15/12/2011: External Trade for October 2011

Data for external trade for Ireland for October 2011 is out (preliminary estimates) and the picture of the general slowdown in the economy in Q4 is now being confirmed in the exports sector.

Overall,

1. Seasonally adjusted exports fell by 4% to €7,652m in October, while imports increased by 3% to €3,937m, resulting in an 11% decrease in the trade surplus to €3,715m.
2. Overall exports fell €358.4mln mom (-4.47%). Year on year exports in october were up €299.1mln (+4.04%) and relative to October 2009 exports are up €1,306.9mln or +20.60%. It is worth noting that average exports volumes for January-October 2011 stand at €7.692bn - ahead of the October monthly reading by €40mln - a small difference, but this is the first month since July that we are seeing exports below average.
3. Imports rose €98.4mln (+2.56%) mom and €339.3mln (+9.43%) yoy. Relative to October 2009, imports are up €526mln or +15.42%.
4. Trade balance fell €456.8mln mom in October (=10.95%) and €42.1mln (-1.12%) yoy. Relative to October 2009, trade balance is still up hefty €780.9mln (+26.6%).

Charts below illustrate:

Note that the trade balance remains on the upward sloping trend and the sub-trend is both steeper and above the historical trendline, which is, obviously a very strong development. Imports continue to underperform below the trendline, something that we can expect to be corrected once capes returns to exporting sector and also as the euro depreciates (margins on transfer pricing shrinking).

Terms of trade improvements are now virtually exhausted (although the data here is through September, not reflective of the gains in terms of trade that are materializing out of the latest weakening on the euro).

 Mom terms of trade deteriorated by 0.7 index points of 0.92%, however, year on year Irish exporters are enjoying strong gains of 7.88% and relative to September 2009, terms of trade have improved 10.54%. (Note: in the chart above, improvement in terms of trade is reflected in the lower value of the index).

It's worth noting (chart above) that exports are responding to terms of trade improvements well ahead of trend for the third year in a row, consistent with increasing transfer pricing component in our trade. This picture is further confirmed by the increasing sectoral concentration of our exports in pharmaceutical and medical devices sectors.

Overall imports-intensity of exports - the ratio of exports value to imports value has risen in October, as index moved from 208.7% in September to 194.4% in October (-6.86%) and year on year there has been relatively similar deterioration of 4.9%. This compares against the historical average ratio of 156.0%, implying that currently transfer pricing is running at a higher rate than average.

As noted earlier, imports are now rising faster than exports, reflective of cyclical stocks of inputs exhaustion and this can be a net negative going forward if the MNCs begin to see slowdown in new orders. In other words, as imports of inputs begin to outpace exports of outputs, stocks of finished goods will rise, implying that in the future, stocks of finished goods contribution to GDP will shrink, unless new orders take these stock out.

Despite good performance, seasonally adjusted trade flows are suggesting some troubles ahead for the trade balance. Annualized data based on previous years monthly series generates the forecast for Irish imports of €48.53bn in 2011 (+5.98%yoy against average annual contraction in 2008-2010 of -9.85%) and exports at €91.41bn (+2.42% yoy - well behind the target of 4.3% and well behind 2010 annual gain of 5.26%). This implies the forecast trade surplus of €42.89bn or some 1.35% less than in 2010. The crucial point for the GDP is how much stock build up activity we are going to see in November-December. And for GNP, the added critical issue is whether the MNCs will accelerate their profits expatriation or not.

Overall, there are signs (albeit still relatively weak) of the slowdown momentum building up in exports.

13/12/2011: European Summit and Markets Efficiency

One thing that clearly must be disheartening for the perfect markets efficiency theory buffs (supposedly there are loads of them around, judging by the arguments from the 'State Knows Best' camp, though I personally know not a single one who thinks that markets are perfectly efficient) is the speed with which the markets produced an assessment of the Euro zone's latest 'Grand Plan'.

Frankly speaking, the ink was still drying on the last week's summit paper pads and it was already clear that the new 'Solution' is not a solution at all and that the Euro zone crisis is not about to be repaired by vacuous promises of the serial sinners not to sin in the future.

This blog highlighted back on the 10th of December (here) the simple fact that Euro zone is highly unlikely to deliver on its newly re-set old SGP criteria targets, no matter what enforcement (short of Panzer divisions) Merkozy deploy. And in a comment to Portuguese L'Expresso (see excerpts here and full text here) and elsewhere I have said that instead of resolving the debt crisis, European leaders decided to create a political crisis.

Many other observers had a similar assessment of the latest Euro Land Fiasco pantomime that was the Summit. And yet, despite the factual nature of analysis provided, I was immediately attacked as a token Euro skeptic and an Anglophile.

Now, more confirmation - this time from the EU Commission itself (presumably this too has evolved into a Euro skeptic and an Anglophile institution overnight) - that the propposed Merkozy Pact is (1) extra-judicial and (2) largely irrelevant to the problem at hand. Today's Frankfurter Allgemeine reports that the new Pact will be - per EU Commission opinion - part of an inter-governmental treaty, which is subordinate - in international law - to any European treaty. This, in turn, means that a country in breach of the 'quasi-automatic fiscal rules - 3%-0.5%-60% formula - can simply claim adherence to existent weaker rules established under the fully functioning European treaties. This, in turn, will mean that there can be no application of the new Pact rules.

Thus, the new Merkozy Pact is subordinated to the weaker fiscal rules under the SGP and any extra-SGP enforcement of these rules is subordinated to the SGP procedures. Can anyone explain how, say Italy, can be compelled to implement the new Pact, then?

Meanwhile, of the other 'agreements' reached at the Summit, the EFSF agreement represents the weakening, not the strengthening of the previous Euro area position. In fact, post Summit, the EFSF is about to lose its AAA status (as France is preparing to lose its own AAA rating). S&P has the EFSF AAA-backers on negative watch and under a review, Moody announced yesterday that it will be reviewing AAA ratings across the Euro zone and Fitch labeled the Summit a failure. And amidst all of this EFSF is going to remain about 1/3 of the size required to start making a dent in the Euro zone problems. That, of course, assuming it can get up to that level - a big question, given pending downgrade and previous difficulties with raising funds.

The third pillar of the Euro zone 'strategy' for dealing with the crisis - the permanent ESM - also emerged from the summit in the shape of a party balloon with a hole in its side. Rapid deflation of the ESM hopes means that even with 'leverage' option, the ESM will not be able to underwrite liquidity to Italy and GIP, let alone Spain & Belgium. Furthermore, there is a question yet to be asked of the European leaders. Fancying ESM at €500 billion might be a wonderful exercise in fictional narrative, but where on earth will they get these funds from?

The fourth pillar of the 'strategy' was the IMF merry-go-round loans carrusel. Now, recall that brilliant scheme. The IMF has strict (kind of strict - see here) rules on volumes of lending it can carry out. But Euro zone problems are so vast, the IMF limits represent a huge constraint on the funding it can provide to the common currency debt junkies. So the EU came up with an 'Cunning Plan'. The EU will lend IMF €200 billion (which EU doesn't really have) and the IMF can then re-lend EU between €800 billion (under old rules on IMF lending) or up to €2 trillion (under that new 'leverage scheme'). Note: IMF doesn't really have this sort of money either.

So a junkie will borrow somewhere some cash, lend it to his dealer-supplier, who will then issue junkie a credit line several times greater than the loan, so the junkie can have access to few more years of quick fixes. Lovely. When you think of it, the irony of the EU passing a new 'Discipline Pact' with one stroke of pen, while leveraging everything it got and even leveraging the IMF to get itself more debt with the next stroke of pen takes some beating in the land of absurdity.

But fear not. The IMF is not likely to engage in this sort of financial engineering. Not because its new leader, Christine Lagarde - who comes from the European tradition of creating massive fudge out of monetary and fiscal policies - objects to it. It is unlikely to do so because its other funders - the US and Japan and BRICs etc are saying 'No way, man' to the Euro zone's plans. The US expressed serious concerns that Euro zone's plan will lead to US losses on IMF funds, while Japan's Fin Min Jun Asumi said that Europe must create a functional firewall first, before any IMF involvement can be approved. He also stated Japan's support for US position.

And so we have it. Post-Summit:

• There is no effective new 'Treaty' or enforceable new rules
• There is no enhanced EFSF and the old one is about to lose all its firepower
• There is no feasible ESM
• There is no Euro-leveraging of the IMF

Oh, and the ECB is becoming increasingly non-cooperative too.

And amidst all of this, the newsflow gets only worse and worse for Europe's battered economies. Greece is now projecting GDP decline of 6% in 2011 and 3% in 2012. The new deficit projections for 2011 are at 9% of GDP or €2.6 billion worse than the annual budgetary forecast of 8.5% deficit. Ditto for Belgium, where 2011 deficit is heading for 4.2% of GDP - 0.6 percentage points above the budgetary target (€2.2 billion shortfall). And, of course, there is that post-boy of austerity - aka Ireland - where Government tax revenues are collapsing as data through November shows (see details here).

So reality bites, folks. Markets are clearly not perfectly efficient. But once they discover the truth about the Euro Summit, fireworks will begin.

13/12/2011: Sunday Times 11/12/2011

The unedited version of my Sunday Times article from December 11, 2011.

Billed as the Budget that will fundamentally change our fiscal policy over the long-term, the documents released this week have managed to make history. Indeed, Budget 2012 was a record-breaking one in three ways.

Firstly, Government’s retreat over the issue of disability payment cuts for the younger beneficiaries has to mark the fastest policy reversal ever achieved by the State. Secondly, by labelling new revenue measures in health services as expenditure cuts, Minister Howlin has managed to perform a minor miracle of transfiguration – transforming sweat and labours of ordinary insurance card holders who will now pay higher services charges into a Public Sector reform.

Thirdly, the Government set another speed record that will be hard to match. Within just 9 months after coming to power, the Coalition has magically morphed into a Fiana Failesque clone, replete with Bertie-style creative thinking which equates economic growth with property incentives.

The 2012-2015 profiling of spending and tax measures, released by the Department of Finance clearly shows that this Government has adopted Brian Cowen’s approach to crisis management. Tax measures are frontloaded into 2012 and 2013 at €2.85 billion out of the total €4.65 billion. The bulk, or €5.55 billion, of the spending cuts out of the total of €7.75 billion were delayed until 2013-2015. Within spending reductions planned, capital cuts are frontloaded into 2012-2013, while current spending reductions are pushed back. In other words, the Government is delaying the painful reforms in a hope that something turns up to rescue the Exchequer revenues.

This much is clearly reflected in the Department of Finance’s overly optimistic outlook for growth. The Budget estimates appear to reflect the Department November 2011 forecast for 1.6% 2012 growth in GDP. Subsequent revision downward to 1.3% projected GDP growth in 2012, revealed on Tuesday, seems to be a window dressing to suggest caution as they clearly were introduced sometime around December 5th and 6th – with no time alter core budgetary estimates. Afterall, the Department Monthly Economic Bulletin, released this Monday continues to project 2012 growth at 1.6%. Even at that, the Department projections exceed most recent forecasts by the ESRI (0.9% GDP growth) and OECD (1.0% growth).

Past 2012, medium-term projections envision 2014-2015 growth coming in at a lively 3.0% per annum, boosted by booming exports and investment assumptions. Balance of payments, the metric that reflects economy’s overall ability to generate external growth, will skyrocket more than seven-fold from 0.5% this year, to 3.7% in 2015.

The country drowning in the sea of middle class debt, collapsed domestic investment, crashed consumption, rampant emigration, skills drain due to excessive taxation and exploding growth in the black markets, in the view of the Department of Finance economics experts will shrug off the depression and get back to the business of filling Government’s coffers with cash.

Incoherent numbers set the stage for incoherent policies.

The Government that is concerned with deposits stability in the Irish banking sector and talks about the need for investment is frontloading capital cuts and has introduced three measures on DIRT, CGT and CAT that will do exactly the opposite of what it tries to achieve. The Government that incessantly drones about jobs creation has managed to publish a budget that will further depress investment, reduce disposable incomes and increase costs of doing business in this country. To make things worse, the Budget also made hiring workers more risky by increasing the future cost of redundancies. With measures like these, the only jobs creation that will be taking place in Ireland for the foreseeable future is going to be taking place in the Fas-run schemes.

The Government that talks about exports-led recovery has managed to introduce not a single measure to help exporters. An exports credit guarantee scheme and ringfencing of new tax incentives for marketing Irish goods and services abroad would have helped. As would a scheme to encourage technical skills importation in the sectors where such skills cannot be found locally. None came.

Plagued by declining tax revenues the Budget unveiled three measures – VAT, fuel and tobacco taxes increases – that will see Black Market economy booming once again at the expense of legitimate businesses.

On the expenditure side, the very same Government promising deep reforms loaded the Budget with small-scale measures that neither address the issues relating to the value-for-money in public services delivery, nor achieve substantive real savings, nor improve productivity in the sector.

Take one of the largest ‘reforms’ – the reduction in the numbers employed in the public sector. At 6,000 planned reductions in 2012, the target is un-ambitious. More importantly, it marks the very same ‘extend-and-pretend’ approach to change that is traceable across the entire Budget. Instead of taking the medicine upfront and setting a target at 12,000-15,000 reductions, the Government opted to increase uncertainty about future positions and promotions for those who stay in their jobs. The fact that even the shallow target is to be achieved solely through early retirement adds insult to the injury. Early retirement schemes solemnly lack any connection between employees’ suitability for their jobs, their performance on the job, and other meritocratic metrics. As the result, early retirement schemes will not enhance overall levels of productivity in the workforce.

Minister Howlin, and with him the rest of the cabinet, simply appear to be unaware of what reforms are supposed to achieve. What is really needed is a comprehensive independent review of all positions across all departments and subsequent involuntary removal of those who are unsuited for their jobs.

There is also no joined-up thinking on welfare system reforms. For example, introducing a refundable tax credit per child at a mid-range rate of, say, 20%, would make the credit automatically means-tested. This would also make the scheme virtually self-administered for the majority of the recipients and allow to focus more resources on the cases where special help is needed most.

There is a virtually hit-and-run feel to the Government’s grasp of what constitutes long-term change. At this stage in the crisis, it is clear that sooner or later, the sacrosanct basic rates of social welfare as well as the unlimited nature of benefits will have to come to the chopping block. There is no economic growth path that can get us out of this painful corner.

Yet, instead of tackling the problem head on, the Government attempted once again to move along the margins, selecting individual sub-groups of aid recipients in a hope of ‘striking gold’ – finding the least vociferous ones for the hit. This is done in a naïve belief that the loudness of the group complaints is somehow proportional to the need for assistance. The end result is that those most in need, but are present in smaller numbers, got the stick, while the able-bodied adults with lesser merit claim to help are getting their carrot.

There are no reforms of the public sector pay and pensions in the Budget. The gargantuan bill for new and existing state retirees will fall this year by just €500,000 and is expected to decline by less than 2.3% in years ahead.

With social welfare fraud rampant Minister Joan Burton cheerfully reported back in August this year that her Department delivered €345 million worth of savings tightening enforcement of the welfare payments in just 7 months of 2011. Why is then Budget 2012 aiming to generate just €41 million in new fraud reduction-related savings for the entire 2012?

Despite the rhetoric, Budget 2012 was another windows-dressing for avoiding painful reforms. The new curtains of ‘austerity’ will now adorn the rotten façade of state finances until the whole structure crumbles over the next 2 years under the weight of our debts and structural recession.

Box-out:

Back in July 2010, the Minister for the Environment published a relatively un-ambitious Report of the Local Government Efficiency Review Group. The report reviewed the cost base, expenditure of and the numbers employed in local authorities in Ireland. It identified some marginal savings to the tune of €511 million comprised of €346m in efficiencies and €165m in improved cost recovery and revenue raising to be gained from introducing very moderate set of reforms, such as joint administrative areas for some sets of counties; reductions in senior management and other staffing levels; greater efficiency in procurement; more use of shared services, such as joint inspectorates and regional design offices; and better financial management. None of these suggestions have made it into specifically costed savings under the Budget 2012. Which begs a simple question – why?

12/12/2011: What if - the value of the punt nua?

For those of you have been reading recent (weeks old) reports that Irish punt, were it to be reintroduced, can witness appreciation relative to the dollar or 'old' euro, here's the table from Nomura research that, in my view, more accurately reflects what's going on:

Even the above estimation suggest long-term equilibrium value (5 year horizon post-introduction) for the punt, in my view, which means that on the downward adjustment path it is likely to undershoot the new equilibrium level and first move to a devaluation of more than 28.6%. The problem in terms of predicting the actual short-term movement in the punt is that we will have to deal with a number of problems that will take place simultaneously upon re-introduction of the new currency. The analysis is also sensitive as to the nature of transition from euro to the punt, as well as to the assumptions on debt to be carried over into new currency against the debt remaining in foreign currency.


Note: specially for those trigger-happy readers, this is not, repeat not, my view on viability of the punt or the desirability of exit from the euro or retaining the common currency. This is simply 'what if' argument.

12/12/2011: Are debt repayments to be blamed for growth collapse?

Some of the paper have clearly reached a bizarre level of Keynesian paranoia. Behold one example - The Guardian today (link here) screaming "Debt repayment is driving the EU back to recession".

While I agree with the idea that EU (more like the Euro zone to be accurate - do note that, folks from the Guardian) is heading into another recession, I highly doubt the cause of this is 'debt repayment' (note that the tense suggests that it is currently ongoing repayment) fault. Here's why:

Table above, taken from the IMF WEO September 2011 database clearly shows that not a single euro area member state is currently repaying its debts.

And in fact, as the table below details, NOT A SINGLE euro area state will be repaying any of its debts until the earliest 2014, when Greece is expected to start paydowns on its debts (under very rosy assumptions, of course):

Interestingly, IMF expects that in 2015 and 2016 overall debt levels will continue rising in ALL member states except for Greece.

So, run by me again that headline from the Guardian?

12/12/2011: Bonds starting position for the week

Couple of very handy charts from Dolmen Stockbrokers on week opening in bond markets:

The above clearly show risk-off condition at the start of this week when it comes to European sovereigns and risk-taking positions in the corporate debt markets.

And a handy summary of current corporate deposit rates across Irish financial institutions:

The above highlights the closely-realigned relationship between risk and deposit rates with permo leading the pack of 'sickies' and EBS following the lead.

12/12/2011: QNHS Q3 2011 - Take 2

Another quick note on the QNHS latest data:

• Total labour force is now down 147,600 on peak levels
• Total employment is down 346,800 on peak levels
• The demographic dividend is bust.

Table of sectoral changes to summarize latest data (note, public sector data is from the main QNHS, so it is less accurate than data reported in previous post):

Notable differences arise in terms of part-time and ful-time employment changes. relative to pre-crisis levels, full-time employment is down 21.5% while part-time employment is up 9.6%. Thus, overall quality of employment is deteriorating rapidly. But while yoy full-time employment is being displaced by part-time employment -3.69% to +1.76%, qoq both part-time and full-time employment is shrinking.

Relative to pre-crisis levels, employment is down in all sectors except Transportation & Storage (+3.28%),  ICT (+9.35%),  Education (+3.02%), and Human Health and Social Work Activities (+9.46%).

Overall number in employment is down 15.82% on pre-crisis levels. Meanwhile, of sectors that posted declines in employment over the same period:

• Largest declines were recorded in the collapsed Construction (-59.53%), in the allegedly-booming Agriculture, forestry and fishing (-28.9%) and Industry (-23.25%). 
• In addition, Administrative and support services (-20.25%) and Accommodation and food service activities (-18.01%) posted deeper than average cuts.
• Shallow cuts were recorded in Financial, insurance and real estate activities (-6.12%) and Public administration and defence; compulsory social security (-5.45%)

12/12/2011: QNHS Q3 2011

Headline unemployment number out of QNHS for Q3 2011 is at 14.4% up on 14.2% in Q2. This is bad, but not as bad as two other core labour market performance parameters.

On a seasonally adjusted basis, Irish employment fell by 20,500 (-1.1%) in Q3 2011. This follows on from a seasonally adjusted fall in employment of 4,100 (-0.2%) in Q2 2011 - an acceleration of 5-fold!

Unemployment increased by 15,700 (+5.3%) in the year to Q3 2011 and the total number of persons unemployed now stands at 314,700.

Meanwhile, the long-term unemployment rate increased from 6.5% to 8.4% over the year to Q3 2011. Long-term unemployment accounted for 56.3% of total unemployment in Q3 2011 compared with 47.0% a year earlier and 25.5% in the third quarter of 2009.

The total number of persons in the labour force in the third quarter of 2011 was 2,120,300, representing a decrease of 30,200 (-1.4%) over the year. This compares with a labour force decrease of 51,800 (-2.4%) in the year to Q3 2010.

Charts to illustrate the above:

Adding to this emigration, the above chart paints the picture of mass-exodus from the labour force, most likely due to twin effects: layoffs and tax increases.

Now, updating figures for public v private sector employment:

 CSO provides more accurate, by their own admission, figures for public sector employment in the Table A3 of the QNHS release. Here is the summary, excluding temporary Census 2011 staff:

• Civil service employment in Q3 2011 stood at 39,900, up on Q1 2011 39,500 reading and unchanged on Q3 2010. In Q3 2008 the same number stood at 43,000 so net reductions on pre-crisis level are 3,100 or 7.2%.
• Total public sector excluding Semi-State bodies stood at 339,900 in Q3 2011, down 8,400 on Q3 2010 and 5.6% lower than in Q3 2008.
• Total public sector employment including Semi-State bodies is now at 392,900, down from 399,000 in Q1 2011 and down 8,200 on Q3 2010. Compared to Q3 2008, public sector total employment is down 24,000 or 5.8%.
• Total private sector employment is at 1,123,600, down from 1,147,800 (-2.1%) year on year and down 194,800 on pre-crisis levels or -14.8%.

So to summarize - public sector employment is down 5.8% relative to pre-crisis levels, while private sector employment is down 14.8%.

10/12/20111: Euro summit twin tests: deficits and structural deficits

In the wake of the European summit, it's worth taking a look at historical and projected future performance of the member states of the Euro area based on the parameters for fiscal sustainability.

First, consider historical performance of the Euro area member states based on the 3% Government deficit criteria. Charts summarize:

And a plot of all instances when Euro member states have fallen outside the 3% deficit sustainability criteria:

Let's summarize the above evidence:

As can be seen from the above, by the 3% deficit criteria, between 2000 and forecasted 2016,  only two states will have been in full compliance with the fiscal rule: Luxembourg and Estonia. Only two more state, Austria and the Netherlands, will see probability of falling outside the sustainability criteria below 30%. Seven Euro area states will have probability of not satisfying this criteria in excess of 50%. It is also evident, based on the IMF forecasts, that Ireland, Spain, Cyprus, Slovenia Belgium, Greece and France will have an uphill battle satisfying this criteria between 2012 and 2016. Ireland is by far the worst performing state in terms of required future adjustments with cumulative reductions required of 27.7% of GDP, followed by Spain with 21.8%.

Now, let us consider the 0.5% of potential GDP bound for structural deficits:

To summarize the above:

As shown above, with exception of Finland, no member state of the Euro area has been in compliance with this rule since 2000 through (forecast) 2016. The numbers for expected future adjustments required under this rule for 2012-2016 are horrific. Spain is the worst off country under this criteria, followed by Ireland, Cyprus and Slovenia. Things are also gloomy as the future adjustments go for all other countries, save Germany and, irony has it, Italy (due to the country lack of any growth potential), Netherlands and Portugal (same case as Italy).

In short, there is no real evidence that the Euro area can deliver on the targets set without

1. Running a truly depressionary level of fiscal adjustments over the next decade; 
2. Raising dramatically levels of sustained growth over and above current potential capacity in a large number of countries, but especially in Italy, Portugal and Greece, and
3. Exercising the levels of discipline that the Euro member states have not exhibited in their recent history.

09/12/2011: Services PMI for November

With all the excitement around the Budget Days, few data series fell into a longer-hold folder. So some catching up is in order. I covered Manufacturing PMI release by NCB in a recent post here. Let's update data for Services PMI before getting back to the core newsflow from Europe.

Services PMI continued signaling expansion and surprised to a slight upside in November. Overall Business Activity Index posted a rise from 51.5 in October to 52.7 in November and the index reading has now been in the expansion territory since January 2011. Year-to-date average is 51.6 and 3mo MA through November is 51.8, while 3mo MA through August was 51.7. As chart below shows, Services activity has been on a higher level, but relatively flat trend since around Q2 2010.

New Business Activity sub-index posted even stronger performance in November, moving from the contractionary 49.7 reading in October to an expansionary 52.6. Year-to-date average is 49.5 and 3mo MA through November is at 49.9, against 3mo MA through August at 48.8. The trend is slightly up recently toward sustained expansion, but it remains shallow and relatively flat since October 2009.

Summary of a more recent data snapshot for the two core indicators below:

Virtually all other series also posted improvements and only two sub-series - Profitability and Employment - remain in contraction (more on these in follow up posts).

Chart above highlights continued pressures on profit margins with Input Prices posting robust expansion in November, against Output Prices posting moderating contraction. Output prices now remain mired in continued contraction since October 2008.

So on the net, decent news on Services side, especially given the conditions in the global economy. However, it remains to be seen if these gains are sustainable over time and have any strengthening momentum that would be required to make a significant contribution to overall growth.

08/12/2011: Let the failed banks fail

John Cochrane on Europe's banking crisis:

"What financial system will we reconstruct from the ashes? The only possible answer seems to me, to go back to the beginning. We'll have to reconstruct a financial system purged of run-prone assets, and the pretense that nobody holds risk. Don't subsidize short-term debt with a tax shield and regulatory preference; tax it; or ban it for anything close to "too big to fail." Fix the contractual flaws that make shadow bank liabilities prone to runs."

and

"For nearly 100 years we have tried to stop runs with government guarantees--deposit insurance, generous lender of last resort, and bailouts. That patch leads to huge moral hazard. Giving a banker a bailout guarantee is like giving a teenager keys to the car and a case of whisky."

and

"European banks have all along been allowed to hold sovereign debt at face value, with zero capital requirement. It's perfectly safe, right?"

Brilliant.

Read the full note here.

08/12/2011: An even greater threat

Here's an even greater threat to Ireland's 'economic model' - the one based on attempting to attract into this country a new generation of FDI - FDI that is increasingly based on human capital-intensive activities.

BBC report here covers increasing mobility of skills across the borders (link). And I co-authored recently a report on this (here).

But Ireland, folks, is not a serious contender for this capital due to the confluence of the following trends here and abroad:

1. Our taxes on top earnings - earnings associated with higher human capital, once we remove the egregiously high salaries at the top of the public sector bureaucracies and in sheltered private/semi-state sectors;
2. Our quality of public services that can be meaningfully utilized by people with higher human capital is not up to scratch - in health, education, transport, urban amenities, cultural amenities and Government services;
3. Our quality of promotional opportunities within the country is restricted, especially for foreign talent due to archaic promotion practices and cronyism; and
4. Our quality of public discourse, when it comes to higher earners is toxic - in part justified by absurdities of our top public sector brass who enjoy earnings well in excess of their talents, and in part justified by our absurd 'bankers' whose performance in the past is also unmatched to their earnings.

So we are witnessing an outflow of key talent from Ireland. In recent months a large number of high quality academic researchers have packed up and left (or currently leaving) this country. In a number of sectors - including the 'flagship' ICT services sector - we are seeing jobs moving after key workers (not key executives, as our Government mistakenly thinks, judging by the special measures in the Budget 2012, but key skills-holders). In a number of sectors, we are failing to develop critical mass of skills and activities due to lack of talent - one example would be funds management in IFSC, the area where policymakers have been trying to build activity for some 5 years now.

Now, we might think that these issues should be priority number 734 or so on the list, given the gravity of our crisis, but they are not. Long term competitiveness no longer rests on simplified harmonized indicators for brawn labour, but on yet-to-be-compiled indicators of our human capital pool. And here, mass-produced degrees with plausible-sounding names of poorly ranked institutions on them won't do the job. Ireland is facing two roads ahead: one road leads to a low wage, low income autarky of skills, another to a high wage, high income open skills economy. So far, our policy wheels are pointed firmly in the direction of the former.