Economics 26/12/2009: Commoners Amongst Our Foreigners

Merry Christmas to all and a Happy New Year.

To start off the post-Christmas season on an interesting note, here is a different look at the CSO's data on PPS allocations.
Cumulative PPS allocations over 2002-2008 show clearly the magnitude (absolute and relative) of migration from Poland to Ireland. It is worth highlighting the fact that the number of people moving to Ireland from the countries with strong historical links to this country is smaller than that from Poland, and close to that from the 3 Baltic States. Of course, the relative potential pool of migrants from the historically important destinations for Irish emigrants in the past is of magnitude of 100 times greater than that of the Baltic 3 entire populations.
Total immigration figures are impressive, peaking in 2006 and falling in 2008 to the average of 2004-2005 levels.
Looking at the same in terms of countries, the above graph shows again how dramatic was immigration from Poland relative to other countries. In 2005, tiny Lithuania sent more people into Ireland than any other country save for UK and Poland. However, as credit bubble blossomed back in the Baltics, Lithuanian and Latvian migration started to decline after 2005, as was the case with Slovakia post 2006.
A messy chart above shows several interesting trends in migration from other countries. Nigeria - a clear decline post Michael McDowell-led reforms of the free-for-all asylum processes. Brazil - massive increase between 2004 and 2008. Whatever the reasons might be? Philippines - no dramatic slowdown in inflows, save for 2002-2004 period. In other words, given that the Philippines is the leading country supplying nursing staff to HSE, there is really no evidence here that Filipino nurses stopped coming to Ireland (remember the claims made by the trade unions). There are many other interesting things going on in the chart, so feel free to interpret/speculate.
Some more trends in PPS allocations in 2002-2008 above. As percentage of the total, Poland's weight was still increasing in 2008, relative to all other major destinations sending immigrants to Ireland.
Cumulative allocations as shares of total allocations above. And next, same by broader region:
Here is a funny thing - 3 Baltic states accounted for more allocations in 2004-2006 than the UK, the rest of the EU15, the US and even the rest of the world. Amazing, given these three countries are about 1/100th of the EU27 population. And, given that incomes were raising in these countries at very high rates, why would these three countries attract such a massive migration to Ireland? Perhaps the reason is coincident with the anecdotal evidence that vast majority of migrants from these 3 states were Russian speaking. Of course, if this is true, it would represent a small embarrassment to these countries' leaderships, because it would illustrate dramatically how prosecution of Russian-speaking minorities in these countries was pushing people to emigrate. But, again, this is speculative at this point in time, as we never bothered to ask these people their ethnicity, as opposed to their citizenship.

Now, next, look at the dynamics of allocations of PPS numbers to foreign nationals:
Note the dramatic dynamics for the EU10 - virtually none in 2003, jump in 2004 and on to peaking in 2006. what does it tell us about these workers? Prior to 2004, they had to compete with the rest of non-EU employees for jobs. And they were not very good at it, apparently. Post 2004, they no longer had to face real competition. And they became, overnight, very good at getting jobs. Suspicious? Me too. Just shows how arbitrary the world is out there - your skills, your aptitude, your knowledge - all these matter as a secondary differential at the very best. Your passport is what determines who you are, can be and will be to a greater extent.
Total allocations to foreign nationals above.

Now, on to two very interesting graphs:
The above chart shows that overall, the groups with no employment activity were dominated not by the EU10 citizens, but by the UK, EU15, and US migrants. Why, you might ask? Well, citizens of these countries came to Ireland for many reasons, some of which were simply not available to those from EU10 - retirement would be one, second homes would be another one. In other words, it is not that the citizens of these countries had lower propensity to work in Ireland, they simply were more heterogeneous (age wise and occupation/income wise).
Chart above dispels several myths:

• EU10 citizens propensity to drop out of labour market activities was no more dramatic than that of other major groups of migrants. However, this must be interpreted with care, as the EU10 migrants do not include second home owners or retirees (which makes their drop-out rates higher than average for EU15, UK and US migrants) and they have no restrictions on spouses employment here (which makes their rates of dropping out more significant than those for the rest of the world migrants);
• US migrants have the lowest rate of decline in labour market activities;
• EU10 numbers for 2008 also conceal the fact that many of those migrants probably moved into gray economy (cash payments) and into sub-contracting, both not recorded by PAYE system. This increases the rate of non-participation for these immigrants.
  

So despite a massively different levels of migration from the EU10 over 2004-2008, there is little evidence so far to suggest that these migrants were dramatically different from other groups of migrants. In some areas they were somewhat distinct, but one cannot conclude that these differences were dramatic...

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 23/12/2009: Ending 2009 in Red

As 2009 is drawing to a close, let's take a quick look at the broad shares performance in Ireland. starting with a 10-year picture for ISEQ, S&P500 and Nasdaq:
This clearly shows just how dreadful the crisis has been for Ireland - in terms of total decline on the peak valuations. A five-year view confirms this:
But it also shows that 2008 was much worse for Ireland Inc than it was for the benchmarks. And despite the deceptive nature of statistics (remember - we started 2009 at a much lower valuation than other indices, so we could have expected a much stronger bounce from the bottom over 2009 bear rally), we remain heavy underperformers over 5 year horizon.
Ditto over the two year horizon although much closer/tighter view on the 2009 alone:
And if you were swayed by the 'buy' signals from our ever-optimistic brokers in the H2 2009, here is what you've been aiming for:
Yeeeks... At the beginning of the year, I predicted that the markets will continue discounting Ireland throughout 2009 on the back of the adverse news flow (deeper recession, failures in fiscal governance and collapse of banking) relative to the broader global indices. Clearly, they did.

Oh and one more reminder - back in July-August 2008 an MD of our top-5 stockbrokerage firms issued a fanfare-sounding Green Jersey note telling his clients that 'markets come back'.
Were we to listen - we would be buying ISEQ at 5,070 and valuing it today at under 3,000 - a 40.8% drop. Some price for a Green Jersey.

Oh, and it wasn't exactly a ride for the risk-averse, even compared to the scary trender like Nasdaq:
So markets do come back, don't take me wrong - except in their own time and at their own speed. Better luck in 2010, folks!

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 21/12/2009: Nama - perpetuum mobile of ethics and objectives

For those of you who missed my Sunday Times article yesterday - here is the unedited version of the text.

But before we begin on Nama - here is a superb article on the prospects of potential sovereign defaults in Europe (read: Baltics, Greece and Ireland) from the FT today.

And here is a fantastic compendium of Brussels-imposed costs to the UK economy as estimated by the UK Government own assessments studies. One wonders if Irish Government bothered to do the same exercise and what its outcome might be. In the UK, the cumulative present value cost of these measures is ca £184 billion through 2020. If the same apply to Ireland, proportional to the overall size of the Irish economy, the combined cost of these Brussels directives could be around €18.6 billion - more than 77% of our annual deficit.



In the real world economics there is one Newtonian-level certainty: what can’t go on, doesn’t. We should have learned this some years ago, following the 1980s economic debacle and the 2001 collapse of the tech bubble. We had another opportunity to understand it last year. But in Ireland, real economics is reduced to the domain of an eccentric hobby. The real business of the nation leadership is preservation of the status quo – first at the state level, then political, and now – in banking.

Nama is a focus of all three. Through it, even in the midst of the current historic crisis, our political and executive elites continue to inhabit a parallel universe where responsibility and accountability are for the commoners, and transparency and governance are decorations for EU summits.

Aptly, in its current form, Nama reigns supreme as the most non-transparent financial institution in the developed world. Its ‘independent’ directors are being selected behind the closed doors by those who presided over the systemic failures of our regulatory and supervisory regimes. Its risk, audit and strategy functions will be fully contained within the secretive and unaccountable structure of the organization itself.

Nama will not publish a register of properties against which it will hold the right of seizure. This, we are being told, is done to protect privacy of the developers involved. But a register does not have to declare the names of the borrowers – property location, purchase price, vintage, LTV ratio and valuation by Nama would do just fine.

Nama accounting and audit functions will not comply with the requirements imposed by our regulators on public companies. Its directors, management and consultants will enjoy a blanket indemnity that is unparalleled by the standards of any public office or company law. Their remuneration will not face even the farcical constraints that senior banks executives face.

Nama owner – the SPV – is a bogus shell entity with ghost investors and a minority shareholder (the state) in charge. That this scheme has been concocted not in a distant off-shore location, but by our own state in our name and with our money adds insult to the injury.

As if the existent shortfalls of the legislation establishing Nama were not enough, even after the entity approval by the Dail, the goalposts for its operational performance continue to shift. Just weeks after the TDs voted to approve it Nama is now a different beast altogether.

Take the issue of discounts. Throughout the approval process, the Government doggedly refused to accept the need for realistic writedowns on the loans. Hence, all official estimates for Nama were incorporating an extremely optimistic 20-23% average discount. A handful of independent analysts, including myself, Professors Karl Whelan (UCD) and Brian Lucey (TCD), and an independent banking expert Peter Mathews, kept on showing analytically and factually that the final discount must be closer to 35-40% if Nama were to become anything but the skinning of the taxpayer.

The latest revelations from the banks and our stockbrokers, who insisted earlier this year that a 12-15% discount would be just fine, put an average Nama discount at over 30%. Nama cheerleaders now admit that applying a low discount is simply bonkers. This week, international agencies – Fitch and Moody – also waded back to the shores of reality. Both highlighted the fact that going forward Irish banks will remain in their current insolvent state. Nama won’t repair their balancesheets and it will not change their ability to raise capital privately.

With this change in direction, Nama became an exercise in racing to the top of recapitalization heap, as banks scrambled to issue new estimates of their expected demand for additional capital.

Two months ago I estimated in a public note that Bank of Ireland will require up to €2.6bn in capital after Nama loans are transferred, AIB will demand close to €3.5bn, Anglo €5.7bn and the rest of the pack will need approximately €1.2bn. The total demand for recapitalization costs post-Nama – none of which is factored into that work of fiction known as Nama Business Plan – will be €10-13 billion.

All of these figures could have been glimpsed from the banks balancesheets, but the Department of Finance, NTMA, and an army of advisers have opted for creative accountancy in place of realistic estimates.

Over the recent months, virtually every vested analyst in the country has confirmed the above figures for the banks. In one case – that of INBS – the analysts actually exceeded my worst case scenario projections. The result of this delayed admission is the current bear run on Irish banks stocks.

Now, recall that consensus estimates prepared by the independent analysts show that in the end of its operations, the ‘bad bank’ is likely to yield net losses to the taxpayers of between €11 billion and €17 billion. Not a single estimate, short of the fictionalized official Nama accounts, shows the entity breaking even on the loans.

Do the maths: expected losses of €11-17 billion, plus recapitalization costs to date of €11 billion, plus expected post-Nama recapitalization costs of €10-13 billion (only partially reflected in the expected losses estimates). The total bill for this bogus ‘rescuing’ of the Irish banking system is likely to be in the neighbourhood of €29-40 billion.

And, judging by the public pronouncements from the top bankers of AIB, Bank of Ireland, Anglo, permanent TSB and EBS – there is not a snowballs’ chance in hell Nama will repair lending to Irish companies or households. Instead, as the US experience with TARP shows – a liquidity trap is awaiting our economy. Put in simple terms, no rational banker would forego an opportunity of borrowing from the ECB and lending at ca 5% to the state instead of providing capital to SMEs and households.

Contrary to the hopes of restarting the lending cycle, what we have to look forward to in 2010 is the strengthening of the margins by the banks. A combination of the ‘risk sharing’ scheme built into Nama legislation, costlier interbank funding markets (courtesy of reduced liquidity supply from the ECB), falling corporate deposits base and the deterioration in the capital reserves of the banks will mean that the cost of existent loans and future borrowing will rise. And it will rise dramatically.

The first taste of this was the implementation by permanent TSB of a rate hike on adjustable rate mortgages. ESB preannounced the same move some months ago. Bank of Ireland, AIB and the rest of the pack will follow. When this happens, even absent ECB rates hikes (anticipated by the market in mid-to-late 2010), the retail lending rates will rise, triggering a wave of defaults by households on credit cards debt, consumer loans, car loans and ultimately home loans.

Short term lending facilities for businesses and export supports will also come under pressure as banks address the twin problems created by Nama – the deficit of capital and the uncertain nature of risk sharing scheme. The lack of exports supports either in the form of state-backed export credit insurance for indigenous exporters or the currency risk offset scheme in the Budget 2010 will further exacerbate the problem.

All of this is fuelling the current run on the banks shares. Even with their wings clipped, stock markets investors are indirectly ‘shorting’ Irish banks by withdrawing their cash from the AIB, Bank of Ireland and Irish Life & Permanent valuations. The markets are shouting: ‘We are not buying your story that Nama will work for Irish economy!’ The Government is not listening.

Box out:
A study based on the Standard & Poor’s data released this week shows that over the last 5 years, active funds managers have managed to under-perform broader market indices in four out of four asset categories. Thus, only 37% of active funds managers with large cap strategy orientation beat S&P500 large cap index to July 1, 2009. Only 32% of funds specializing on small cap equities outperformed S&P Small Cap 600 index, and abysmal 13% of funds with international (as opposed to US) orientation have managed higher returns than S&P700 index of global equities. Just 20% of bonds funds beat Barclays Intermediate Government/Credit index. And that is before we factor in cost differentials between actively managed funds and plain vanilla index-linked ETFs. Ouch…

Economics 19/12/2009: Ireland's Financial Assets & Liabilities 2002-2008

Per CSO release earlier this week: "The net financial assets of households fell by €41.4bn in 2008 to €80.9bn, a drop of 34%. The financial assets of the sector, which does not include housing or other physical assets, dropped by €27.3bn while liabilities increased by €14.1bn, resulting in the decline in net financial assets of the sector."

What worries me more than the decline in the values of assets is the rise in liabilities.

"A net incurrence of liabilities of €13.4bn (a pronounced drop from 2007, due mostly to the decline in borrowing) combined with a fall in the net acquisition of financial assets to €7.7bn, has led to net financial transactions of €-5.7bn for 2008. This continues the trend observed in earlier years although to a much lesser degree."

Summary:


So let's see those continued trends up close and personal:
So currency & deposits - aside from financial sector, or more specifically banks - is held primarily by the households (suckers for liquidity and low yields), followed by non-financial corporations.

When it comes to financial securities (other than shares), households and non-financial corporations are at bottom - not to be seen in comparison with other financial intermediaries and bonds- issuing government.
But these too are dwarfed by the extent of securities holdings by financial system and in particular banks. Ex monetary institutions (aka banks) there has been a drop off in assets in this category in 2008.

Loans on the asset side:
Obviously banks and other financial intermediaries lead. But non-financial corporations are also increasing lending here. Why? Because these account for loans to subsidiaries and also because these reflect overall decline in lending to the corporate sector. It is, in many ways, a form of financial barter - non-financial companies should not really engage in lending, they should engage in producing.

So what happened to total financial asset holdings?
Per chart above, things were not all too bad in 2008, given the destruction of value in assets worldwide and serial devaluations against the euro. Not too bad, unless you consider the net assets held:
Oops...

Economics 18/12/2009: Public Sector Earnings & Employment

Per CSO release today: is the Government is losing the fight to keep this economy afloat?

"Average weekly earnings in the Public Sector (ex Health) rose by 2.5% in the year to September 2009 from €945.18 to €969.11 per week. This compares to a rise of 3.2% in the year to June 2009."

Weekly earnings for

• the Regional Bodies rose by 4.6% (from €815.58 to €852.71)
  
• the Education Sector by 3.0%, from €944.49 to €973.10.
  
• An Garda Síochána, inclusive of overtime, fell by 0.8% from €1,196.19 to €1,186.37 per week. Their weekly earnings excluding overtime decreased slightly by 0.1% from €1,077.55 to €1,076.22 for the same period.
  

Over the four year period from September 2005 to September 2009, average weekly earnings in the Public Sector (excluding Health) rose by 14.2% from €848.94 to €969.11:

• Regional Bodies’ earnings rose by 15.3% (from €739.27 to €852.71),
  
• Semi State by 17.2% (from €902.95 to €1,058.46),
• An Garda Síochána, inclusive of overtime, rose by 8.8%,
• Education Sector rose by 11.5% in this period,
  
• Civil Service and the Defence Sector rose by approximately 18% (from €797.37 to €933.03 and €691.28 to €815.58 per week respectively).

Natural attrition with recruitment bans has produced a decline in PS employment from 369,100 in September 2008 to 360,900 in September 2009 - a decline of 8,200 or 2.22% - way too small compared to the declines in private sector employment and labor force. But the natural reduction rate is accelerating - there was a decrease of just 2,700 in a year to June 2009.

Nonetheless at this rate, it will take Ireland about 20 years before we reach the reasonable levels of public sector employment, comparable to other countries, which stands, given our size of labor force and lack of functional military sector, at around 250,000.

In the year to September 2009 employment in Regional Bodies fell from 40,400 to 37,000, a decrease of 3,400. In the same period there were 1,200 fewer people employed in the Civil Service where numbers dropped to 38,100 in September 2009. Employment in the Health Sector fell to 110,200 in the year to September 2009, a drop of 600. Employment in An Garda Síochána rose by 500 from 14,200 in September 2008 to 14,700 in September 2009.

In the four years to September 2009, employment in the Public Sector rose by 17,300 to 360,900

• Education Sector from 84,700 to 97,200, an increase of 12,500
• An Garda Síochána rose by 2,400 from 12,300 to 14,700,
  
• Health Sector from 101,500 to 110,200, an increase of 8,700,
• Regional Bodies employment decreased from 38,200 to 37,000, a drop of 1,200.

Updated charts as always (note, data goes back to Q1 2005, unlike CSO's latest release).

Employment numbers first.

Earnings last:
With two details: earnings by category within and outside 1 standard deviation of the mean:showing the lack of overall volatility in the public sector earnings, which shows that the argument offered by the unions that some occupations in PS earn less than others is simply statistically not true. They all earn pretty much the same:
Not a single sub-sector of the PS falls outside 2 standard deviations from the PS mean. Of course, homogeneity is the sign of the lack of proper pricing relative productivity. Then again, it is public sector we are talking about.

Economics 18/12/2009: How fair is that Ireland-Greece comparison?

Our policymakers are quick to point out that Ireland has been unfairly treated by the bond markets, for its CDS and bonds spreads are moving in tandem with those of Greece.

The sop story usually flows along the following lines: “Ireland has a better starting position in terms of lower debt burden and it has taken the pain necessary – through three Budgets effecting significant cuts to spending and imposing new revenue raising measures. Greece, obviously, have not done so. Thus, our bonds spreads should be much closer to Germany than they are to Greece.”

An interesting, if somewhat lopsided proposition.

Here are some comparatives (do keep in mind that our real income is GNP which is now 20% below the GDP figure):
Note: No recap scenario refers to no recapitalization funding for banks post-Nama; Recap 50% scenario assumes that 50% of expected cost of recapitalization of banks post-Nama impacts in 2010.
* Severely unrealistic target.
** Ex-Nama.
*** Nama primary €59bn, higher number also factors in expected post-Nama recapitalization costs.

And consider a couple figures:
Data for all three is from IMF/World Bank/BIS database

So here we go. Is Ireland unfairly singled out to be put next to Greece? You decide, but remember, bond markets do not care about one’s starting position or about the current position – they care about the future positions. When a patient gets a massive stroke, the fact that he was jogging 5 miles a day before is neither here, nor there.

And on a good news front: here. We are saved! Escaping Nama will be just a quick 88-mph blast to the past away.

Economics 17/12/2009: End of recession in Ireland?

Is Ireland technically out of the recession? Well, I don't know. And for several reasons.

First, it takes two consecutive quarters to get into a recession. Should one quarter of positive growth mean you get out of a recession? Me thinks not.

Second, what measure do you go by? In a large diversified economy, GDP does the job. In the case of Ireland - GNP. Just as we should not count transfer prices by multinationals as our income, we should not count GDP as our measure of economic well-being. And here is a sticky point for today's QNA data: Q3 2009 saw GDP rise by 0.3%, but GNP fall by 1.4%. So this economy's income/output is falling still.

Third, consider why the GDP expanded in Q3 2009.

In the case of Q3 2009, every category of domestic expenditure fell on Q2 2009:

• Spending by consumers down by 0.7%qoq;
• Government expenditure down 0.9% qoq (good news given the deficit);
• Investment down some 10%
• Spending on Irish exports down 0.6% relative to Q2 2009.

So how did the economy grow? Imports fell a whooping 4.5%. Fewer BMWs and Mercs and flat screen TVs imported into the country and, magic happens – we are now richer by 0.3% than we were in June 2009. Right… North Korean model of growth indeedanyone?..

GDP expenditure components, % qoq
Now, in comparison, the US – economy on public spending (err stimulus) steroids – grew by 0.7% increase in GDP Q3 2009 and this growth was broadly present across all categories of expenditure.

The only net positive is that GNP contracted only 1.4%, which is much slower rate of collapse than 5.2% decline in Q1 2009 and even slightly slower than Q2 2009 fall of 1.7%. Nonetheless, the fall is still significant.

Thus, overall, GDP/GNP gap grew wider once again as the real domestic economy is still deeply in the recessionary dynamic. The GDP / GNP gap is accounted for by the “Net Factor Income from Abroad” or NFIa. As MNCs export more and more profits from Ireland, driven by increased transfer pricing through our off-shore accounting zone, NFIa rises. NFIa also increases as Government debt financing rises – and we know where that is coming from. And it does so as a proportion of the overall value added in the economy. Aptly, Q3 saw NFIa reaching record levels.

How important is the transfer pricing effect in Ireland? Chart below updates the earlier data on the GDP/GNP gap. But figures for sector activity show that while modern manufacturing sectors (Chemicals, Pharma, ICT – all dominated to the tune of over 90% by the foreign companies) grew in output by 6.5% in 2009, traditional sectors (dominated by domestic firms) collapsed in output by some 15%. Did anyone notice new factories supported by MNCs mushrooming over this year? Not really, So 6.5% ‘output’ increase is the MNCs booking higher value added to their Irish operations, assigning accounting value to the same products they manufactured here last year and booking more profits in Ireland at our 12.5% tax rate.

This is cool – it supports jobs here. But do not confuse this with Irish output. Or with Irish income. Or with the end of Irish recession. Lest you want to be that one-time invitee to a cool party who imagines himself to be the owner of a lavish host’s estate.

Now, let me update some charts.
GDP at constant prices - all components are down. Even those that were showing improvement in Q2 2009 (Agriculture, Forestry & Fishing) or stabilization (e.g Industry) are now turning negative. Except for Other Services & Rents (gotta be Nama offices at the banks renting new facilities).
GDP is down in all measures at constant market prices, and GDP relation to GNP is fairly evident (more on this below).

Now, contributions to GDP:
Again, no improvements on Q2 above.

And GDP/GNP gap visualization:
Yes, an end to a recession indeed. We've breached 20% for the gap - a full 1/5 of the so-called Irish income has absolutely nothing to do with Ireland except for the accounting ledger in MNCs offices. If this is growth - well, set up an imaginary ledger in DofF and start entering zeros to our GDP figure on a monthly basis.

Now on to value added in Irish economy:
Things are now worse than they were in Q2 2009 in all sectors, save 'Other' and Agriculture.

This not an end to a recession. It is a recession running at pretty much the same rate as in Q2 2009.

QED