25/07/2011: Comprative analysis of Euro Area and Euro Big 4

There’s a lively debate going on in parts of Europe about the longer-term fall out from last week’s ‘Deal for Greece +”. Most notably – in Germany (see here). In light of this, it is worth looking into some facts about economic performance of the Euro area Big 4 economies: is Germany right about protecting its fiscal conservativism from collectivization of risks envisioned by the ‘Deal’?

Let us plough through some data and IMF forecasts for the following set of countries & country-groups: France, Germany, Italy and Spain (the Big 4) against the Euro area as a whole, plus Advanced Economies and Major Advanced Economies (G7). Please note that the IMF forecasts are not exactly in agreement with my view of where some of these economies are heading, but for the reasons of comparative simplicity and transparency, I will rely on IMF data here.

In the end, what I am after here is some (crude – so be warned) metric of risks – disaggregated across countries and groups.

Starting from the top: chart below shows annual growth rates in GDP expressed in constant prices.

Economies, 2000-2007 growth rates averaged 2.61%, while the crisis years growth fell on average 0.06% annually. The projected growth for post-crisis period 2011-2016 IMF forecasts growth of 2.46%. In all of these periods, Advanced Economies group leads the league table of our sample countries/regions.

Area managed to achieve average annual growth of 2.16% in pre-crisis period, but suffered 0.63% annual average contraction during the crisis. Post-crisis, Euro area economies are expected to grow 1.76% which is the third slowest rate of growth in our sample.

G7 economies grew 2.27% on average annually in pre-crisis period and faced a relatively mild average crisis-period contraction of output of 0.36%. These economies are expected to grow at 2.29% per annum on average in 2011-2016.

France recorded average annual growth of 2.12% in 2000-2007 and subsequently posted relatively mild contraction of 0.32% (annual average) in 2008-2010. The country is expected to grow its economy at an average annual rate of 1.94%.

German economy grew on average at an annual rate of 1.58% during the pre-crisis years – posting second slowest growth in the sample. During the crisis, the economy contracted 0.15% per annum on average (second best performance in the sample), while it is expected to grow at 1.84% average rate in 2011-2016 – not a blistering growth forecast, but above Euro area as a whole.

Italy posted slowest average annual growth in the sample during the pre-crisis period (1.46%), the deepest average annual contraction in the sample during the crisis (-1.75%) and is expected to continue slowest growth performance with 1.32% average annual growth rate in 2011-2016.

Spain recorded the fastest real growth in the sample for the pre-crisis period (3.62% average annual rate), followed by the second magnitude of contraction (-1.0% per annum on average) in the crisis period. Spanish economy is expected to grow at 1.62% on average in 2011-2016 – second slowest in the sample.

In terms of GDP per capita (chart below):

Germany was the first in our sample to reach pre-crisis peak level of GDP per capita between 2009 and 2010, followed by the Advanced Economies and the Euro area. G7 group of countries recovered from the crisis in terms of GDP per capita by the end of 2010, while France’s recovery will take it into 2011. Spain is expected to recover from the declines in GDP per capita around 2011-2012, while Italy will take the longest to reach pre-crisis peak – some time between 2012 and 2013.

In terms of investment as a share of GDP (chart below):

Advanced economies investment averaged 21.05% in the period prior to the crisis, falling to 19.08% during the crisis before recovering somewhat to 20.08% in the period 2011-2016. No data is available for the Euro area and G7 countries.

France invested 20.2% of its GDP on average during 2000-2007 period, recording a marginal decline to 20.11% in the crisis years and is expected to recover to 20.60% of GDP in 2011-2016.

Germany was the weakest country in the sample in terms of investment with investment ratio to GDP of 18.24% in the pre-crisis years, followed by 17.50% during the crisis and by expected 17.81% in the post-crisis period.

Italian economy investment as a share of GDP was 21.01% in pre-2008 period, followed by 20.11% during the crisis. IMF expects Italian investment to rise to 20.54% of GDP in the post-crisis period.

Spain’s investment to GDP ratio was 28.30% in 2000-2007 period, followed by 25.5% in 2008-2010 and 22.98% projected for 2011-2016.

So in terms of investment as a share of GDP, Germany is clearly a laggard here, which is of course explained by two core factors: (1) aging population and (2) already extensive stock of capital.

Unemployment rates are shown in the chart below:

During pre-crisis period, Spain psoted the highest rate of unemployment, averaging 10.54%, followed by Germany (8.93%) and France (same as Germany). Euro area as a whole averaged 8.45% unemployment rate during the pre-crisis period, followed by Italy at 8.11%. This poor performance by European part of out sample is contrasted by the pre-crisis unemployment of 6.11% for the group of Advanced Economies and 6.05% for G7 group.

During the crisis, Spanish unemployment rose to 16.47%, followed by France (9.02%) and Euro area (9.0%). G7 economies posted 7.35% average rate of unemployment while Advanced economies came in at 7.34%. Germany shows the best unemployment rate for the period at 7.22%.

Post-crisis, IMF forecasts for Spain to remain worst performing country in our sample with 16.91% average unemployment rate, followed by Euro area at 9.03% and France at 8.57%. In contrast, Italy’s unemployment is projected to settle at 7.87% average, with Advanced economies coming in at 6.77% and G7 economies at 6.54%.

So what about employment – in other words, jobs creation:

The chart clearly shows that Germany, G7 group and France are the weaker performers in the sample in terms of longer-term trends in jobs creation. Now, see the following chart on population changes. Of course the problem here is that while German population is shrinking (so jobs creation is not exactly high on their agenda, especially with low unemployment), for France (with expanding population) slow jobs creation is a major draw back (hence high unemployment as well).

By 2015, based on IMF projections, German population will shrink by 1.284 million relative to 2000, while Italian population will grow by 4.638 million, French by 5.352 million and Spanish population will expand by 6.304 million.

In terms of fiscal performance, consider the following two charts plotting general government revenue as % of GDP and the general government expenditure as % of GDP:

The following chart shows general government deficits:

Based on three charts above, consider the fiscal adjustments required to deliver on the deficit targets to 2016:

Of all countries in the sample, France represents the steepest required fiscal adjustment in terms of deficit reductions, totaling 4.475% of GDP between 2011 and 2016, followed by the G7 group of countries with 4.063% and Advanced economies at 3.567%. Euro area projected adjustments are 2.519%, while German projected adjustment is 2.326%. The weakest – fiscally – performing countries – Italy and Spain – have the lowest fiscal adjustments planned at 1.439% and 1.679% respectively.

Mapping these adjustments alongside the absolute measure of fiscal performance (Gross Debt) and taking into account the economies growth potential, chart below shows two groups of countries. The first group (no shading) is the group of economies facing the moderate adjustment on deficits side, against stronger targets on debt reductions. This group includes Germany, Italy and Euro area. The second group of countries represents a group facing steeper adjustments on fiscal deficits side and/or significant deterioration in debt positions. This group covers Spain, Advanced economies, G7 and France. It is worth noting that this group of countries faces stronger growth prospects, but Spain and France represent two weaker economies in this group.

Chart below provides an illustration of the debt challenges faced by the sample economies. General Government debt rose 48% in Spain form an average of 47.62% of GDP in 2000-2007 to 70.5% of GDP projected average for 2011-2016. In France, the same increase was 43.6% from 61.83% of GDP pre-crisis to 88.76% average in post-crisis period. At the same time in Germany, gross government debt to GDP ratio rose from 63.64% of GDP pre-crisis to 76.48% of GDP in post-crisis period – the second slowest rate of increase in the sample after Italy.

Overall, for the period of 2011-2016, average gross government debt levels are expected to range from 121.93% of GDP for the G7 economies, to 119.32% of GDP for Italy, 105.33% of GDP for Advanced economies, 88.76% of GDP in France, 87.55% of GDP for the Euro area, 76.48% of GDP in Germany and 70.49% of GDP in Spain.

Lastly, let’s take a look at the current account positions.

As chart above shows, cumulative 2011-2016 expected current account positions as the share of GDP are: Germany +25.9% of GDP, Euro area +0.67% of GDP, Advanced Economies -1.92% of GDP, G7 economies -7.13% of GDP, France -14.6% of GDP, Italy -17.4% and Spain -24.5% of GDP.


Now, let us pool the information contained in the above data to derive the overall riskiness of each economy/group in the sample. To do this, I assign to each country/group a score out of 1-14 based on their performance relative to the top performing economy. So top performer in each category of score below gets 14, the with the next performer getting 12 or less, with distribution of scores within each category/heading following the underlying data. The higher raw scores reflect stronger economic performance and / or lower risk. So the final risk scores are based on inverting the raw scores. Summing these up across categories/criteria produces the total risk score reported in the penultimate column of the table. These are ranked in the last column with 1=highest risk country.


The results are consistent with statistical distribution and are robust to several checks, namely:
1) Removal of the GDP per capita recovery statistics
2) Removal of the Employment index
3) Removal of the Government Expenditure metric

The core results are:

1. Germany clearly represents the most sustainable country in the sample of all Big 4. In fact, its fiscal and macroeconomic position would be significantly undermined if it were to move to Euro area harmonized position
2. Spain and Italy are the two weakest economies in the sample with very high risk rating
3. France is statistically closer to Spain and Italy than to Euro area harmonized economy and is clearly the least sustainable economy in the sample after Spain and Italy.
   

23/07/2011: Internet Age and Social Capital

We have heard on many occasions various arguments that Internet and the culture of new media and exchanges it has created are responsible for dumbing-down of society, reduced imagination, increased propensity to violence, contracting attention spans and a host of other evils.

My personal view on this – not scientifically proven, mind you – is that Internet is yet another medium for developing, visualizing and delivering information. I do not see it as intrinsically transformative of the way we interact with the world around us, but as a tool for amplifying the speed of our interactions. Hence, any dumbing-down – if it takes place at all – is, to me, not the outcome of the Internet Age, but of something in our human nature, in our ways of relating to the world.

At last, there is some evidence appearing – academic, not market research-led (again, not that there is any intrinsic reason to mistrust the latter or to trust the former) – that Internet might not be all that bad for us as ‘Social Beings’.

A recent study "Surfing Alone? The Internet and Social Capital: Evidence from an Unforeseeable Technological Mistake" by Stefan Bauernschuster, Oliver Falck and Ludger Woessmann, published by CESIfo (Working Paper 3469, May 2011) uses some wide-cover German data to attempt to answer whether the Internet undermines social capital or facilitates inter-personal and civic engagement in the real world.

The study “exploits a quasi-experiment in East Germany created by a mistaken technology choice of the state-owned telecommunication provider in the 1990s that still hinders broadband Internet access for many households.” In other words, the study uses East German data as control group for reduced exposure to Internet to see if such limitation yielded profound difference in social interactions compared against the groups with full access to broadband Internet.

The study finds “no evidence that the Internet reduces social capital. For some measures including children’s social activities, [the study] even find[s] significant positive effects.”

Per authors’ conclusions, “in virtually all specifications and for virtually all social capital indicators, both the value-added models and the instrumental-variable (IV) models yield positive point estimates on having broadband Internet access at home. …results indicate significant positive effects of broadband Internet access on the frequency of visiting theaters, the opera, and exhibitions and, …on the frequency of meeting friends. Exploring a relatively small sample of children aged 7 to 16 living in the sampled households, we further find evidence that having a broadband Internet subscription at home increases the number of children’s out-of-school social activities, such as doing sports or ballet, taking music or painting lessons, or joining a youth club. Broadband Internet access also does not crowd out children’s extra-curricular school activities, which include such areas as sports, music, arts, and drama.”

Crucially, “several tests of validity and robustness support a causal interpretation of our results”.

20/07/2011: EU's Banks Levy is a dangerous idea that will impede reforms in the sector

The latest calls for introduction of the banks levy within the EU (see here) as:

• the means for financing some of the banks rescue measures and
• the means for reducing the probability of the future crises
  

represents nothing more than a cynical and/or largely economically illiterate attempts by the EU lawmakers to dress up new revenue raising measures as ‘reforms’.

The core problems with this proposals are:

1. With current market structure & declining competition in Euro area banking sector, this levy represents another hidden tax on European households & companies. The current environment in banking sectors in many EU countries lends itself to the incumbent banks being able to pass the levy on to their customers without incurring any, whatsoever, direct moderation either on their own leverage levels or stabilization of their funding streams.
2. xWith declined competition in the sector, the new levy will act to further reduce Returns on Equity for any new entrant into the market, thus effectively acting as a barrier to entry and the means for protecting European zombie banks from competition from non-legacy banking institutions.
3. A levy will do absolutely nothing to resolve the problem if Europe’s zombie banks unable to exist as functional banking institutions, but sapping vital deposits and savings out of investment stream, thus starving the European economies of capital. European banks require some €250-500 billion worth of funds to cut their dependence on public funding and ECB/CB emergency assistance for funding and capital. Raising €10 billion annually through the proposed banks levy is simply too little to address the above gap.
4. In many cases, this levy will in effect result in a transfer of taxpayers’ own or guaranteed funds from the banks balance sheets (where these funds are now being deposited to support capital and funding activities of the zombie banks) to the EU collecting body.
   

A recent (June 2011) IMF Working Paper /11/146, titled “Recent Developments in European Bank Competition” by Yu Sun clearly finds that introduction of the common currency and the current financial crises have led to repeated reductions in overall degree of competition within the European banking sector, compared before and after EMU (1995–2000), post-EMU (2001–07) and post-crisis (2008-09)."

"Columns (3) and (4) in the table below report the H-statistic (higher H-stat reflects higher degree of competition in the banking sector) and standard error before EMU for each country or region, columns (5) and (6) after EMU. Column (9) displays the changes in the H-statistics from pre to post EMU period."

Thus, “the overall competition level in euro area dropped slightly after EMU, from 0.699 to 0.518 while competition levels across member countries converged [the standard deviation of H-statistics of euro member countries drops from 0.17 before EMU to 0.12 after EMU]."

“The finding that large and financially integrated countries or regions tend to exhibit less competitive behavior than smaller sectors is in line with others studies, including Bikker and Spierdijk (2008), who also find some deterioration in competitive behavior over time for Europe’s banks. They argue that banks in large and integrated financial markets are pushed by rising capital market competition and tend to shift from traditional intermediation to more sophisticated and complex products associated with less price competition."

“While the small decline in the level of bank competition for the euro area is statistically significant, it is somewhat smaller than the estimates reported by Bikker et al. (2008) using an un-scaled revenue function. For Austria and Germany, a slight increase in the competition level of their banking systems is estimated; however, the increase is not statistically significant. The H-statistics in Finland, France, Greece, Italy and Netherlands dropped after EMU. At the same time, Spain, the U.K. and the U.S. experienced some small but statistically significant improvement in the competition level of their banking systems."

Before and after the recent financial crisis: “The recent financial crisis and possibly corresponding policies seem to have left a strong mark on bank competition in many countries, as indicated by the competition indicators before and after the crisis for the sample…. Columns (7) and (8) of Table 3 show the H-statistics after the financial crisis. In the U.S., Italy, Germany, Spain and the euro area, bank competition seems to have declined following the financial crisis; however the declines in Germany, Italy and euro area are trivial.”

Bank competition among large (top 50) and small banks (bottom 50): “For some countries, like U.S. and U.K., small banks compete more intensively, while larger banks in Austria, France, Italy, Portugal and Spain are more competitive before EMU. In other countries, the competition indicators of larger banks are not statistically different from those of smaller banks before EMU”. Competition within small and large banks: “The euro area, France, Greece, Italy and Netherlands have experienced a significant drop in competition in both small and large banks, while both banks in the U.S. and U.K. showed a noticeable increase."

So overall, “the euro area experienced a significant but small decline in bank competition after EMU and the financial crisis. Some studies with similar findings have attributed the decline in competition to the process of consolidation, and the movement of bank activities from traditional financial business to off-balance sheet activities [both anti-competitive processes have accelerated under regulatory blessings of many Governments since the crisis]. More importantly, competition levels in euro countries seem to have converged after EMU, not just at the average national market level, but also between different bank types and ownership [so that less competitive markets became more competitive with euro creation, while more competitive ones became less so]. Finally, following the financial crisis, competition fell in many countries, and especially in some countries where large credit and housing booms took place."

In this environment, in my view, introducing a banking levy will simply reinforce the existent market structure and further prevent markets-led corrective adjustments in the sector. At the same time, the levy will exert new costs and pressures on banks clients.

20/07/2011: Foreign Nationals & Foreign-born population in EU27

Eurostat published new statistics on foreign-born and non-national populations across the EU for 2010 (see Statistics in Focus, 34/2011, "6.5% of the EU population are foreigners and 9.4% are born abroad").

In 2010, there were 32.5 million foreign citizens living in the EU27 Member States, of which 12.3 million were citizens of another EU27 Member State and the remaining 20.2 million were citizens of countries outside the EU27.

Foreign citizens accounted for 6.5% of the total EU27 population.

On average in 2010, foreign citizens living in the EU27 were significantly younger than the population of nationals (median age 34.4 years compared with 41.5 years).

Among the EU27 Member States, the highest percentage of foreign citizens in the population was observed in Luxembourg (43% of the total population), followed by Latvia (17%), Estonia and Cyprus (both 16%).
High proportion of foreign citizens in Latvia and Estonia is due to a bizarre situation where large numbers of residents of these countries have no official citizenship due to discriminatory (in my view) practices against people of non-Latvian and Estonian ethnicity. As Eurostat notes: “In the case of Latvia and Estonia, the proportion of non-EU foreign citizens is particularly large due to the high number of ‘recognised non-citizens’, mainly former Soviet Union citizens, who are permanently resident in these countries but have not acquired Latvian/Estonian citizenship or any other citizenship. The foreign-born would include people who were born in other parts of the former Soviet Union." It is worth noting that many of these 'non-citizens' have resided in these countries all their lives and many were actually born inside the borders of these countries. Despite this, the EU largely overlooks the issue of their rights within Latvia and Estonia, even though outside these countries, they are accorded the same rights as EU nationals.

The percentage of foreign citizens was less than 2% in Poland, Lithuania and Slovakia.

In terms of citizenship, nearly 40% of the EU foreign population were citizens of another EU27 Member State, with the highest shares in Luxembourg (86% of the foreign population), Ireland (80%), Belgium (68%), Cyprus (66%), Slovakia (62%) and Hungary (59%). A third of the foreign-born population were born in another EU27 Member State.

Since citizenship can change over time, it is interesting to complement this information with data on the foreign-born population. They include foreign citizens who have acquired the citizenship of the country of residence, but who were born abroad, plus nationals born abroad (for example in the territory of a former colony) or nationals born in a part of a state which, due to dissolution or border changes, no longer belongs to the same country.

The number of foreign-born people exceeded the number of foreign citizens in all Member States, except in Luxembourg, Latvia and the Czech Republic.

In 2010, there were 47.3 million foreign-born people living in the EU27, with 16.0 million born in another EU27 Member State and 31.4 million born in a country outside the EU27. In total, foreign-born people accounted for 9.4% of the total population of the EU27.

Data on the place of birth of the foreign-born population show that one third of foreign-born people living in the EU27 were born in another EU27 Member State, with proportions above 50% being observed in Luxembourg (83% of total foreign-born), Ireland (77%) and Hungary (67%).

19/07/2011: Ireland-Russia Bilateral Trade - April 2011

Updating our trade statistics for Russia for April 2011:

• In April 2011, Irish exports to Russia stood at €51.5 million, up from €40.6 million in March and up on €35.8 million a year ago
• Irish imports from Russia in April 2011 were €15 million, flat on March 2011 and down from €18.8 million in April 2010

• Irish trade balance with Russia in April 2011 stood at €36.5 million - the highest trade balance achieved in bilateral trade with Russia in any month since January 2009

Using data for the first 4 months of 2011, we can update (still very crude) forecast for annual bilateral trade:
One way or the other, the data suggests we are on track to post another record trade year and record trade surplus year in 2011.

Some more stats. For the first 4 months of the year, 2011 trade surplus with Russia amounted to €113.8 million, which was the 5th highest trade surplus for Irish trade with the countries other than EU 27 and US. Only Australia (€202.5 million), Japan (€251.9 million), Saudi Arabia (€179.3 million) and Switzerland (€1,032 million) yielded stronger trade surplus for Ireland than Russia in absolute terms. The trade surplus for the first 4 months of 2011 rose substantially - by 252.32% or €81.5 million compared to the same period of 2010.

In comparison with Ireland's trade surplus with Russia of €113.8 million in January-April 2011, Ireland recorded:

• A trade surplus of €30.6 million with Brazil,
• A trade surplus of €108.6 million with Canada,
• A trade deficit of -€61.7 million with China,
• A trade deficit of -€71.8 million with India,
• A trade surplus of €98.5 million with Mexico,
• A trade deficit of €343 million with Norway,
• A trade surplus of €74.7 million with Turkey
  

19/07/2011: Irish Trade Stats for May 2011

External trade figures for May (provisional) and terms of trade figures for April are out this week, so time to do some updates.

PS: Please, note - the source for these is CSO and all complaints about numerical values reported/shown arising due to some readers disliking some results for whatever reason - out to them.

• Imports in May 2011 came in at €3,727.9 million in seasonally adjusted terms, which was €1,199.6 million below April figure (-24.35% mom), €154.7 million above the same figure in May 2010 (+4.33%) and €357.5 million below May 2009 figure (-8.75%).
• Exports in May 2011 came in at €7,511.3 million which was €48.8 million below April figure (-0.65%), up €76 million (+1.02%) yoy and up €534.6 million (+7.66%) on May 2009.

• Trade balance in May stood at €3,783.5 million which is €1,150.9 million above April 2011 level (+43.72% mom), but down €78.7 million (-2.04%) yoy and up €892.2 million (+30.86%) on May 2009.

• Terms of trade continued to improve (vis-a-vis external sales with price of exports ratio to the price of imports falling) in April (there is 1 month lag in TT data compared to trade volumes data), posting an improvement for the 4th consecutive month. TT measured index 76.6, down from 77.1 in March and down 8.70 points yoy (-10.20%). Compared to April 2009, this year April reading was down 11.80 points or 13.35%.
  

So mapping the above progression:
The chart above suggests that in 2011 we are potentially entering some structural (and much expected - remember IMF forecast for trade growth for Ireland is about 50% below that attained in 2010) slowdown in the rate of growth in external trade.

Lastly, imports-intensity of exports (a ratio of exports volume to imports) has increased in May from 153.4% in April to 201.5% in May 2011 - an increase of 31.3% mom. At the same time, imports-intensity declined from a year ago by 3.2% although it is up on May 2009 by 18.0%.
So courtesy of CSO:

• "With seasonally adjusted exports remaining static and imports decreasing by 24% (or €1,200m) between April and May, the trade surplus increased by 44% to €3,784m" in mom terms. The improvement, therefore is solely due to decline in inputs imports and further contraction in consumption.
• "On an unadjusted basis, the value of exports in May 2011 (€7,390m) was slightly down (-0.6%) on the May 2010 figure of €7,435m. The value of imports (€3,749m) was up 5% on the May 2010 figure."

In January-April 2011, compared to the same period in 2010 exports increased by 8% to €31,161m:

• Exports of Medical and pharmaceutical products increased by 17% or €1,324m,
  
• Organic chemicals by 14% or €896m
• Overall Chemical and related products category exports rose from €17,347.3m in January-April 2010 to €19,607.7m in the same period of 2011, while imports in this category rose from €2,889.9m to €3,591.9m over the same period of time
  
• Petroleum by 126% or €208m. of course over the same period, petroleum imports rose from €1,410.1m to €1,752.8m
  
• Exports of food and live animals rose from €2,077.1m to €2,465.1m as trade balance in this category rose from €635.4m in the first 4 months of 2010 to €831.0 million in the same period of 2011
  
• Exports of goods to the USA increased by 17% or €1,069m, to France by 18% or €276m and to Switzerland by 25% or €258m. Exports to Belgium fell by 5% or €232m and to Spain by 19% or €225m.
• In the first four months of 2011, 52% of Ireland’s exports went to the USA, Belgium and Great Britain.
  

Over the same period, imports increased by 13% to €17,293m:

• Imports of Other transport equipment (including aircraft) increased by 27% or €401m,
  
• Petroleum increased by 24% or €342m and
  
• Medical and pharmaceutical products by 22% or €251m.
• Goods from Great Britain rose by 19% or €782m, from the United States by 7% or €188m and from Germany by 15% or €167m.
• Over half (54%) of Ireland’s imports came from Great Britain, the USA and Germany in the first four months of 2011.
  

18/07/2011: Some thoughts on Irish stocks bubble

There is a classic defined relationship between the various stages of bubble formation and markets responses, as illustrated in the chart from (source here) below.

Of course, there is an argument to be made that ‘normal’ bubbles are driven by either information asymmetries or behavioural ‘exuberance’ or both, and are, therefore, significant but temporary departures from the steady state ‘mean’ growth trend. The return to the mean, thus implies the end of the correction phase, as also shown in the chart below.


Of course, one can make an argument that what we have experienced in the case of Ireland is more than a simple bubble, but a structural break underwritten by underlying fundamentals, such as lower permanent rate of growth.

Irish GDP grew 8.82% cumulative in the period 2003-2010 in terms of constant prices or annualized rate of growth of 1.215%. In per capita terms current prices it grew by 14.85% cumulatively and at an annualized rate of 1.998%. Taken from these rates, from 2003 on through today, the average expected value of IFIN should be around 8,898 (mid-point between 8,659 and 9,139 implied by above rates from the ‘Smart Money’ period mid-point valuation). Note that, crucially, the new mean post-bubble bursting should be at least at or above the ‘Smart Money’ end-of-period valuations.

This is certainly not the case with Irish financials as shown in figure below:
Note that three forecasts (my own calculations, so treat as indicative, rather than absolute) provided assume that the average annual growth rate of 1.998% (upper forecast from the starting point at 2003-2004 average), mean forecast (based on 1.215% annualized average growth, starting from 2003-2004 average) and lower forecast (based on 1.215% annualized growth, starting from 2000-2003 average). All three are well above the post-Despair peak.

What about other signs of a classic bubble?
In the run up to the Public Money phase, it is clear that IFIN shows a number of sell-offs and shallow bear traps, but these can be linked to higher overall volatility of the index.

For any period we can take, IFIN exhibits more volatility than either S&P or FTSE bank shares sub-indices. Historically, across indices (to assure comparable scale), IFIN standard deviation stands at 65.40 against S&P’s BIX at 36.84 and FTSE A350 Banks at 32.70. January 2003 through June 2006, IFIN standard deviation was 25.16 against that for BIX of 10.29 and FTSE A350B at 12.07. For the run up to the crisis period between June 2006 and June 2007, IFIN standard deviation was 15.66 against S&P’s BIX of 4.64 and FTSE A350B of 5.22. Lastly, during the crisis – from July 2007 through today, IFIN standard deviation was 56.40 against 28.07 for S&P BIX and 27.83 for FTSE A350B.

To see the relationship, or the lack there of between the volatilities, consider the following chart.
Even from the simple consideration of the rates of change, week on week, IFIN has the lowest correlation with the S&P Banking BIX index – with relatively low explanatory power. Things are even worse if we are to look at the downside risks. Chart below plots downside weekly movements for the three indices that correspond to market declines of 2% or more week-on-week. Again, you can see that both before and during the crisis, there is little relationship between downside risk to Irish financials and to S&P measure.
And the same story is formally confirmed by the Chart below which plots the pair-wise relationships between S&P BIX and FTSE A350 and IFIN.
So overall, IFIN data strongly suggests that we are not in a “normal” financial bubble scenario.

But what about that claim that Lehman's Bros collapse had influence on our banks shares? Recall, Lehman was in trouble since Spring 2008 and went to the wall on September 15, 2008. Also recall that the issues started with Bear Sterns troubles in March 2008 and JPMorgan Chase completed its acquisition of Bear Stearns on May 30, 2008. So let's take the data subset on extreme downward volatility for the period from May 2008 through September 2009. If Lehmans and/or Bear had much of an effect on Irish financials we should expect either one of the following two or both to hold:

1. Correlation between IFIN and S&P BIX to be large and significant
2. Correlation between IFIN and BIX to be larger in the period considered than over the history from 2003 through today.

Overall, evidence suggests that actually the opposite of both (1) and (2) above holds. In fact, based on data for weekly market declines greater than 2% (relatively significant events, but not really too dramatic by far), the period between Bear & Lehman collapse and the next 12 months, Irish financials were less impacted by the US financial shares movements than in the period of 2003-present overall. The impact of Lehmans & Bear on UK financials was stronger, although not dramatically strong, however.

18/07/2011: Two charts on electricity prices

Another look at the residential and industrial prices for electricity across EU27 + 3 (Norway, Turkey and Bosnia candidate states). All information within the charts.

15/07/2011: Irish electricity prices and subsidies

Some interesting data on electricity prices within the EU - the latest is now available from the Eurostat, covering H2 2010. Keep in mind, between 2008 and 2010 we have experienced the largest deflation of overall consumer prices in the Euro area.

In terms of household prices for electricity, 2010 H2 price in Ireland was €0.1875/kWh up on €0.1855/kWh in H2 2009 and down from €0.2033/kWh in H2 2008. Back in H2 2008, Ireland ranked as the 6th most expensive electricity market for households in EU27, plus Norway, Turkey, and Bosnia & Herzegovina (let's call these EU27+3 for brevity hereinafter). The ranking improved to 7th most expensive in H2 2009 and to 9th in H2 2010. Chart below (arranged in order of increasing cost for H2 2010) illustrates.
Small, but progress: over 2 years overall decline was 7.8% in average prices.

Next, the cost of electricity for industrial users: In H2 2010 Irish electricity prices for industrial users averaged €0.1131/kWh down from €0.1419/kWh in H2 2008 and down on €0.1175/kWh in H2 2009. So the decline in the industrial electricity prices over the same period of time was almost 3times larger than for households - 20.3%.
Why? One reason - taxes. Our Government, incapable of creating a level playing field for investment and entrepreneurship has made a conscious choice to shift tax burden from the shoulders of producers/employers onto the shoulders of employees/households. Hence, as with income tax and other taxes, business taxes are kept lower for electricity than for households.

Before taxes are added, Irish household electricity cost was 0.1629 in H2 2010, which was 44.9% above the comparable pre-tax price for industrial users. Now, suppose this premium was justified by higher transmission costs to the households. And do note that Ireland and France are the only two countries that do not report break down of final prices by generation and transmission. For all other countries, network transmission costs account for about 42.15% on average of the total pre-tax price of household electricity in H2 2010. But here comes a tricky thing. After taxes are factored in, final price premium for electricity paid by households over and above industrial users rises to 65.8%.

What's the 20.85% tax wedge on the premium about? Most likely - a subsidy from the households to industrial users, cause, you know, to be competitive we have to charge someone to subsidise someone else... Although the subsidy is a sort of Pyrrhic victory, you see, since even with this transfer, Irish industrial users face the 6th highest electricity tariff in the EU27+3 in H2 2010, same as in H2 2009, but an improvement on the 4th highest in H2 2008.

Let us say thank you to the Social Partners and CER who work this hard protecting our consumers' interests.

12/07/2011: Irish Tax Rates in International Perspective - Part 2

More tax comparatives, courtesy of OECD dataset. Note, these refer to 2009 tax returns.

In the previous post (here), I provided some assessments of the overall taxation burden in Ireland compared to EU27, plus Norway, Israel and Switzerland. Now, let's look at components of the total taxes.

First - taxes on production:
What this chart above tells us is that we are not distinct from the sample average in terms of our taxes on production expressed as a function of GNP, while we are below average when expressed in terms of GDP:

• Total production and imports tax revenues in Ireland stood at 14.0% of GNP and 11.5% GDP in 2009. Sample average stood at 13.1% (median 13.0%) and +/- 0.5 STDEV band is (11.0, 14.4). So Irish taxes on production and imports as a share of GNP were above sample average. Again, for comparison : Switzerland was at 6.8% of GDP, while Sweden at 19.0%.
• Total production and imports tax revenues are broken down into Taxes on Products, and Other Taxes on Production. Taxes on Products in Ireland yielded 12.4% of GNP and 10.2% of GDP against sample average of 11.6% (median 11.3%), with +/- 0.5 STDEV band around the mean of (10.6,12.7). Again, Irish tax yields here were within the band when expressed in terms of GNP and below the mean when expressed against GDP. Other Taxes on Products (other than Vat, Import Duties and direct taxes on products) accounted for 1.3% of GDP and 1.6% of GNP - against the mean of 1.5% and the +/- 0.5 STDEV band of (0.9,2.1). Neither GDP nor GNP comparative here was out of line with the mean.
• Taxes on Products mentioned above can be further broken down into Vat, Taxes & Duties on Imports (ex-Vat), Taxes on products ex-Vat & Import taxes. VAT in Ireland in 2009 accounted for 6.4% of GDP and 7.8% of GNP. Sample average here was 7.3% with +/- 0.5 STDEV band around the mean of (6.6,8.0), median of 7.4, which means that Irish Vat receipts were in line with the sample average in terms of GNP, but below the mean in terms of GDP. In terms of Taxes on products ex-Vat & Import taxes, the same picture holds. In terms of taxes and Duties on Imports ex-Vat, Irish receipts were above the mean (statistically significantly) for both GDP and GNP measures.
  

Next, Irish Times / ESRI / Trade Unions' favorite taxes on Income and Wealth:
Remember, we allegedly have very low taxes on these and more needs to be extracted out of the 'Irish rich' :

• Total current taxes on income and wealth in Ireland stood at 10.7% of GDP and 13% of GNP. This compares against the sample average of 11.9% of GDP (median of 10.8%) with +/- 0.5 STDEV band around the mean of(9.3, 14.5). In other words, our taxes were slightly (but statistically insignificantly) above average in terms of GNP and also slightly (and again statistically insignificantly) below average in terms of GDP.
• The above can be broken down into Taxes on Income, and Other Current Taxes. Taxes on income yielded 12.5% of GNP and 10.3% of GDP. Both are within sample average range: sample average was 11.3%, +/- 0.5 STDEV band around the mean was (8.8,13.8) and median was 10.4%. Other current taxes were small at 0.4% of GDP and 0.5% of GNP, but also within the range of the mean of 0.6% of GDP.
• Capital taxes came in within the mean range in terms of both GDP and GNP comparatives.
• Total income tax related receipts and capital taxes accounted for 22.4% of GDP and 27.2% of GNP in Ireland in 2009. The sample average was 25.2% and the median was 24.4%. +/- 0.5 STDEV band around the mean was (22.0, 28.5), which means that our income and wealth taxes were solidly within the range of the mean for both GDP and GNP measures. An interesting coincidence - Swiss and Netherlands' taxes in this heading were bang on identical as a function of GDP to ours.
  

Social Contributions taxes:
Now, keep in mind that social contributions are meant to pay for social protection services. For which we, in Ireland, should have lower demand than in other states of EU due to younger population, but the demand on social welfare side does offset this due to a spike in unemployment. Social protection taxes in Ireland have also been dramatically increased in Budget 2011 - not reflected in the data above.

• Social Contributions is the largest component of the tax receipts here, with Irish contributions accounting for 7.0% of GNP and 5.8% of GDP. The mean was 10.6 and the median 11.2, while +/- 0.5 STDEV band around the mean was (8.7,12.5). This means Irish Social Contributions overall were below the mean in terms of GDP and GNP.
• Let's take a look as to why. Our Employers' contributions (at 3.3% of GDP and 4.0% of GNP against the mean of 6.3% and band of (4.9, 7.7)) fell short of the mean in terms of GDP and GNP. The same was true for our Contributions by self- and non-employed (o.2% of GDP and GNP against the average of 1.1% with the median of 0.7% and the band of (0.6, 1.6)).
• The above 'below average" performance was offset slightly by the Employees Contributions which came in at 2.3% of GDP and 2.8% of GNP against the mean of 3.2% with the median of 3.1% and +/- 0.5 STDEV band around the mean of (2.4, 4.1). In other words, our Employees Contribution is within the average for GNP metric, but below the average for GDP metric.

So now on to the overall tax burden in this economy. As highlighted in the previous post, our total tax revenue stood at 35.9% of GNP and 29.6% of GDP. The average for the sample was 36.5% against the median of 35.9%. The +/- 0.5 STDEV band around the mean was (33.5, 39.6) which means that our overall tax burden

• expressed as a function of GNP was bang on with the median, and statistically indistinguishable from the mean;
• ex pressed as a function of GDP was statistically significantly below the mean.
  

Again, folks, the data above shows that by virtually all comparisons, we are a country with average tax burdens - not a low tax economy.

11/07/2011: Real value of the Euro and Irish trade

A new paper from IMF looks at the effects of Euro currency valuations and the effect on competitiveness-trade links for trade within the Euro area and for trade outside the Euro area. The study, authored by Tamim Bayoumi, Richard Harmsen and Jarkko Turunen and titled Euro Area Export Performance and Competitiveness is available from the IMF as a working paper from June 2011, IMF WP/11/140.

The main issue assessed is: "Concerns about export growth within the euro area peripheral countries due to a lack of competitiveness within the euro area are a key policy issue."

The main results are:

1. Long-term price elasticities for exports within the euro area are at least double those for exports outside euro area. In other words, exports outside the euro area are much less responsive, in the long term, to price changes than exports within the euro area. Which, of course, is good news for countries with diversified direction of exports. Ireland is a relatively good performer here, as we re-exports to the US, UK and as our exports to the rest of the world are also growing.
2. (1) above means that traditional real effective exchange rate indexes may overstate the effectiveness of euro depreciation in restoring exports growth in the euro area periphery. Specifically, the study shows that Real Effective Exchange Rate metrics of competitiveness yield highly volatile effects on countries exports. Wholesale Price Indices-based measures provide a better metric for competitiveness within the Euro area and poorer metrics for competitveness for exports outside the euro area. Unit Labour Cost-based competitveness metrics too perform best for trade within the euro area, but are signifcant performance metrics for outside the euro area exports as well. (Note - in my own analysis on this blog, I use consistently only ULC-based metrics). Finally, CPI-based metrics are yeilding totally counter-intuitive results and represent the poorest metric.
3. So, per (2), the pace of deterioration in exports due to appreciation of the euro, depends on the measure of relative prices used.

In particular, the four REER indicators for the peripheral countries "give only partial support to the much-discussed view that external competitiveness deteriorated significantly since the adoption of the euro became likely enough that interest rates started to narrow":

• In Ireland, the CPI-based REER has appreciated by about 20 percent since 1995, while the WPI- and ULC-based REERs have depreciated by about 20-30 percent over this time period.
• Portugal shows similar divergences.
• While Italy’s competitiveness does appear to have eroded, the size of this effect is, frankly, anyone’s guess—while the CPI- and WPI-based measures show only modest appreciation since 1995, the ULC- and XUV-based indicators have appreciated by about 50 and 110 percent, respectively.
• The data for Greece and Spain show a more consistent story, involving steady appreciation of some 10-40 percent on all four measures.

You can read the charts below just as you read my charts on Harmonized Competitiveness Indicators: higher values mean bad things. Higher REERs in the second figure reflect export-related REERs for wthin and outside the Euro area trade.

Figure 1. Real Effective Exchange Rates in Euro Area Countries, 1995 to 2009 , Index 1995 = 100

Figure 2. Real Effective Exchange Rates in Euro Area Countries: Intra/Extra-Euro Area, 1995 to 2009, Index 1995 = 100

"There is surprisingly large variation across our four measures of extra- and (in particular) intra-euro area relative prices—based on wholesale prices, consumer prices, unit labor costs, and export unit values. For some countries, such as France and Ireland, the picture becomes clearer if one ignores the CPI price series that generate unconventional results".


All together, a very interesting study which suggests that in particular for Ireland, intra-Euro area trade has been consistent with continuously depreciating Euro, while extra-Euro trade is consistent with consistently appreciating Euro. Since exports within Euro area are more price-sensitive than exports outside Euro area, this clearly explains, at least to some extent, why nominally appreciating Euro (in Forex markets) had so far little adverse effect on Irish trade outcomes: we benefit from effective real devaluation within the Euro zone and are not signficantly hurt by effective euro appreciation outside the Euro area.