20/09/2011: Wholesale Prices - more margins pressure

Wholesale Price Index for Ireland is out today - monthly series (note - these are highly volatile series in general) and the results are not too good for profit margins in Irish manufacturing.

Monthly factory gate prices declined 0.4% in August 2011 against an increase of 0.2% in August 2010, implying annual rate of contraction of 1.0%. In July 2011, annual rate of decrease stood at 0.4%.

Overall price index for manufacturing industries (NACE 10-33) stands at 97.2 in August 2011, down from 97.6 in July and 98.2 in August 2010. We are now in the third monthly decline in a row.

Stripping out effects of food, beverages & tobacco sector, manufacturing price index fell to 92.2 in August 2011, down from 92.5 in July and 94.2 in August 2010. Year on year index is now down 2.1% against annual decline of 1.5% in July.


In the month, the price index for export sales was down 0.5% while the index for
home sales (domestic sales) increased by 0.1%. In the year there was a decrease of 2.2% in the price index for export sales (this can be influenced by currency fluctuations, as CSO correctly points out). In July 2011 annual rate of decline was 1.6%. However, CSO fails to point out that deflation has been affecting severely our largest exporting sectors - pharma and ICT (see below on this). In August 2010, annualized rate of change in export prices was +0.2%.

There was an increase of 4.7% in respect of the price index for home sales (this can be influenced by state-controlled producers ripping-off domestic consumers, but hey, no mention of that in CSO release). In July 2011 there was a 4.9% increase yoy in same prices. And in fact, domestic sales prices have been rising every month since December 2009, implying increasing pressures on retail sector here and domestic consumers.

So the two-tier economy is well supported by price changes as well as production volumes: our exports are getting cheaper (last increases in exports prices yoy were recorded in January 2011), while our domestic sales are getting more expensive and fast. The last time changes in prices in domestic sector fell behind changes in prices (in same direction) in exports sectors was July 2010. And not a peep from either our policymakers or the CSO about these facts.

What CSO does highlight is that: "Contributing to the annual change were increases in Dairy products (+10.1%), Meat and meat products (+8.1%) and Other Manufacturing including Medical and Dental Instruments and Supplies (+3.2%), while there were decreases in Computer, electronic and optical products (-6.4%), Basic pharmaceutical products and pharmaceutical preparations (-3.6%) and Other food products including bread and confectionary (-1.1%)."
Now, recall that pharma accounts for 90% of our trade surplus. Basic pharma sector wholesale prices have now fallen to 87.4 in August 2011, down from 90.7 in August 2010 and from the local peak of 106 attained in November 2008.

CSO does report that "The price of Energy products increased by 3.3% in the year since August
2010, while Petroleum fuels increased by 9.1%. In August 2011, the monthly price index for Energy products decreased by 1.4%, while Petroleum fuels decreased by 3.7%." I would add that electricity remained unchanged at 115.2 year on year and most of price increases in this sector are due to Petrol and Autodiesel (both +9% yoy), Gas oil (+10.3%) and Fuel oil (+8.8%).

Year on year, the price of Capital Goods decreased by 5% in August, to 82.5 and it was down 4.3% in July. The index now stands at 82.5, down from 83 in July 2011 and 86.8 a year ago. Intermediate goods ex-energy price index rose 2% in August (yoy) against yoy rise of 2.7% in July. This index remain in the positive territory since November 2011.

Economics 25/02/2010: Wholesale prices - deflation is still a problem

Wholesale and Producer prices are out today for Ireland, January 2010.

Per CSO: Monthly factory gate prices are up 1.5% in January as compared to 0.4% rise a year ago. Annual percentage change now stands at -2.8% in January 2010, compared with an annual decrease of 3.8% in December 2009.

Exports prices rose strong 2.0%, while the index for home sales was down 0.2%. In the year there was an increase in the exports price index of 3.3%, primarily due to positive currency movements and a decrease of 0.9% for domestic sales prices.
Producer price deflation is moderating
but this moderation is driven primarily by external factors.

January 2010 most significant changes were:

• Basic chemicals (+4.9%),
• Pharmaceuticals and other chemical products (+1.7%)
• Other food products including bread and confectionery (+1.4%),
• Beverages (-0.3%)
• Building and Construction All material prices increased by 0.9% in the month

On an annual basis:

• Basic chemicals (-9.6%),
• Office machinery and computers (-4.1%),
• Radio, television and communication equipment (-3.7%),
• Other food products including bread and confectionery (+1.8%)
• Tobacco products (+7.8%)
  
• Building and Construction All material prices -1.4% in the year since January 2009.

Capital goods – a very important driver for recovery, posted a yoy price drop of 0.6%, and a mom rise of 0.4%. Thus, mom changes were too weak to signal any significant turnaround in business investment cycle.

Wholesale price of Energy products fell 3.9% in the year since January 2009, while Petroleum fuels increased by 24.1%. In January 2010, there was a monthly increase in Energy products of 0.8%, while Petroleum fuels increased by 2.7%.

Overall, therefore, while some moderation in deflation at wholesale level is evident, there is not enough momentum to suggest that we are out of the woods yet. Chart above clearly shows that the deflationary trend prevalent since May 2009 was broken in December 2009 and the positive trend has accelerated in January 2010. It will require 1-2 months of continued upward trend to signal sustained movement toward a recovery and the risk here is for a double-dip.

The same stands for Industrial producer prices (Manufacturing). But there is far less optimism in the numbers for Capital goods, which show more volatility and reversals than broader indices.

Economics 24/08/2009: Wealth effects in Ireland and Wholesale Prices

Mountain air and thunderstorms are conducive to light reading, so I was wading through an interesting and sweetly short ECB paper from May 2009, titled “Euro Area Private Consumption: Is There a Role for Housing Wealth Effects”.

The paper looks at a number of Eurozone countries – excluding the wonderland of Ireland (so it provides conservative estimates for the wealth effects) – to find that the marginal propensity to consume out of financial wealth (MPCF) in the Eurozone ranged between 2.4% and 3.6% on the aggregate. The MPC out of nominal housing wealth lies between 0.7 and 0.9%.

Re-parameterizing the model for the case of Ireland,

• financial wealth declines since 2007 peak imply that Irish consumption should have fallen by ca 1.9-2.9%;
• housing wealth declines add another 0.35-0.45% to the consumption losses;
• while negative equity effects (assuming 20% of households in negative equity) subtract further 0.69-1% off our consumption.
• So the cumulative effect of recent wealth losses should be in the area of 1.45-2.1% of consumption expenditure.

The above figure does not account for the fact that in most cases our debt levels used to finance financial and housing wealth acquisitions were not diminished over the last two years. Factoring this in, net decline in consumption expenditure should be around 1.7-2.6% in permanent terms.

This goes some ways to highlight the fact that this economy is not running a tax-shortfall-driven deficit on public accounts – we are now increasing public consumption amidst permanently shrunken private consumption. Given that Ireland’s net current Government expenditure is projected (by the DofF) to rise 17.64% between 2009 and 2013 (from €46.365bn to €54.546bn) while the expected cumulative loss in private consumption is expected to total 8.8-13.7%, the wedge between private and public consumption growth in the crisis years is likely to be around 17.5-22.5% of private consumption. And that is before tax increases and future bonds financing burdens are factored in. In other words, tax us some more and we will withdraw all unnecessary consumption from this economy. If we were a land-locked Luxembourg, I doubt there will be many non-public service workers still living in Ireland after that.

And per the latest wholesale price indices release from CSO, here are few charts.

First, exporting vs home sales prices – a clear return to the previous trend of widening gap. Exporters are still suffering while domestic sectors are running improving pricing conditions. A brief period of convergence in November 2008 – January 2009 has now been firmly replaced by a renewed bout of falling export prices and rising domestic ones. Unfortunately, CSO is not providing actual raw data on these series this time around, so no more analysis is possible for now.

Second chart is dealing with manufacturing prices and growth rates (yoy and mom). Deflation continues here and has accelerated in July relative to June. Month-on-month changes are really telling the story – June improvement is still visible, but is being erased. Note monthly range for July 2008-July 2009 being negatively sloped, as contrasted with July 2007-July 2008. Plotting monthly indices by year shows that seasonality is not as important here and that 2009 is pretty much all about traveling down a steep deflation curve that started in November 2008.