13/1/2012: Irish Household Income and Consumption: Q3 2011

The latest data on disposable income (Institutional Accounts) from CSO presents the picture of real recession ravaging Irish economy. Here are the core details from Q3 2011 - the quarter when Irish economy tanked once again in terms of aggregate GDP and GNP.

• Gross disposable income of Irish households in Q3 2011 amounted to €21,761 million - a decline of 4% yoy and a drop of 4.3% qoq.
• By use of disposable income (separate database proving longer historical series), gross disposable income of households dropped 3.8% yoy and 4.2% qoq.
• Final consumption has declined 3.8% yoy and 2.5% qoq.
• Gross savings of the households fell 3.9% yoy and 11.6% qoq

Using Q1-Q3 2011 data we can compute expected annualized series for 2011, which are shown in chart below. In annualized terms:

• 2011 is forecast to see gross disposable income of Irish households drop 2.9% yoy on 2010 and reach -14.2% cumulative fall on the peak at 2008
• Final household consumption expenditure is set to fall 2.7% yoy and 16.2% on peak at 2008
• Gross household savings is expected to fall 4% yoy and 17% on the peak in 2009

 Of course, in the above, Gross household savings includes repayments of debts, which is reflected in the fact that since the beginning of the crisis, our savings were rising, just as out incomes tanked.

13/1/2012: EU27 External Trade - Greece falling out of trade picture

As German lawmakers are putting pressure on the parties in the PSI negotiations in Greece with calls for Greece to exit the Euro to devalue and regain competitiveness have some serious basis in real economic performance of the country.

Today's data on trade balance across EU27 clearly shows that Greece is unable to sustain serious debt repayments under the current arrangements. Here are the details:

The first estimate for November 2011 euro area (EA17) trade surplus came in at €6.9 bn surplus, against the deficit of -€2.3 bn in November 2010. October 2011 trade balance was +€1.0 bn, against a surplus of +€3.1 bn in October 2010.

In November 2011 compared with October 2011, seasonally adjusted exports rose by 3.9%, while imports remained unchanged.

The first estimate for the November 2011 extra-EU27 posted trade deficit of -€7.2 bn, compared with a deficit of -€16.8 bn in November 2010. In October 2011 the trade balance extra-EU27 was -€11.2 bn, compared with -€9.5 bn in October 2010.

In November 2011 compared with October 2011, extra-EU27 seasonally adjusted exports rose by 2.8%, while imports fell by 0.6%.

EU27 detailed results for January to October 2011:

• The EU27 deficit for energy increased significantly (-€317.5 bn in January-October 2011 compared with -€246.4 bn in January-October 2010)
• Trade surplus for manufactured goods rose to +€198.9 bn compared with +€136.4 bn in the same period of 2010. 
• The highest increases were recorded for EU27 exports to Russia (+28%), Turkey (+23%), China (+21%) and India (+20%), and for imports from Russia (+26%), Norway (+21%), Brazil and India (both +20%). 
• The EU27 trade surplus increased slightly with the USA (+€60.8 bn in January-October 2011 compared with +€60.1 bn in January-October 2010) and more significantly with Switzerland (+€24.1 bn compared with +€16.6 bn) and Turkey (+€21.3 bn compared with +€14.7 bn). 
• The EU27 trade deficit fell with China (-€132.2 bn compared with -€139.8 bn), Japan (-€16.1 bn compared with -€18.3 bn) and South Korea (-€3.9 bn compared with -€9.6 bn), but increased with Russia (-€76.0 bn compared with -€61.1 bn) and Norway (-€38.7 bn compared with -€29.8 bn). 
• Concerning the total trade of Member States, the largest surplus was observed in Germany (+€129.2 bn in January-October 2011), followed by Ireland and the Netherlands (both +€35.9 bn) and Belgium (+€10.1 bn). The United Kingdom (-€98.2 bn) registered the largest deficit, followed by France (-€72.5 bn), Spain (-€40.1 bn), Italy (-€24.2 bn), Greece (-€16.9 bn), Portugal (-€13.3 bn) and Poland (-€12.0 bn).

Some charts:

The charts above clearly show that:

• Of all PIIGS, Ireland is the only country showing capacity to generate significant trade surpluses, with Irish merchandise trade surplus of €2.5bn in November being the second highest in EU 27 in absolute terms and the highest in terms relative to GDP. Exactly the same is true for Irish trade surplus recorded in October. Irish trade surplus in November was almost as large as the combined surpluses of all other countries with positive trade balance, ex-Germany (€2.9bn).
• In November 2011 Ireland posted the third fastest rate of mom growth in exports in EU27 (+8.3%), the effect compounded by the 9.4% drop (4th deepest in EU27) in imports.
• In contrast, Greece posted a 14.4% contraction in its exports in November 2011 compared to October 2011 - the largest drop of all countries in EU27. Greek trade balance in October stood at a deficit €0.1 billion and in November 2011 this widened to €0.2 billion.

So in terms of trade, Ireland is not Greece, and Greece is not showing any signs of ability to sustain internal debt adjustment within the euro structure.

13/1/2012: The need for political reforms

An interesting paper from the World Bank (linked here), by Torgler, Benno, titled "Tax Morale and Compliance: Review of Evidence and Case Studies for Europe" (December 1, 2011). World Bank Policy Research Working Paper Series, 2011 (World Bank Policy research Working Paper 5922) presents an overview of the literature on tax morale and tax compliance. Perhaps unsurprisingly, it finds that accountability, democratic governance, efficient and transparent legal structures, and crucially, "trust within the society" are important in enforcing tax compliance and tax morale.

Which offers an interesting point for observation: in 2011, trust in Irish system of government as measured by the Edelman Trust Barometer stood at 20%, against the average of 52% for 23 countries surveyed in the report, making Ireland the lowest ranked country in the study. 


But things are even worse than the above number suggests: 

• Ireland ranks lowest 23rd in terms of average trust measures across four institutions of government, media, business and NGOs
• The above result is driven by: high trust in NGOs at 53%, although this is still below global trust in NGOs at 61%, high trust in business at 46% against global trust in business at 56%, low trust in media at 38% and abysmally low trust in government.

So may be, just may be, folks, in order to improve our fiscal performance we need deep political and leadership changes at least as much as tax increases and spending cuts? Perhaps, one of the problems with Irish fiscal crisis response to date is that the current Government and its predecessor are not doing enough to make Ireland's elites more accountable, more transparent, and better governed? There's an old Russian saying that every fish rots from the head (although Chinese, British and other nations claim the origin of this phrase as well).

12/1/2012: Q4 2011 Sovereign Bonds performance

Four charts covering Q4 2011 sovereign bonds (CDS) performance:

Data sourced from CMA Global Sovereign Risk Report Q4 2011

12/1/2012: Q4 2011 Sovereign Bonds Report

CMA released their Quarterly Global Sovereign Risk Report Q4 2011 which makes for an interesting reading. Here are some highlights:

"The Eurozone debt situation continued throughout Q4, with the region widening 9% overall. A bail out of Dexia at the beginning of the quarter was followed by continued concerns on Italy’s debt in November and risk of an S&P downgrade of the entire Eurozone in December.

"Nearly all global CDS prices widened during November’s volatile period, clearly indicating the significance of Western Europe to the global economy and the importance of finding a permanent resolution to the debt crisis.

• Italy’s austerity measures failed to move the market tighter in Q3, and the spread widened to a high of 595bp in-mid November. This prompted the end of the Bersculoni era, a new president [obviously, they mean PM] and a new set of austerity measures aimed at reducing the 2 trillion dollars of debt and 120% debt-to-GDP ratio. Implied FX devaluation from a default in Italy is around 17% according to CMA DatavisionTM Quantos.
• Spain and Belgium’s charts were a mirror image of Italy’s.
• Ireland remained relatively stable throughout the quarter, perhaps indicating a balance between a well capitalised banking sector and IMF concerns about the prospects for growth in exports to Europe."
• Greece was the worst performer worldwide (see tables below charts), while Portugal outperformed Ireland

Charts:

Summary of 10 highest and lowest risk sovereigns:

 

So despite our 'gains' in the bond markets, Ireland moved into 6th highest risk position in Q4 2011 from 7th in Q3 2011. 

And amongst the safest bond issuers there are just 2 euro zone countries: Finland and Germany (an improvement on Q3 2011 where only Finland was there).

Here's the summary of our performance since Q1 2009.

11/1/2012: Great Moderation or Great Delusion

A recent (December 2011) paper published by CEPR offers a very interesting analysis of the macroeconomic risks propagation in the current crisis. The paper, titled Great Moderation or Great Mistake: Can rising confidence in low macro-risk explain the boom in asset prices? (CEPR DP 8700) by Tobias Broer and Afroditi Kero looks at the evidence on whether the period of Great Moderation in macroeconomic volatility during the period from the mid-1980s (the decline in macroeconomic volatility that is unprecedented in modern history) had an associated impact on the rise of asset prices that accompanied this period, setting the stage for the ongoing crash.

In recent literature, this rise in asset prices, and the crash that followed, have both been attributed to "overconfidence in a benign macroeconomic environment of low volatility" or to excessively optimistic expectations of investors that the lengthy period of macroeconomic stability and upward trending is the 'new normal'. 

The study introduced learning about the persistence of volatility regimes in a standard asset pricing model of investor decision making. "It shows that the fall in US macroeconomic volatility since the mid-1980s only leads to a relatively small increase in asset prices when investors have full information about the highly persistent, but not permanent, nature of low volatility regimes." In other words, in the rational expectations setting with no errors in judgement and perfect foresight (investors are aware that volatility reductions are temporary), there is no bubble forming.

However, when investors "infer the persistence of low volatility from empirical evidence" (in other words when knowledge is imperfect and there is a probabilistic scenario under which the moderation can be permanent, then "Bayesian learning can deliver a strong rise in asset prices by up to 80%. Moreover, the end of the low volatility period leads to a strong and sudden crash in prices."

Specifically, calibrated model generates pre-collapse rise in asset prices of 77% and overvaluation of assets by 79% over the case of no learning. The subsequent collapse of asset prices is 84% in the case of imperfect information learning.

A pretty nice result! 

11/01/2012: Risk-off or 'Grab that Straw, Man'?

Another day, another historical marker falls under the weight of the euro area mess:

US Treasury auctioned off USD21bn of 10 year notes today achieving the yield of 1.90% - lowest on record for an auction. Cover was 3.19 times the offering, slightly ahead of 3.15 average for previous four 10 year notes auctions. Direct bidders demand was up to 17.4% of sales against the average 10%. 10 year secondary markets yields sliped to 1.91% from 1.97% pre-auction.

Here's the IMF illustration (all charts below are from Cottarelli November 2011 presentation) of the evolution of holdings of US debt:

Which, funnily enough, is pretty diversified when compared to that found in Europe:

But the US yields are, of course, purely irrational:

Then, again, not as irrational as those found in Japan:

Altogether elsewhere, vast... German bund auction - 5 year, €4 billion - attracted cover of 2.24 and the average yield of 0.9%. That is well below inflation - however measured - and even below expected inflation, accounting for the potential slowdown. In other words, investors are now so scared, they are paying German government money to store their cash. In the secondary markets, German 1 year bonds turned negative yield back at the end of November, for the first time in history. German 10-years are currently trading in the 1.87% yield territory. According to FT, 10 year bund yields fell from 3.49% in April 2011 to a low of 1.67% in September last year.

Risk-off raging as EU vacillates... or rather, as its leaders consider how to by-pass Belgian General strike that has derailed their January 30 summit.


Nice one, folks. The insolvent Rome burns, the leaders are having summits galore and the unions are demanding more insolvency, while country output shrinks due to striking.


We are no longer in risk-aversion or even loss-aversion world, we are in a grab-anything-that-might-float world.

10/1/2012: Entrepreneurship and Chaos

In a slight departure from macroeconomic focus of the blog, here are two links to, in my view, pivotal articles on business and entrepreneurship. Pivotal not because they provide the answers, but because they raise questions I suspect will be the most important ones in years to come.

So enjoy:
http://www.inc.com/eric-schurenberg/the-best-definition-of-entepreneurship.html
and
http://www.fastcompany.com/magazine/162/generation-flux-future-of-business

And I would be interested in your views on these as well.

9/1/2012: Week opener: Merkozy continuing to ignore Greek realities

Today's meeting between Sarkozy and Merkel is being framed in the context of continued pressures across the euro area (see report on the meeting here). More ominously - within the context of the euro area leadership duet ignoring the latests warning signs for Greece.

Per Der Spiegel report, IMF has changed its analysis of the Greek rescue package agreed in July 2011 in-line with IMF changes in forecasts for Greek economy in the latest programme review in December 2011. Specifically, IMF lowered its forecast for growth from -3% to -6% GDP.

Der Spiegel cites IMF internal memo in claiming that the Fund is viewing existent Greek programme (including to 50% 'voluntary' haircut on Greek bonds currently under negotiations) as insufficient to stabilize the Greek economy and fiscal situation. The Fund is, reportedly, considering 3 possible options to alleviate the latest set of growth pressures:

• New austerity measures for Athens - a measure that in my view will only exacerbate immediate pressures on Greece and will lead to dangerous destabilization of political situation in the country, leading to even more second order adverse effects on growth (e.g. prolonged strikes and rioting);
• Deeper haircuts on Greek debt held by private institutions - in my opinion this will lead to more contagion from Greece to euro area banks and sovereigns and should be, instead complemented by writedowns of Greek debt held by the ECB, to match existent private sector arrangements;
• Increase in the euro zone bailout funds - in my view, this measure is currently outside the feasibility envelope for Europe and, if attempted, will lead to increased cost of euro area borrowing and have a knock on effect of higher cost of lending to countries currently in the Troika programme. It is also important to note that the EFSF head Klaus Regling is aiming to raise EFSF guarantees to foreign investors to 30%, thus reducing the leverage ratio from 4-5 times to 3 times. This will lower EFSF's theoretical borrowing capacity even further.

The IMF note reports are effectively matched by the statement from the senior Germany Finance Ministry adviser made Saturday, who tole the Greek press that a 50% haircut on Greek debt will not be enough to restore sustainability to Greek fiscal dynamics.

In effect, three of out three IMF 'options' cited will exacerbate the crisis, not resolve it. And there is no Option 4 on the books.

8/1/2012: Irish property prices - History, Equilibrium & Directions to Nowhere Fast

A quick footnote to Brian Lucey's post on house prices:

I often hear people referring to 'historical averages' as price equilibrium indicators. Hmmm... historical and histrionic - here's a snapshot from The Economist data plot:

That pretty much does the trick for anyone still saying we have crossed some sort of the long term equilibrium level... 

7/1/2012: Irish Exchequer Results 2011 - Shifting Tax Burde

In the previous 3 posts we focused on Exchequer receipts, total expenditure by relevant department head, and the trends in capital v current spending. In this post, consider the relative incidence of taxation burden.

Over the years of the crisis, several trends became apparent when it comes to the shifting burden of taxes across various heads. These are summarized in the following table and chart:

To summarize these trends, over the years of this crisis,

• Income tax share of total tax revenue has risen from just under 29% in 2007 to almost 41% in 2011.
• VAT share of total tax revenue has fallen, but not as dramatically as one might have expected, declining from 30.7% in 2007 to 29.7% in 2011
• MNCs supply some 50% of the total corporation tax receipts in Ireland. And they are having, allegedly, an exports boom with expatriated profits up (see QNA analysis last month). Yet, despite this (the exports-led recovery thingy) corporation tax receipts are down (see earlier post on tax receipts, linked above) and they are not just down in absolute terms. In 2007-2011 period, share of total revenue accruing to the corporation tax receipts has fallen from 13.5% to 10.3%. So if there is an exports-led recovery underway somewhere, would, please, Minister Noonan show us the proverbial money?

 So on the tax side of equation, the 'austerity' we've been experiencing is a real one - full of pain for households (whose share of total tax payments now stands at around 58% - some 12 percentage points above it levels in 2007) and the real sweet times for the corporates (the ones that are still managing to make profits to pay taxes, that is). This, perhaps, explains why even those working in protected sectors are talking about their biggest losses coming from tax changes.

7/1/2012: Irish Exchequer Results 2011 - Capital v Current Spending Trends

In the previous posts we considered Exchequer results for 2011 for tax receipts and headline expenditure items. In this post we look at the capital and current spending composition breakdown for total spending.

One core assertion that was made in the previous posts is that capital spending carried the main load of Exchequer spending adjustments in 2011. Overall, year on year, total net cumulative voted spending by the Irish state declined 1.6% or €721 million. At the same time, current expenditure went up by 2.2% or €903 million. Capital expenditure dropped 27.4% year on year in 2011 or €1,623 million.

Table below highlights the yearly changes over the crisis period:

The table above clearly shows that while during the crisis Net Voted Current Spending went up by €663 million, capital spending has declined by €4,265 mln on aggregate. The table also shows that despite all the austerity discourse, our Net Current expenditure was rising in 2010 and 2011, while our capital expenditure was declining to compensate for these increases.

In addition, the table highlights the trend that shows current expenditure rising at accelerating rate in 2010 and 2011 and capital expenditure falling at accelerating rate in 2011 relative to 2010.

If capital spending by the state constitutes either a 'Keynesian' stimulus (as claimed by the Governments over the years) or an investment in future productive capacity of our economy (as also claimed by the Governments in the past), we are now into a third consecutive year of bleeding the economy dry.

And the dynamics are best illustrated by referencing to the longer time horizons:

So current expenditure share of total spending by the Government now stands at 90.6%, up from 2010 level of 87.3% and 1998-2002 average share of 82.3%. On the other hand, capital investment share of total Government spending has dropped from 21.7% average for 1998-2002 period to 21.0% in 2008 and to 14.6% in 2010. In 2011 this share declined to below 10.4%.

 Between 2000 and 2010, Irish State invested in new capital stock some €66.26 billion of funds. Assuming 8% combined amortization and depreciation on this stock implies the need for continued gross investment of ca €5.3 billion annually. This means that 2011 Net Capital Spending fell some €1.01 billion short of covering the depletion of the state-financed capital stock.

The above, of course, is a rather crude calculation, since amortization and depreciation are at least in part covered from the current spending and since we use net voted capital spending figure for the capital stock measurements, but it does clearly suggest that current rates of capital investment cannot be sustained in the long term. And hence, much of the savings that have driven our Exchequer deficit improvements to-date are not sustainable either.