1/02/2011: Growth rates in credit and deposits

Having looked at the levels of credit and deposits through December 2010 in the previous post (here) lets take a look at the rates of change.
Credit growth rates above clearly show the following trends:

• Household loans rate of contraction has accelerated from 4.8% yoy in October and November to 5.2% in December. Thus December 2010 marked the worst month in the entire series history since 2004.
• Rate of decline in mortgages lending was also accelerating to 1.9% in December from 1.7% in November and 1.6% in September and October.
• Rate of decline in credit for non-financial corporations eased in December to 1.6% yoy from 2.4% in November.

Next, deposits rates of change:
The chart above shows:

• A dramatic exist from Irish banks by non-financial corporate deposits. This flight is accelerating - having gone from -9.2% yoy fall in July, to -13.1% in August, -14.8% in September, -15.4% in October, -14.9% in November and a whooping -16.1% in December.
• Household deposits are also accelerating in the rate of decline from -2.4% in October to -4.5% in November and -4.7% in December

To highlight these dynamics and to dispel the myth of 'savings are rising' often perpetrated by some banks analysts, let's come back to the data on deposits. In December 2008-January 2009 there was a discrete jump in household deposits to the tune of just over €12.4bn. This jump is never really noticed by the analysts, but it reflects addition of the credit unions to the database. These are not new deposits, but rather the deposits that were held in institutions previously not covered by the dataset.

Now, let' remove this 'hump' and see what the banking sector deposits really look like today:
The chart abvoe does exactly this. And it clearly shows that:

• Over 2010, Irish households have suffered a loss of savings, not a gain, pushing our deposits to the comparable level of December 2007
  
• Over the entire crisis total private sector deposits have fallen to the levels comparable to those in May-June 2006.

And yet, we keep hearing (admittedly whimpered) calls for taxing 'sky-high' deposits/savings to 'release spending into consumption markets'.

1/02/2011: Credit supply and deposits in Ireland

CBofI released monthly data for December 2010 on credit supply and deposits in the Irish financial institutions.

Updated charts and some analysis:
Irish private sector credit continued to contract in December, having fallen 0.98% mom and -10.7% yoy in total. Overall, credit outstanding fell €3.33bn in December mom and €40.23bn yoy.
Credit has fallen across all categories, except one:

• Household credit fell 4.72% (-€6.49bn) mom and 6.41% (-€8.98bn) yoy
• Mortgages credit fell 7.05% (-€7.55bn) mom and 9.65% (-€10.63bn) yoy
• Non-financial corporations credit fell 2.63% (-€2.5bn) mom and 37.08% (-€54.34bn) yoy
• Insurance and pension funds sector credit rose 5.36% (€5.66bn) and was up 26.18% (€23.09bn) yoy
• Combined non-financial sectors and households credit fell a massive €63.32bn in 12 months to the end of December 2010.

Onto deposits next:

Headline figure is that total deposits fell 2.24% (-€3.86bn) mom and 8.41% (-€15.46bn) yoy. This was backed by deposits declines across two out of three core components:
So:

• Household deposits rose 0.71% (€669mln) mom but fell 4.57% (-€4.53bn) yoy
• Non-financial corporate deposits were down 5.18% (-€1.83bn) mom and 17.64% (-€7.17bn) yoy
• Insurance and pension funds sector deposits fell 6.29% (-€2.7bn) mom and 8.57% (-€3.77bn) yoy
• Non-financial sector and household deposits fell €11.693bn in 12 months through December 2010.

The relative changes in deposits and loans outstanding implied changes in the ratio of loans to deposits - an instrument for the leveraging taken on by the economy at large.

Overall, Irish economy achieved a very modest reduction in the ratio in 2010:

• Total private sector credit to deposits ratio fell 2.53% in 12 months to the end of December 2010 reaching 198.81%
• Lowest deleveraging took place in the household sector, where the ratio fell 1.93% in 12 months and currently stands at 138.56%
• Highest degree of deleveraging was achieved in the non-financial corporate sector, where the ratio declined 23.6% yoy in December (though it rose by 2.69% mom) reaching 275.68%
• Insurance and pensions funds sector actually increased overall leverage ratio by 38% in 12 months to the end of December, reaching the ratio of 276.6%

Overall, outstanding loans exceeded domestic deposits by 98.81% in the end of 2010.

1/02/2011: Ireland's Manufacturing PMI

Boom times arrive in Irish manufacturing - according to the latest NCB Manufacturing PMI for Ireland.

Here are the updated charts and my commentary:
Strong drivers for PMIs in Manufacturing in January 2011 were:

• New orders (up to 58.8 in January 2011 against 53.2 in December 2010 and 12-mo average of 52.5), driven by New Export Orders (up to 60.3 in January 2011 against 54 in December 2010 and 12-mo average of 56.1).

Headline PMI rose to 55.8 from 52.2 in December signaling strengthening of growth in the sector. On seasonally adjusted basis, January 2011 reading was well ahead of 51.8 average reading for 12 months preceding, and 51.4 average reading for Q4 2010. In Q1 2010 the same average reading was 49.9 (signaling contraction in the sector) and in Q1 2009 it was 35.8 (a veritable disaster!).

A close-up:
Backlogs and inventories:
Again, good performance with all signlas going in the right direction here.

Employment index is now for the second month running showing expansion, which is good news. Bad news - employment index is still relatively weak. But this is the first two-months consecutive expansion signal we had since October-November 2007.

Worrisome trend is on output-input prices gap, which is showing significant inputs price pressures.

Let's take a look at employment figures a bit closer:
You can see the divergence between services and manufacturing PMIs in both core PMIs and employment index.

So mapping the recovery:
Right move, in right direction for manufacturing. Let's hope services surprise on the positive side as well...

It is worth remembering that:

• Manufacturing sector in Ireland is heavily exports-oriented and as such is less labour-intensive than more domestically-oriented manufacturing in, say, France
  
• Manufacturing in Ireland is less labour-intensive than services (which, per December - the latest data due for an update in the next few days - is still tanking)
• Net effect of manufacturing growth - on employment is negligible, but still great news!

28/01/2011: Eurcoin January 2011

The latest Eurocoin leading indicator for growth in the Eurozone is out and it is a mixed bag.

From the headline figure level, Eurocoin declined marginally from 0.49 in December to 0.48% in January. Both levels are largely consistent with 2% annualized rate of growth. This, of course is an improvement on Q3 2010 and suggests that growth remains relatively robust (by Euro area standards).
However, a worrisome feature of the latest reading is that it was supported by the confidence surveys, rather than by the real activity.

Industrial production growth rate remained basically constant across the Euroarea in the latest data (up to November 2010 and for the three consecutive months), driven by stable growth in German production, decline in Spain and stagnant Italian production. France posted a slight increase.

Business confidence as measured by the EU Commission surveys boomed in Germany and posted a robust rise in France, slightly offset by negative, but negligibly slowing confidence in Italy and the robust negativity in Spain. This marked the fifth consecutive month of business confidence moving well above the PMI-signaled confidence indicators.

In contrast, consumers were getting gloomier in France, Spain and Italy, while showing robust optimism in Germany.

So overall, a mixed bag, with leading growth indicator signaling growth slightly ahead of the IMF forecasts. Which means I am now leaning toward seeing 0.48-0.5% qoq growth in Q1 2011 - annualized rate of 2.00-2.01%

27/01/2011: Gold - an interesting chart

Few interesting charts on gold for 2010 - all courtesy of the GoldCore.

The above, of course, highlights the relative power of gold as risk-diversification instrument. Gold price volatility was 16% on an annualised basis in 2010 which is consistent with long-term trend. At the same time, volatility on S&P GSCI daily returns was 21% annualized. Given that GSCI is a broad commodities index, 's worth taking a look at relative returns: Gold price rose by 29% in 2010, S&P GSCI rose 20%, S&P 500 +13%, MSCI World ex US Index +6% in USD terms, Barclays US Treasuries Agg +6%. Now, note that the only less volatile commodity instrument is non-storable livestock.

If you want an in-depth view of hedging and flight-to-safety properties of gold - go here. Alternatively, for a more popular view: see the video here.

27/01/2011: Retail sales for December 2010

Retail sales stats are in. Given the weather conditions in December, the Budget 2011 pillaging the pockets of consumers, remaining uncertainty in the economy, and tanking consumer confidence (see here) it was not surprising to see the end results for the sales in December 2010.

Per CSO: “The volume of retail sales (i.e. excluding price effects) decreased by 3.1% in December 2010 when compared with December 2009 and there was a monthly decrease of 1.1%.” Worse than that: ex-Motor Trades, the volume of retail sales fell by 3.6% yoy in December 2010, and 2.5%mom.

• Motor Trades (-8.0%)
• Fuel (-21.7%)
• Furniture and Lighting (-21.5)
• Bars (-9.9%)

were “amongst the ten categories that showed year-on-year decreases in the volume of retail of retail sales this month”.

The value of retail sales has suffered even more than the volumes (and remember – it’s the value, not the volume that supports jobs in the sector) contracting by 4.1% yoy in December 2010 and falling 0.9% mom. Ex-Motor Trades annual decrease was 3.3% in the value and a monthly decrease of 1.3%.

Further per CSO: "Provisional estimates are now available for the final quarter of 2010… the volume of retail sales decreased by 0.6% year on year in Q4, with the value decreasing by 2.1%. If Motor Trades are excluded the volume of retail sales decreased by 1.8% year on year in the final quarter of 2010 and the value of retail sales decreased by 2.4%."

Let’s add to that the following observation: since 2007 through the end of 2010 Irish retail sales fell 23.3% in value and 18.6% in volume.

Weather effects, that undoubtedly contributed to the declines in retail activity in December should not give us comfort going into 2011. The trends in both RSI and Consumer Confidence are less than encouraging. But one does need to take into perspective that, for example, a massive decline in fuel (due to transport disruptions during the snow periods) and declines in 'Other' categories - mobiles, toys, jewelery etc - and clothing, footware & textiles clearly inidcate the disruptive nature of December weather.

27/01/2011: External trade (goods)

Latest data for Ireland's external trade in goods was released yesterday, showing another month of spectacular trade balance performance in Ireland, albeit with a slight easing in month-on-month activity.
The value of exports in November 2010 rose robust 17% year on year while the value of imports was up by 2%. The trade surplus increased by a spectacular 37% to €4,086mln, marking a third consecutive month when the trade surplus exceeded €4bn. However, seasonally adjusted exports fell 1% in November mom, as did imports, leaving seasonally adjusted trade balance virtually unchanged.

The main drivers of trade balance in the first 10 months of 2010, compared against the same period of 2009 were:

• Medical and pharmaceutical products exports rose 15% or €2,705mln, while imports were down 21%
• Organic chemicals exports up 3% or €429mln.
• Computer equipment exports fell 32% or -€1,724mln, while imports declined 31% or €994mln
• Other transport equipment (inc aircraft) exports fell by 70% or €458mln, but imports fell 31% or -€1,069mln.
• Imports of Petroleum fell 34%,
• Imports of Road vehicles declined by 74%

Now to updated charts showing the above dynamics:
Headline series show two trends - a relatively flat trend (though down-sloping slightly) in exports and a robustly negative trend in imports. Exports and imports in the short run are still performing above the trend and the persistence of performance suggests that the trend is likely to reverse onto positive in exports and flatten out in imports. While continuing to signal strong performance in trade surplus, the trend suggests that future growth in trade balance might be moderating in months to come.

Chart above clearly highlights an emerging problem of deteriorating terms of trade (ratio of exports prices to imports prices). This process has been on-going and is now starting to present a major headwind for exporters.

That said, due to a heavy exposure of our trade to MNCs, volumes of trade have little relationship with the short and medium term pressures on terms of trade:The above suggests that the headwinds will be strongly felt by domestic exporters.

A summary of cumulative changes in exports and trade surplus in 2010 relative to 2007:

Notice weakening performance (relative to pre-crisis conditions) in October and November - something to watch.

25/01/2011: Just how independent is the EU's Systemic Risk Board

On January 20 there was a momentous occasion in Europe. After years of crisis, bent on preventing another financial meltdown in the future, the EU unveiled the first sitting of the new super-regulatory/supervisory body - the European Systemic Risk Board.

Here is the press release from the EU official site with emphasis and comments added by me:

"The General Board of the European Systemic Risk Board (ESRB) held its inaugural meeting today at the European Central Bank (ECB) in Frankfurt am Main. The meeting led to a number of decisions on the set-up and functioning of the Board:
...

• Mr Marek Belka, Governor of the Narodowy Bank Polski; Mr Mario Draghi, Governor of the Banca d’Italia; Mr Athanasios Orphanides, Governor of the Central Bank of Cyprus; Mr Axel Weber, President of the Deutsche Bundesbank; were elected members of the Steering Committee for three years. [Note that all members of the Steering Committee are Central Bankers, hence not independent from the ECB]
  

• Mr Stefan Ingves, Governor of the Sveriges Riksbank was elected Chair of the Advisory Technical Committee for three years. [Again the above comment applies]

The ESRB is an independent EU body responsible for the macro-prudential oversight of the financial system within the Union. The ESRB is located in Frankfurt am Main and its Secretariat is provided by the European Central Bank.

The Chair of the ESRB is the President of the European Central Bank, Mr Jean-Claude Trichet. The first Vice-Chair of the ESRB is Mr Mervyn King, Governor of the Bank of England. He was elected by the members of the General Council of the ECB on 16 December 2010 for five years. The second Vice-Chair of the ESRB will be the Chair of the Joint Committee of the European Supervisory Authorities.

The General Board consists of the following members with voting rights: the President and the Vice-President of the European Central Bank (ECB); the Governors of the national central banks of the EU Member States; one member of the European Commission; the Chairperson of the European Banking Authority (EBA); the Chairperson of the European Insurance and Occupational Pensions Authority (EIOPA); the Chairperson of the European Securities and Markets Authority (ESMA); the Chair and the two Vice-Chairs of the Advisory Scientific Committee (ASC); the Chair of the Advisory Technical Committee (ATC). The following members have no voting rights: one high-level representative per Member State of the competent national supervisory authorities; and the President of the Economic and Financial Committee (EFC)." (end quote)

So in a summary: the ESRB is composed of:

• National CBs and supervisory authorities (subject to ECB control)
• ECB members
• EU Commission representatives
• EU industry quangoes

And this is called 'independent'?

15/01/2011: Austerity and structural deficits

In recent days, there have been some questioning responses to a series of posts I did earlier this month on Irish Exchequer results for 2010. In particular, some queried my concerns with the long-term deficits and the dynamics of Irish Exchequer deficit.

Well, here's an EU official confirmation of my analysis: "As displayed in Graph 12, the distance of the deficit – corrected for the business cycle and one-off measures, i.e. structural deficit – from the medium-term budgetary objective (MTO) is particularly large (more than five percentage points of GDP) in twelve Member States." (from Brussels, 12.1.2011 COM(2011): GROWTH SURVEY, ANNEX 2, MACRO-ECONOMIC REPORT)

As the chart below clearly shows - Ireland's structural - recession effects-adjusted - deficits are in the league of their own:
Austerity, folks, or not - we are still living beyond our means when it comes to public expenditure. And when it comes to our austerity metrics (the blue bar), it is clear that much more remains to be done and that the worst Budget is yet to come.

15/01/2011: EU's claim to fame in 2010

I promised some time ago to post on EU's marvelous youtube video (here) which talks about all the things that the EU allegedly did for its citizens in 2010 (hat tip to the OpenEurope.org).

As you would notice - watching the official video - there some pretty good things that the EU delivered in 2010, although many of these, such as the EU work in the areas of justice are long running themes. But one cannot avoid several absolutely ludicrous claims.

Here's the biggest whooper:
One doesn't need a PhD in Finance or Economics to understand that 2010 was the year of:

• Jobless and anemic recoveries across a number of EU states;
• Continued recession across a number of other EU states;
• Acute and still ongoing crisis in sovereign debt markets; and
• Virtually EU-wide austerity marking the unsustainable nature of European economic model

Actually, one only needs to read through EU-own flagship policy document from 2010 - Europe 2020 (here) - to see that (quoting from the preamble):
"2010 must mark a new beginning... The last two years have left millions unemployed. It has brought a burden of debt that will last for many years. It has brought new pressures on our social cohesion. It has also exposed some fundamental truths about the challenges that the European economy faces. And in the meantime, the global economy is moving forward... The crisis is a wake-up call, the moment where we recognise that "business as usual" would consign us to a gradual decline, to the second rank of the new global order. This is Europe's moment of truth."

So if anything, per EU own admission, the crisis is not over and for EU, the wake-up call from the crisis is yet to arrive. Note that what Europe 2020 refers to the 'moment we recognize the business as usual would consign us to a gradual decline' as timed beyond June 2011 when the Commission expects European Parliament's and Member States approval of its agenda.

But here's EU Commission own assessment of EU's progression toward 'securing a sound economy' - quoting directly from Europe 2020:

• Europe's average growth rate has been structurally lower than that of our main economic partners, largely due to a productivity gap that has widened over the last decade. Much of this is due to differences in business structures combined with lower levels of investment in R&D and innovation, insufficient use of information and communications technologies, reluctance in some parts of our societies to embrace innovation, barriers to market access and a less dynamic business environment.
• In spite of progress, Europe's employment rates – at 69% on average for those aged 20-64 – are still significantly lower than in other parts of the world. Only 63% of women are in work compared to 76% of men. Only 46% of older workers (55-64) are employed compared to over 62% in the US and Japan. Moreover, on average Europeans work 10% fewer hours than their US or Japanese counterparts.
  
• Demographic ageing is accelerating. As the baby-boom generation retires, the EU's active population will start to shrink as from 2013/2014. The number of people aged over 60 is now increasing twice as fast as it did before 2007 – by about two million every year compared to one million previously. The combination of a smaller working population and a higher share of retired people will place additional strains on our welfare systems.

So no sight of 'secured sound economy' in sight here. And as far as financial markets go, here is an article summarizing the four scenarios for the Euro that FT Deutschland published last month. You judge if having any one of the four outlined by the FT:

• Continued crisis, or
  
• A de jure and de facto two speed Europe, or
• A break up of the EU into two blocks precipitated by a Lehmans-like event in European sovereign debt markets, or
• A total collapse of the Euro

constitute a 'secured stronger financial market'.

Now on to the second most outlandish claim made in the video:
The very same - yet to be fully approved and implemented - Europe 2020 agenda is focused heavily on the need to:

• create new jobs and
• boost small businesses

If this was already achieved by the EU in 2010 as Commission video claims, why, may I ask, should the EU worry enough about these objectives to plan to deliver on them by 2020?

Here's what Europe 2020 says: "Europe must act:

• Employment: Due to demographic change, our workforce is about to shrink. Only two-thirds of our working age population is currently employed, compared to over 70% in the US and Japan. The employment rate of women and older workers are particularly low. Young people have been severely hit by the crisis, with an unemployment rate over 21%. There is a strong risk that people away or poorly attached to the world of work lose ground from the labour market.
  
• Skills: About 80 million people have low or basic skills, but lifelong learning benefits mostly the more educated. By 2020, 16 million more jobs will require high qualifications, while the demand for low skills will drop by 12 million jobs. Achieving longer working lives will also require the possibility to acquire and develop new skills throughout the lifetime

Does the above quote suggest that in 2010 the EU has 'created new jobs'? Not really.

Here's Eurostat's latest data release: "The euro area (EA16) seasonally-adjusted unemployment rate3 was 10.1% in November 2010, unchanged compared with October. It was 9.9% in November 2009. The EU27 unemployment rate was 9.6% in November 2010, unchanged compared with October. It was 9.4% in November 2009." So recap - through November, 2010 marked a yar of rising unemployment across the EU and the Euro zone. What 'new jobs created'?

Eurostat puts some more real numbers on the EU claim: "Eurostat estimates that 23.248 million men and women in the EU27, of whom 15.924 million were in the euro area, were unemployed in November 2010. Compared with November 2009, unemployment rose by 606 000 in the EU27 and by 347 000 in the euro area." So year on year, some 606,000 jobs were destroyed on the net across Europe, not 'new jobs created'.

Here's the chart:
But may be, just may be the EU did deliver on some other economic performance indicator in 2010?

How about inflation? Eurostat again: "Euro area annual inflation was 2.2% in December 20102, up from 1.9% in November. A year earlier the rate was 0.9%. EU annual inflation was 2.6% in December 2010, up from 2.3% in November. A year earlier the rate was 1.5%." Oops.

External trade? Eurostat nails it: "The first estimate for the November 2010 extra-EU27 trade balance was a €14.7 bn deficit, compared with -7.3 bn in November 2009 [worsening deficit on trade account year on year]. [and also worsening trade account month on month] In October 2010 the balance was -7.9 bn, compared with -6.4 bn in October 2009. In November 2010 compared with October 2010, seasonally adjusted exports rose by 0.3% and imports by 6.1%."

But wait - what about growth? Eurostat: "In comparison with the same quarter of the previous year, seasonally adjusted GDP rose in the third quarter 2010 by 1.9% in the euro area and by 2.2% in the EU27, after +2.0% in both zones in the second quarter." So yes, growth returned, but it was extremely anemic and what's worse - in the Euro area it has deteriorated in Q3 2010 relative to Q2 2010. At any rate, the Commission can't relaly make any claims about 2010 growth because the numbers for Q4 are not in yet and Q3 numbers are still provisional.

"Stop", you shout - "they made a claim about small businesses boost - address that!" Can't and neither can the EU Commission, since

• Eurostat's latest data on "SMEs - Annual enterprise statistics broken down by size classes - industry and construction" only covers year 2008.
• Eurostat's latest publication on SMEs development in Europe, dates back to 2009 and - per it's title - covers SMEs were the main drivers of economic growth between 2004 and 2006
  

Notice that the database for SMEs page was last updated by the Eurostat on 14.10.2010. And that's despite EU Commission setting strategic priority in early 2010 to significantly increase growth amongst SMEs in 2011-2020.

In other words, the EU's claim of boosting small business in 2010 is, folks, non-falsifiable, or translated from the philosophy of science language - pure fiction.

As an indicator strongly instrumental for SMEs, let's take a look at entrepreneurship. Here is a useful link to OECD analysis, conducted jointly with Eurostat.

Couple of charts from November 2010 OECD publication on the topic (notice these cover data through Q2 2010):
Clearly, with exception of the UK and Denmark, no EU country posted an increase in entrepreneurship rates in 2010.

And for the laughs, here's No Comment claim to EU fame
Now, we are truly saved!

15/01/2011: Capex in Irish Industry

Capital acquisitions in industry in the third quarter of 2010 were €572.0m, compared with €735.6m in the third quarter of 2009 per CSO's latest data released this week. The main contributors to capital acquisitions were sectors:

• Food products with €69.2m.
• Pharmaceutical products and preparations with €49.3m.
• Other Manufacturing with €38.5m.

In 2009, the main contributors to capital acquisitions were:

• Basic pharmaceutical products and preparations €581.1mln
• Food Products €264.5mln
• Machinery and equipment n.e.c. €258.5mln

Total acquisitions in 2009 were €3126.4mln and Q1-Q3 2009 total was €2,438.9mln against €1,577.1mln for Q1-Q3 in 2010, implying a decline of 35.3% yoy.Clearly, no investment / capex restart anywhere in sight:

15/01/2011: Consumer Sentiment in Ireland

Per this week's data release by the ESRI, Irish consumer confidence suffered another set back in December 2010 - updated chart:
Overall, Consumer Sentiment Index declined to 44.4 in December from 48.4 in November, and relative to 53.3 in December 2009. The November reading remains above the all time low in July 2008 of 39., but way below 67.9 local peak achieved back in July last year.

The decline in index was across the board with

• a strongly negative move in the Index of Current Conditions - to 68.5 in December, compared with 76.6 in November, and
  

• Expectations index staying at 28.1, down from 29.4 in November.

According to the ESRI: “The majority, over 70 per cent [would have been nice to put an exact number here, but what can you expect - it's ESRI], of reported that their finances had worsened rather than improved during the past year.”

All thanks for that to Leni & Co for spectacularly reducing middle class' disposable incomes to bail out systemically unimportant banks and public sector elites.