05/10/2011: Tax receipts for September

Tax receipts for September released yesterday show predictable evolution along the trend established in recent months - the trend of broadly matching the targets, but continuing to surprise on the downside in some core categories. In other words, no signs of recovery here, folks.

Here are the details.

Income tax came in at €9,254mln (this, of course, includes USC, rendering annual comparisons virtually meaningless). Compared to the target, Income tax receipts were up €147mln or 1.6%. Year on year Income tax came in at +25.7%, much of which is due to levies and USC, making multi-annual comparisons even less meaningful. Annual target for the category envisions an uplift of 25.3%yoy so we are slightly ahead of that for now.

The bright-ish spot that is Income tax is offset by the continued fall off in VAT. Through September 2011, VAT receipts stood at €7,994mln down on the target of €8,294mln (-3.6% or €300mln shortfall). Year on year VAT receipts are down 2.04% or -€167mln. VAT receipts are now down 7.7% on comparable period of 2009 and mark the worst year-to-date for 2007-present period.

Corporation tax - the Big White Hope of the 'exports-led recovery' is below target at €2,054mln (do notice that Government's Great Hope is less than 1/4 of the income tax as far as contribution to the overall Exchequer balance goes). Target was €2,085mln, so the shortfall now stands at -1.5% or €31mln. Corporation tax performance through September 2011 is now at the worst levels in 2007-present period despite all the record activities in exporting sectors, which again puts the boot into the Government's claims that exports-led recovery will restore our economy to health.

Excise tax is also underperforming the target, coming in at €3,229mln or €77mln (-2.3%) below the target. Excise tax revenues are also below 2010 levels by some 1.4% so far, implying that through September, 2011 is the worst year since 2007 in terms of excise tax collection.

In terms of smaller taxes:

• Stamps came in at surprisingly high levels of €1,124mln in 9 months through September, up €384mln or 51.9% on the target. This builds on gains in July and, most likely, represents incidental returns from one-off activities, such as €457mln expropriation of private pension funds via the FG/LP levy (HT to Jerry Moriarty of http://www.iapf.ie)
• Capital taxes are below target and posting the worst year so far for the entire 2007-present period.

Overall tax returns are now at €24.098bn, up 0.7% or €160mln on the taget and 8.7% on 2010 performance, with virtually all the yoy gains achieved due to USC reclassifying health levy into tax revenue, plus through increases in tax burden on households.

Relative to overall annual target, 0.7% increase on target through September 2011 and 8.7% increase yoy in outrun to-date are contrasted by the annual target set at 9.9% over 2010 outrun, so we do have to step up tax returns performance in months to come dramatically to deliver on the annual target.

More on the tax burden distribution in the subsequent post.

To conclude - tax receipts show no signs of substantive change in the overall Exchequer position on 2010 broadly confirming that 'exports-led recovery' thesis for restoring Irish economy to health, at the present, remains invalid.

05/10/2011: Profitability data for September

Irish PMIs for Manufacturing and Services, as well as their employment sub-components, are all continuing to signal lack of substantive recovery in the real economy. In the mean time, despite relatively strong confidence, profit margins are tanking across the main sectors. Here's the latest data:

• In September profit margin index (differential between output prices index and input prices index) in Services has fallen to -18.52 from -14.6. The index now stands well below all medium and long term averages. 12mo average is at -16.5, same as Q3 2011 average, a slight improvement on Q2 2011 average of -18.1. However, 2010 Q3 average was -9.1 and 2009 Q3 average was -5.6, implying dramatic worsening of the margins in the Services sector on 2009-2010. The last time profit margins were positive for Irish Services sector companies was in June 2009.
• In September profit margin index in Manufacturing was -9.67 adding onto dismal reading of -15.62 in August. 12mo average is at -19.6, and Q3 2011 average was -13.4, an improvement on Q2 2011 average of -19.7. Last time profit margins in manufacturing moved in favor of Irish producers was in February 2009.

As margins usually translate into expansion, investment and, thus, employment, the above numbers are not encouraging...

05/10/2011: Employment conditions in Services & Manufacturing

September PMI for Manufacturing and Services have signaled continued weaknesses in much of the activity, including:

• Core PMIs: Manufacturing PMI sliding deeper into red at 47.3 in September against 49.7 in August, while Services PMI posting weak growth at 51.3 in September up from 51.1 in August.
• Overall New Business Activity falling for Services from already contractionary 47.9 in August to 47.5 in September. In Manufacturing, New Orders activity fell from 57.7 in August to a miserable 45.8 in September.
• Much of the above performance is posting repeats month on month since May-June 2011 and there is little hope for this to change any time soon.

However, it is in the employment sub-indices where the entire nature of our exports-led 'recovery' becomes apparent.

• Employment sub-index in Manufacturing in September stood at 46.5 down from 51.1 in August, with year-to-date average of 50.7 and Q3 2011 average of 48.9.
• Employment sub-index in Services in September was 46.0 down from 48.2 in August, marking the fifth consecutive month of contracting employment.

The chart below shows clearly that we are in a jobless 'recovery' scenario for Services (with 'recovery' part of the equation being extremely weak) and in recession scenario for Manufacturing:

And the next chart shows that the 'exports-led recovery' tale is not alleviating the misery of unemployment reality, as predicted.

05/10/2011: Services PMI for September

Unlike Manufacturing PMI (see details here), Services sector PMI continued weak expansion in September. However, underlying momentum remains extremely weak and the tenuous recovery is, as previously, jobless. Here are the details:

Overall Services PMI rose from 51.1 in August to 51.3 in September - both the increase and the level above 50 are statistically insignificant, but welcome, nonetheless. This marks ninth consecutive month with index reading above 50, although only in January and February did the rate of expansion rise statistically above zero. 

The rise in overall activity was recorded in spite of a drop in overall new business from 47.9 in August to 47.5 in September. New orders fell at a statistically significant pace that was the fastest since December 2010. Per NCB statement: "Anecdotal evidence pointed to weakening economic conditions, and a related drop in client confidence."

 

The widening gap between new business activity and PMI core activity reading is now present in 10 of the last 12 months:

Confidence levels remained well in the expansion territory at 59.5 in September, virtually unchanged on August reading of 59.4. It is worth noting that confidence reading has no statistically significant bearing on actual activity as I have shown in previous research. Overall, per NCB release: "Respondents to the survey remained optimistic that activity will be higher in 12 months’ time than current levels, although the level of positive sentiment was largely unchanged from the muted
level seen in August. Growth of external demand was reportedly a factor behind the latest optimism." The reason for the use of the word 'muted' is that confidence levels readings stood above 60 in all months between December 2010 and July 2011 with the year-to-date average reading of 63.0 and Q3 reading of 60.3.

In contrast to the trend seen for total new business, new export orders rose in September to 53.1 from 50.4 in August - a statistically significant increase. With new business from abroad now rising in eight of the past nine months, the tenuous recovery in the sector is driven solely by exports (that and probably Nama, plus continuous reshuffling of chairs on the banking sector Titanic's decks). However, new exports orders expansion is still running below the longer term averages. Q2 2011 average was 54.0 against Q3 2011 average of 51.0 and year-to-date average is 53.3.

Services providers continued to cut the backlogs of work as slowdown in new orders hit and this was in line with previous months contractions.

Employment levels fell solidly, and at the fastest pace since April 2010 with Employment sub-index now at 46.0 against 48.2 in August. Employment in the sector has now been shrinking every month since March 2008 with exception of one month.

More on employment and profitability in both Manufacturing and Services in the subsequent post. Price movements in services between input costs and output prices continued to pressure profit margins in the sector:

03/10/2011: Euro area PMIs & Industrial Production - September

So for a poor start of the week, Monday data on manufacturing across the euro area continues to push the stagflationary growth scenario.

First, the eurocoin leading economic indicator came in at another contraction in September - see details here.

Second, gloomy PMIs readings across the entire euro area are, not surprisingly, confirming slowdown and contrasting the UK (although not too-cheerful 51.1 reading, on a foot of a 49.4 revision in August, with UK new export orders sub-index falling to 45.0 from 46.9, reaching the lowest level since May 2009):

• Euro area overall PMI at 48.5 in September against 49.0 in August, marking the worst monthly reading since August 2009. Output sub-index at 49.6 against 48.9 in August and new orders sub-index at 45.2 in September, down from 46.0 in August, lowest reading since June 2009. Rate of output contraction slows but new orders drop at fastest rate for over two years. PMIs fall in all countries except Italy. Steepest declines seen in Greece and Spain.
  
• German September PMI for manufacturing is at (barely expansionary) 50.3 from 50.9 in August and at the lowest level since September 2009.
• French September PMI-M fell to 48.2 from 49.1 in August. Now, recall that France posted zero growth in Q2 2011 when PMIs were above expansion line.
• Italian PMI-M up at 48.3 from 47.0 in August, implying that manufacturing is shrinking at a slower pace than before, but shrinking nonetheless.
  
• Spanish September PMI for manufacturing is at 43.7 down from 45.3 in August - both depressing readings signaling accelerating and deep contraction.
• Greece: 43.2 in September, down from 43.3 in August

So manufacturing activity overall is followed now by new exports fall off as well:


All of this has been building up for some months now. The latest Eurostat data (through July 2011) shows already nascent trends of weaknesses on manufacturing and broader industry sides:
Manufacturing:
New orders (lagging series in terms of signaling slowdown):
Capital goods (leading indicators):

And finally, overall industrial production:
Things are now looking structurally weak, rather than temporarily correcting.

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.