07/07/2011: What's in the interest rates hikes

Working away on the data for PIIGS, I was interested in a question, what if the ECB were to go to the equilibrium repo rate consistent with the current inflation & growth environment?

In a recent post (here) I did analysis of the ECB historical rates in relation to eurocoin leading indicator of growth. This chart is reproduced here with suggested ranges for the repo rates consistent with current and with higher inflation.
So if the equilibrium rates are in the neighborhood of 2.25-2.75 percent, what would 1% increase in interest rates from June 2011 rate of 1.25% do to the cost of fiscal debts financing across the PIIGS?

Using IMF projections for debt levels for PIIGS through 2016 and assuming that all interest payments are financed out of deficits / borrowing, the chart below shows the extent of the increase in the cost of interest charges on government debt by 2016:
This translates into an increase in the annual cost per capita (2016 forecast) of:

• €560.48 in Greece
• €834.84 in Ireland
• €546.74 in Italy
• €309.24 in Portugal
• €319.02 in Spain

Overall, the increases in interest costs for PIIGS will amount to ca €47.06 billion per annum or 1.23% of the PIIGS GDP and 0.44% of the Euro area GDP. Oh, and by the way, this does not take into account the additional costs of financing banks lending by the ECB.

So that should put into perspective my view of today's hike in the ECB rate, expressed earlier here. So happy wrecking ball swinging, Mr Tri(pe)chet & Co.

06/07/2011: Profit Margins in Irish Services and Manufacturing

Based on latest Manufacturing and Services PMIs, let's update my index of profit margins in Irish economy.

• Profit margins continued to decline in Services, with the rate of decline slowing down from -19.74 in May to -16.02 in June. Profit margins declines are still steeper than 12mo MA of -14.6, but are now more moderate than the Q2 2011 average of 20.1 and Q1 2011 average of 17.4. However, profit margins declines for Q1 2011 were more benign than in Q2 2011.
• Profit margins in Services are now on the declining trend for 24 months straight and have accelerated significantly since 2009 and 2010. 2010 H1 average was -6.9 and 2009 H1 average was -11.0.
  
• Profit margins volatility has risen steeply during the crisis. The standard deviation for profit margins in Services was 5.29 for the entire history of the series and 5.31 for the period from 2000 through today. However, volatility now reads 7.90 for the period from January 2008 through today - the period of the crisis.
  
• Profit margins in Manufacturing also continued to decline in June, with the rate of decline moderating even more than in Services from-21.19 in May to -16.22 in June. Profit margins rates of decline are now more moderate than 12mo MA of 20.6. Q1 2011 profit margins rate of decline was -20.8 with Q2 2011 declines steeper at -23.6.
• Profit margins in Manufacturing are now on the downward trend for 28 months in a row. 2010 H1 average decline was -19.3 and 2009 H1 average was -3.7, implying that 2011 deterioration in profit margins is steeper than in both previous years.
• Profit margins volatility also rose in manufacturing during the crisis. Historical standard deviation for profit margin indicator in manufacturing stands at 6.95, while since 2000 through today volatility is 6.98. However volatility since January 2008 is 8.92.

05/07/2011: Pre-ECB council meeting note

Here's my (cynical, but) concise summary of the pre-ECB call on rates this week:

We (Euro zone) have:

• Greece being kept alive pretty much for its 'spare parts' (privatizations)
  
• Porto just gone into coma with the latest downgrade of its bonds to junk,
  
• IRL in an ICU on an artificial respirator (see the bottom line on Irish Exchequer expenditure here)
  
• Spain feverish & fading out of consciousness on negative watch and with banks starting to implode (HT to Namawinelake, Spain is facing €660 billion of redemptions in 24 months ahead and with banks providing just 10% provisions cover on €450 billion worth of development loans)
  
• Italy getting the first symptoms of the deadly debt/banks spiral virus (negative watch for ratings and latest signs of banks starting to slip)
  
• Belgium on the trolly about to be wheeled into casualty department
  

In this environment, ECB raising rates this week will be equivalent to shutting off power supply to the entire hospital that is Euro zone.

05/07/2011: Irish Exchequer Expenditure: H1 2011

Previous posts on the H1 2011 Exchequer results covered Exchequer balance, Tax Burden composition, and Exchequer Receipts. This post will cover Exchequer Expenditure side of the balance sheet.

Please note: cross annual comparisons are distorted by the changes in departments compositions and remits. Nothing we can do about this.

Top level numbers for H1 2011.

Agriculture, Fisheries and Food (accounting for 1.8% of the total Net Voted Expenditure - NVE) spending stood at €388 million in H1 2011, down 28.9% on the same period for 2008 and down €79 million or 16% yoy, though all of the savings came from the capital side, with current spending up €87 million yoy (+44%).

Art, Heritage & Gaeltacht (0.5% of total NVE) managed to spend €108 million in H1 2011, down 67.3% on 2008. Spending here is down 68% yoy (saving €158 million) with most of savings coming from the current side, although in proportional terms capital savings are on par with current savings.

Communications, Energy & Natural Resources (0.4% of NVE) spending in H1 2011 was €98 million, up €13 million (+15%) on 2010. Increases in spending took place on current side (+€11 million or 28%) and capital side (+€2 million or 4%). Relative to H1 2008 spending is down 14.9% which is 7th lowest rate of savings amongst the departments.

Community, Equality and Gaeltacht Affairs (0.5 of NVE) - no, don't ask me why is Gaeltacht having itself spread over 2 departments - spent €105 million, down €79 million (-43%) yoy. This time around, most of the savings in volume came from the current spending side, but in relative terms, capital spending is down 77% while current spending is down 36% yoy. Department spending has fallen 53.9% on comparable period in 2008.

Defence (1.9% of NVE) spent €419 million, which is down 13% on comparable period in 2008, making the department 6th lowest saver in the entire voted expenditure set. Department spending was up €4 million yoy with all of the increase accounted for by current spending.

Education and Skills spent €4,066 million in H1 2011 which is €171 million above H1 2010. Capital side increased by €59 million (+58% yoy) and current side was up €113 million (+3%) yoy. The department is the third largest of all Government Departments, accounting for 18.6% of NVE. Overall austerity has resulted in a 4.8% decrease in Department spending through H1 2011 compared to H1 2008, making the level of savings achieved the fourth lowest of all departments.


Jobs, Enterprise, Trade & Innovation (1.5% NVE) spent €336 million in H1 2011, down 48% on H1 2008. Compared to H1 2010, department spending fell €219 million (39% drop yoy) with current spending falling €245 million (-62%), while capital spending rose €26 million (+16%). Much of the capital side increases across the departments is attributable to the timing of spending with previous Government actively delaying paying on capital projects until later in the year. At least, with the current Government, contractors might be getting paid more on-time for their work.

Environment, Community & Local Government (2.6% of NVE) spent €561 million in H1 2011, down 52.8% on H1 2008. Spending was down €200 million yoy (-26%) with capital savings of €119 million (-32%) and current savings of €81 million (-21%).

Finance (2.3% NVE) managed to spend €510 million in H1 2011, down 20.3% on 2008 and achieving savings of a miserly €4 million yoy, with €20 million saved on current spending side and a deficit on 2010 of €16 million on capital side.

Foreign Affairs and Trade (1.6% of NVE) spending of €342 million is down €61 million (-15%) yoy, with €59 million of the savings coming from the current side. Relative to H1 2008, current year performance is delivering savings of 29.7%.

Health (the largest of all departments, with 30.9% of NVE, although Social Protection is coming close second and is bound to overtake Health by year end) spent €6,757 million in H1 2011, up a massive €666 million yoy of which €662 million came from the current spending side. With all of this, Health spending is now down 0.8% on H1 2008. The figures are obviously distorted by the introduction of USC, but as of H1 2011, the department has achieved 3rd lowest rate of savings of all departments.

Another billionaire department: Justice & Equality (4.9% of NVE) had total spending of €1,081 million in H1 2011, up €32 million on H1 2010 (+3%), with deficit coming at €56 million on current side, offset by savings of €24 million on capital side. Department spending is down 12.2% on H1 2008 - 5th lowest rate of savings across all Departments.

Social Protection (soon to be the largest spending department in Ireland but in H1 2011 accounting for 29.8% of NVE) spent €6,517 million - up 10% or €589 million yoy, with €587 million of this increase coming from the current side. Compared to H1 2008, H1 2011 spending rose 49.5% making it the worst performing department when it comes to savings.

Taoiseach (0.5% NVE) came with a bill of €108 million in H1 2011, which was 23.1% above comparable period in 2008. More than that, the department managed to increase its spending on 2010 as well, with cost rising by €20 million (+29%) yoy all of which came from current spending increases.

Transport, Tourism & Sport spending of €593 million in H1 2011 was 187 million down on H1 2010 (-24%) with savings of €240 million achieved on capital side and current side yielding an overrun of €53 million on 2010. The department accounts for 2.9% of NVE and spending here is down 53.8% on H1 2008.

So the top of the line numbers are: in H1 2011 Total Net Cumulative Voted Spending stood at €21,898 million or which €20,547 million were accounted for by current spending and €1,351 million by capital spending. Overall expenditure is now €399 million above H1 2010 (no sign of austerity here, if anything, spending just rolls on at the aggregate) - an overspend of 1.9%. On Current expenditure side things are even more 'boomish' with overspend relative to 2010 at €892 million (+4.5%). Capital took another hit of real austerity with spending here coming €493 million below H1 2010 (-26.8%).
The above clearly shows that while austerity has caused some real pain in specific departments, it has not been successful in reducing total spending. This is even more worrisome, when one recognizes that by now, capital account has been drained with no sizable potential future savings to be achieved on this side. On the current expenditure side, austerity so far has meant taking spending on one side of the Exchequer shopping list and spending it on the other. One way or the other, this is not austerity, folks. It's reallocation of expenditure priorities.

Now, recall, in H1 2011 we spent total of €21,898 million. That is just €804.5 million in savings relative to H1 2008 (or 3.54% improvement) - after 3 austerity budgets!

So what do these figures look like in dynamic setting - month-to-month?
And where do we take money from and reallocate to?
No need for another comment here.

05/07/2011: Employment in Services and Manufacturing - June 2011

As promised earlier, analysis of employment data from Manufacturing and Services PMIs for June 2011.

• Headline on Services PMIs: After posting only marginal growth in the previous month at 50.5, Irish services activity rose at a faster pace in June to 52.4. However, overall Q2 2011 average at 51.0 signals lower rate of expansion than Q1 2011 at 53.4. Current index is above it's 12mo MA of 51.6.
• Headline on Manufacturing PMIs: June activity signals a slowdown at 49.8, down from expansionary May reading of 51.8. Q1 2011 expansion of 56.1 average has moderated through Q2 2011 to 52.5. 12mo MA is at 52.6.
• Employment sub-index in Manufacturing showed further acceleration in the rate of decline from 49.9 in May to 48.3 in June. The sub-index now stands below 12mo MA of 50.2. Q1 2011 average was expansionary 53.2 and despite two consecutive months of contractions, Q2 sub-index still reads 50.7. This compares favorably relative to Q3 2010 reading of 46.8 and Q4 2010 reading of 49.9. Employment in Manufacturing has now fallen for two months, breaking expansionary readings trends established over December 2010-April 2011.
  
• Employment sub-index in Services remained flat at 48.1, signaling continued contraction in May and marking a second consecutive month of contractions since an outlier expansion in April 2011 to 51.1. 12mo MA is now at 48.7, while Q1 2011 reading was 49.2, accelerating down to 49.1 in Q2 2011. In comparison, Q3 2010 reading was 48.9 and Q4 2010 reading was 47.6, so the rate of jobs attrition in the sector has declined in H1 2011 relative to H2 2010. With April 2011 out-of-line reading of expansion, this index remains in contractionary territory in 39 out of 40 last months

With both Manufacturing and Services signaling contractions in employment, we are now firmly into jobless recovery territory in Services and stepping into the recessionary territory for Manufacturing.

It is worth noting that volatility of employment sub-index has risen since the beginning of the crisis in Manufacturing, but declined in Services, most likely due to the persistent trends in domestic services. The same pattern is true for core PMIs.

05/07/2011: Services PMIs: June 2011

Services PMIs for Ireland are out today for June from NCB Stockbrokers. Last week, manufacturing PMIs came in disappointingly low, signaling renewed contraction in the sector (see details here). The headline numbers for services are:

• Core PMI reading for Service has risen to 52.4 in June from 50.5 in May - a reasonably strong increase. Controlling for volatility, last 3mo average stands at 51.0, down from the Q1 2011 average of 53.4, and below 12mo MA of 51.6, which means that the current reading is still short of Q1 2011 average, but ahead of it's own quarter average and historical average.
• Q2 2010 period average was 52.9, ahead of Q2 2011 average of 51.0. To compare to the dire conditions in 2009 - Q2 2009 average was 38.0. Now, remember, PMI is not an absolute measure of activity, but a relative one, which means that given a deep fall-off of 2009, we need strong growth - again, my benchmark would be to see PMIs in 60s+ - in 2010 and 2011 to compensate for the declines in 2009. This not happening. Still, it is good to see the index sticking above 50 for the 6th month in the row.

• New business index - my concern last month - has notched up on May, rising from 48.2 in May to a still contractionary 49.4 in June. Current reading is consistent with the Q2 2011 average and is down on both Q1 2011 average of 50.9 and 12mo average of 49.9. Q2 2010 reading was 52.6. Again, as with core PMI Q2 2009 reading was 37.5 - abysmally low, but there was no recovery since then, as new business index was stuck below 50 in all months except April-August 2010 and February-April 2011, furthermore, index never reached beyond 54.0 (June 2010), so no momentum in terms of new business orders recovery.
  

Note in the above chart, that we now are two consecutive months running with core PMI signaling weak expansion, while New Business Orders PMI stuck in contraction zone.

In terms of other components - note, I will be covering employment in a separate post for both Services and Manufacturing PMIs:

• Backlogs of work have declined again in June - from 44.9 in May to 44.5 in June, implying that service providers shifted more resources to complete unfinished work. Q2 2011 average stands at a contractionary 45.3, down from Q1 2011 average of 48.0 and 2010 Q2 average of 48.8. 12mo average reads 45.6.
• Employment index remained flat at contractionary 48.1, down from expansionary 51.1 in April. With April 2011 out-of-line reading of expansion, this index remains in contractionary territory in 39 out of 40 last months. More on this later.
• Output Prices/Charges index has fallen further into contraction (deflation) territory, declining from 43.9 in May to 43.5 in June and marking 35th consecutive month of declines (in a separate post I will be covering the issues of profit margins, so stay tuned for more on output/input prices divergence).
• Input prices have remained in expansion territory, although the pace of inflation has moderated further from 54.7 in May to 51.8 in June, with June marking 3 consecutive month of moderating input prices growth.
• Confidence / Business Expectations index has shown lower rate of growth, with June reading of 60.3 coming in behind May index reading of 62.3. Overall, Q2 2011 average was 63.1 and Q1 2011 average was 65.8, while 12mo average stands at 64.0, so clearly confidence is getting stronger slower. This is largely irrelevant in my view, as the index reading was averaging 50.7 (growing confidence) during the abysmal Q2 2009, just as other components were showing massive fall-off the cliff for services activities in Ireland. In addition, I have previously shown that over the entire life-span of the series data, confidence failed to act as a predictor of any real future activity (core PMIs, New Orders, New Export Orders or Employment) in the sector.
  
• New Export Business index continued to signal expansion, albeit at lower rates with June index standing at 53.1 down from 54.4 in May. Q2 2011 average now stands at 54.0 against Q1 2011 average of 54.8. 12mo average is 53.6, while Q2 2010 was 56.5. So data suggests a clear slowdown in the rate of exports growth. This, of course, is an important indicator as CSO does not report monthly series for services exports.
  
• Finally, profitability index has moderated the fall recorded in May, rising from contractionary May reading of 41.4 to still contractionary 44.8 in June. June reading is now ahead of Q2 average of 43.7, and Q1 2011 average of 43.5, but behind Q2 2010 average of 48.0 and behind 12mo average of 45.5. Again, more on profitability in a separate post

04/07/2011: Exchequer balance: H1 2011

Exchequer results are in for June and in the previous two posts I discussed tax receipts (here) and overall distribution of taxation burden across various tax heads (here). In this post, I will be quickly covering Exchequer balance/deficit for H1 2011.

Overall tax and non-tax revenues came in at €16,744.6 million against €15,298 million in H1 2010 with both tax revenues and non-tax receipts on current side coming upside. However, total voted current account expenditure came in at €20,547 million in H1 2011, up on €19,655 million. This hardly amounts to 'austerity' working (more on expenditure analysis in the later blogpost).

Non-voted current expenditure came in at €3,375 billion, similar expenditures for 2010 over the same period were €3,071 million. Banking measures in H1 2011 accounted for €3,085 million against comparable period 2010 official (see below) figure of zero.

Overall, Exchequer deficit for H1 2011 stood at €10,828.5 million against 2010 figure of €8,887 million. Excluding banking measures H1 2011 deficit stood at €7,743, while excluding banking measures accumulated over 2010 and backed-out to June 2010, the ex-banks deficit for H1 2010 was around €7,590. Note - this imperfectly takes into account variable timing for deficit increases due to banks measures.

Here's the chart:
Again, I am not seeing any dramatic improvements here on 2010 performance.

It is worth noting - remember that department expenditure will be covered in the later post - that national debt interest and management expenses through H1 2011 have risen to €2,501 million from €2,231 million in H1 2010. Thus interest and debt management cost are currently running at 16.36% of total tax receipts.

Through H1 2011 we have borrowed €11,370 million from EFS, €7,178.5 million from IMF and €3,659.6 from EFSF, so total borrowings rose from €7,589.6 million in H1 2010 to €16,653 million in H1 2011. Of the money we borrowed (at more than 5.8% pa), €10,277.5 million is still held in deposits with Irish banks at, oh, maximum rate of ca 1.4-1.5% (see here) implying an annualized cost of this shambolic support for Irish banks to the Exchequer of ca €450 million - oh, about the amount of money the Government is clawing out of the pensions levy?..

04/07/2011: Banking Guarantee & Cross-Border Deposits Protection Co-operation

My comment for the Central Banking on the Irish example of importance of cross-borders cooperation in deposit insurance. Apologies for pdf copies, as the site is subscription only.

04/07/2011: Tax burden composition: H1 2011

A quick post summarizing changes in the overall tax burden in Ireland, based on the latest Exchequer returns.

In Q2 2011:

• Income tax took up 39.52% of the total receipts, up from 28.7 in Q2 2007 and 34.42% in Q2 2010
• Share of VAT in total tax receipts has declined to 33.22% from 35.49% in Q2 2010 and from 34.97% in Q2 2007
• Share of Corporation tax receipts also dropped to 9.32% in Q2 2011, down from 11.16% in Q2 2010, but up from 7.48% in Q2 2007
• Excise taxes accounted for 14.4% of total tax intake in Q2 2011, down slightly from 14.4% in Q2 2010, but up on 13.91% in Q2 2007
• Stamps, CGT and CAT have fallen from 14.06% share in Q2 2007 to 3.63% in Q2 2010 and to 2.64% in Q2 2011.

04/07/2011: Exchequer Receipts: H1 2011

Exchequer receipts are out for June and here are the stats on tax receipts (expenditure and deficit analysis forthcoming later).

Headline figures:

• Income tax came in at €6,038 cumulative for January through June 2011, which obviously includes the new USC. There is no point of comparing this against previous years, so I will include a chart only for completeness. So instead - relative to target: income tax came in above the target by €11 million cumulative for 6 months through June, or +0.2% - not exactly a stellar performance by any possible measures.
• But here's an interesting bit (illustrated in the chart) inclusive of USC, 2011 income tax for the first 6 months of the year is pretty much matching 2007 income tax for the same period (€5,972 million) which had no USC receipts in it.
  

• VAT surprised on the downside, with receipts at €5,075 million or 8.89% below same period in 2009 and 0.92% below same period in 2010. 2010 first six months yielded receipts of €5,122 million. VAT receipts are now running 2.6% below target or some €134 million short.
  

• Corporation tax receipts continued their fall off the cliff, albeit the distance to the bottom seemed to have shrunk somewhat. January-June 2011 corporate taxes came in at €1,424 million, some 11.55% below 2010 figure of €1,610 and some 24.26% below the same period of 2009. Corporate tax receipts are now €116 million (or 7.6%) behind target.

• Excise taxes came in at €2,200 million, up 5.5% yoy and up 2.76% on 2009 period. This means that Excises are now €79 million (3.7%) ahead of target.

Of smaller tax heads:

• Stamps are down 5.02% yoy and down 22.97% on 2009. Put things into perspective, in 6 months through June 2007 stamps yielded €1,696.5 million for the Exchequer. In the same period this year - only €265 million, down 84.38%.

• Capital taxes: CGT fell to a miserly €90 million down from €114 million in 2010 and from €1,046.1 million in the same period in 2007. That's contraction of 91.4% on 2007 figures.
  
• CAT fell off the cliff (despite QNA showing uplift in fixed capital formation in Q1 2011, suggesting that the uplift had little to do with indigenous investment - taxable - and more to do with MNCs - non-taxable), shrinking to €48 million in H1 2011 down from €131 million in the same period of 2010.

• Lastly, Customs came in at €117 million, up 16.3% from €101 million a year ago.

Total tax receipts have therefore increased (again, due to USC) to €15,279 million in H1 2011 from €14,432 million in the same period 2010 (+5.87%), but are down 3.35% on same period of 2009 and are 26.59% below their level in 2007.

Relative to target, Irish Exchequer receipts for H1 2011 are €115 million (0.7%) short of budgetary targets. So no smoking gun there so far, but the risks remain on the downside as economy signals slowdown since May.

04/07/2011: New Deposits in Irish Banking

Over two previous posts I examined the data for new business loans rates for households (here) and non-financial corporations (here and spreads here). This post covers the deposits – both household and corporate.

Here is what the data on new deposits telling us:

• Rates for household deposits with agreed maturity have fallen significantly between March 2011 (1.93%) and April 2011 (1.81%). The rates are now below those for the historical average of 2.366% and crisis period average (January 2008-present) of 2.394%. 12mo MA is 1.707%. The volatility of the rates has risen during the crisis from standard deviation for historical period being 0.950 to crisis period standard deviation of 1.155.
• At the same time, new deposits volumes have contracted sharply for households from €12,333 million in March 2011 to €7,873 million in April 2011. Historical monthly average is €12,636 million and crisis period average is €12,938 million with 12mo MA at €10,079 million. April level of new deposits is the lowest since January 2003 – the start of the series.
• Rates for non-financial corporations’ deposits with agreed maturity have risen from 1.41% in February and March to 1.52% in April, standing still below the historical average of 2.336% and crisis period average of 2.125%, but well ahead of the 12mo MA of 1.293%. The volatility of these rates has risen sharply during the crisis to a standard deviation of 1.319 from historical standard deviation of 1.036.
• Volumes of corporate deposits with agreed maturity have declined from €6,720 million in March 2011 to €5,170 million in April 2011. These levels compare extremely poorly against historical average of €13,739 million, the crisis period average of €11,593 million and 12mo MA of €7,277 million.
  

Lastly, consider the spreads between deposit rates available to the households and those available to corporate clients. Keep in mind that from funding perspective, households deposits are probably less volatile than corporate deposits. Note that standard deviations for the two types of deposits by volume were: historical 3,000.8 million for households against 4,198.09 million for corporates and this relationship remains relatively stable for the period of the crisis.

So the spread on deposit rates for households over and above corporate deposit rates has narrowed to 0.29 percentage points in April from 0.52 pp in March 2011. Historical average spread was 0.03 pp and crisis period average is 0.269 pp while 12mo MA spread is 0.413 pp.

04/07/2011: Irish property prices - daft.ie report

My comment and rather back-of-the-envelope outlook for Irish property markets is available with daft.ie report - link here. Note that the prediction concerning rents-prices feedback is based on my earlier analysis published here - see the last chart.

Strangely, at least in one instance my opening paragraphs were identified by some commentators as being a 'political statement'. To all who know my work, this should sound like a mistake for two reasons:

1. I have never taken partisan political positions. While I do hold strong policy views, these are not aligned with any political party or movement. I have consistently provided advice to and public engagement with any political party or movement that asked for such. During the last election, as in the previous elections, I did not support any particular party, although I did support / help a number of individual candidates whose views span left and right of the political spectrum and with whose views I was not necessarily in full agreement.
   
2. The entire opinion piece is based on my understanding of economic facts. I have spoken on many occasions about the adverse effects of increased taxation on investment and household spending. I have been vocal about the mirage of 'foreign investors flocking to Ireland' stories being pulled out of thin air by our real estate journalists. Over a number of years, I have been critical of the state policy of promoting - via pricing systems and lack of regulatory independence - inflation in state-controlled services. Nothing political here.