03/10/2011: ESRI Savings Index - August 2011

This is the first time I am covering a relatively new data set from the Nationwide UK (Ireland)/ ESRI Savings Index. The latest data is for August and the index shows that overall savings conditions in the country have fallen by six points in August to 105 "as divergent concerns temper attitudes towards saving".
Overall, since January 2011, volatile series have posted relatively flat trend as shown above, contrasting the constant refrain that Irish consumers are saving too much.

Per ESRI release, "divergent attitudes of the over and under 50 age groups are apparent and driving the decline of the Savings Index in August."

Specifically: the Savings Attitude sub-index fell five points in August to 94, "primarily driven by the over 50 age group who showed a more negative attitude towards the amount that they are currently able to save."

The overall percentage of people who feel they are saving less than they think they should rose by four percentage points to 56%, driven by a ten percentage point increase for those over 50s compared to no change among the under 50s. Regular saving has increased among the under 50s from 38% in July to 43% in August. Further per ESRI, "only 49% of the over 50s group think that it is personally important to save compared with 70% of the under 50s."

The Savings Environment sub-index also fell by seven points in August to 117. Significantly, 53% of under 50s believe that government policy is discouraging saving compared with 47% of over 50s.

In a commentary to the release, Brendan Synnott, Managing Director of Nationwide UK (Ireland) said (emphasis mine): “Those aged over 50, who are more likely to have accumulated savings, have a heightened concern about the impact of the wider economic environment on these hard earned resources. There is also obvious concern about potential future taxes on savings. Those aged under 50 seem to be under pressure from all sides, they are more likely to have to save regularly for things like children’s education or to make provision in the event of losing their jobs. These people need reassurance from government and more signs that things are at least stabilising, since it is still too early to think about an improvement in economic conditions.”

The precautionary motive for savings appears to remain the main driver, with the highest proportion of people surveyed, 41%, indicating that they are saving for unexpected expense with a further 12 % saving for education/training.

Debt overhang also remains prominent: "When asked what they would use any surplus funds for, 47% said they would pay off debts, including mortgages; 40% would save; only 7% would spend spare cash with a further 7% preferring to invest in a pension or shares."

As far as the 'vastness' of savings glut goes, it is nowhere to be seen. Per ESRI: "25% of consumers save between €51 and €100 a month while 24% save between €101 and €200 per month." Which means that 49% of those who save are saving less than 7.7% of the average annual income for those in employment - a rate of savings not sufficient to cover future pension needs, let alone offset potential unemployment spells, losses of earnings due to health issues, children education and other risk- and life-cycle- related expenses.

Overall, we can view savings environment as being divided into two components: actual conditions for savings today and perceptions/behavioral drivers for savings in the longer term. These are illustrated below.
Given small number of observations, any conclusions have to be drawn very carefully, but overall it appears that current environment is relatively closely linked to current index reading, while attitude to savings has little to no relationship to overall stated importance of savings.

The former might suggest that when consumers perceive the need for larger savings, they do not necessarily tend to view savings as being more important to them. In other words, the need to save more is not positively correlated with overall need to save, which may highlight evidence of robust precautionary savings motive.

The latter suggests that higher savings are relatively strongly coincident with the conditions in favor of saving in the marketplace. Which can be related to the current state of Irish banking sector where state-subsidized banks are competing for deposits by offering abnormally elevated deposit returns.

03/10/2011: Eurocoin September 2011: continued weakness in euro area growth

Euro area leading indicator for growth, eurocoin, was released last week, showing dramatic decline in economic activity for September. Eurocoin has peaked in May 2011 at 0.62, having dropped persistently since then.

In September, eurocoin reading stood at 0.03, barely above the recession reading (below zero) and down from 0.22 in August.
This marks the second consecutive month that eurocoin is statistically indifferent from economic stagnation. The projected quarterly growth rate for Q3 2011 is now down to 0.08% from 0.1% estimate in August and from Q2 2011 actual reading of 0.2%. Annual rate projection based on 9 months through September averages is 1.82% and dropping rapidly from 2.5% in May to 0.12% in September.

In terms of ECB monetary policy stance,
Eurocoin-consistent policy rate is now around 2.0-2.25%, while inflation-consistent rate is now closer to 2.75%.
The divergence of the current rate from both targets and the gap between inflationary and growth targets suggests that the likely direction of the economy is toward moderate stagflation with inflation anchored around 1.8-2.5% and growth around zero.

And here are the core components of eurocoin showing significant downward trends:

03/10/2011: Manufacturing PMI for Ireland

It's the Groundhog Day in the euro land once again with September PMIs readings coming in at a recessionary levels all over the place (save Germany, which is statistically insignificantly different from stagnation). More on the euro area leading indicators in the follow up post, but first - Irish Manufacturing PMIs.

NCB released Irish Manufacturing PMIs earlier in the morning today and they make for a disheartening reading. Please keep in mind that these are generally volatile, so some interpretations of the short-term data require identifying a trend, rather than short-term fluctuations.

Overall seasonally-adjusted PMI for Manufacturing (PMI-M) simply crashed, to put it bluntly, in September to 47.3 (statistically-significant reading for contraction as it fell below 48.0 which is 1/2 STDEV down from the growth-neutral reading of 50). This marks 4th consecutive month of below 50 readings. PMI-M is now below 12mo MA of 52.1 and 3mo average of 48.4. Previous 3mo average for April-June 2011 was 52.5, so the swing is very strong - 4.1 points for 3mo averages and 5.2 points on September basis.
And a more recent snapshot:
Output sub-index reached back into contraction territory with September reading at 49.8, down from 52.4 in August and back at the level of July. 12mo MA is now at 53.8, well ahead of 3mo average for July-September 2011 of 50.7. You have to go back to 2009 same period reading to hit the numbers lower than the current 3mo average. Overall, however, output sub0-index has been volatile, swinging from positive to negative territory every couple of months or more frequently since April this year.

New orders sub-index has take severe beating reaching 45.8 in September, down from 47.7 in August and marking the fourth month of below-50 readings. Last month's performance was the poorest since August 2009 when the sub-index was at 43.7. New export orders also fell in September, the first reduction in a year, mainly on the back of contracting global demand. Per NCB: "As new orders fell again, firms worked through outstanding business. Consequently, backlogs of work decreased at a substantial pace that was the fastest in 29 months." New Export orders are now at 49.2, down from 53.5 in August. 12mo MA is at 55.7 and 3mo average is 51.3 through September against 3mo average of 56.4 through June.

Again, quoting NCB: "After increasing in August, suppliers’ delivery times shortened marginally in September, although the majority of respondents noted no change in vendor performance. The rate of decline in purchasing activity quickened markedly over the month, and was the
strongest since August 2009. Firms cut input buying in line with falling workloads. Stocks of purchases were depleted markedly again in September, with the rate of decline little changed
from those seen in the preceding two months. Post-production inventories also fell as firms
reduced stock holdings in line with lower new orders. The rate of depletion was solid, but weaker than that seen in August."

Output prices moved deeper into deflationary territory as producers cut factory prices to respond to falling demand. Output prices sub-index is down to 48.6 in September from 49.7 in August, marking the second month of below-50 performance. 3mo average through September is now at 49.6 against 3mo average through July at 54.7. So deflation is biting in the sector.

Input prices sub-index posted continued inflation at 53.8, though the pace of inflation in inputs is continuing to moderate, falling from 80.9 in March 2011. 3mo average through September is now at 57.3 against 12mo MA of 65.8 and 3mo average through July at 68.3.

Combined, the two metrics suggest that overall profitability continues to decline in Irish manufacturing, with rate of decline slowing down as of recent months (more on this later this week, once we have Services PMI data).

Employment once again returned to contraction territory with sub-index for September down to 46.5 from 51.1 in August. This is the lowest reading for the sub-index for any month since September 2010. 12mo MA for the sub-index now stands at 50.7, while 3 mo average through September is at 48.9, against 3mo average through July at 50.7.

Overall, very disheartening performance for Manufacturing that, until recently, was the bright spot on our dark economic horizon.

28/09/2011: Retail Sales for August - a nasty surprise.

After showing the signs of some stabilization in quarterly data (Q2 2011 index of retail sales by value was up to 88.3 from 88.0 in Q1 2011 and volume of sales index went up from 91.8 in Q1 to 92.9 in Q2), the latest data has thrown a nasty surprise to the downside in retail sales activity in August.

Here are the core highlights:

• Value of retail sales has fallen 0.8% mom in August to 87.1, down from 87.8 in July. In two months since the end of Q2 2011, the value of retail sales (seasonally adjusted) has declined from 88.7 to 87.1, more than erasing the gains recorded in May and June this year. Annual rate of decline in August was 3.1%, compared to the annual rate of decline of -1% in July.
• August value index posted the sharpest monthly contraction in 4 months, ditto for annual rate of decline. Comparable monthly peak took place in August 2007 and we are now 25.04% down on that in terms of value index. 3mo-MA is now at 87.9, down from the 6mo-MA of 88.0. 2010 annual average for the index was 88.8 and 2011 average to-date 88.0, which means that 3mo- and 6mo- and year-to-date performance through august is worse than 2010 annual average.
• Volume index (seasonally adjusted) also fell, declining from 92.4 in July to 92 in August, the rate of decline of 0.4% mom and 3.6% yoy. This is sharpest rate of contraction (yoy terms) since April 2011.
• 3m0-MA is now at 92.7 against 6mo MA of 92.6 and these are both below 93.3 annual average for 2010. Annual average for 2011 to-date is 92.3.

In summary, folks - the battered sector is taking even more water!

Relative to peak things are even bleaker:

• Value index is now at 73.0% relative to peak down from 73.6% in July. August reading is the lowest since January 2010.
  
• Volume index is at 79.1% of the peak and this is down from 79.45% in July. August reading is the lowest since April 2011.
  

Ex-motors sales:

• Value of retail sales ex-motors in August stood at 94.4, down from 95.2 in July, a decline of 0.9% mom reversing 0.4% mom increase in July, the sales are now down 2.8% yoy against 1.5% decline yoy in July. 3mo-MA at 94.8 and 6mo-MA at 95.5, as well as 2011 average to-date of 95.9 are all below 2010 annual average of 97.6.
  
• Volume of retail sales ex-motors is down to 98.7 in August, 0.5% below the 99.2 reading in July. 3mo-MA of 99.1, 6mo-MA at 99.5 and 2011 average to-date at 100.0 are all below 2010 average of 102.3.

Relative to peak:

• Value of core sales is now at 79.6% of the historical peak having risen to 80.3% of the peak back in July. August reading marks the lowest point in the series relative to peak.
• Volume of core sales is at 84.4 relative to historical peak, also the lowest point in the series.
  

According to CSO:

• Electrical Goods (+2.1%) was the only category that showed year-on-year increases in the volume of retail sales this month. Sales fell in value 5.0% yoy as deflation continued in the sub-sector.
  
• Books, Newspapers and Stationery (-13.3% both in volume and in value), Pharmaceuticals Medical & Cosmetic Articles (-10.4% in volume and -9.8% in value) and Furniture & Lighting (-9.5% in volume and- 13.1% in value) were amongst the categories that showed year-on-year decreases this month.
• Fuel sales have declined 8.2% yoy in volume, but rose 3.1% in value as inflation bit harder into the pockets of consumers cutting back on fuel purchases.
• Hardware, Pains & Glass sales are down -6.3% in volume and -6.8% in value
• Motor trades are down 5.7% yoy in August in value and 2.6% in volume
• Bars sales are down 7.1% in volume and 7.3% in value.

Irish retail sales decline in volume terms was the seventh largest in EU27. Euro area as a whole experienced a decline of 0.2% in the volume of retail sales. More on this in upcoming separate post.

26/09/2011: Greek crisis and exit strategy

At last - an excellent summary of the Greek crisis possible outcomes and exit strategies, courtesy of BBC (link here).

The bottom line is that no matter what Greece and Troika do or fail to do, the crisis will either move onto a full-blow economic implosion of Greece or global meltdown. This puts Greek dilemma, from euro area's perspective, squarely into the category of the choices faced by a patient with gangrened leg: to cut or to die. In other words, unless someone can find a node to hang a decent outcome on in the above - and I can't find one - the optimal policy mix from the point of view of both Greece and the euro area would be:

• Swap tranche release in October for commitment from Greece to exit the euro area under oversight from the IMF (staged exit with monetary support provided by the IMF and ECB). Future tranches should be tied to Greek Government progress on the bullet points below.
  
• Greece should default on sovereign and banks debts (60-70% writedown on sovereign and 50% writedown on banks), in part financed out of the current bailout package, in part netted through ECB (with ECB providing support for non-Greek banks and financial institutions writing down Greek assets on their balance sheets).
  
• Post-default, Greece should remain within the EU but outside the euro to avail of the benefits of free trade, labour and capital mobility.
  
• EU assistance to support growth via infrastructure investment should be extended to Greece in 2012-2017, in part to provide stronger foundations for growth and in part to provide an incentive to see through structural reforms in public sector and overall economy.

In effect, Greece will be incentivised via emergency supports and future investment assistance to exit the euro area voluntarily. There are no guarantees that post such exit Greek new currency and indeed its economy can gain a footing in the markets. However, retaining Greece within the euro zone does not appear to be a feasible option at this stage.


Note: The argument that Greece should default and exit euro is hardly a novel one. Nouriel Roubini recently made a very strong case for this here. Roubini also, in my view correctly, recognizes that transition from euro to domestic currency will require some financial supports from the EU.

26/09/2011: French and German indices signal continued slowdown in September

This week's early trickle of data is continuing to signal ongoing process of deteriorating macroeconomic conditions in core euro area economies.

According to the latest reports, Portugal's economy is likely to post 2.3% decline in GDP in 2012 (revised from 1.8% decline forecast earlier) and shrink 1.8% in 2011 - an improved estimate on 2.2% contraction predicted in Q1 2011 (the swing in 2011 is due to strong H1 2011, while the swing in 2012 forecast is due to weak expectations for H2 2011 and after).

France's MNI survey of economic forecasts (here) are coming in weaker by the week. For previous week, median forecasts were for

• Manufacturing PMI at 48.2 down from 49.1 a week before, both below growth line of 50;
• Services PMI at 54.4 down from 56.8, above the growth line, but slowing

Confirming these, Insee Index of Business Climate posted the first below 100 reading since June 2010, coming in at 97 in September, down from 101 in August. 3mo average through September is now at 101 against the previous 3mo period average of 108. Year on year, index is down 5 points. Just as with German data below, the latest result marks the third month of continued declines.


And today, German Ifo index came with further downgrades to business expectations and conditions. Here's the chart:

• Business climate assessment came in at 107.5, above expansion line, but down for the third month in a row. 3mo average through September is now at 109.7 down from previous 3mo average (through June) at 114.3. Year on year the index is down 3.7 points.
• Business situation sub-index came in at 117.9, down from 118.1 in August, marking 3rd month of continued declines. Q2 average is 121.9 and Q3 2011 average is now at 119.1.
• Business expectations sub-index has hit contraction territory at 98.0 against August reading of 100.1. Q2 2011 expectations average was 107.1, while Q3 2011 average is 101.0. Year on year September 2011 reading is down 9.9 points.
  

26/09/2011: Youth unemployment problem

The latest QNHS data for unemployment in Ireland - discussed in detail here - was not a pretty picture by any means. But the ugliness of age-breakdown in unemployment is something else altogether.

Now, recall that Ireland is a young country. Per CSO, 1.5% of our workforce is age 15-19, 6.7% age 20-24, 28.9% age 24-35 and a full 37.1% of the workforce is aged less than 35. This has many good implications for the economy and the prospect for future growth, but it also places some tough demands on the economy. You see, young people are quite pesky subjects. They (unreasonably - from our, older folks point of view) want in life:

• Improved prospects for the future as far as their careers, earnings, quality of life etc go,
• Good chances for beating their parents performance in terms of gaining jobs and progressing up the career ladders,
• Ability to enjoy some of younger years' offers of decent consumption, comforts of some certainty in life, while earning returns to their efforts and education.

Not exactly an easy bunch to satisfy, younger people tend to be more mobile. And the greater their skills set / potential, the more they invested in education or training, the more mobile they are. This is why, in my view, the idea of the 'demographic dividend' is a bit of a silly old hat - the dividend is there (or rather here, in Ireland) if and only if the asset is here.

But the QNHS data does not lie (well, kinda - it does lie in so far as it underestimates true extent of unemployment by omitting those over-extending their education and training in the absence of jobs). The assets we have in the form of our younger people are... err... extremely highly jobless, pretty much deprived of hope of gaining any of the above points.

Here are some stats, all from QNHS for Q2 2011.
Overall,

• 38,400 males of age 15-24 and 116.2 males of age 25-44 were unemployed in Q2 2011
• 25,100 females aged 15-24 and 53,900 females of age 25-44 were also unemployed in Q2 2011

However, these absolute numbers do not tell the entire story as the size of the labour force itself has been changing over time (shrinking). In terms of unemployment rates:

• Overall unemployment rate for those under the age of 20 is now at 40.1%, implying that a person aged 15-19 who wants to be employed is facing 2.8 times higher probability of not having a job than an average person in the workforce. For the age group of 20-24 years of age, these numbers, respectively are 27.7% and 1.94 times. For those in their prime employment years - 25-34 year olds - the numbers are 16.5% and 1.16 times.
• A woman of age 15-19 is facing unemployment rate of 33.7%, while her slightly older counterpart of age 20-24 is facing probability of unemployment of 21.8%.

Dramatic as the above figures are, the picture is much worse for males:

• A young male of age 15-19 seeking employment is facing unemployment rate of 46.1%, while a male of age 20-24 is facing the prospect of 33.7% unemployment. Unemployment amongst males age 25-34 is 21.5%.

This is desperate, folks. But it gets worse. per Table S9b in QNHS, in Q2 2011, of all persons aged 18-24:

• 79% of all early school leavers were either unemployed or not economically active a number that rose from 77% in Q1 2011
  
• 59% of all other persons in this age category were either unemployed or not economically active, same as in Q1 2011
  

For comparison, for all persons 25-64 years of age, the above numbers were:

• 55% of all early school leavers either unemployed or not economically active, up from 54% in Q1 2011
  
• 27% of all other persons either unemployed or not economically active, down from 28% in Q1 2011.
  

This is a dire prospect for our 'demographic capital', folks, as it shows that the gap by age for even educated unemployed is a vast 22 percentage points - statistically most likely indifferent from the same gap for those with little or no education.

26/09/2011: Irish property prices hit Early Paleozoic layer

Another month, another "Splat, Zap, Squish!" from the Amazing Property Bust Land, Ireland. CSO's RPPI data out for August today is showing continued falls in property markets and accelerating on the July 'performance'. Here are the updated charts and numbers.

Headlines are not pretty, folks:

• RPPI down 13.87% annually in August against a fall of 12.47% in July index now stands at 73.9 down from 85.8 in August last year.
  
• In 12mo through August the decline was 10.8%.
• Mom prices are down 1.6% in August. 3mo MA is at 74.9 down from 76.0 in July.
• Relative to peak, prices are now down 43.4%
• Relative to Nama valuations cut-off date of Nov 30, 2009, prices are down 21.3%. Adding LTEV uplift applied by Nama to purchased loans, state-held residential portoflio is now down in values some 28.5%.
  

Headlines on property prices by type are even less pretty:

• RPPI for houses is at 77.0 in August, down 1.41% on 78.1 reading in July. 3moMA is now 77.9, down from 79.0 in July. Year on year prices are down 13.58% from index reading of 89.1 in August 2010. Relative to peak prices are down 41.7% (September 2007). This is the steepest rate of decline since March 2011.
  
• RPPI for apartments is at 54.9, down 4.7% on July reading of 57.6. August 2010 reading was 67.2, so we are now 18.3% down yoy. 3moMA is now at 57.3, down from 59.0 in July. Monthly rate of declines is now accelerating for the 3rd month in a row. August rate of decline is the steepest monthly decline in the history of the series. Relative to peak (February 2007), apartments prices are now down 55.69%.
  

Geographical distribution of price changes:

• Dublin residential property prices fell by 3.76% in August and were 14.85% lower than a year ago. Dublin house prices decreased by 3.4% in the month and were 14.7% lower compared to a year earlier. Dublin apartment prices fell by 6% in the month of August and were 17.4% lower when compared with the same month of 2010. 3mo MA for Dublin properties is now at 68.23, down from 69.7 in July. Relative to peak (February 2007) Dublin prices are down 50.56%. House prices in Dublin are 48% lower than at their highest level in early 2007. Apartments in Dublin are now 57% lower than they were in February 2007.
• The price of residential properties in the Rest of Ireland (ex-Dublin) fell 0.3% in August compared with an increase of 0.2% recorded in August 2010. Prices were 13.2% lower than in August 2010. The fall in the price of residential properties in the Rest of Ireland relative to peak is at 40%.

My forecast for the annual results is below. In summary - we've gone from the penthouse to the ground floor, through the parking levels and still going - services levels, sewer, imaginary metro tunnel.... next "Splat" is due at around middle Paleozoic layer... see you in October's Early Mammals exhibit...

26/09/2011: Ireland's Debt Overhang - unprecedented, unmanageable & unsustainable

A recent paper, titled "The real effects of debt" by Stephen G Cecchetti, M S Mohanty and Fabrizio Zampolli (05 August 2011) presented at the "Achieving Maximum Long-Run Growth" symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming, 25-27 August 2011 put forward evidence on the overall effects of debt overhang - across public, private corporate and household debts - on the real economy.

Here is the summary of their findings, followed by a closer look at the implications of these for Ireland. I have to warn you - the latter are highly disturbing.

The authors argue that although debt can be used to drive growth and development, "...history teaches us that borrowing can create vulnerabilities. When debt ratios rise beyond a certain level, financial crises become both more likely and more severe (Reinhart and Rogoff (2009)). This strongly suggests that there is a sense in which debt can become excessive."

The authors set out to answer a simple question: When does the level of debt go from good to bad? 'Bad' as in producing the effect of lowering long term economic growth in the economy.

To do so, the authors used a new dataset that includes the level of government, non-financial corporate and household debt in 18 OECD countries from 1980 to 2010.

The core results "support the view that, beyond a certain level, debt is bad for growth":

• "For government debt, the threshold is in the range of 80 to 100% of GDP... Our result for public debt has the immediate implication that highly indebted governments should aim not only at stabilising their debt but also at reducing it to sufficiently low levels that do not retard growth. Prudence dictates that governments should also aim to keep their debt well below the estimated thresholds so that even extraordinary events are unlikely to push their debt to levels that become damaging to growth." Furthermore, "when government debt rises to [threshold] level, an additional 10 percentage points of GDP drives trend growth down by some 10-15 basis points."
• "Up to a point, corporate and household debt can be good for growth. But when corporate debt goes beyond 90% of GDP, our results suggest that it becomes a drag on growth."
• "And for household debt, we report a threshold around 85% of GDP, although the impact is very imprecisely estimated."
  

The table below shows the core results from the paper and adds the comparable data for Ireland (Ireland was not included in the analysis). Make sure you are seating before reading it:
As shown in the table above, using the study estimates, the potential reduction in Irish GDP growth over the long term horizon arising from the combined debt overhangs is 2.1%.

The table also shows that the largest impact from debt overhang for Ireland arises from corporate debt, followed by household debt. Despite this, our Government's core objective to-date has been to deleverage banks and to contain Government debt explosion. In fact, the Government is consciously opting for loading more debt onto households - by reducing disposable after-tax incomes and refusing to implement significant savings in the public sector expenditure.

Yet, folks, our debt levels are extreme. They are more than extreme - the table below shows comparable combined public and private (non-financial) debt for the countries in the study sample, plus Ireland.
And the reates of our debt increase during the crisis are also extreme:

In fact, we have both - the highest level of debt to GNP ratio, the second highest debt to GDP ratio and the fastest increases in 2000-2010 in both ratios in the developed world. In the nutshell, this means we are more bust than the most bust economy in the world - Japan. Unlike Japan, however, we are faced with:

• No prospect of devaluation
• No prospect of controlling our interest rates
• Young population that requires growth and jobs creation, and
• Much heavier levels of private and corporate debt - i.e. debt that has more significant adverse economic effects than sovereign debt.
  

Yet, even exporting powerhouse of Japan is not delirious enough to believe their debt overhang can be brought under control via 'exports-led' growth.



Now, much of the issues and data discussed in this post relate to the question raised in the Dail by Peter Mathews, TD, who relentlessly pursues, in my view, public interest in raising such questions. The record of his question and Minister Noonan's answer is provided below:

25/09/2011: Returns to Education in Europe

CEPR working paper No. 8568 (link) "RETURNS TO EDUCATION ACROSS EUROPE" by Daniela Glocker and Viktor Steiner, published last week, provides some interesting (and intuitively consistent) evidence on the overall structure of the market returns to education.

Education is generally considered to be a key driver for economic growth and as such forms a specific target in many policy programmes for growth and development, such as the Europe 2020 strategy.

Since the seminal work of Gary S. Becker (starting from his 1960s papers) from an economic perspective, "the optimal level of education depends on the returns to education". Individuals invest in education if the life-time returns to education exceed the cost. These returns drive at least some of the differentials in education outcomes found across the countries. The CEPR study compares "the private returns to education across selected EU countries to explain cross-country differences in educational attainment."

The analysis is based on the 2008 panel data from the EU Statistics on Income and Living Conditions (EU-SILC) which provides comparable micro data for the member states of the European Union. The authors "estimate separate augmented Mincer-type wage equations for Austria, Germany, Italy, Sweden and UK, countries which differ significantly regarding both their education system and labour market structure."

"While the Austrian and German educational system are broadly similar and differ significantly in terms of enrollment rates in higher education from the other countries considered here, labour market outcomes in the two countries are quite distinct. Whereas Austria's unemployment rate is persistently one of the lowest in the European Union, Germany has one of the highest rates. Italy also features a relatively low enrollment rate in tertiary education, but does not have the system of vocational training prevailing in Austria and Germany which is said to be an important factor contributing to the relatively low levels of youth unemployment in these two countries. While Sweden and the United Kingdom both have relatively high enrollment rates in higher education, its financing differs significantly between these two countries and they also differ markedly in terms of labour market outcomes."

Table below - reproduced from the paper - summarizes some of the difference in outcomes across various countries.


The study estimates returns to education by country and by gender. Across countries the study finds that:

• The direct effect of education on wages is positive and significant for all countries.
• Education has a negative effect on unemployment duration, with effect being the strongest in Germany, and lowest for Swedish men where it is not statistically significant.
• The probability of an unemployment spell is lower by up to 23 percentages points, for those with 16 years of education (university level) relative to those with nine years of education (basic education). The highest decrease in probability of unemployment spell is observable for German and Austrian men, and the lowest for Swedish men and women.
• Similarly, the unconditional expected length of the cumulated unemployment declines with education. "For German men the decrease in the expected unemployment duration is the highest with six months, and the lowest for Swedish women"
• Wage decreases due to time spend in unemployment reduce hourly wages in Germany, Austria and Italy, so that "education has an indirect effect on wages in these countries."
• "The returns to education are positive and significant for men. Comparing the gross returns to education across countries, the UK has on average the highest returns to education with an increase in the hourly wages by 9 percent with an additional year of education. Sweden has the lowest gross returns to education with 4 percent."
• "The effect of the expected cumulated unemployment duration is negative, but not statistically significant for Sweden and the UK. Although the level of schooling has a significant effect on the cumulated unemployment duration in the UK, the expected cumulated unemployment duration itself has not a significant effect on wages. The indirect effect of education on wages through the channel of the cumulated unemployment duration is the highest for Germany."
• Focusing on the net returns broadly confirms the above results for gross (pre-tax) returns. "A slight change occurs when comparing Austria and Germany. While Austria has slightly higher gross returns (7.2 percent compared to 7 percent), Germany has with 6 percent 0.2 percentage points higher net returns. Looking how the returns to education change when comparing gross and net hourly wages, the UK has, on average, the highest reduction, i.e. by roughly 2 percentage points. In Austria, Italy and Germany, the respective net returns are approx. one percentage point lower than the gross returns. Sweden shows the smallest change with 0.7 percentage points. Interpreting this difference between gross and net returns as the "social return to education", the UK benefits the most from a high level of education in the population."
• "For women [data shows] significant positive returns to education as well. As for men, the cumulated unemployment duration is significant for Austria, Germany and Italy. The combined gross as well as the net returns to education is highest for UK and Austrian women with 9 percent (and 7 percent when considering the net returns). As for men, Swedish women are estimated to have the lowest returns with respect to education."
• "Comparing the returns of education by gender across countries, [the study] finds that there are no significant gender differences in the UK. While the returns are slightly lower for women in Germany and Sweden than for their male, the opposite is true for Austria and Italy."
  

24/09/2011: Anglo Bonds and National Accounts

Note: corrected figures below (hat tip to @ReynoldsJulia via twitter).

Per Nama Wine Lake blog - an unparalleled true public service site on Irish debacle called Nama and many matters economic and financial, Irish Government (err... aka ex-Anglo Irish Bank, aka Irish Bank Resolution Corporation*) is on track to repay USD $1bn (€725m) unsecured unguaranteed senior Anglo bond on 2nd November 2011.

The gutless, completely irrational absurdity of this action being apparent to pretty much anyone around the world obviously needs no backing by numbers, but in the spirit of our times, let's provide some illustrations.

According to the latest QNA, in current market prices terms, Irish GNP grew in H1 2011 by a whooping grand total 0f €307 mln from €64,337 mln in H1 2010 to €65,012 mln in H1 2011, when measured in real terms. This means that Anglo bondholders payout forthcoming in November will be equivalent of erasing 28 months and 10 days worth of our economic growth.

According to the CSO data on national earnings, released on September 8, 2011, Ireland's current average earnings across the economy stand at €687.24 per week, implying annualized average earnings of €35,736.48. Irish tax calculator from Delloite provides net after-tax (& USC) income on such earnings of €28,287.39 per annum. This means that Anglo bond payout in November is equivalent to employment cost of 25,630 individuals.

According to CSO's latest QNHS data, in April-June 2011 there were 304,500 unemployed individuals in Ireland. This means the jobs that Anglo bond payout could cover are equivalent to 8.42% of the current unemployment pool.


I am not suggesting for a minute that we should simply use the money to 'create' government jobs - anyone who reads this blog or my articles in the press etc would know I have no time for Government-sponsored jobs 'creation'. But, folks, the above numbers are startling. We are about to p***ss into the proverbial wind the amount of money that is enough to cover our entire economy's growth over 2 years, 4 months and 10 days! For what? To underwrite 'credibility' of the institution that is a so completely and comprehensively insolvent?

* Note 1 that Anglo still calls itself Anglo (until October 14th) and still insists it is a bank as the web page http://www.angloirishbank.ie/ states clearly [emphasis mine] that: "As a Nationalised Bank since January 2009, the key objective of Anglo Irish Bank’s Board and new senior management team is to run the Bank in the public interest... The Bank continues to provide business lending, treasury and private banking services to our range of customers across all our locations."

Note 2:
The above, of course, assumes that €725mln exposure is hedged against currency fluctuations. If not, as Nama Wine Lake points out, the exposure rises to ca €740mln. The above figures therefore change to:

• GNP growth equivalent of 2 years, 4 months and 28 days
• Number of average earnings jobs of 26,160, plus one part-time job
• 8.59% of currently unemployed
  

24/09/2011: Projected trends in economic growth for 2011

In the previous post I covered the current results for Q2 2011 QNA for Ireland. As promised, here, I will focus on forward-looking signals emerging from H1 2011 data.

Please note, though I do use the term 'forecast' below, the results shown here are really more projections than formal forecasts. The difference is very important. I use data through Q2 2011 to estimate what the economy performance is likely to be, assuming no change on the trends established in H1 2011. Of course, this is subject to significant risks (identified below).


Based on Q2 2011 (preliminary - and I stress this) data, chart below shows my forecast for 2011 growth:
Using simple forward forecast based on Q1 20003 - Q2 2011 data, we can now expect:

• Agriculture, Forestry and Fishing sector real output to grow by ca 5.5-5.6% this year, well in excess of 2010 growth of 0.7%, lifting sector output closer to €3.2bn in 2011 or 3.2% ahead of 2007 (the peak year for GDP and GNP).
  
• Industry, including construction, is expected to expand by 5.0-5.1% this year, slightly below 5.2% growth rate achieved in 2009. This will put sector output in real terms 2,9% ahead of the pre-crisis peak of 2007.
• However, industry performance will come against continued double digit contraction in Building & Construction sub-sector, which is expected to shrink 17-18.5% in 2011, compounding an astonishing 30.1% decline in 2010. Bu the end of this year, the sub-sector output can be 61.3% below the level of pre-crisis peak year of 2007. Note, the peak for the sub-sector was back in 2004 and if things continue on trend, 2011 output will be a whooping 74% below that.
• Distribution, transport & communications sector is likely to post another decline this year - shrinking by some 1.1-1.2% against a decline of 2% in 2010. Relative to economy's pre-crisis peak the sector is likely to be down 16.3% in 2011.
  
• Public administration & defence sector will contract 2.4-2.5% in 2011, based on data through Q2 2011, compounding a 2.7% decline in 2010. The sector is likely to fall compounded 4.9% on 2007 and 9% on peak sector contribution in 2008.
• Other services (including rents) - the sector accounting for 51% of our overall economic acitivity (GNP) is likely to post another contraction of -0.6-0.8% this year, compounding a 2.3% fall in 2010 and down 6.6% on 2007 peak.

Hence, GDP is expected to expand by 1.5-1.6% this year on the constant factor basis if we are to use the data from H1 2011, following 0.1% contraction in 2010. This will put our GDP somewhere around 5.6-5.7% below 2007 peak levels.

Taxes, net of subsidies are continuing to fall with 3.5-3.7% decline in 2010 now expected to be followed by 1.8% contraction in 2011. The end of 2011 taxes net of subsidies will likely come in at 32-33% below 2007 levels. This, of course, is driven by the twin forces of rising social welfare costs and continued presence of other substantial transfers, plus a reduced tax take.

With this, overall GDP (in constant market prices) can be expected to rise ca 1.1-1.3% in 2011, based on preliminary data through Q2 2011 (subject to revisions and also reflective of much more robust global economic conditions pre-July 2011 amplification of the crises). This will follow on a 0.4% decrease in 2010, leaving the gross real income 9% below 2007 levels.

Net factor income outflows to the rest of the world are likely to continue rising in 2011, growing 2.4-2.6% in 2011 (assuming amplified crisis conditions do not trigger signifcant withdrawals of retained profits), leaving factor outflows up 4.3% on 2007 levels.

With that, we can expect GNP to rise 0.8-1.0% in 2011, following on 0.3% growth in 2010 and national income will be 11.2% below 2007 peak levels.

Sectoral decomposition of national income by source, so far, stands at:

• Agriculture, forestry and fishing - the flagship sector by subsidies received and attention paid to it (remember, RTE and Irish Times are so keen covering ploughing championships) - contribution to GNP will be a whooping 2.4% in 2011 a 'massive' jump on 2.3% in 2008 and 2009, but still below 2.8% average annual contribution in 2003-2005.
• Industry (including Building & Construction) will be contributing 34.9% on GNP, up on 33.5% in 2010. If this materialises, 2011 will be the best year for Industry since 2003, which, incidentally, shows just how significant the growth in MNCs-led exports-oriented manufacturing was over recent years. As Building & Construction subsector contribution shrank from 9.9% at the peak in 2004 to 2.6% in 2011, manufacturing picked up the slack, pushing Industry overall contribution from 34.1% in 2004 to 34.9% - a swing of 8.1 percentage points.
• Distribution, transport & communications sector contribution is currently running at 15.7%, behind 16.0% in 2010, and at the lowest levels since 2005.
• Public administration and defence contribution to GNP is running at 4.2%, down from 4.4% in 2010, but still ahead of 3.9% in 2006 and 2007 and ahead of 4.0% annual average for 2003-2005. In 2003-2007 sector contribution average was also 4.0%, so our austerity so far is, in relative terms, seeing an increase in spending on public administration and defence as the share of the total economic pie. Now, these two functions are not front-line vital services, last time I checked, so you would expect a rational policy would be to shrink these sub-sectors at least at the speed of reduction in GNP. So far, this is not happening. Another alternative would be to reduce them at least at the rate of decline in taxes importance in the economy. This too is not happening, as shown below.
  
• Other services are likely to contract in their importance in the economy in 2011 (to ca 51.1% of GNP) following a contraction from 53.5% in 2009 to 52.1% in 2010. Large share of these services are exportables, which highlights the fact that not all of our exporting activities are booming.
• Taxes net of subsidies are likely to come in at 11.3% of GNP in 2011, down from 11.6% in 2010 and reaching the lowest level on the record since 2003. 2003-2007 average here is 14.5%, 2008-2010 average is 12.4%, so current state of taxes net of subsidies is worse than any recorded sub-period.
  

Again, to stress, one metric for sustainability of public spending would be to have public administration and defence spending contracting faster than the rate of contraction in taxes. And again, this is simply not happening. Since 2007 taxes have fallen from 15.0% of domestic economy to 11.3%. In the same period, public administration & defence contributions have increased from 3.9% to 4.2%.

Again, to stress, these 'forecasts' or rather 'projections' are based solely on preliminary figures for H1 2011. They are not strictly speaking forecasts, but rather annualized reflections of performance between January 2011 and June 2011. The risks to these are to the downside:

• Decreasing rate of growth in the US and the euro area materialising since May-June 2011 is not reflected in the projections above
• Signs of significant slowdown in broad leading economic indicators (PMIs, investment etc) are not reflected in the projections above, and
• Preliminary data can see significant revisions in time - in Q1 2011, preliminary estimate for GNP decline was estimated at 4.3% and it was revised to 3.0% decline in the current release, so the swings can be quite significant.