Economics 2/7/10: Exchequer's sick(ly) arithmetic

Exchequer statement is out today. As usual, for the sake of the markets and the media - right before the closing of the working day. It's either a pint with friends, a dinner with the family, or dealing with Brian Lenihan's problems. Forgive me, the first two came ahead of the third one.

Mind you, not because Mr Lenihan's problems are getting any lighter. They are not. Second month running, tax receipts are under-performing the target. Sixth month in a row, the only saving grace to the entire shambolic spectacle of 'deficit corrections' is the dubious (in virtue) savaging of capital investment spending.

Let's take a look at the details: there was €80 million shortfall in June tax take. All tax heads receipts came roughly in line with the DofF monthly plans, except for income taxes (off €84 million behind expectations).

To hell with 'expectations', though, look at the reality
Tax receipts dipped below down-sloping long term trend line. Which is seasonally consistent. The deviation from the trend line was small, compared to previous 2 years. These are the good news. Total spending is below the flat trend line and roughly seasonally consistent. Given the scale of capital budget savaging deployed this year, this is not the good news. You see, it appears that the Government has back-loaded capital spending while front-loading capital receipts. If that is true, expect serious explosion (hat tip to PMD) of deficit in Autumn. If not,m and the cuts to capital budgets are running at the real rate observed so far, expect mass-layoffs by late Autumn. Either way - things are not really as good as they appear on the surface (more on this 'capital' effect later).

and back to the receipts: H1 2010 so far, income tax receipts are down €227 million cumulatively. Other tax heads are running €76 million above plan. Vat is actually improving, backed by falling value of the Euro and serious cuts in prices by retailers. There is a tendency to attribute this to 'improved retail sales', but in reality most of this 'improvement' is simply due to better weather and smaller savings margins to be had in Newry. Not exactly a graceful cheering point for Ireland Inc... but let's indulge:
€1 billion cut was applied to the expenditure side. Or so they say... Deficit on current account side is now €8.045 billion, up on 2009 €7.212 billion. Vote capital expenditure is down from €1.844 to €2.870 billion. But, wait, in 2009 (well, after Eurostat caught the Government red-handed mis-classifying things) there was €6.023 billion drain on Exchequer 'capital' side from Nama and the banks. This time around, the Exchequer posted only €500 million worth of banks measures on its balance sheet. Something fishy is going on? You bet. Anglo money are not in the Exchequer figures. At least not in six months to June. So things are looking brilliantly on the upside.
Hmm... but what about Anglo? and AIB? BofI? All the banks cash that flowed since January? Well, for now, this remains off-balance sheet. And, there's missing (we actually spent it last year forward) NPRF contribution. Were these two things to be counted, as they were in 2009, the true extent of cuts, the Government has passed through would be revealed. And, fortunately, we can do this much. Take a look at what our cumulative balance looks like to-date, compared with 2008 and 2009.

First - absent adjustments for the banks:
And now, with banks stuff added in:
Notice how all the improvement in deficit to-date gets eaten up by the banks? Well, this is simply so because when we are talking about the improvement on 2009, we are really comparing apples and oranges. Ex-banks in both years, there is virtually no improvement. Cum-banks both years - there is no improvement. But Minister's statement today compares cum-banks 2009 against ex-banks 2010...

Net voted expenditure by departments is running €141 million below expectations for June. Cumulatively, H1 2010 is below expected Budgetary outlook by some €500 million - 2.3% savings on the Budget 2010. Even more impressively, it is now 6.2% behind 2009, 'saving' us €1.4 billion. Not exactly the amount that gets us out of the budgetary hole we've dug for ourselves, but...

I'd love to stop at this point for a pause to enjoy the warm rays of achievement for Ireland Inc. But I can't - it's all due to cuts in capital spending - running some €609 million below Budget 2010 plan for the first xis months of the year. €400 million plus of this comes out of DofTransport budget. All in, current cuts to capital budget represent whooping 36% reduction on 2009 levels. Surely, this will cost many jobs in a couple of months ahead.

And on the other side of this equation - current spending is actually running ahead of Budget 2010 forecasts (actually made in March 2010, so no - DofF has not improved its forecasting powers, it simply is missing targets closer to its own estimation date). And this is true for the second month in the row. Overall, we are now in excess of forecasts by 0.5% and only 1.9% behind comparable figures for H1 2009.

Last few charts:

Now, keep reminding yourselves - the last chart above does not include banks funding in 2010 to-date... Your final tax bill - will. Get the picture?

Economics 2/7/10: The markets way of saying 'No'

Just in case anyone reading the vitriolic blogosphere stuff about my conclusions questioning the 'turn around' in the Irish economy based on the 'nominal data' (apparently there are people out there capable of commenting on economy, yet unable to read in plain English), here's another take on our 'turning the corner' path. This time from the bond markets: 10-year bond yields for Ireland (red) and Portugal (black) - hat tip to Brian:
Notice Ireland hanging above Portugal in the chart, and notice the path we took since January 2010.

My entire analysis of Irish data to date is consistent with the markets pricing of Irish economy. So either a couple of nameless commentators on Irish posting boards are off in their views of reality, or the entire market is plain wrong. What was it, that someone once said about doing something against the gale force wind?

Economics 1/7/10: Finland - Broadband access is a universal right

An interesting follow up to our Digital Economy Rankings 2010 released jointly by EIU and IBM's Institute for Business Value earlier this week (see here for global results and here for detailed data on Ireland).

Finland - ranked 4th in the world this year by DER2010 - has just announced that its residents will have the legal right to broadband access. A law passed in October 2009 came into force today requiring all telecomms providers to offer 24/7-on high-speed internet connections to all of the country's 5.3 million residents. A minimum speed of at least 1 megabit per second must be guaranteed.

For comparison,

Finland achieved the following scores in Connectivity and Technology Infrastructure category (relating to quality and supply of broadband):

• Overall Connectivity & Technology Infrastructure score = 8.0/10.0
• Broadband penetration = 7.0
• Broadband quality = 1.0
• Broadband affordability = 9.0
• Internet user penetration = 9.0
• International internet bandwidth = 10.0
• Internet security = 10.0

In comparison, Ireland scores, relating to broadband) in this category were:

• Overall Connectivity & Technology Infrastructure score = 7.20/10.0
• Broadband penetration = 5.0
• Broadband quality = 1.0
• Broadband affordability = 9.0
• Internet user penetration = 7.0
• International internet bandwidth = 10.0
• Internet security = 10.0

Spot the difference?

Economics 1/07/10: Left behind by the 'turning' Ireland

Stephen King's traditional plots involved mundane occurrences of banal middle-class lives punctuated by the extraordinary events that completely reshape the world around the protagonists: a family fight in the foreground broken apart by zombies invading the entire town in the bay windows of the family room behind warring spouses.

The last two days in statistical releases from Ireland have a similarly absurd quality, juxtaposing dynamic foreground (QNA's assertion that Ireland is 'out of the recession') with a macabre background (Live Register data for June) that, one intuitively knows, will inevitably come to dominate the entire plot.

Today's data on Building and Construction sectors output for Q1 neatly fits the 'invading zombies' framework: per CSO's release today, Q1 2010 output for the sector has fallen 34.1% yoy, while the value of production decreased 34.8% in the same period.

Clearly, yesterday's turn of the corner greeted us with a blank wall, as far as the road to real recovery goes.

Per CSO: "The fall in the volume of output largely reflects declines of over 48% and over 32% respectively in residential building work and non-residential building work. Output in civil engineering fell by over 18%".

Over the same period of time, output in the building and construction sector fell by just 7.8% in the EU27 and 9.9% in the Euro area. Sweden (+3.4%), Finland (+1.6%) and the UK (+1.2%) posted increases. The largest decreases were in Latvia (-43.4%), Lithuania (-42.9%) followed by Ireland. which means that we managed to beat off Spain for the dubious prize of being the worst performing advanced economy in the world when it comes to construction sector bust.

Makes you wonder - what the Live Register look like when the 110,000 odd workers remaining in the sector finally finish work on the few remaining sites still left from the boom?

Economics 01/07/2010: Recovery or a triple dip?

So the recession is over… or it just went into a triple dip… you have a say.

Today’s QNA for Q1 2010 showed a 2.7% increase in real GDP compared with the final quarter of last year. This brings to an end eight consecutive quarters of economic contraction – the longest recession of all advanced economies to date.

What happened? Have you felt that warm wind of spring back in March and decided that it is time for Ireland Inc to start upward march to renewed prosperity?

Err… not really. What did happen was a simple trick: Deflation took out a bite out of the price level adjustment, as nominal GDP grew a fantastically unnoticeable and statistically indifferent from zero 0.0956%. Yes, that’s right, less than one tenth of one percent. Take a snapshot: in Q1 2010, our MNCs-led exporting economy was better off than in Q4 2009 by a whooping €37 million, while our domestic economy shed another €2,199 million. Don't know about you, I feel so much richer today than back in December 2009...

One has to be sarcastic about the Government that needs a massive deflation to generate economic growth. Industry gains - again driven by MNCs manufacturing - are clearly not supported by domestic services and construction.
Oh, and subsidies-reliant sectors - Government and Agriculture - are going relatively strong. Clearly CAP is recession proof - per chart below - with Agriculture up 84% on Q4 2009. Investment continues to compress: capital formation down 14% qoq, and 30% yoy. And that’s gross! Government spending was down a paltry 0.9% qoq or €96 million – a clear slowdown in deficit reduction efforts. Give it a thought, we will be borrowing this year some €17bn - not accounting for banks alone. At the current rate of Government spending contraction, Q1 2010 reductions in public spending (net!) will cover just 10% of our annual interest bill on one year worth of borrowing!
Consumer spending contracted further by 0.2% supported from hitting much greater decline numbers by services spending and, potentially, 2010 registration plates fetish. Remember, total retail sales are down more than 6% in Q1 2010. Added support to consumer spending was winter freeze, which was a boost to the likes of state-owned ESB and Bord Gas – carbon footprint notwithstanding, good news for state monopolized energy sector.

Time for champagne, then? Perhaps not quite vintage variety yet, but some bubbly? I am afraid not.

There’s another trick to the data: Net exports boomed – as we imported fewer things to consume, invest and use in future production, while Ireland-based MNCs booked on massive profits. So massive in fact that net increases in transfers of profits abroad were literally bang on (take few euros) with net increase in our trade balance.

This has to be the fakest ‘recovery’ one can imagine.

Before charts, illustrating the above, few more points. Services exports were particularly strong (good news):

• volume of goods exports rose 2.4% yoy in Q1 2010,
• volume of services exports was up 9.5% yoy.

Services – the Cinderella of our external trade policies – now account for 46% of total exports.

As MNCs-driven economy steamed ahead, domestic economy continued to contract -0.5% in Q1 2010, in qoq terms. Profits expatriation by the MNCs reached €7.9bn in Q1, up from €7.1 in Q4, and GDP/GNP gap widened to over 20% in quarterly terms.

Should things stay on this 'recovery' course, by the end of this year some 26% of our entire economy's output will be stuff that has nothing to do with our economy. That would put us on par with some serious banana republics out there as an offshore centre. And not that I, personally mind. It's just fine that companies book profits via Ireland Inc. The problem is when we, the natives, start believing the hype that our GDP generates.

Seeing much of a recovery anywhere?

And a more detailed look at exports and imports - the causes of our today's celebration:

As I have pointed out many times before, our MNCs need imported components, goods etc in order to generate exports. So as imports fall, two things come to mind:

1. A serious concern that lower imports might reflect slowing down of MNCs-led exporting; and/or
2. A serious concern that our consumers (dependent on imports) are still running away from our retail sector.

You be the judge as to what really goes on, but either way, this is not a good omen. The 'recovery' might be a Pyrrhic victory.

At any rate, you'd need a microscope to notice that we are out of a recession in the chart below:
But you can clearly see what's going on on that side of economy which generates jobs, pays our bills and actually translates into our standards of living (aside from Government stuff, that is):

Welcome to an MNCs-led recovery, then:
If it doesn't feel like much of a boom, then don't listen to anyone saying 'We've finally turned the corner'. Or be warned it might be a dead-end alley, or worse a brick wall...

Economics 1/07/2010: Live Register - no recovery here

Live Register figures for June are truly depressing, folks. Regardless of what our QNA numbers telling us about real GDP growth, unemployment is continuing to climb.
We are now at 444,900 and climbing. In the year to June 2010 there was an unadjusted increase of 37,420 (+9.0%), down from an increase of 43,788 (+11.1%) in the year to May 2010. But that offers little in terms of consolation - most of people on LR in 12 months to May are still there - unemployed or underemployed.
A snapshot of weekly numbers above. Depressing. The average net weekly increase in the seasonally adjusted series in June 2010 was 1,450, which compares with a weekly increase of 1,650 in the previous month. But unadjusted things are looking much worse (figure above).

There was an increase of 4,800 males and 1,100 females in the seasonally adjusted series in June. Undoubtedly strengthening contraction in construction activity in June is not helping here.
The standardised unemployment rate in June was 13.4%. This compares with 12.9% in the first quarter of 2010, the latest seasonally adjusted unemployment rate from the Quarterly National Household Survey. We are firmly on track to reach 13.7% before the end of this year.

Rates of change in LR are also accelerating - a disheartening feature:
As I said in my previous post on QNA data (here): we are having a fake recovery.

Economics 30/06/2010: The curve is getting curvier

This wasn't supposed to be news, folks. ECB has pre-announced that it will be closing down its 12 months lending facility some time ago, and the readers of this blog would have known this much - see here. So what's the rush to shout 'Stop!' now, then?

Well, it turns out that in the best European tradition, Euro area banks have conveniently decided not to do much about their deteriorating loan books, preferring the Ponzi scheme of monetizing their poor loan books via ECB funding, and ignoring all warning lights.

Per Bloomberg report today: the ECB said it will lend banks €131.9bn more under its 3-mo lending facility. European banks tomorrow will have to repay €442bn in 12-mo funds, assuming ECB wants to preserve the remaining shreds of monetary credibility and shuts down the pyramid game. So, promptly a week after Bank for International Settlements' dire warning that zero interest rates are leading to shortening maturity of banks & sovereign debts, inducing greater maturity mis-match risks for both, we have a roll over of 1/3rd of the ECB quantitatively-eased banks debts into a much shorter maturity instrument.

ECB said that Euro area-wide, 171 banks asked for the 3-mo funds at 1%, with banks allowed to borrow in the market at about 0.76% euribor and rising (again, the theme picked up by this blog ahead of general media attention: here).

And there is not a chance sick-puppies, like Irish, Greek, Spanish or Portuguese banks, can borrow at the euribor rates. Instead, as the Indo reports today, Fitch ratings agency estimates that the Irish banks borrowed a whooping 12% of the €729bn the ECB has lent to all Euro area banks in 2009. Some of this is accounted for by the IFSC-based facilities. But some, undoubtedly, is held by the Irish banks, and their own IFSC affiliates. Not surprisingly, Irish banks shares have been running red in days preceding July 1...

The liquidity fall-off curve is getting curvier for Irish banks, to use Bertie Ahearne's model of dynamic analysis.


Bloxham morning note reports on an interesting development: the Arms index - an index measuring overall bullishness (for values <1.0)>1.0) of the stock markets "rose to one of the highest levels in at least the last seventy years yesterday rising to over 16 before closing at 5.88". This is an extreme move and at these valuations it is consistent with the overall markets bottoming. As Bloxham note states, "what is fascinating is that yesterdays extreme reading was in fact higher than the 11.89 found at the absolute bottom of the 1987 crash. The pullback in February 27^th 2007 also ended on an extreme reading of 14.84." Here's the chart - again, from Bloxham's note:
Exceptional!

Economics 29/06/2010: Digital economy rankings 2010: Ireland details

Updated: here is the link to the actual report.

Ireland results, as promised.

High level stuff first:
Good move - 1 rank improvement overall, improvements in 3 sub-categories, but slipping in 3 other.

Compared to peers:
Note: New Zealand has shown remarkable consistent gains over the last 10 years, moving to top 10 position this year for the first time.

Next, consider all categories changes in the case of Ireland:
Very strong across the board, offset by significant deterioration in connectivity and technology infrastructure score (driven by new measurements of quality of broadband and mobile communications introduced in this year's rankings). Weak performance in consumer & business adoption - primarily on the back of economic crisis. Also weak performance in social & cultural environment, driven by education system shortcomings.

So to summarize:

• Ireland ranks 17th in connectivity & technology infrastructure, though broadband penetration remains low
• Ireland ranks 17th in business environment in tough market conditions
• Ireland ranks 17th in social & cultural environment despite low innovation scores compared to regional average
• Ireland ranks 22nd in legal environment, the main detractor is electronic ID implementation
• Ireland is in 21st place on Government policy & vision, the major challenge is in ICT spend
• Ireland is doing well and placed at 8th in consumer & business adoption
• Ireland has the lowest score drop in Western Europe from last year, which is only -0.02 (7.84 to 7.82)
• Ireland moved 1 rank up overall compared to 2009 (18 to 17), consumer & business adoption moved 4 ranks up and social & cultural environment up by 3 ranks
• Ireland has made a lot of progress in Government policy & vision scoring 8.40 and up 6 ranks, the progress is highest (+1.10) of all in Western Europe
• Broadband quality and affordability the weakest of connectivity category, scoring low on the quality and drop in affordability measurement
  

Economics 29/06/2010: EIU/IBM report on e-readiness

Global Digital Economy 2010 rankings are being launched today by the Economist Intelligence Unit (EIU) and IBM's Institute for Business Value. Here are some early results - I will be blogging on more in-depth analysis over the next few days.

Global Top 10:
Sources: all charts and tables are from IBM analysis of EIU/IBM e-readiness rankings, 2010.

Western Europe results:

• Overall, regional digital economy score declined in 2010 – from 7.86 in 2009 to 7.70 this year
• The biggest score decline this year in the connectivity & technology infrastructure (-0.99), which is highest drop of all regions
• Sweden, Finland, Ireland and Spain are up in their overall ranks compared to last year
• The strength lies in all categories being at the top of all regional averages. Also, Western Europe average is higher than Major markets. The score increased for business environment (+0.20) & Govt policy (+0.18) from last year
• Western Europe dropped in all other 4 categories compared to last year (Connectivity, Social environment, Legal environment and Consumer & business adoption)
  

Note that Western Europe leads the rest of the world in terms of regional scores. This, however, in part is due to the inclusion of three smaller economies in North American region: Bermuda, Jamaica, Trinidad and Tobago.
Clearly, there are two well-defined tiers in Western European regional grouping - countries that score between 1 and 12 globally (challenging top 10 positions in the world) and those lagging at around mid-20s and low 30s.


Ireland results to follow, so stay tuned.

Economics 28/06/2010: Watch out for VIX

Short-term VIX options and VIX itself are starting this week on the upside... is risk contagion spreading from sovereign bonds to corporate?
An interesting view here.

Let's put this on record - I think we are now in 50:50 chance of a new recession - Euro area, UK and US, plus Japan. Time horizon - 6 months.

Economics 28/06/2010: Knowledge economy blueprint worth the ink

A quick post on two articles relating to science, research and knowledge economy Ireland.

Sunday Business Post printed an excellent article by Professor Colm Kearney of TCD School of Business on the policies for developing a real knowledge economy. The link is here. As those of you who follow my writings would know, I have campaigned for a long time now for proper recognition of the non-hard science fields of social sciences, business research and humanities as contributors to the 'knowledge economy'. See links here, here, here, here, here, and probably most succinctly - here.

Professor Kearney's article is certainly worth a read for anyone interested in the economic future of this country.

Note: Professor Kearney, unbeknown to many in Ireland, advised Australian Government during the period when Australia established one of the most progressive economic and fiscal environments which has resulted in its economy being able to weather the latest global crisis remarkably well.

One just hopes Professor Kearney gets drafted into a policy-making framework in this country, with some real power to change things.

The second story, related to the subject was also published by Sunday Business Post (here). It relates to the issue of collapsing funding for research in Irish leading academic institution - TCD. In the article in early 2009 published by the Sunday Business Post (here) I warned that it is only a matter of time when thousands of Irish post-docs - funded by the EU, Irish Government and minor private sector grants - are going to face a chop. Jobless PhD - as labeled them - are the direct cost of our short-sighted policies for pursuing lab-coats based innovation and knowledge economics.

Economics 28/06/2010: G20 to euribor: beware of the central banks

Update: with a slight delay on this blog's timing - Reuters picks up the same thread here.


Another Monday, another set of pear shape stats.

First, we had a farcical conclusion to a farcical meeting of G20. If Pittsburgh summit was a hog wash of disagreements, Toronto summit had a consensus view delivered to us, mere mortals who will pay for G20 policies. This consensus was: G20 leaders called for

• austerity, but not too much (not enough to derail growth, but enough to correct for vast deficits - an impossible task, assuming that public deficit financing has much of stimulating effect in the first place);
• generating economic growth (with no specifics as to how this feat might be achieved);
  
• increased tax intake (to help correct for deficits); and
• no changes to be made to the global trade and savings imbalances.

In other words, G20 decided that it is time to have a 4 course meal without paying for one.

Then , on the heels of these utterly incredible (if not outright incompetent) pronouncements by G20, Bank for International Settlements (BIS) came in with a stern warning to the Governments worldwide to cut their budget deficits "decisively", while raising interest rates. Funny thing, BIS didn't really see any irony in cutting deficits, while raising the overall interest bill on public debt. Talking of Aesopian economics - let's pull the cart North and South, in a hope it might travel West.

In many ways, BIS got a point: “...delaying fiscal policy adjustment would only risk renewed financial volatility, market disruptions and funding stress” said BIS general manager Jaime Caruana. Extremely low real interest rates distort investment decisions. They postpone the recognition of losses by the banks, increase risk-taking in the search for (usually fixed) yield, perpetuating nearly economically reckless financing of sovereigns that cannot get their own finances in order, and encourage excessive levels of borrowing by the banks.

Continued water boarding of the western economies with cheap cash through Quantitative Easing operations by the CBs risks creation of zombie banks and companies with sole purpose in life to suck in liquidity from the markets. Alas, the problem is - shut these zombies down and you have no means for monetizing public debt in many countries, especially in the Eurozone. Boom! Like the main protagonists in Stephen King's movies, governments around the world now need zombies to rush into their disorganized homes before the whole plot of deficit financing blows up in their face.

BIS also warned that many economic experts and central banks are underestimating inflation risks. And this is just fine, assuming you are dealing with short term investment horizons. However, for a Central Bank to ignore the possibility of a restart of global inflation - fueled by the emerging markets growth and later also supported by accelerated inflationary pressures in the advanced economies following the re-flow of liquidity out of the bank vaults into the real economy once writedowns are recognized and banks balancesheets stabilise - is a very dangerous game. inflation, you see, is sticky.

And inflation might be coming. Look no further than the Fed (here) and the US Administration insistence on the need for continued debt-financed stimulus.

Or, look no further than the movements in the interbank lending markets:

So the long term Euribor is up, up and away despite all the Euro area leaders' talk about fiscal solidarity funds and tough austerity measures. Think: why? Either the interbank markets don't believe in Euro area's ability to get its own house in order (which they certainly don't) or they believe that future inflation will be higher (which of course they do)...

Hence, shorter maturities are in an even more pronounced push up:

While dynamically, the trends are deteriorating:
Now, think about the Irish banks (Spanish, Portuguese, Greek - etc) that are on life support of interbank markets and ECB. Can they sustain these credit prices?.. While facing continued writedowns?.. Don't tell I did warn you about these.