to Q3 2011, exports of services are now up cumulative 9.89%.

Imports of Goods and Services fell 1.28% y/y in Q3 2013 and are now up only 0.73% on Q3 2011. The decline was primarily driven by a 3.4% drop in imports of goods and moderated by a decline of 0.11% in terms of imports of services.

Trade Balance grew on foot of stronger trade surplus in services (+EUR747 million in Q3 2013 compared to Q3 2012) and moderated by small decline in trade deficit in goods (-EUR93 million in Q3 2013). Trade balance overall grew by EUR654 million in Q3 2013 compared to Q3 2012, up 6.56% y/y.

Thus, on the expenditure side of the National Accounts, Q3 2013 gains in GDP were supported by 

• Growth in the Net Government Expenditure on Current Goods and Services, Gross Domestic Fixed Capital Formation, and Exports of Services
• Contraction in Imports of Goods and Imports of Services

The GDP dynamics were adversely impacted by declines in:

• Personal expenditure on goods and services,
• Decline in Exports of goods.

Volatility remains a dominant theme in quarterly data analysis, so it is worth looking at the figures for the first 3 quarters of the year. This will be done is the next post.

2/10/2013: Clusters Resilience in Downturns

Interesting research paper from CEPR on the resilience of firms clusters to the downturns. The DP 9667 "Are clusters more resilient in crises? Evidence from French exporters in 2008-2009" by Philippe Martin, Thierry Mayer, and Florian Mayneris (September 2013) looks at two types of clusters: traditional clusters and incentivised clusters.

Per abstract [emphasis mine]:

• "Clusters have already been extensively shown to favor firm-level economic performance (productivity, exports, innovation etc.)."
• "However, little is known about the capacity of firms in clusters to resist economic shocks."
• "In this paper, we analyze whether firms that agglomerate in clusters and firms that have been selected to benefit from the "competitiveness cluster'' industrial policy, implemented in France in 2005, have performed better on export markets during the recent economic turmoil."
• "We show that, on average, both agglomeration and the cluster policy are associated with a higher survival probability of firms on export markets, and conditioning on survival, a higher growth rate of their exports."
• "However, these effects are not stronger during the 2008-2009 crisis; if anything, the opposite is true."
• "We then show that this weaker resilience of competitiveness cluster firms is probably due to the fact that firms in clusters are more dependent on the fate of the "leader", i.e. the largest exporter in the cluster."

Note: couple of things to note as a potential lesson to be learned:

1. Make clusters more horizontal, rather than vertical, to reduce excessive dependency on one 'leader' firm.
2. The above is probably even more critical of a consideration for clusters involving partnering of smaller firms with larger MNCs.