4/1/2012: EU Commission new logo

In the Really-Really-Really Important News of the Day: the EU Commission has a new logo... ahem... yes, a NEW LOGO:

Notice the two distinct sets of correlated lines - one set ascending, another descending, separated by a clear space with no sign of continuity between the two sets, presumably to summarize the emerging dis-Union of those states that are set to grow in the future, from those that are set to contract. Also note the 'growth' group dynamic is shallower than the dynamic of decline in the 'drop-outs' group.

There is also a semiotically potentially revealing positioning of the flag and the banner - off centre, more into the growth set of lines, possibly suggesting that the EU is now becoming more of a 'growth club' or alternatively 'de hell with dem slower periphery states' club?

So how about a new tag line: EU - a Union for Disunity?

Disclaimer: I am obviously take a proverbial p***ss, but., as Russians say - every joke contains at least a grain of reality...

3/1/2012: Government debt - maturity v overhang

There are some good reports on the massive debt rollover in G7 and BRICs in 2012 - see a summary here. That can lead non-economists to confuse total outstanding Government debt with that maturing in 2012. Here's the summary of Government debt projections for G7 and BRICs for 2012 and 2016 based on September 2011 WEO database from the IMF.

So overall:

• Back in September 2011, the IMF projected total G7 Government debt to reach US$43.02 trillion, or 123% of the expected 2012 GDP
• BRICs 2012 Government debt is projected to reach US$4.9 trillion or 34% of GDP
• Total G7+BRIC Government debt outstanding for 2012 is expected to be US$47.92 trillion or 97% of GDP
• The above figures show why public debt in G7 nations is such a concern for the markets and the real economies.
• By 2016, G7 Government debt is expected to rise to US$51.01 trillion or 127% of GDP. These projections are based on rather rosy assumptions that were built into September WEO forecasts and since then have been revised down, although there is no comprehensive database data incorporating these revisions available yet (it should come out in April 2012).
• Absolute debt levels for G7 Governments are expected to rise for all countries except Canada and Germany. Relative to GDP, Government debt levels are expected to rise between 2012 and 2016 in Japan and the US.

So that US$ 7.6 trillion figure of maturing Government debt for G7+BRICs mentioned in the Bloomberg article linked above - that is just 15.9% of the total Government debt of these countries outstanding that matures in 2012. Not to be confused with the whole debt mountain...

3/1/2012: Are we really still 'filthy rich'?

Parts of Irish media love GDP per capita comparatives within the EU27. Years after the Celtic Tiger went belly up, the Irish Times and RTE and some (though not all) Left-of-Centre alternative media trumpet our allegedly stellar performance in this metric as the evidence that more should be taxed out of the 'rich' to pay for 'vital services'. Parts of international Right-of-Centre media still refer to these comparatives as the evidence of the 'Low Tax' Irish miracle at work. Both are missing the core point I have been raising over the last decade (since moving to Ireland, really): GDP is irrelevant metric for Irish economic well-being.

Take, for example, the following 'latests' data released last month by the eurostat. In 2010, Irish GDP per capita stood at 28 percent premium over EU27 average and at 18.5% premium over EA17 (euro area). This 'achievement' made us look like the third highest income economy in EU27, and the 5th highest earning population when Norway, Switzerland and Iceland are added into the equation. Our GDP per capita was ahead of Iceland (111% of the EU27 average) and was second only to Luxembourg and Netherlands. Even more significantly, although our standing compared to EU27 did drop from 133% in 2008 to 128% in 2009 and 2010, our rank did not change. We were the 3rd highest 'income' economy in per capita terms in 2008 and we were, allegedly, that in 2010.

Now, that claim alone should put a grain of doubt into the wheels of the 'spend more, tax more' machine here. Afterall, we, in Ireland, have experienced the worst recession on record in 2008-2010. And yet, the indicator is showing us doing 'Just Grrreat!'

Of course, we know that somewhere around 20% of the GDP is expatriated with little benefit to the economy by the MNCs. And shaving off these 20% off the 128% premium we allegedly possess leaves us with an approximate GNP-linked premium of 102% - just above Italy at 101%. This would rank Ireland as 12th highest income economy in EU27. But in addition, what GNP and GDP don't measure and yet all of us know, Ireland's cost of living is well ahead of the EU27 average. Which means that while nominally we might earn slightly more than the average European, in terms of what these earnings buy us we should be much further behind. The alleged 'competitiveness gains' so much lauded by the Government help, but they shouldn't make as much of a difference to consumers, since these gains are primarily adversely impacting their earnings, not the cost of things we spend our money on. Deflation in the private sectors of economy over the last 3 years has been matched by inflation in the State-controlled sectors.

So the eurostat, handily, reports another metric of real incomes and wellbeing in the state - the Actual Individual Consumption per Capita - a measure that takes into account both public and private sources of individual consumption. And here, folks, we are much less of a 'high achiever'. In 2010 Irish AIC was 102% of the EU27 average - exactly where it should be once we control GDp for GDP/GNP gap. Which makes us 13-14th highest ranked economy in EU27. Or in other words, an average performer. Worse than that, our performance here was on par with italy (102%) and just 1 percentage point ahead of Greece. Barring the PIIGS we were the worst performing economy in the group of advanced EU27 member states.

And rebasing the data to compare against the EA17 average (euro area average) shows things are pretty much dire in Ireland. Back in 2008 we had AIC of 102% of the EA17 average. that fell to 96% in 2009 and 95% in 2008. This 7 percentage points drop in ireland's relative standing is the worst of all EA17 states. For comparison, in Greece the decline was 3 percentage points. Chart below illustrates:

Now, there's a chart RTE and Irish Times won't show you. And not only because it requires doing some research in the form of recalibrating the data, but because it won't fit the philosophy of 'Ireland is Still Rich. Tax Ireland!' that both outfits are so keen supporting.

2/1/2012: Sunday Times January 1 - 2012 Economy Forecast

This is an unedited version of my Sunday Times article for January 1, 2012.

Happy New Year and the best wishes to all of you fond of reading up on economics this morning.

Having just closed the book on the fourth year of the crisis, one can only hope that 2012 will be the year of the return of the global and Irish economic fortunes.

I wish I could tell you that this will be so with some sort of certainty. That ‘exports-led growth’ will open the way for reduced unemployment and that ‘real reforms’ will take place to the benefit of those of us living here and restore the confidence of the proverbial international investors. Alas, the only reality we can glimpse from the road we travelled since 2008 is that this year will be marked by the same fiscal uncertainty, growth volatility and markets psychosis that were the hallmarks of the years past.

So in line with the New Year’s Day tradition for forecasts, lets take a look at the crystal ball and ask two questions.

Question number one: Where are we today on the road of the global economic and financial crises resolution?

At the macroeconomy level, the US has completed some two-thirds of the required private sector deleveraging. This means that by the very end of 2012 we might see some signs of life in the US consumer demand and household investment, assuming the credit system globally does not experience another seizure. Until this takes place, corporate balance sheets will remain focused on hoarding cash and capex is unlikely to re-start. The US economy is likely to bounce around the growth rates just above zero, with moderate risk of a recession in the first half of 2012.

The three black swans for the global economy are: the risk of the deficit blowout and the lack of Congressional consensus on dealing with the US debt mountain that can destabilize the Treasury market; China’s economy teetering on the brink of an asset crisis and growth slowdown; and the euro area hurtling toward a disorderly collapse. Should any one of these materialising, there will be an unprecedented shift in global investment portfolia with gold and a handful of international blue chip corporates becoming the only stores of value. Unlikely as it might seem, such a scenario will cause a new Great Depression worldwide.

Barring the catastrophe identified above, global demand will most likely remain subdued in 2012, with previous pockets of growth – e.g. the emerging markets, the beneficiaries of exceptionally low cost of carry-trade finance from QE funds in the US in 2009-2010 – becoming mired in a significant growth slowdown.

Europe is likely to be on the receiving end of the poor global growth newsflows.

Germany was the driver of European growth in 2011 and its exports performance (up 13.4% in 2010 and 8.5% in 2011) looks set for a severe test in 2012. In months ahead, the ECB will drive down key interest rates to 0.5-0.25 percent from the current 1.0 percent to accommodate the default-bound euro area sovereigns. However, in the climate of deleveraging banking sector, this move will fail to stimulate private demand. Government spending in Germany is also set to fall in 2012, by 0.4-0.5 percent. As the result, we can expect German GDP to contract in Q4 2011 and Q1 2012. Annual rate of growth is likely to fall from 2.9% in 2011 to 0.2-0.4% in 2012.

France is now forecast to enter a shallow recession between Q4 2011 and Q1 2012 with annual growth falling from 1.6% in 2011 to zero percent in 2012. The downside risk for the second largest euro area economy is that fiscal adjustments planned to-date can be derailed by lower growth. In this case, France can remain in a shallow recession through 2012.

Overall, euro area growth looks set for some negative downgrades in months ahead. We can expect GDP to remain flat in 2012, having shown expansion of 1.5 percent in 2011. Personal consumption will be static, investment will shrink by 1.2 percent and Government spending will contract 0.3 percent. Exports growth will fall 10-fold, from 2011 annual rate of 6.3 percent.

This provides the backdrop to the second question of the day: What will 2012 bring to Ireland?

We are all familiar with the fact that Irish economy is highly volatile and subject to a number of push and pull factors ranging from global demand for Irish exports, to foreign conditions for debt crisis resolution in the common currency area.

Assuming no major disruptions to the current global environment, we can look at two possible scenarios.

Scenario 1 involves benign assumptions of continued growth in agricultural output, modest resilience in exports, moderating contraction in construction sector, and only slightly deeper reduction in public spending compared to 2011. Crucially, this scenario assumes virtually no nominal change in the services sector activity, a moderate rise in net taxes and a slight decrease in profits by the multinational enterprises expatriated abroad. All in, Scenario 1 yields estimated rate of growth in real GDP of 0.8% and GNP growth of 0.7%.

Less benign Scenario 2 with shallower growth in agricultural and exporting sectors activity, as well as services sectors contraction, yields growth forecast of -0.6% for real GDP and -0.9% for GNP. In this adverse scenario, Irish economy is likely to end 2012 with real GNP 13% below the peak 2007 levels.

These small differences in forecasts are, however, compounded year on year, as illustrated by the historical divergences between previous Department of Finance forecasts and realised rates of growth in the chart.

The range of risks we face is a daunting one, but there is also a narrow range of potential outcomes that present an upside for the battered economy.

In terms of the sovereign risk, recent discontent with the Budget 2012 has translated into dramatically reduced approval ratings for both Fine Gael and Labor. These are likely to persist on the back of higher taxes and a potential increases in unemployment in the retail sector and other services, post-January sales. By mid-2012, lower growth and overly optimistic projections on tax revenues and expenditure reductions will mean that the Coalition will face a stark choice of either further reducing capital expenditure, or levying some sort of a new revenue raising measure. Discontent of the backbenchers will only increase as time moves closer to the Budget 2013, possibly forcing the Government to adopt some structural reforms on the expenditure side and rethink its policy on future tax increases.

The latest projections by the Economist Intelligence Unit put peak Government debt/GDP ratio at 120-125% in 2013. At this stage, there will be a belated restructuring deal struck with EU that will see debt/GDP ratio falling to below 100%. The pressure for such a deal will be building up throughout 2012 and we might see some positive moves during the year.

Banks will be nursing continued losses, with mortgages showing a more visible trend toward deterioration, while business insolvencies will continue driving significant losses behind the façade. Again, pressure of these losses will become more apparent in late 2012, just around the time banks capital buffers begin to dwindle once again.

With economy bouncing up and down along the generally stagnant growth trend, the Government will continue its search for excuses for avoiding deep reforms. Thus, 2012 will be the year of silent risks build up in Irish economy, culminating in a major blow-out in late 2012 or early 2013. Welcome to the Groundhog Year Number Five.

Box-out:

Most recent data for Ireland’s external accounts shows that in Q3 2011 our balance of payments stood at a surplus of €838 million, comprising a current account surplus of €850 million and a capital account deficit of €12 million. For the nine months of 2011, the current account has registered a deficit of €669 million, an improvement of just €125 million on the deficit in the same period of 2010. Over the same time, balance of payments deficit fell from €771 million in the nine months through September 2010 to €675 million for the first nine months of 2011. Which raises the following question: given that we continue running current account and balance of payments deficits, what external surpluses does the Government foresee for the near future that can possibly make a dent in our public debt overhang? Since the onset of the current exports boom in the beginning of 2010, Ireland’s average quarterly current account surplus has been a meagre €13 million. At this rate, it will take Ireland Inc some 190 years to pay down just €10 billion of debts, even if these debts were costing us nothing to finance.

2/1/2012: Latest Composite Leading Indicators for Q4 2011

Latest leading economic indicators for Q4 2011 for OECD are not showing any real signs of economic recovery for the euro area. Here are some of the details (please note, data is through October, so forward signal is for November-December 2011).

For Australia, Q4 2011 indicator is now down at 100.55 against Q3 2011 reading of 100.80. 3mo MA is 100.71 against previous 3mo MA of 100.89. For comparative purposes, 2007 average reading was 101.96, 2009 average of 96.07 and 2010 average 101.13. 2011 average to-date is 100.99.

Canada's CLI is at 99.66, ahead of Q3 2011 reading of 99.42. 3mo MA is at 99.62 and previous 3mo MA was 100.72. 2011 average to-date is 100.90, well behind 102.13 average for 2010 and 101.26 average in 2007.

France current reading is at 98.13 slightly behind Q3 2011 at 98.60. 3mo MA is at 98.69, behind previous 3mo MA of 100.96. 2011-to-date average is at 101.16, behind 2010 average of 103.38 and 2007 average of 101.37.

Germany's current reading is at 98.28, down from 99.10 in Q3 2011 with current 3mo MA at 99.26, down from the previous 3mo MA of 102.93 - one of the highest rates of slowdown at 3.57%. 2011-to-date average is at 102.77, down from 2010 average of 104.08 and 2007 average of 103.96.

Ireland (for our local interest) is at 96.99 against Q3 2011 of 96.19 - one of the handful of countries (such as Greece) that shows some improvement. 3mo MA is at 100.40 against previous 3mo MA of 101.00. 2011-to-date reading is at 100.94 against 2010 average of 99.74 and 2007 average of 105.28.

Italy is currently reading at 96.55, down from 97.47 in Q3 2011. Current 3mo MA is at 97.50 down from 100.46 for previous 3mo MA - a decline of 2.95%. 2011-to-date average is 100.58 against 2010 average of 103.93 and 2007 average of 101.69.

Japan current reading is at 101.33 against previous reading of 101.55. 3mo MA at 101.62 down from 102.69 for previous 3mo MA. 2011-to-date average is 102.65 against 2010 average of 100.78 and 2007 average of 102.29.

Spain latest reading is 100.16 against previous reading of 100.65. 3mo MA is at 100.52 against previous 3mo MA of 101.18 and 2011-to-date average is at 101.38 against 2010 average of 102.86 and 2007 average of 102.52.

UK current reading is at 98.64 against previous reading of 99.01, with current 3mo MA of 99.14 against previous 3mo MA of 101.13 (-1.96%). 2011-to-date average is at 101.02 against 2010 average of 103.14 and 2007 average of 102.13.

US current reading is at 100.95 down from the previous reading of 101.25. 3mo MA is at 101.24, down from previous 3mo MA of 102.37 (-1.11%). 2011-to-date average is at 102.20 and 2010 average was 100.39, while 2007 average was 103.20.

In terms of EA17, current reading for the euro area stands at 98.53, down from previous reading of 99.13. 3mo MA currently stands at 99.20 against previous 3mo MA of 101.67 (down 2.43%). 2011-to-date average is at 101.75 against 2010 average of 103.34 and 2007 average of 102.81.

Big Euro Area 4 economies index is now at 98.12, down from the previous reading of 98.77. 3mo MA is at 98.88, down from 101.66 for the previous 3mo MA (-2.74%) and 2011-to-date average is at 101.66, down from 103.77 average for 2010 and 102.44 average for 2007.

Charts to illustrate:

1/1/2012: That debt overhang problem: replay

I am delighted to note that John Mauldin is also stressing the issue of total real economic debt overhang that I have been vocal about for some time now. Here's his 2012 predictions post: http://www.businessinsider.com/mauldin-collateral-damage-2011-12
that also contains this delightful chart:

And, spot the one country that stands out? Yep, that's Ireland - second to Japan in terms of total combined debt/GDP ratio, and well ahead of Japan when GNP is referenced in the above.

I have highlighted the issue of debt overhang and the long term real growth drag exerted by it in a number of articles now, including articles in the Sunday Times, the Globe and Mail, Ireland's Village magazine and on this blog. At last, analysts are starting to pay attention to the issue.

1/1/2012: Groundhog Year 2012 - part 2

And on with another summary of 2011. One side of the euro area economy had a boom year in 2011, unlike the rest of us. The boom, of course, was of a very dubious nature, but it is set to continue through 2012. That side was the ECB balance sheet.

Check out the following charts to spot the 'up year' for ECB's 'assets':

But what about ECB's capacity to carry these? Well, of course, ECB doesn't really function like a regular bank, but were it, with capital and reserves finishing 2012 at €81.481bn against total assets of €2,733.2 billion, ECB's leverage currently stands at 3,354%, which is well above 2000-2004 average of 1,372% and 2005-2008 average of 2,180% and 2009 level of 2,609% and 2010 level of leverage of 2,565%.

And, of course, more financial wizardry to come in 2012, folks. So brace yourselves for another 'up-and-up they go' year at ECB.

1/1/2012: Groundhog Year 2012 - part 1

In the tradition of looking back at the year passed, let's take a quick view of one of my favorite indicators for risk assets fundamentals: the VIX index.

CBOE Volatility Index finished the year well off the inter-year highs, but nonetheless in an unpleasant territory. VIX closed December 2011 at an elevated 23.40, ahead of December 2010 close of 17.75, 2009 close of 21.68 and only behind the December 2008 levels of 40.00. December 2007 close was 22.50 and December 2006 was 11.56.

More unpleasant arithmetic emerges when we consider inter-annual performance. Historical maximum for daily close (from January 1990 through present) is 80.86, while maximum for 2010-present was 48.00 set on August 8, 2011.

The historical average for VIX is 20.57, while the average for January 2008-present is 27.74, for January 2010-present is 23.38 and for 2011 as a whole - 24.20, implying that wile 2011 was not the worst performing year on the record, it was certainly worse than 2010. Table below summarizes annual data comparatives.

Average intra-day volatility actually marks 2011 as the worst year on record. Average intra-day spread for VIX stands at 9.28 in 2011 against 8.97 in 2010-present and 9.08 in 2008-present. And both 3mo and 1mo dynamic standard deviations posted poor performance for VIX in 2011, making it the worst year on the record other than 2009. VIX dynamic 1mo semi-variance closed the year on 7.80 and annual average of 4.26 against 2010 average of 3.96 and 2009 average of 5.78.

Charts below highlight the fact that 2011 was a poor year for fundamentals-based analytics:

All above suggest that volatility is the starting point for 2012. Welcome back to the New 'Groundhog Day' Year.

30/12/2011: Eurocoin December 2011: recession + inflation

Eurocoin - euro area's leading indicator of growth environment - posted another disappointing month in December. December reading came in at -0.20, same as November with 'stabilization' accounted for by improvement in surveys-based indicators for industrial and services firms, offset by material deterioration in actual demand indicators. Core Q4 2011 forecast for euro area growth now moved to -0.2, dangerously close to establishing a full-blown statistical contraction in the economy. More significantly, current growth and inflation conditions pairing pushed ECB policymaking into a proverbial straight jacket corner: rates consistent with inflation remain in the region of 3-times higher than current rate, while rates consistent with growth conditions are about right for the current 1.0% rate.

Charts below illustrate.

3mo MA for Eurocoin is now at -0.18, against 6mo MA of +0.03. YOY Eurocoin is down 141% and the indicator remains at the lowest level since August 2009. Annualized growth rate is forecast is running at -0.798% and 6mo MA annualized growth rate is running at +0.117% (also the worst performance since August 2009).

30/12/2011: Taleb's quote

AN excellent quote from Nassim Taleb via @econbrothers :

"If we attempt to systematically extinguish all forest fires, we will eventually experience a big one".

Which, of course, goes to describe concisely and precisely the fallacy of rescuing all banks that Europe has pursued as a principled policy. The old Schumpeterian creative destruction is a required condition for functioning of the private economy, with the latter being the required condition for functioning of the public economy as well. Bankruptcy - as a tool for clearing the hazardously dead forest of private enterprises - must apply to the banks too.

By underwriting the entire private banking system, the EU has created the Mother of All Hazards - a dry forest with numerous pockets of quasi-extinguished fires burning. Now, all we need is wind...

28/12/2011: ECB: New evidence on public-private pay gap: part 2

As an addendum to the previous post on public-private pay gap study, here are the core results for differences in the pay gap based on various income percentiles:

In the table above, levels of income are referenced to percentiles, so wage differentials are estimated for public-private sector gap per each income percentile. In general, for most countries other than Spain, Ireland and Portugal, "the public sector gap is higher at the lower quantiles and declines along the wage distribution. This is further evidence that the dispersion of the wages in the public sector is much smaller than in the private sector. In this context, public sector employees with low wages earn a higher wage premium relative to higher income employees [again, ex- Spain, Ireland and Portugal]."

In the case of Ireland, the premium lowest for top-earners, second lowest for bottom-earners. The premium rises slightly for 25th percentile and 75th percentile and peaks at 50th percentile. So Irish public sector premium is highest for mid-range earners, lowest for top-range earners, and second lowest for low earners.

28/12/2011: Brain-drain & IRL's knowledge economy

When Government policy-supported brain-drain is compounded by heavily subsidised 3rd level education system, Ireland risks turning into a third world-styled resources supplier to our more dynamic trading partners:

http://www.irishtimes.com/newspaper/ireland/2011/1228/1224309553505.html

HT to @dalkeyhead

That's the 'Knowledge Economy' in the absence of real jobs creation: taxpayers pay for knowledge, private holders of knowledge emigrate to earn private returns, taxpayers pay for more 'Knowledge Economy' boffins and pamphlets... but do not worry - 20 years from now, the IDA will have plenty of new ex-Irish execs in UK, US, Australia, Canada, etc to beg for FDI.