3/02/2011: Services PMI for Ireland

NCB released their PMI for January for Irish Services sector. Headline news is good:

• After contracting in December, Irish Services sector showed modest growth, signaled by PMI rising to 53.9 (up from December contractionary 47.4)
• January reading of 53.9 was ahead of 12 months average of 51.5 and well ahead of Q1 2010 reading of 47.6
• January 2011 reading, however was below Summer 2010 peak readings of 55.4 and 55.7 in June and July

Or over the entire series history:
And a more recent snapshot with the core driver of increase:

New business orders have actually fallen in January, with a reading of just 47.7, marking 5th consecutive month of declines. 12-months average was 50.0 but Q1 2010 reading average was 47.1, so realistically speaking, the latest reading is not an improvement.

Historically, you can see where we are from here:

Other sub-components showed weaknesses, with exports orders being trend breakers and the driver of the positive improvement in overall PMI reading:

Hence:, quoting from the NCB report:

• New Export Business In contrast to the trend seen for overall new business, new export orders rose markedly over the month, with the UK a key source of new work. New export business has now expanded in the sector in sixteen of the past seventeen months
• Backlogs of Work Falling new business alongside increased activity led to a further reduction in backlogs of work during January, extending the current sequence of depletion to forty-one months
• Providers expect economic conditions in Ireland to improve over the coming year, leading to higher new business and subsequently increased activity. According to respondents, export markets will remain a key source of growth over the year. The level of optimism in the service sector improved to the highest since last September

• Input cost inflation accelerated over the month, but remained much weaker than the long run series average. Where input prices increased, panelists mentioned higher fuel costs as well as rising taxes [My comment - the wedge between input and output prices points to severe pressures on services providers' margins]
• Irish service providers were unable to pass on higher cost burdens to their clients during January. Intense competition was the main factor leading firms to cut charges, which fell at a substantial pace that was steeper than that seen in the previous month
• Profitability at Irish services companies continued to decline over the three months to January, extending the current period of decline to thirty-seven survey periods. Moreover, the pace of reduction was the sharpest since the three months to February 2010, with panelists reporting a combination of lower sales and strong competition

• Employment continues to be a bad performer with jobs losses continued
  

So on the net Services have jumped into expansion zone, but the recovery at the very best is jobless and volatility of the series implies that it will take several months of continued robust improvements in index sub-components to provide comfort in the sector improvements overall:

2/02/2011: Dependency ratios

Looking over LR data earlier tonight, I decided to update the charts for dependency ratios, based on a combination of LR and QNHS. Here are some charts.

From the top: in Q1 1998 there were 1,619.8 thousand persons aged 15 years or older in Ireland that were not in full-time employment and 1,237.4 thousand of the same age category persons who were in full time employment - a ratio of 1.3. By Q1 2000 this ratio fell to 1.1. The same was attained in Q1 2005. This ratio declined to 1.0 in Q4 2005 and stayed there until Q4 2008. Then in Q 12009 the ratio rose to 1.3. As of Q3 2010, there were 2,075.9 thousand 15 year old and over persons who were not in full time employment in Ireland. Against this, there were 1,436.8 thousand persons of the same age category in full time employment. The implied ratio there for has rise to 1.4. Chart below illustrates:
Not scared yet? Ok, another shot:
Oh, and another angle:
The above shows just how bad is the dependency ratio getting in Ireland during the current crisis.

2/02/2011: Live Register for January

Live Register was out today for January with some positive news. The headline figure shows a seasonally adjusted decline in LR of 6,900. Unadjusted, LR rose 5,598 over the same month. It's hard to argue just how accurate are seasonality adjustments off the trend line, but let's stick to seasonal figures, so we can at least feel somewhat better about our predicament.

Charts below shows the slight decline in LR-implied rate of unemployment and the drop in LR itself:
So LR-implied unemployment rate is down from 13.6% in December to 13.4% in January.

Average weekly dynamics are looking pretty strong (in part, these are due to 4 weeks month - December, for example covered 5 weeks):
Monthly rate of change:
Also looks strong.

These are all headlines so far. Now, let's dig a little deeper:
Number of LR signees who are non-Irish nationals rose 1,882 to 78,527 in January 2011 - an increase of 2.46% mom and a decline of 3.52% yoy. Number of Irish nationals on LR rose 3,716 in January 2011, a rise of 1.03%mom and 2.42%yoy. So as chart above clearly shows, the two series are moving in the opposite directions. There were 4.64 Irish nationals on LR per each non-Irish national in January 2011. The same number for January 2010 was 4.37.

Another alarm bell is ringing for the increasing number of those in part-time and occasional employment (presumably not all happy to undertake less than full employment). This number rose from 82,058 in December 2010 to 83,232 in January 2011, with monthly increase of 1.43% and a year on year rise of 8.29%.

2/02/2011: Irish interest rates

For the last post on monthly data release from the CBofI, let's take a look at the interest rates environment at the retail level.

First up - lending rates:

As of November 2010 (latest data available):

• House purchases lending floating rate was at 2.95% (up 0.34% mom and 13.03% yoy - note, these are percentages, not percentage points); rates for over 1 year fixed were 4.10% average (up 0.24% mom and 14.53% yoy)
• Consumer credit rate was 6.06% floating (up 1% mom and 30.32%yoy)
• Non-financial corporations faced a floating rate for <€1mln loans of 4.49% (up 10.86%mom and 13.96%yoy) and over 1 year fixed rate for same level of loans of 5.14% (up 4.26%mom and 18.16%yoy)
• The trends are up for all two borrower types year on year
  

Now, deposits:
So for deposit rates:

• Household deposits attracted an average rate of 1.75% (up 6.06% mom and 17.45% yoy)
• Non-financial corporations attracted an average rate of 1.25% (down 0.79% mom and up 39.98% yoy)

Now, consider the difference between deposit rate and borrowing rate:
For households, the gap between earnings on savings and cost of financing mortgages (I used house purchase, floating rate or up to 1 year fixed) has moved in favor of savers until November 2008, and there after switched in the direction of favoring borrowers. The switch is extremely volatile and since August 2010 the direction has changed once again. Thus, since August 2010 the banks are moving into more aggressively charging mortgage holders and rewarding relatively more savers.

Corporate rates differential has been moving in the direction of penalizing corporate deposits holders. This process in now being reinforced since July 2010.

So here we have it - deposit rates are becoming less attractive to the corporates, just as more and more of them abandon Irish banks... who would have thought that charging our customers out existence can be a bad thing?

Finally, using CBofI breakdown on loans by type and maturity, I conducted a simple exercise - what happens if the interest rates on new and ARM mortgages charged by banks go up by 1 percentage point (incidentally - PTSB is doing just that, apparently). By my calculation, added cost of interest finance will translate into roughly additional €1.67bn being taken out of the economy. That's like having another Leni's tax hike over again for Irish households.

2/02/2011: Irish termed deposits and credit cards

In the previous two posts I updated data on credit and deposits levels and flows. In this post, let's tidy up by taking a look at deposits by maturity and credit cards.

First deposits by maturity:
Clearly, longer term maturity is exiting, medium term maturity deposits are now shrinking as well, while short term maturity deposits remain steady. This suggests that

1. Irish depositors are exiting Irish banks when longer term savings mature;
2. Irish pool of savings available for investment - remember, banks can more safely lend out of longer maturity deposits than out of shorter maturity ones (lower risk of maturity mismatch) - is also shrinking.
3. Overall, overnight deposits have increased 2.11%mom in December 2010, but fell 4.35% yoy
4. Up to 3 months deposits fell 4.33% in December 2010 mom and 2.77% yoy
5. Up to 2 years deposits fell 9.64% mom and 17.32% yoy.
   

Not very good trends.

On credit cards, the picture is What the data suggests is:

• Irish credit cards balances are declining, but this decline is relatively mild - down 0.81% mom in December 2010 (latest data) and -6.28% yoy.
  

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.