09/01/2011: Exchequer returns - Part 5

In a follow up to the previous 4 posts on Exchequer returns (part 1, part 2, part 3 and part 4), let me update my own earlier charts on receipts to cover 2007-2010 horizon. There are some striking comparatives to had out of these.

First by tax head:

Now, totals
And now, let's carry out two exercises. First, consider changes year on year and over 2007-2010 horizon:
The second exercise is in the bottom section of the table above. Suppose we fix tax revenues at the levels of 2007 (case 1) and at 85% of 2007 (case 2) levels. The choice for 85% is warranted as it roughly speaking represents a 50% moderation in housing price growth activity on 2005-2007 - not a housing recession, but slower rate of growth. In other words, this is equilibrium effect. What would have been the Exchequer shortfall in funding given the path of expenditure taken by the Government over 2007-2010?

As shown above, between 2008 and 2010 the Government would have to cut expenditure by some €10.3 billion in order to bring fiscal balance to the receipts fixed annually at 85% of 2007 levels. And these are net cuts! Alternatively, only €13 billion of the total cumulative 2008-2010 deficits of €49.1 billion can be accounted for by a decline in tax revenue below equilibrium level. The rest, my friends, is due to over-spending...

08/01/2011: Exchequer returns - part 4

Corrected - hat tip for an error to Seamus Coffey.


In Part 1 of the post on 2010 Exchequer returns I looked at a couple of headline points relating to the issue of Ireland's fiscal policy performance in 2010 (here). Part 2 of the post dealt with my forecasts and longer term analysis of fiscal environment in Ireland (here). Part 3 focused on the expenditure side of the Government balancesheet (here).

In this part, let's tackle the issues relating to tax receipts.

Again, the main headline picture first:

As the chart above clearly shows, the idea of 'stabilizing' tax revenue relates to the Government view that replicating previous year performance - albeit at a slightly lower levels - is somehow a good thing.

Amazingly, 2010 absolute underperformance of the already abysmal 2009 comes after a host of tax hikes and levies introductions by the Budgets 2009 and 2010. Minister Lenihan has been pushing ever increasing tax burden onto the Irish economy, while getting less and less revenue in return.

Relative to 2009 and 2008:

• Income tax was down 4.72% and 14.43% respectively
• VAT is down 5.33% and 24.79% respectively
• Corporate tax - the one Minister Lenihan has been singing praises about this week - is up 0.606% on 2009, but down a massive 22.55% on 2008

Here are few charts by main tax heads:

Of course, given investment and housing markets performance, stamps, CGT, CAT etc are showing continued strain as well:

Of course, CGT is a reflection of economy's performance on investment side. Here, there is clearly no recovery in sight.

Dynamics year on year:

All of which means that year on year performance is now 'stabilizing' around 2009 dynamics. Again, one might say the glass is 1/10th full (things are not getting much worse than 2009) or 9/10ths empty (things are not getting any better).

One thing that remains stable throughout the crisis is Government's determination to load the burden of fiscal adjustment onto ordinary taxpayers:

Table below summarizes the above point:

And, for conclusion, let's indulge in the Government's own fetish of focusing on performance relative to target (not that there is much of an economic meaning to this):

06/01/2011: Exchequer Returns - part 3

In parts 1 and 2 (here and here) I've dealt with some longer term issues relating to the general Exchequer performance figures. In the following two posts I will update specific expenditure (current post) and tax receipts (next post) data.

First, total expenditure:
Two things worth noting here:

• Up until November, total spending side of Exchequer returns was performing relatively strongly, with year on year savings of 4.22%. These savings were significantly reduced in December, with full year savings performance of just 1.55% on 2009.
• The reductions in 2010 have been achieved solely on the back of capital expenditure cuts. Year on year, current spending rose by €261mln or 0.6% in 2010, while capital spending was cut by 14.3% or €990mln
  

You can see the dynamics of reductions over the year in the following two charts:
Combined savings by each department head per quarter end:
Feel free to interpret the above, but what interested me much more is just how stable are the Government's spending priorities over time. To see this, I plotted annual shares of each department head as a percentage of total spend (note - this exercise is not a perfect comparison as departments' responsibilities have changed over time).
The chart above suggests strongly to me that the Government, despite all the criticism it deserves in managing the crisis, has so far elected to cut largely discretionary spending. This is a rational response to the early stages of the crisis, but it is clearly insufficient to deliver stabilization of public finances, let alone their restoration to health.

06/01/2011: Exchequer Returns - Part 2

In Part 1 (here) I raised couple of specific points concerning the latest official claims over Irish Exchequer returns for December. Here, I follow up on the first point raised earlier and then post on longer term trends in Government spending, including my forecasts for fiscal performance in 2011-2014.

First, relating to the point raised in yesterday's post: Minister Lenihan stated that
"On the spending side, overall net voted expenditure at €46.4 billion was over €700 million below the level recorded in 2009, reflecting the ongoing tight control of public spending. While day-to-day spending was marginally ahead of target in the year, this is due to a shortfall in Departmental receipts rather than overruns in spending."

As I outlined earlier, I beg to disagree with the Minister on the claim of 'tight control'. Let me add to the reasons for my disagreement:

• The Exchequer Returns show that the Government had an overall budget deficit of €18,745m in 2010,
  
• On the surface, this appears to be ,896m lower than the deficit in 2009, which stood at €24,641m.
  
• However, deficit 2009 included a €3bn payment to the National Pensions Reserve Fund as part of the banks recapitalization plus a €4bn re-capitalization injection into Anglo Irish Bank
  
• Deficit 2010 does not include bank recapitalization measures.

This implies that the Exchequer deficit was:

• 2010 = €18,745m
• 2009 = €17,641m

And thus Minister Lenihan's tightly controlled public spending measures in 2010 have managed to increase Government deficit by €1,104m on 2009 levels.


Next, let's take a look at the annual data for Irish Exchequer over the recent years, incorporating latest release.

First, receipts v expenditure over time - for 1983-2011 and on with my forecasts. All data is annual:
Notice that with exception of 3 points - all observations fall to the right and below the 45 degree blue line. Also notice that the trend over time has been toward greater excess expenditure. Overall, however, 'when I have it, I spend it' relationship really does hold - the RSq is high 0.9413.

Latest figures show that in 2010 the Government has savaged capital investment side of its balancesheet and failed to curb current spending. This too is consistent with long term trends:
The age of Brian Cowen 'stimulus' (remember - he did say that we are going to have recession stimulus in the form of large capital investment) is now over and, despite Minister Lenihan's claims that we are not in the 1980s... guess what - 2010 we landed right into pre-1989 era.

Lastly, on to forecasts for the future:
Above chart clearly shows why I am with the IMF on the deficit outlook for 2014, and not with the Government. Apart from slightly higher total expenditure outlook than that of DofF, I expect slightly lower tax take and non-tax returns, but then I also expect the remaining costs of banks and subsequent increased interest repayment burdens to come due in 2011-2014 as well.

05/01/2011: Exchequer returns - part 1

So the Exchequer returns are out and I will blog on these in detail over the next couple of days with in-depth annual data analysis. In the mean time, let's take a quick look at the official statement. Couple of things - other than headline figures - come to the forefront:
1) Minister Lenihan statement, and
2) Nama news

First, Minister statement (emphasis and commentary are mine):
"On the spending side, overall net voted expenditure at €46.4 billion was over €700 million below the level recorded in 2009, reflecting the ongoing tight control of public spending. While day-to-day spending was marginally ahead of target in the year, this is due to a shortfall in Departmental receipts rather than overruns in spending.

[In fact, DofF data shows that overall spending savings this year relative to 2009 were €729mln, consisting of a cut of €990mln on capital spending side and an overspend of €261mln on current spending side. This, by any possible means, does not constitute any real 'tight control' over public spending. In fact, the net savings achieved in 2010 on 2009 amount to 0.463% of GDP. Given the Government is aiming to cut some 7% off 2014 GDP in deficit reductions through 2014, this means that at the pace of 2010 'tight control' savings, Minister Lenihan's budgetary measures can be expected to deliver 3% deficit in 20.1 years or by 2031, not by 2014.

Or let my suggest the following arithmetic Minister Lenihan should have engaged in in judging his own performance (remember, 'tight control' is something he was supposed to deliver over the last 3 years and 4 Budgets): if we take an increase from the average bond yields of 2009 to the average bond yields of 2010,

• In the course of 2010, the interest cost of financing our 2010 deficit, rose by ca €750mln;
• In the course of 2010, Minister Lenihan achieved net savings of €729mln
• Conclusion: Minister Lenihan's 'tight control' doesn't even cover the rising interest rate bill on our deficits, let alone our debt!]
  

... The Government has consistently identified export-led growth as the strategy that will return this economy to growth and generate jobs. This strategy is working thanks to the improvement of competitiveness, and the flexibility and adaptability of the Irish economy. Exports in 2010 were at an all time high and represented growth of 6.2% on 2009. This strong performance was particularly positive in the manufacturing and agri-food sectors.

[So Minister Lenihan has 'identified' export-led growth as the strategy to deliver on 2014 fiscal targets. This is true. Achieving 3% deficit in 2014, per Government own white paper for 2011-2014 (I refuse to call this fiction a National Recovery Plan), will require creation of 300,000 exporting jobs. Now, using past historical data, creation of 300,000 exporting jobs in 4 years will require a 50% increase in overall exports, implying an annual average growth rate in exports of ca 10.8%. Every year, folks. Not 6.2% achieved in 2010 that delivered historically high levels of exports of €161 billion, but 10.8%. You be the judge how realistic Government's fiction is.]

Now on to Nama-related news.

Cornerturned blog has posted on the change in Nama ownership from 49% State-owned to only around 33% State-owned. This constitutes a public asset give away to private shareholders in Nama SPV - aka 3 Irish banks. Nama is now maximising returns rather than repairing the banking system, this implies that the latest change of ownership structure is indeed a transfer of an asset.

However, even more revealing is the charade that this latest twist in Nama situation reveals. Per latest change, Nama is now owned (67%) by banks, of which one is outright owned by the taxpayer, another has significant taxpayer stake and the third - well, the third will probably also require taxpayer equity injections at certain point in time. Two of these banks have received state aid which was also used to 'invest' in Nama SPV. Hence we have:

1. Taxpayers pay banks to 'invest' in Nama SPV and 'invest' in the SPV directly as well via Exchequer 49% stake;
2. Nama uses taxpayers money to 'repair' the banks;
   
3. Taxpayers write off part of their share in favor of banks which are themselves on life support courtesy of taxpayers funds;
4. Banks - not taxpayers - will reap any potential upside from the SPV.

Which means, really, that in Nama SPV we have an Enron-ized Parmalat - dodgy accounting tricks used to conceal the real nature of ownership leading to a reverse commissariamento disclosed today... Well done, lads.

05/01/2011: PMIs and employment trends - December 2010

This is the last post in the series of three covering PMIs. The first two covered two sectors of the economy: Manufacturing and Services. As before, the data was released by the NCB Stockbrokers.

As I mentioned in the first post, PMIs serve important function - they act as close-lead indicators of economic activity ('close' referring to short lags between PMIs and economic performance). One of the most pressing issues in Irish economy today is unemployment and PMIs provide employment outlook that signals (albeit imperfectly) where we are heading in terms of jobs creation. Here are the two series for PMIs

and the same for employment:
So while Manufacturing is signaling weak growth across both output and employment, Services are showing neither:
Weighted (by economy weights) average of the two points in the chart above places December squarely into the Recession Area along the axis that barely enters Optimal Growth Area. It is worth noting that longer-term trends (and these are strong with 0.847 RSq for Services and even stronger 0.892 for Manufacturing) do not support Jobless Recovery. In contrast with historical experience, this is exactly where we are heading in Q1-Q2 2011 per chart above.

05/01/2011: Services PMIs - December 2010

Today's data from NCB Stockbrokers on Services PMIs (Manufacturing sector PMIs were covered in the earlier post here). The trends are generally worrisome:
First the headline numbers:

• Overall business activity index in services sectors has dipped below expansion mark of 50, with December reading of 47.4 signaling an outright and sharp-ish contraction. 12-months average for the sector was 50.7 - hardly blistering growth, but still a notch above the waterline. Q4 average is now at 49.7 - a steady decline from the annual peak of 52.9 in Q2 and slightly less impressive 52.5 in Q3.
• New Business index fell to 46.2, marking 4th consecutive month of below 50 performance. 12-months average is at 49.8, with Q4 reading of 46.8 being the lowest quarterly average of 2010.

A snapshot of the series:
Now to detailed sub-indicies:
Since I will be posting separately on employment, it is just worth mentioning that (a) employment index remains under water since February 2008 - marking a truly scary contraction stretching uninterrupted over 34 months now, and (b) employment index fell even lower in December (to 47.8) than in November (48.7).

The rest:

• New Export Business index is in contraction territory with December reading of 49.7 being the first sub-50 month since August 2009. 12-months average was 53.6 while Q4 average fell to 52.6 from 52.8 in Q3 and the annual peak of 55.3 in Q2.
• Despite this, Business Expectations actually rose to a strong 62.2 in December against 55.2 in November. 12-months average was 65.5, ahead of Q4 average of 62.8, which marked the lowest quarterly performance of the index for 2010.
• Profitability remains poor cousin of expectations - Profitability index reached 46.1 in December, down from 48.4 in November. To see last month when profitability was in expansion mode we would have to go back to December 2007, so this December marks 36th month of shrinking profitability for Irish services producers.
  

Chart above concludes by showing some recovery in prices trends, with output prices still lagging inputs prices inflation. In fact, the gap between two series, having opened up once again around Q2 2010 remains wide.

05/01/2011: Manufacturing PMIs - December 2010

Manufacturing PMIs were released earlier this week by NCB Stockbrokers (a truly useful service for all concerned with the Irish economy - see the third post on PMIs to come for the true reason). Here are the updated charts and some comments:
First what matters most on GDP side - second consecutive month of declining growth on New Exports Orders side - December reading was at (still expansionary) 54.0, down from 54.7 in November and 54.9 in October. 12-months average was 55.5, so we have a signal of relative growth slowdown into Q4 (average 54.5), compared with Q2 and Q1 (averages of 57.4 both), but of Q3 (52.7).

Total New Orders are robustly up to 53.2 reading for December (12-months average is 51.7), but December increase was not enough to push poor performance in Q4 (average for the quarter is 51.6).

Overall PMIs for Manufacturing are signaling relatively positive momentum, rising to 52.2 in December, from 51.2 in November, marking third consecutive monthly rise. December reading is above 12-months average of 51.2 as is Q4 average reading (51.4).

Here's a close-up:
But what about capacity?
So far, capacity remains below growth line (50 reading signifies expansion, of course), suggesting - strongly - that Irish companies are not running out of existent capacity yet. Which means productivity will continue grow, and that's the good news. The bad news is that with capacity remaining underutilized, there's no real hope for strong growth in either wages or employment.

Although index of Employment rose above 50 line - reaching 50.5 in December for the first time since May 2010 (when it stood at 51.5 - and then again, nothing really happened on employment side, as sustained jobs creation will require consistent above 51.3-52 readings in the index). Clearly, Employment prospects have improved - December reading was 2.6 points above 12-mo average reading of 47.9, and Q4 average - at 49.9 - is almost touching jobs-neutral expansion.

Most worrisome to me is the New Exports Orders data - as discussed above, although the series is generally more volatile than Total Orders series, it is clear to me that going forward, domestic demand of the Total Orders is not going to hold.

Another issue - more of a question, than concern is: backlogs of orders rising appears to be driving up forward employment expectations. There seem to be some 3mo plus lag in the two series, so delivery time remaining relatively benign, but under pressure, it is difficult to make a call on employment index reading. That said, employment index for manufacturing does show stronger correlation, historically with overall sector PMIs than in the case of services (but more on this in the third post on PMIs later today.

Again, the credit for data goes to NCB Stockbrokers, but analysis (and any errors it may contain) is solely my own.

05/01/2011: Eurozone growth - January

For the first post of 2011. So a slightly belated wish to all of the readers: May 2011 be (in no particular order of importance):

• A prosperous and a fruitful one
• A healthy and a happy one
• A year for me to write better research and for you to comment more on it
  
• A year of renewing the political and economic strengths of the countries we call our homes.

Oh, and may the 30-year bull market in fixed income finally come to an end in 2011. Why you may ask? Because I, for one, am sick and tired of watching the sovereigns from the US to the EU to Japan borrowing beyond any control to underwrite unsustainable status quo of our bankrupt social democratic models. Leveraging our children and ourselves to pay for the dubious 'benefits' of redistributive 'justice' is unlikely to end with anything but tears. And the latter stage of history is uncomfortably close for all of us to continue ignoring the facts of our economic sickness.


Now, to the top of the newsflow from the EU-wide perspective.

The latest Eurocoin leading indicator for Eurozone growth was out recently and hence the updated details:
December performance was above November, reaching 0.49 - 4bps above November reading of 0.45. As of the beginning of January, Eurozone economy signals expansion that is yoy some 28% weaker than in January 2010 (December 2009 reading was 0.68).

Historically, Eurocoin is a pretty decent longer-term leading indicator (70%+ RSq) for the trend in the Eurozone GDP growth:
The new reading is consistent with growth of ca 2.0% and is driven primarily by industrial production and producer confidence. However, Eurozone industrial production growth has been declining persistently from the annual peak achieved back in May. Per latest (October) data, Germany continues to power ahead with strong positive growth, France and Italy remain at near zero growth and Spain's industrial output growth sticky in negative territory.

Composite PMIs for Germany (through December) powering ahead, while staying in contraction territory in France, Italy and Spain. Consumer confidence is at 2007 levels in Germany, while staying below the water line in other three economies (see chart):
Source: CEPR

I will be blogging on Ireland's PMIs in few hours tonight, so stay tuned for comparatives to the homeland.

Economics 24/12/10: Retail Sales for November

Retail sales stats were out this week, prompting the usual 'upbeat' comments from the official analysts.

Here's an example from one bank analyst (emphasis is mine):

"November retail sales figures show a second consecutive monthly increase in sales volumes. The 0.2% rise last month followed a 0.3% monthly gain in October, representing the first back-to-back monthly increases since March/April. This leaves total sales in October/November running some 0.4% above the average level seen in the third quarter."

Oh, Mighty Aphrodite, folks. Time to pull the crackers out and funny hats? Alas, no. The quote above is so full of spin, you get dizzy after the first two sentences and by the end of the second paragraph all systems collapse is virtually inevitable. For reality is nowhere to be seen in the claims made above.

Take a look at the full seasonally adjusted figures for sales:

First, levels of sales - volume and value
Few things are worth noting:

• November shows that we - consumers in Ireland - are purchasing 23.89% less today than in February 2008 - the peak of our retail sales volumes
• Same figures show that we are buying 17.45% less value relative to October 2007 - the peak point in the value of sales index
• We are now consuming some 9.2% less in terms of volume and 4% less in terms of value than in 2005
• November 2010 index of 90.8 seasonally adjusted volume of sales is below that in November 2009 (91.8) and November 2008 (109.1)
• November 2010 index of 96 seasonally adjusted value of sales is above that in November 2009 (95.1) but below November 2008 (106.5)

Chart above shows changes in two series mom and yoy. Three things are worth noting there:

• Mom - both series are pointing down, with alue index going from +0.6% in October to -0.1% in November, while volume index from +0.3% to +0.2%
• Yoy - value index going from -0.3% in October to -1.1% in November, while volume index moved from +1.9% in October to +0.9% in November
• Yoy there has not been a positive growth month in terms of value of sales since April 2010

Our friendly economist quoted above went on in his/her note:
"As has been the case for much of the year, the overall picture is being flattered somewhat by rising levels of car sales. This was a pattern that was again evident last month, according to the CSO, as the motor trade category posted a 0.4% monthly rise in sales volumes. While modest by the standards of the stronger increases in car sales earlier in the year, this was still enough to pull total sales higher in November as core sales (which strips out the motor trade) fell by 0.2% on the month. This 0.2% fall in underlying sales followed a flat reading in October to leave core sales running about 0.5% lower than their average level in the September quarter."

Well, notice - there are no yoy references. Shall we take a look?
As above:

• Relative to the peak (February 2008) value of core retail sales today is down 19.09%
• Relative to the peak (October 2007) volume of core retail sales today is down 12.90%
• There are clearly two moments - around Q1-Q2 2010 when the volumes and values of retail sales ex-motors peaked locally - prompting the very same analysts to start trumpeting the recovery in retail sales, alas, all of these 'gains' were exhausted
• Ex-motor retail sales have reached another record lows in terms of both volume of sales and value in November 2010.
  

While the picture above confirms that there is little ground for optimistic reading of retail sales let's do justice to the quotes above:

• While celebrating the first consecutive two months rise in volume of retail sales since April,
• Keep in mind we also had (1) third consecutive month of declines in the value of core sales - the first time since December 2009, (2) 28th consecutive month of annual declines in the value of core sales, (3) 6th consecutive month of annual declines in the volume of core sales.

Looking at subcategories of sales, 7 out of 12 categories posted declines in volume mom and 8 out of 12 yoy. In value terms these figures were 7/12 and 9/12 respectively. In October 2010 we posted 9th worst performance in retail sales volumes in EU27 and 5th worst in Euro area 16.

Economics 24/12/10: Forecasting 2010 Trade performance

As a follow up for the previous post, here are my forecasts for levels of Exports, Imports and Trade Balance as well as Terms of Trade for Ireland for 2010 - using monthly data:
Overall, Terms of Trade deterioration in October 2010 stood at -5.12% on the best reading for 2007-to date.

Economics 24/12/10: Ireland's Trade Balance

With a slight delay, here is a deeper look into Ireland's trade performance through October.

First - exports and imports in levels:
Notice first that Imports are following steeply down-trending line, while Exports are trending flat and even slightly down over 2007-to-date period. Encouragingly, since May 2010, Exports are managing to stay well above their longer term trend line.

Summarized in the tables below, monthly and annual figures show clearly that significant gains in the trade balance are driven primarily by the continued declines in imports.


Hence, trade balance gains - impressive at +7.46% month on month and 11.95% in year on year terms:

At the same time, strong performance in Trade Balance is coming against the tide of adverse changes in the terms of trade: September marked the 4th consecutive month of deteriorating terms of trade, with a fall of 0.7% on August. Overall, since May 2010 terms of trade
have fallen by a cumulative 5.11% through September 2010. We can now expect this process to continue through October-November and cumulative May-October loss in terms of trade to rise to 5.9-6%.

It is worth taking a closer look at the relationships between trade balance components and terms of trade over the 2007-2010 period.

There is no statistical relationship between the level of exports and the terms of trade over 2007-2010 (through October). The relationship stands at y = 0.0175x + 7257.1, R2 = 1E-08. There is a relativeley weak, but strengthening relationship between trade balance and the terms of trade (as reflected in levels). In 2007-2009 data, terms of trade were able to explain roughly 0.32% of variation in the Trade Balance (y = 14.215x + 1385.2; R2 = 0.0032). Including data through October 2010 provides for much stronger explanatory power of 12.3% (y = 90.668x - 4989.4; R2 = 0.1228).

As chart below shows, correlation between levels of exports and imports has reversed sign in 10 months through October 2010 (to – 0.1458) compared with the first 10 months of 2009 (+0.3264). In longer terms, 2007-May 2010 data implied relationship between the levels of exports and imports was: y = 0.3266x + 5726.9; with a strong R2 = 0.2171. Adding data through October 2010: y = 0.1953x + 6398.5 and lower R2 = 0.0802.

Looking at the annual data:

Using annual data for 1990-2010 (where 2010 is my forecast values) we have weak relationships between growth rates in imports, exports and trade balance as a function of terms of trade changes. My full year 2010 forecasts are: Imports value €43,506mln, Exports value €85,209mln and Trade Balance of €41,703mln. This represents a forecast of 3.4% drop year on year in imports, 2.02% rise in exports and a jump of 8.4% in trade balance.

All of this data clearly suggests accelerated process of transfer pricing by profit-generative MNCs during the 2010 period. In fact, looking at log-relationships, growth in the trade balance is currently being explained by faster shrinking imports than the changes in exports. Coupled with deteriorating terms of trade, we have strong suggestion that our trade performance is being sustained primarily by the MNCs driving through strong expansion of profit-booking transfer pricing.

Of course, one should remember that whether due to transfer pricing or organic exports growth or - as indeed is the case, both - the improving Trade Balance is about the only positive news we can count on in 2010.