5/3/2012: Services & Manufacturing Employment - PMI data for February

In previous posts I have covered new data on Manufacturing PMI and Services PMI. In this post, I will look closer at Employment sub-indices by these two broad sectors.

As before, all original data is courtesy of NCB, with analysis provided by myself. Some of the indices reported are derived by me on the basis of proprietary models and are labeled/identified as such.

Chart above shows core PMIs for Services and Manufacturing, highlighting the following changes:

• Manufacturing PMI moved from 48.3 in January to 49.7 in February, remaining below 50 line, signaling weaker contraction mom. 12mo MA is now at 50.3 and Q1 2012 average running is 49.0 against Q4 2011 average of 49.1.
• Services PMI has improved from contractionary 48.3 in January to expansionary 53.3 in February, with 12mo MA at 51.0 below february reading. Q1 2012 running average is 50.8 and it is almost identical to 50.9 average for Q4 2011.
• Volatility of Manufacturing PMI had risen from the STDEV of 4.48 in 2000-present sample to 5.62 for 2008-present sub-sample (crisis period), while volatility of Services PMI had fallen from 7.75 in 2000-present to 6.60 in 2008-present.

The chart below summarizes Employment sub-indices for Services and Manufacturing PMIs:

• Employment index in Manufacturing has deteriorated from 49.5 (contractionary) in January to 49.3 in February, with 12mo MA now at 49.9, Q1 2012 running average of 49.4 and Q4 2011 average of 48.6.
• Employment index in Manufacturing has become more volatile during the crisis, with STDEV rising from 4.41 for the sample of 2000-present to 5.51 for the crisis-period sample.
• Employment index in Services has improved from contractionary 44.5 in January to still contractionary 47.9 in February, with 12mo MA at 47.7 and Q1 2012 running average of 46.2 against Q4 2011 average of 47.3.
• Employment in Services is less volatile since the crisis on-set, with STDEV of index running at 6.71 for the sample of 2000-present against crisis period STDEV of 5.64.
• Overall, Employment index in Services is virtually as volatile during the crisis period as the Employment index in Manufacturing. However, before the crisis onset, and historically overall, employment was much less volatile in Manufacturing than in Services. This suggests, given strong growth of our exports in Manufacturing compared to Services, that most of our current exports boom is explained not by real economic activity, but by transfer pricing - a conjecture supported by my analysis of the trade data here. Note, that this is also consistent with lower overall employment and lack of jobs creation despite the relatively strong singlas coming from the PMIs in both sectors.

Charts below clearly show that our 'exports-led' recovery is not creating jobs and is instead associated with overall net jobs destruction continuing to rage across the economy.

So what is going on? we can only speculate, but in my view, 


Reasons why our Services PMI growth is not translating into jobs creation are: 
(1) much of growth is due to transfer pricing via IFSC & likes, 
(2) Maj of services exports are not labour intensive (hours worked) but skills intensive (high-end skills generating high value added), 
(3) Domestic services continue to shrink (retail etc), 
(4) Profit margins are very severely strained - so profitability has ben shrinking since end of 2007 every month, implying cuts in employment to raise productivity, 
(5) Many of jobs in services exports are NOT employing domestic workers as lack of skills drives these jobs into international markets. And these are the growth areas, while domestic employment sectors are shrinking. 


Incidentally, this is not new. 


Since the beginning of data series, in Manufacturing, we had 33 months characterized by rising unemployment and rising exports (exports-led jobless recovery) against 43 months of jobs-creating exports-led growth. So there is a 43.4% chance that any recovery in Irish manufacturing will be jobless. This chance is much higher during the current crisis, with 20 monthly episodes of jobless recovery against just 8 jobs-creating recovery episodes.


Similarly, in Services, since the beginning of the data history, we had 31 episodes of jobless recoveries against 32 episodes of jobs-creating exports growth. So probability of 49.2% is associated with seeing jobless recovery if a recovery is exports-driven. Since the beginning of this crisis, there were 26 jobless exports-growth episodes against only 1 month when jobs growth coincided with exports growth.


The above, of course, show exactly how fallacious it is to anticipate exports growth to translate into jobs recovery.

5/3/2012: Services PMI - some improvement in February

In the previous post (here) we looked at the latest PMI data for Manufacturing. This post updates data for Services PMI. Subsequent posts will deal with employment and profit margins across both sectors.


As before, all original data is courtesy of NCB, with analysis provided by myself. Some of the indices reported are derived by me on the basis of proprietary models and are labeled/identified as such.

Table below summarizes main data:

 
Per chart above, core Business activity in the sector showed improved dynamics in February (53.3 - statistically significantly different from 50) relative to contractionary reading in January (48.3). 12moMA is now at 51.0, while 3mo MA is 50.0, suggesting that the series are returning to the moderate growth trend established since the beginning of 2011.

Per chart below, the trend in overall Services PMI is driven by New Business Activity which also showed significant improvement in February (53.5) against January (49.7), with 12mo MA now running at 49.8 and 3mo MA at 50.2.

The following chart plots a number of sub-indices. The critical one is New Export Orders which shows significant increase mom into solid growth territory. The sub-index rose from 52.8 in January to 55.2 in February, with 12mo MA now at 52.5 and 3mo MA running ahead of that at 53.4.

Another critical sub-index is Employment, which remained disappointingly below 50 mark at 47.9, but improved from 44.5 in January. 12mo MA is at a very poor level of 47.7 and 3mo MA is at even worse level of 46.6. The sub-index has now been showing contraction in employment since May 2011, and barring April 2011 strange move above 50 mark, the sub-index remains signaling rising unemployment since February 2008. I will deal with employment signals in more details in the subsequent posts.

Lastly, February data showed slight moderation in the price deflation in terms of output prices/charges from 46.7 in January to 47 in February. On the other side of the profitability equation, input costs inflation moderated to 54.8 in February from 55 in January. The two indicators combine to result in slowdown in the deterioration in profit margins from 42.5 in January to 48.2 in February. Please note, this is not the same as an improvement in the profit margins. Profitability sub-index is now averaging 44.6 for 12mo MA and 45.3 for 3mo MA. There is basically continued shrinkage in the profit margins for Irish Services suppliers every month since December 2007. More detailed analysis of profitability will be posted in subsequent posts.

In the next post we will look at the Employment signals coming from the Manufacturing and Services PMIs.

5/3/2012: Weak Manufacturing PMI for February

In the next few posts I will be updating the current data on Irish PMIs. This first post will be focusing on core PMI data for Manufacturing. All original data is courtesy of NCB, with analysis provided by myself. Some of the indices reported are derived by me on the basis of proprietary models and are labeled/identified as such.

Taking from the top:

• Core Manufacturing PMI has posted shallower contraction at 49.7 (statistically insignificantly different from 50.0=no change) in February. This signals compounded contraction on January deeper rate of deterioration (48.3).
• 12mo MA for core PMI is at 50.3 with 3mo MA at 48.9. Previous 3mo period average was 38.4, so there is no consistent break from the shallow negative growth trend so far.
• Same 3mo period in 2011 averaged 54.9 and in 2010 - 48.5. Again, data suggests roughly similar dynamics today as in 2009-2010, not 2010-2011 period.

• New orders sub-index reached marginally above 50 in February at 50.1, marking substantial improvement since January 46.8 reading. 12mo MA is at 50.2 - in effect showing no growth in the last 21 months. 3mo MA remains strongly contractionary at 47.6
• New exports orders posted a deterioration and slipped into negative growth territory at 49.7 in February from 50.9 in January. 
• Output subindex clearly shows the established flat trend that is running since mid-2011. Output rose to 50.4 (statistically indistinguishable from 50) from contractionary 47.3 and is now running ahead of 3mo MA of 48.8, but behind 12mo MA of 51.5.

Chart below shows more recent snapshot of data with clear evidence of flat - zero-growth - trend since mid-2011.

Two charts below detail other components of the Index:

• Backlogs of work slightly improved to slower contraction-signaling 43.8 from 41.1 in January
• Quantity of purchases also improved by posting shallower rate of decline at 48.7 agains 47.1 in January
• Critically, February output prices posted deeper deflation at 47 against 48 in January. Output prices are now staying in deflationary territory since August 2011.
• Input prices inflation shot up in February to 60.5 from already inflationary 58.3.
• The two movements above mean profit margins have shrunk in Manufacturing - although more details on this in later post dedicated to profits margins in both Services and Manufacturing sectors.

Real disappointment comes from Employment sub-index:

• Employment sub-index in Manufacturing has posted slight acceleration in contraction from 49.5 in January to 49.3 in February
• The index is now running below 50 - on average - over 12 months. Last 3 mo MA is 49.8, which is down from same period of 2011 when it stood at 51.8.
• Given the above profitability trend, it is likely that Manufacturing Employment will not be posting any serious growth any time soon.

Next post will update data for Services PMI.

3/3/2012: Irish Merchandise Trade 2011 (preliminary estimates)

With some delay, updating Ireland's external trade figures for merchandise trade for December 2011 data. Instead of doing a monthly update, let's take a look at the annual figures. Please keep in mind that December numbers incorporated here are preliminary estimates by the CSO. And do also remember that this is trade in goods / merchandise trade ONLY - the CSO doesn't wish to distinguish it as such in its releases, but this data does not include trade in invisibles / services.

Chart below shows exports, imports and trade balance in goods trade:

•  Imports value posted significant increase in 2011 of 5.65% yoy after a shallow rise of 0.62% in 2010. 3 year average rate of change in imports remains deeply negative, however at -5.13%, a year ago it was -9.85%.
• Exports rose 3.88% yoy, reaching the level of €92.71bn, the second highest level in history after €93.68bn in 2002. Last year, exports rose 5.26% yoy. 3 years average rise now stand at 2.31% against previous year 3 year average increase of 0.05%.
• Trade surplus rose to another historic high of €44.32bn - up 2.0% yoy - a significant accomplishment, but a slowdown in the rate of growth of 10.64% achieved in the 2010. In 2010, 3 year average rate of increases in trade surplus was 19.62% and in 2011 it was 16.64%.
• Record trade surpluses have now been recorded in 2009, 2010 and 2011, implying that the 'exports-led recovery' is now full 3-years strong without a corresponding translation into full economic recovery.

Chart below shows imports intensity of our exports - the ratio of exports to imports expressed in percentage terms.

Per chart above, our exports remain largely divorced from imports, which strongly suggests that the last 3 years (during which imports intensity was well above the historic average of 150%) the core driver for exports and trade balance performance was transfer pricing, not the real economic activity. Chart below illustrates the differential between volume of trade consistent with 9-year MA intensity and the actual volume of trade, with the MA-consistent trend stripping out some recent transfer pricing activity out of the exports figures (note, this, of course, is a highly imperfect measure, so treat the chart as being simply illustrative).

2/3/2012: Nama valuations - January 2012 update

In the previous post I looked at the latest data on residential property prices (link here). Here, let's update the Nama valuations numbers based on January 2012 property prices data.

Table below summarizes referencing of January 2012 numbers to two different dates: November 30, 2009  - the cut-off date for Nama market value assessments, and Q1 2010 - the first time Nama tried to call property market 'bottom'. So 'Loss' on nama book valuations refers to the percentage difference between the cut-off date value of properties and current value of properties according to RPPI - please note, this is an economic loss - not an actual loss to be provisioned for. Nama valuations inaccuracy index is reflection of Nama prediction - implicitly reflected in its business plans - that the property market in Ireland will bottom out in Q1 2010. Weighting to book assumes that on residential portfolio 70% of portfolio in in Apartments and 30% in houses.

Note that in the above I take account of Nama-applied Long-Term Economic Value uplift and net out the subordinated debt cushion of 5% for burden sharing (Nama loss cushion). When you think about it, we are paying six figure salaries to these boffins who are almost 30% wrong in their market predictions just 7 quarters out.

2/3/2012: Lending to Irish SMEs - a pipe dream that keeps piping

A quick thought. RTE reports on CBofI data from the standard banks lending surveys (I can't be bothered to dig through the pile of ECB data files on this right now, so let's take what they have (link here), even though it ain't much.

"Central Bank economists say that the lending conditions imposed by the banks are significantly tougher in terms of collateral requirements, interest rate charges, the size of loans available and the rejection rates. Central Bank Governor Patrick Honahan has said that the authorities have provided unlimited liquidity to the banks at very low interest rates and noted the importance of the SME sector for the economy as the main engine of job creation. ...the Irish Bankers Federation has insisted that banks are lending to SMEs contrary to new central bank research."

So here's a memo to the CBofI front desk:

You (CBofI) spent last 4 years

1. Actively and even preventatively protecting Irish majority-Zombie Banks and larger Investment Firms via regulatory and funding channels, stifling competition and restricting new entries; 
2. You, CBofI, have been incessantly talking about ensuring that the 'banks' are lending into the real economy;
3. You, CBofI, have allegedly 'adequately' recapitalized Zombie Banks for 2011-2013 period under PCARs with so much taxpayers dosh, the country is crocking under the weight of debts;
4. You, CBofI, have actively campaigned to reduce the scope of systemic insolvency resolution, thus, along with (3) above exacerbating investment funds shortages in the country by making sure the 'Banks' capture people's savings into perpetual mortgages & debts repayment scheme;
5. You, CBofI, are running the largest (per supervised institution) sized staff of all NCBs in the euro area and are still hiring new 'talents';
6. You, CBofI, have failed to put in place anything in terms of reforming the banking sector here, other than more protectionism, duopoly, risk de-diversification via geographically targeted deleveraging;
7. You, CBofI, have retained all the staff that was present during the systemic capture of the financial regulation in this country by the very same banks you are now protecting... 

So here's an unpleasant monetary arithmetic the Irish-style:

∑(i=1...7)= Whinging about Toughest Lending Conditions for SMEs in Europe 

What did you guys expect to come out of the above? Healthy, competitive, functional banking and investment sector? Really? I wouldn't call THAT a rational expectation.

PS: I am aware that we have many SMEs in trouble, unable to repay existent debts. But we also have loads of new companies - start-ups and existent enterprises - that can't even get trade finance against clean balance sheets.

2/3/2012: RPPI for January 2012 - Things are Getting Worse, Faster

Residential Property Price Index for January released yesterday shows continuation of a dramatic downward trend in property prices that continues to confound the rents data signals over a number of months now.

Top level data first, followed by Nama valuations-linked analysis in the subsequent post.

1) Overall RPPI has fallen to 67.6 in January 2012, down 1.89% mom (the steepest decline since October 2011) and 17.36% yoy (the largest annual drop since January 2010). 3mo MA now stands at 68.87 and 12mo average rate of change is -1.58% monthly.

2) Index for house prices nationally fell to 70.4 in January from 71.7 in December 2011, implying a monthly decline of 1.81% - steepest since November 2011. Annual rate of decline is now 17.08% - the fastest rate of decline since December 2009. Annual rate of decline has been now rising every month since July 2011, same as for all properties RPPI.
3) Apartments prices index fell to 51.2 from 53.5 in December 2011, implying a 4.30% decline mom and 20.87% drop year on year. This marks the sharpest rate of monthly decline in prices since August 2011 and the sharpest drop year on year since March 2010.

4) Dublin properties index now reads 58.3 compared to December 2011 reading of 60.7. Mom prices are down 3.96% - sharpest on the record and yoy prices are down 21.11% - sharpest since February 2010.

Overall, relative to peak:

• All properties index is down 48.20%
• House prices index is down 46.67%
• Apartments prices are down 56.82%
• Dublin property prices index is down 56.65%

 Acceleration in declines in index readings is present for:

• All properties index since November 2011 for monthly changes and since July 2011 for yoy changes
• House prices index since December 2011 for monthly changes and for yoy changes since July 2011
• Apartments prices index since November 2011 for monthly and yoy changes
• Dublin property prices index since October 2011 for monthly changes and since July 2011 for yoy changes

In other words, things are getting worse faster.

2/3/2012: Few recent links

To tidy up a reading list:

1. Harald Uhlig's excellent essay on economics and reality - the links between empirical, implied and theoretical analytics. Worth a read. Link here.
2. Technical, but nonetheless insightful article on the returns differentials for actively v passively managed funds by Diane Del Guercio and Jonathan Reuter "Mutual Fund Performance and the Incentive to Invest in Active Management" NBER WP17491. The main results: known fact = actively managed funds underperform index funds in comparisons when returns considered exclude considerations of costs and services differentials. The study controls for differences across various mutual funds by controlling for 3 market segments: retail funds sold to investors, retail funds sold via brokers and institutional funds. The study finds that underperformance is strongest in the broker-sold segment and weakest in the directly sold funds segment. Authors find that "within the direct-sold serment, the risk-adjusted, after-fee returns of actively managed funds are statistically indistinguishable from those of index funds". Furthermore, "to rationalize differences in performance, we test for differences in the flow-performance relation across the three segments. We find that fund flows respond most strongly to risk-adjusted returns in the direct-sold segment. We find a wide variety of evidence that direct-sold funds respond to investor preferences for risk-adjusted performance by investing more in active management. Our findings suggest that the underperformance of the average actively managed fund reflects its weaker incentives to generate alpha rather than an inability to generate alpha. We argue that our findings also help to explain the continued demand for actively managed funds."
3. Another interesting paper from NBER by David Hummels et al, titled "The Wage Effects of Offshoring: Evidence from Danish Matched Worker-Firm Data" (WP17496) looks at offshoring and exporting effects on wages by skill-types. Per study: "We find that within job spells, (1) offshoring tends to increase the high-skilled wage and decrease the low-skilled wage; (2) exporting tends to increase the wages of all skill types; (3) the net wage effect of trade varies substantially across workers of the same skill type; and (4) conditional on skill, the wage effect of offshoring exhibits additional variation depending on task characteristics. We then track the outcomes for workers after a job spell and find that those displaced from offshoring firms suffer greater earnings losses than other displaced workers, and that low-skilled workers suffer greater and more persistent earnings losses than high-skilled workers."
4. Great paper on the effects of the Euro crisis on non-financial European firms by Stijn Claessens, Hul Tong and Igor Zuccardi (IMF Working Paper 11/27), titled "Did the Euro Crisis Affect Non-Financial Firm Stock Prices Through a Financial or Trade Channel?" The study finds that for stock price responses over the past year for 3045 non-financial firms in 16 countries: (1) policy measures announced impacted financially-constrained firms more, particularly in creditor countries with greater bank exposure to peripheral euro countries, and (2) trade linkages with peripheral countries also played a role, with euro exchange rate movements causing differential effects.

29/02/2012: New Old Mini Budget?

Having predicted in my comments on Budget 2012 that we are likely to see an Emergency Budget 2012 closer to half-year results, I thought I was making just a risk assessment, backed by the confusion prompted by the DofF release of two rather significantly distinct forecasts for growth between two days of the Budget 2012 announcement. And now this.

Of course, the development of Budget 2012 took place under the assumed growth rate x2 of what is now being forecast by the IMF, the OECD & the EU Comm and roughly x3 times what is being predicted by other markets participants. My own forecast range is for -0.2 to 0.5 percent growth which at the upper range puts it at roughly 1/3 of the Budget assumptions. These developments since Budget 2012 release bound to rationally drive the Troika to push for revaluation, but one must wonder why on Earth would these not be made public to the people of Ireland? Why do we have to learn this from a leaked document from Germany?

28/02/2012: Reforms in Ireland - at risk? (Sunday Times 26/02/2012)

My Sunday Times article from 26/02/2012 - unedited version.

So far, the explosive nature of Greece’s crisis has been a boon for Ireland, as international perceptions of our economic and fiscal fortunes have turned more optimistic in some analysts’ and investors’ circles. This shift in the sentiment, however, may be threatening to derail the already fragile momentum for economic reforms here.

Irish budgetary dynamics for 2011 were largely on target, although this achievement conceals significant pressures on the tax receipts side and the lack of real progress in tackling runaway spending in three core current expenditure areas – Social Welfare, Health and Education. In fact, much of the previous deficit adjustments have been based on the Governments picking the low hanging fruit of capital spending cuts, administrative savings, and substantial tax increases, soaking the middle and upper-middle classes. Budget 2012 was pretty much the firs attempt by the Irish Government to rebalance the overall budgetary dynamics that, since 2008, have penalized higher-skilled and entrepreneurs. It is hard to see how this approach of piecemeal changes targeting the path of political least resistance can continue delivering ever-rising levels of fiscal adjustments already pencilled in for 2012-2015, let alone maintain the budgetary discipline thereafter.

Accounting for the delayed December 2011 tax receipts that were incorporated in January 2012 figures, the Exchequer deficit in the first month of 2012 was €160 million ahead of that recorded in January 2011. This gap shows that the pressure on Ireland’s fiscal dynamics has not gone away.

There is a more fundamental problem looming on the horizon – the problem of growth. To deflate the public debt that is now well in excess of 107% of our GDP and climbing, we need some serious economic growth. On average, over the next 10 years, we will need growth of over 3% annually over and above inflation in order to bring our Government debt down to 90% of GDP. To sustain some private sector debts deleveraging will require even higher rate of growth. Compare the current situation with that in the 1980s and the maths required for budgetary and households’ deleveraging become dizzyingly high.

In Q3 2011, Ireland registered the twin contraction in GDP and GNP and majority of the analysts expect the same for Q4 figures. For the year as a whole, we are likely to post approximately 0.9% real GDP expansion. Forecasts revisions for Irish economic growth have been driving us beyond the bounds of the fiscal targets we set out for this year. The Budget 2012 assumed economic growth of 1.3% against the IMF, Central Bank, EU Commission, and ESRI forecasts of 0.9-1.1% growth. More recent February forecasts by the markets analysts and ESRI put the range for 2012 growth at -0.5% to 0.9%. Much the same is true for forecasts out to 2015, with Government growth prognoses coming in at a rather optimistic 2.43% annual average against IMF November 2011 projection of 2.25%. Taking the lower range of most current forecasts, the shortfall on Government current assumptions for growth can be as high at €5 billion – a sizeable chunk of change. Under the adverse shock scenario by the IMF, if average growth were to decline to 1% of GDP – a statistically plausible assumption – the shortfall will be close to €10 billion.

This means that the pressure is still very much on to deliver on 2012-2013 fiscal deficit targets of 8.6% and 7.5% respectively. More importantly, the entire recovery framework for Ireland is clearly misaligned. Instead of focusing on the simple short-term targets for fiscal deficits, Irish Government must focus on long-term growth environment. Putting the patient – the Irish economy – ahead of the disease – the fiscal and household debts overhang – is a must.

This puts into the context the events of the last two weeks. Specifically, it highlights the levels of unease with Irish Government plans being expressed, for now rather quietly, by some markets participants. It also underpins the subtle change in the Government own signals to the Troika. And, it is simultaneously contrasted by the Government public rhetoric that has been stressing the PR spin over sombre determination to act. Virtually all recent actions suggest that the Government is hoping that something will happen between now and 2013 to miraculously restore growth, thus alleviating the need for serious corrective measures on the current expenditure side.

First, take the Memorandum of Understanding (MOU). Last week, the Government review of budgetary adjustments targets stated that 2013 fiscal savings will be “at least €3.5 billion” (page 14 of the MOU). The subtle change of language from the November 2011 version of the MOU which did not include the words ‘at least’ in relation to 2013 target might be a sign that the Government is being forced to accept the reality of its multiannual growth projections being overly optimistic in the current global and domestic growth environments.

Yet, when it comes to outlining reforms agenda, the MOU contains nothing new compared to its previous versions. The already inadequate set of measures on dealing with personal debt announced last night is presented as the end-all reform. Dysfunctional energy and utilities sectors are barely covered with exception for one specific measure – creation of the unified water management bureaucracy. Inefficiencies in the domestic services sectors, poor institutions relating to supporting competitive markets in these sectors and labour markets reforms are treated with generalities in place of tangible proposals. Vague promises of reforms of social welfare system and structural reforms in the state enterprises sector and financial services unveiled and partially actioned in the past are simply repeated once again in the current MOU.

In contrast, the Government has claimed this week that it has rather specific targets for yet another spending project – the ‘jobs creation’ efforts to be financed via privatizations returns. In other words, unlike Charlie McCreevy who spent the money he had, Minister Noonan is eager to spend what he hopes to have. To-date, Minister Noonan has managed to spend quite substantial funds on ‘jobs creation’ with various announcements taking potential total bill for these initiatives to well over €1 billion annually. Outcomes? Well, none, judging by the QNHS and Live Register data. The JobBridge programme is a resounding failure with the vast majority of ‘apprenticeships’ in effect displacing real jobs that would have been created through the normal course of business growth. The ‘Vat stimulus’ to tourism and hospitality sector is another failure. Fas restructuring is shambles.

The privatization plans, supported by the ESB and other state monopolies, are clearly designed to minimize any potential disruptions in the status quo of the semi-states-dominated sectors. Thus, privatization-induced changes in the energy and transport sectors will be purely cosmetic, the structure of the regulated markets will remain as anti-consumer as ever. Vast swathes of the domestic economy will remain protected from private investment and enterprises as ever.

Despite major risks present in the global and domestic economic environments, the Irish Government is slipping into the comfort zone of PR exercises, photo opps, and foreign ‘investment missions’.

By postponing the reforms necessary to boost our economic growth potential, the Government currently is putting an undue amount of risk onto the Irish economy. Its gamble is that sometime over the next 9-12 months Irish economy will be propelled to a miraculously higher growth plane and that this growth will be sustained through 2015 and thereafter. In the mean time, the Government will spend its way into jobs creation, while protecting its vested interests of the shielded sectors and avoiding any real structural reforms.

Chart:

Sources: IMF WEO database and country updates

Box-out:

Much of the latest attention paid to the external trade data has been devoted this month to the sudden and rapid slowdown in exports over the recent months. And this analysis is very much correct: in H1 2011, Irish goods exports and trade surplus grew by 6% and 2.5% respectively. In H2 2011, the same rates of growth were 1.9% and 1.5%. However, there are some very interesting trends emerging from the trade statistics by geographical distribution. Using eleven months data for 2011, annual rate of growth in Irish trade surplus vis-a-vis the EU is likely to come in at -1.7%, against the overall annual rate of growth of 1.5%. In contrast, Irish trade balance with Russia is likely to rise a massive 92% in 2011 compared to 2010. Our trade deficit with China is likely to decline by 9%. Although our trade deficit with India is expected to widen by almost 11%, our trade surplus with Brazil is on track to increase by almost 32%. Courtesy of Brazil and Russia, Irish trade surplus with BRICs in 2011 is likely to have reached close to €238 million, first year surplus on record.

28/02/2012: The truth behind the ELA

We are made actors in the theater of absurd, folks.

Anglo & INBS are now fake banks with their banking licenses retained solely to prop up their ability to borrow from the euro system and for no other reason.

These 'banks' are made up to look like some quasi real entities by a fake lending scheme (ELA) which was conceived by the complacent Government and Central Bank with a nod of the conveniently 'see no evil' ECB.

The sole objective of this scheme is to continue faking the system stability of the Euro area banks many of which are now barely alive themselves. The scheme operates like some Madoffian Dream with banks pretending to use collateral (which in effect is rather dodgy in many cases and assumes that Spanish Government bonds are as risk free as German Government bonds) to borrow money they can't really be expected to repay (does anyone really think LTROs 1 & 2 can be unwound by calling in the loans or liquidating the 'assets' repoed?) so they can buy more Government bonds and put borrowed money on deposits, thereby creating fake demand for Government bonds (lower yields lead to a pack of idiots claiming that Government debt is now sustainable as its cost 'came down') and increasing headline 'deposits' figure for ECB (pretending there is no liquidity shortage in the system).

Of course, the very reason for this ever-growing pyramid of deception is the very same as the underlying cause of this mess - a currency union conceived solely to promote political objectives of the ever-expanding EU. Nothing else.

The only real thing about this mess is the money Irish Government takes out of the pockets of its residents to dump into this pyramid. Nothing else.

To use a literary analogy, it's not that we are about to hear a child scream 'The King Has No Clothes' that is the most apparent feature of this circus. It's that we have NCB, ECB, National Government, EU Commission and Parliament and courts all acting up in collusion to deport all children from the town, lest they might see that the king is, indeed, naked.

26/02/2012: What happens when debt is too high and taxes are distortionary?

An interesting paper: Public Debt, Distortionary Taxation, and Monetary Policy by Alessandro Piergallini and Giorgio Rodano from February 7, 2012 (CEIS WorkingPaper No. 220 ).

In traditional literature, starting with Leeper’s (1991):

• if fiscal policy is passive (so that it simply focuses on a guaranteed / constitutionally or legislatively mandated public debt stabilization irrespectively of the inflation path), 
• then monetary policy can independently be set to focus solely on inflation targeting (ECB) ignoring real economy objectives, such as, for example, unemployment and growth targeting. 

The twin separate objectives of fiscal and monetary policy can be delivered by following the Taylor principle. This means if the monetary authorities observe an upward rise in inflation, they can hike nominal interest rates by greater proportion than the rise in inflation. This is feasible, because in the traditional setting, fiscal policy objective of sustaining public debt at stable levels can be achieved - in theory - by raising non-distortionary taxes that are not linked to inflation (for example, distortionary VAT and sales taxes yield revenues that are linked to inflation, so monetary policy to reduce inflation will lead to reduced economic activity and reduced revenues for the Government at the same time; in contrast, non-distortionary lump sum taxes yield fixed revenue no matter what income or price level applies, so that anti-inflationary increase in the interest rates is not going to have any impact on tax revenue).

Of course, if fiscal policy is active (does not focus on debt stabilization), monetary policy under Taylor rule should be passive (so interest rates hikes should of smaller percentage than inflationary spike). Such passive monetary policy will allow Governments to inflate their tax revenues without raising rates of distortionary taxation and

In many real world environments Governments, however, can only finance public expenditures by levying distortionary taxes (progressive taxation). So in this environment, the question is - what happens to the 'passive fiscal - active monetary' policies mix? According to Piergallini and Rodano, "It is demonstrated that households’ market participation constraints and Laffer-type effects can render passive fiscal policies unfeasible. For any given target inflation rate, there exists a threshold level of public debt beyond which monetary policy independence is no longer possible. In such circumstances, the dynamics of public debt can be controlled only by means of higher inflation tax revenues: inflation dynamics in line with the fiscal theory of the price level must take place in order for macroeconomic stability to be guaranteed. Otherwise, to preserve inflation control around the steady state by following the Taylor principle, monetary policy must target a higher inflation rate."

Ok, what does this mean? It means that if you want passive rules (public debt targeting - e.g. fiscal compact EU is trying to legislate) you need inflation (to transfer funds to the Government from the private individuals and companies).

Per authors: "The analytical results derived in this paper give theoretical support to the argument recently advanced by Cochrane (2011) and Davig, Leeper and Walker (2011) that the large fiscal deficits decided by governments to offset the crisis can lead to the “Laffer limit” beyond which inflation must endogenously jump up according to the fiscal theory of the price level."

Now, we often hear the arguments that in the near term there will be no inflation as slow growth will prevent prices from rising. Sure, folks. Good luck with that.