13/3/2012: Irish PMIs - signaling continued weakness

An unedited version of my Sunday Times article from March 11, 2012.

This week, NCB along with Markit released the set of Purchasing Managers’ Indices (PMI) for the Irish economy, covering both Manufacturing and Services sectors. These indices are the best, albeit imperfect, leading indicator for growth, exports, corporate profits and employment in this economy and the picture they are presenting is that of continued weakness in Q1 2012 on the foot of deterioration recorded in Q4 2011. A picture that further confirms my earlier observation that Irish economy has entered a period of heightened volatility along a flat-line trend of near-zero growth.

Overall, headline reading for Manufacturing PMI shows that February activity in the sector remained broadly stable. The index of 49.7 was not significantly different from 50 – the level that marks zero growth. This marked the fourth consecutive month of below 50 index results, consistent with a shallow contraction in the sector. In contrast, Services sector index rose in February to a growth-signaling 53.3. This marked the break with previous two months when the index readings were below 50. With 6 months moving average at 50.9, the surveys of purchasing managers suggest that Services are, broadly speaking, on a flat growth trend.

The core drivers for the two sectors’ performance have been changing in recent months.

In Manufacturing, new orders that generally lagged growth in new exports since November 2011 are now the main driver of activity to the upside. New exports have fallen into contraction territory in February for the first time in three months, while overall new business posted flat performance for the first time after three months of declines. This signals that consumer goods producers, rather than MNCs-led goods exporters, drove the overall change in the sector activity. In longer-term trends, new orders are still signaling contraction at 48.3 and new export orders are stagnant at 50.0 on average over the last six months. It appears that our exports-led recovery has run out of steam in Manufacturing – having posted shallow expansion over the last 12 months, as exports growth fell to zero since September 2011 and new orders have been on the declining trend since June 2011.

In contrast, Services show continued exports-driven growth. Thus, new business orders came in at a relatively positive 53.5 in February underpinned by faster growth in new exports at 55.2. Although weak performance of the new business activity in the sector was present in virtually all months since March 2011, this February indicator was the strongest in seventeen months. Overall, new exports posted on average modest growth at 52.5 in 12 months through February 2012 a slowdown on 53.4 average recorded over the last 2 years.

All of this suggests no uptick in the overall economic growth as measured by GDP and GNP in Q1 2012. More critically, the data signals potential deterioration in the underlying external trade balance for Ireland. The reasons for this are two-fold. On the one hand, slower activity in Manufacturing has resulted in slowdown of inputs purchases in previous months, meaning that firms have been exhausting their stocks of inputs into production. This, in turn, sustained suppressed levels of imports over the last ten months that contributed positively to overall trade surplus and our GDP in the past. Going forward, either imports must accelerate to support exporting activity or exports must drop, which is likely to show up in the national accounts as a negative for GDP.

On the other hand, continued collapse in profit margins in both sectors will put pressure on value added in the economy, further undermining any growth momentum we might have. Contrary to the reports from the CSO, which uses aggregated data skewed by larger firms’ and multinationals’ earnings, both manufacturing and services PMIs have been showing sustained decreases in profit margins over much of the crisis.

Thus, input costs inflation in Manufacturing accelerated in February to the highest levels since June 2011, driven by higher raw materials and energy costs, compounded by a weaker euro. We are now in a third consecutive month of rising costs in Manufacturing. In fact, last time trends showed a decline in inputs costs was in December 2009. At the same time, producers continued to cut their gate prices in February for the seventh month in a row. In the last 12 months, average index reading for input costs inflation stood at a massive 61.9 against output prices being close to flat at 50.9. Much the same is taking place in Services sector, where inputs costs remain on inflationary path since December 2010 and output charges have been showing uninterrupted deflation since August 2008.

In contrast with the latest QNHS results for Q4 2011, the PMI data shows tightening, not easing conditions for jobs creation and employment in both sectors of the Irish economy. In Manufacturing, February marked a 46^th consecutive month of falling inventories and in Services, with exception of just one month, this trend prevails for all periods since August 2007. This implies that both sectors continue to run spare productive capacity and are basically holding out on significant cuts in production and employment only in a hope of a turnaround in some near-term future.

In contrast with PMI data, this week’s QNHS data showed quarter-on-quarter seasonally adjusted rise in employment by 10,000 with increases in seasonally-adjusted employment taking place across a number of sectors such as Industry, Accommodation and food service activities, ICT, Financial, insurance and real estate activities, Public Administration, and Human health and social work activities.

Alas, more comprehensive reading of the CSO data shows that the headline 10,000 figure was driven by a number of factors completely unrelated to actual jobs creation.

Real employment in Q4 2011 relative to Q3 2011 was up not by 10,000, but by 2,300, with full-time employment falling by 700 and part-time employment rising by 3,000. Which suggests that seasonal adjustments made to the data could have been impacted by significant changes in employment since the beginning of the crisis and not by actual jobs creation. Critically, the number of part-time workers who consider themselves not to be underemployed fell 2,800, while the number of part-time workers who reported being underemployed rose 5,800. Year-on-year changes clearly show that overall employment remains on a decline and the only growth category of workers since Q1 2011 is that of underemployed part-timers.

The above suggests that most, if not all, of the new jobs showing up in the seasonally-adjusted data represent additions arising from the JobBridge training initiative and reflect the effects of past employment contractions on seasonal adjustment. This is further reinforced by age and occupational analysis of the CSO data.

Reinforcing the above conclusions, PMI data for Services has been signalling not a growth, but a contraction in employment over the last 10 months, with February 2012 reading of 47.9. In fact, Services employment has been on a continued uninterrupted decline since March 2008, excluding only one month of increases in April 2011. Manufacturing employment activity has been now declining in five of the last six months, clearly contradicting seasonally adjusted data from QNHS.

Correlations between new exports orders, new orders and employment data from PMIs very clearly show that in January-February 2012 we have moved into a jobless recovery territory in Services, characterized by positive annual growth in exports and declining employment. In Manufacturing, where exporting boom has been now running over 3 years, we are in the jobs destruction and stagnant exports territory for the last two months running.

CHARTS: PMI-signalled Economic Activity: Manufacturing and Services

Source: Author own calculations based on NCB and Markit data

* Q1 2012 data is based on January-February averages

Note: In charts, negative values show contraction in activity, positive values signal expansion

Box-out:

In recent weeks we have seen some significant disagreements emerging within the Troika. Whilst the ECB remains silent on the issue of sustainability of Irish Government debts, the IMF appears to believe that we should be allowed to restructure at least some of our banking sector liabilities. The EU Commission in its March 2012 review of Ireland’s participation in the bailout programme clearly thinks that further deterioration in our growth conditions and/or renewed credit crunch  “could require additional fiscal tightening later in the year”. This clearly shows that the EU Commission will require Ireland to bring its fiscal performance back in line with the targets set out in the programme by enacting new cuts should any deterioration materialise. However, the IMF review of Ireland’s participation in the programme, released at the very same time as that by the EU, states that should growth slowdown lead to Ireland jeopardizing its programme commitments on the deficit side this year, the Government can let the targets slip this time around, “to avoid jeopardizing the fragile economic recovery as envisaged under the program.” You know something is amiss within the Troika, when the IMF starts cautioning its overzealous partners not to derail recovery for the sake of sticking to fiscal targets.

13/3/2012: CDS moves

On the day Fitch upgraded Greece to B-/Stable from selective default rating, some PIIGS continued to get hammered: 5 year CDS moves with implied probability of default:

Courtesy of CMA.

And per @forexlive - here's analysis of the Fitch move:

"Fitch has begun rating Greece’s new issues at B-, which is deeply into ‘junk’ territory. To put that in perspective, it’s eight notches below Ireland, which Fitch has rated at BBB+ and six notches below Portugal at BBB-. It’s also below Rwanda, Argentina and Ukraine. The current yield on the new 10-year benchmark is 19.01%."

Yep, markets have a strange 'memory'...

12/3/2012: Summary of latest CDS moves

A neat summary from 9/3/2012 note by markit for 5-year CDS:

And let's leave it without a comment.

H/T to @EconBrothers 

12/3/2012: Why the 'trackers deal' is bad news for Irish mortgagees

The news galore surrounding the Promissory Notes (usually reported cheerfully with the customary references to unnamed sources as to the eminence of the 'deal') and so-called 'lobbying' by the Irish Government to restructure more broadly (un)defined 'banks debts' is continuing to gain momentum day after day, with no actual real signs of anything tangible being done. 


But the real news here is what is being 'rumored' and 'discussed', not the actual feasibility of the 'deal'.


Per reports and Ministerial statements, Ireland is lobbying ECB / EU Commission /EU in general (whatever that means) to allow the country to alter the burden of the IBRC Promissory Notes and, crucially, as per last night news - restructure loss-making tracker mortgages on the balancesheets of its banks.


Minister Noonan stated yesterday on RTE that the discussions on the promissory notes also included the possibility of 'shifting' loss-generating (for banks) tracker mortgages off banks balancesheets into IBRC. The problem, of course, is that these mortgages account for ca 53% of all mortgages held/issued by the Irish banks in relation to the residential property. The rates of default on tracker mortgages is lower than that for ARMs


The banks are complaining loudly that their funding costs exceed the tracker mortgages returns due to low ECB financing. So the real issue here is that the banks are facing state-imposed 'reforms' that are in effect forcing them into future losses on tracker mortgages. The current losses are due not to the actual tracker mortgages problems, but due to the banks prioritizing bonds and debt repayments (raising cheap funding to do so) while complaining about losses on tracker mortgages.

Alas, something is seriously off in this argument for the following reason. Irish banks largely fund themselves at ECB rate via LTROs and normal repo operations. What 'funding costs' they have in mind, beats my understanding of their operations. So the whole issue is a red herring. The banks simply make too small of a margin on these mortgages to use them to cross-subsidize market funding access. That's the real story - the story of the potential loss, not actual loss.


How bogus the issue is? Bank of Ireland doesn't even bother to identify specific losses or any issues relating to tracker mortgages in its latest interim report.


So overall, the issue is a bogus concern for mortgagees covering up the real desire of the Government to provide yet another rescue line of taxpayers' funds to the banks. In other words, the move of tracker mortgages will do absolutely nothing to alter the conditions of loans repayments or costs of these mortgages to the mortgagees. Nor will it reduce the mortgagees debt. Instead, it will simply shift lower margin products off banks balancesheets, allowing the banks to gouge their ARM holders with higher margins over the ECB rate without direct comparative (transparent) pricing to tracker mortgages. More opacity, higher margins, no help for tracker mortgagees, shifting more burden of banks bailouts onto ARM mortgagees - that is, in the nutshell, what Minister Noonan's game plan appears to be.

12/3/2012: Social partnership is Ireland's institutionalized corruption

This is an unedited version of my article for the current edition of the Village magazine.

Illegal corruption – in its various forms and expressions – is hardly a rarity in Irish society. So much we know. Perhaps less well understood, are the legally permitted forms of corrupt behaviour that contribute to social and economic degradation and undermine democratic institutions and state legitimacy.

Economists identify corrupt activities to include illegal abuses of the system, such as bribery, cartels,  explicit collusion, price fixing, and embezzlement. But corruption also includes activities that fall into grey areas of the law – tacitly allowed: cronyism, nepotism, patronage, implicit collusion, and influence-peddling.

Over the years, the Irish state recognised that both types of these activities exist in the realm of private and semi-state business, and in order to restrict the former forms of illegal corruption, has decided unofficially – of course – to give the perpetrators of the latter quasi-legal ones the strongest political representation in the land – direct access to policy formation. In recent decades our Government and elites Left and Right, went so far as to institutionalise the arrangement.

Since 1987, Social Partnership has constituted a closed shop with membership restricted to select organisations, representing certain subsets of Irish society. Since this membership restriction is codified and since Partnership is explicitly concerned with fixing prices for some forms of capital and inputs into production (for example – wages, that serve as the compensation for human capital, and via planning restrictions linked to State-determined development agenda, to land), it is both de jure and de facto a cartel. That it is a public cartel, as opposed to a private one, does not change its corrupt and corrupting nature.

This cartel actively and with State support promoted policies that led to gross distortions of the markets and of competition between the market players; and also led directly to the relegation of the State’s duty of care to consumers and ordinary investors. An unobservable, but nonetheless equally distorting feature of the system is the effect this system had on preventing formation of competitive enterprises and entrepreneurship, as Social Partners colluded to restrict and re-allocate (to their benefit) investment and employment opportunities, and re-shape the space of new policy ideas formation, formulation and expression.

Social Partnership rubber-stamped a policy of ‘Never at Fault, Never Responsible’ for our financial regulatory and supervisory regimes. It trumpeted the culture of unaccountability in the public and protected private sectors. Without Social Partnership support, it is hard to imagine the State sustaining the very regimes that led to open, but never-prosecuted violations of the law (e.g. breaches of regulatory liquidity-requirements), ethical codes (e.g. loans-for-shares machinations and misclassifications of deposits), MiFID (Markets in Financial Instruments Directive) requirements (e.g. the mis-selling of investment products by at least four banks in Ireland, explicitly uncovered two years ago) and violations of prudential ethics in financial regulation (e.g. resistance to full public-data disclosure and investor-suitability testing and protection in the case of property transactions).

Neither the Unions, nor any other Social Partners stood up at the Partnership Table in support of the handful of whistleblowers pointing to the above failures. The ‘straw man’ argument is that the Unions always advocated ‘more regulation’. Alas, history shows that other priorities miraculously took precedence time and again over the proper regulation of finance, the protected professions, quangos and pretty much every other aspect of Irish governance. These, of course, were pay and conditions for the Unions’ members, slush-funds for ‘training’ and ‘research’ activities, and state-board appointments, including to the boards of financial regulation and supervision bodies. Having been bought by the ‘robbers’, the self-appointed ‘cops’ have, since the late 1980s, stayed nearly silent lest they damage the regulatory charade performed by the Government and rubber-stamped by their own members in charge of the regulatory bodies.

The Unions, of course, were neither unique, nor the most active participants in regulatory capture of the state by vested interests. Irish semi-state companies, banks, protected professions and public sector own (outside the Unions-led) self-interests were. Nonetheless, by deploying the rhetoric of ‘integrity’ and by relying on the arguments that their actions ‘protected the vulnerable’, the Unions were some of the most damaging – ethically speaking – players in the game.

In effect, the Irish state didn’t just tolerate corruption, it actively managed and encouraged it. Even debating the merits of the form of corruption embodied by Social Partnership shows how instrumental ethics replaces real values when the cancer of corruption metastases. Social Partnership is simultaneously a collusive cartel, a conduit for influence peddling, a vehicle for patronage and a price-fixing mechanism. Its goal is to preserve the status quo of wealth and income distribution, skewed in favour of the Partners.

It should come as no surprise that in 2011, Ireland ranked 19^th in the Transparency International Corruption Perception Index (CPI) – the lowest of all small open economies in the Euro Area, bar Estonia and Cyprus. As the Moral Sages of our Left ardently decry market economics, its flagships – New Zealand (ranked 1^st in the world), Singapore (5^th), Switzerland (8^th) and Hong Kong (12^th) – are less corrupt than the Social Partnership-governed Ireland. In Political Risk Services International Risk (PRSIR) rankings, Ireland is placed between 26th-31^st in the world – alongside Uruguay, the UAE, Botswana, Israel and Malta. The only euro area country that scores below us for overall political risks is Estonia.

Higher corruption overall is associated with a significantly lower quality of economic institutions. The correlation between the CPI score, the Economist Intelligence Unit Country Risk Assessment score, the IMD World Competitiveness score and the PRSIR score is in excess of 0.9 or, in statistical terms, nearly perfect. This shows the costs we pay for corruption in terms of economic institutions quality.

In 2011, in Ireland, trust in the Government as measured by the Edelman Trust Barometer – another metric of democratic institutions quality that correlates strongly with CPI – stood at 20%, against an average of 52% for the 23 countries surveyed in the report, making Ireland the lowest ranked country in the study. On the back of 2011 elections, the reading rose to 35% in 2012 and remains significantly below the 43% global average. As of today, of all institutions of the society – private and public – the Irish Government has the lowest trust of its people compared to businesses and NGOs, and equivalent to that of the Irish media.

Years of institutionalised corruption, sanctioned by the State and sanctified as Ireland’s panacea for industrial conflict and policy stalemate – Social Partnership – have definitely come home to roost.

11/3/2012: Records-busting emigration thingy

A person on twitter asked me about the quick off-hand comment I made stating that we are witnessing 'record emigration'. Here are some numbers from the official CSO counts.

A note of caution: official stats (link here) cover data only from 1987 through April 2011, so all data is annual estimates through April of that year or, rather, year on year comparatives for the month of April. All of the data is based on 2006 census, preliminary numbers, so subject to revisions and implying that 2007-2011 data are themselves preliminary estimates. Births and Deaths are actual recorded. Emigration data is based on QNHS responses (rather lack of responses, signifying exit from the state) and thus subject, in my view, to significant biases. On the net, I would suspect the estimate of emigration figures is biased to the downside - primarily due to surveying methods used (undercounting emigration amongst the foreign nationals).

All said, we don't have any better data than that. So let's crunch through the numbers.

Let's start with the components of population change:

Per chart below, as per my claim on twitter, emigration (gross outflow of people from Ireland) has hit a historical high in overall terms in 2011 at 76,400 against the previous high of 70,600 in 1989. Emigration has surpassed number of births (75,100) in 2011 for the first time since 1990 (emigration of 56,300 vs births at 51,900). Now, number of births, like emigration is taken to population overall, so this comparative is pretty damning.

Now, here's an interesting thing to think about. Higher number of births (record in 2011, incidentally) might be actually keeping emigration numbers down and having double that effect on net emigration. How? Ok, imagine a family with a new-born. One of the parents is receiving maternity benefits and retaining the job. If the other spouse migrates, it is more likely that the mother and the child will remain in the state, if possible, as no destination state of their choice would be covering maternity benefit for new migrants. In addition, both spouses are likely to remain in the state until the maternity runs out. So there is at least some lag possible in terms of those families interested in exiting Ireland and their maternity benefits duration. The effect is unlikely to be huge, in my view, however.

Net effects are plotted in the chart below.

Net migration (immigrants less emigrants) is not at its historic high. In fact in 2011 it slightly improved due to high number of births. Note that higher numbers of births are correlated with conditions that also drive emigration. In 2011, there were total net emigration of 34,100 from Ireland against 34,500 in 2010. These are second and first highest rates of net emigration since 1990. The only two years when net outflow of people from this country was higher were 1988 (41,900) and 1989 (43,900).

It is worth noting, however, that due to higher birth rates, overall population did not decline in any year since 1991 and that 2011 growth in overall population (13,600) was slightly ahead of that in 2010 (11,400).

Let's mention some comparatives to averages:

Again, above summarizes very poor stats for 2010-2011. Natural population increases are running at 50% higher levels than pre-crisis averages. Yet overall population change is running at about 1/5-1/6th rate of pre-crisis average. Immigration numbers are off substantially, but it is the swing in emigration numbers that is driving the entire population change.

Chart below shows net migration trends by nationality:

Prior to 2009, Irish nationals contributed between 5% and 10.3% of the total net migration numbers. In 2009 it was 0%. In 2010 and 2011 Irish national accounted for 41.7% and 67.7% of total net migration  flows. Meanwhile, the largest driver of net migration prior to the crisis - EU12 states nationals - were the source of largest absolute numbers outflows (net) in 2009, but their share of net outflows has fallen to 38.6% and 12.8% in 2010 and 2011 respectively.

Lastly, let's perform a simple exercise. Suppose that over 2008-2011 the trend established since 2000 was present and that we performed on average the same as in 2000-2006 in terms of net outflows. What would have happened then?

As chart above shows, in 2011 76,400 people emigrated from Ireland. This was 47,900 in excess of 2000-2006 average, implying net ex-average emigration of 34,100. Over the years of the crisis so far, between 2008-2011, total number of people who emigrated from Ireland was 252,100, which is 138,000 over the level of 'natural' emigration (average). Taking account of the averages, excess net emigration over and above pre-crisis trend now stands at around 203,400 people.

11/3/2012: Did Global Financial Integration Contribute to Global Financial Crisis Intensity?

An interesting paper (link here) from Andrew Rose titled International Financial Integration and Crisis Intensity (ADBI Working Paper 341 ).

The study looked at the causes of the 2008–2009 financial crisis "together with its manifestations", using a Multiple Indicator Multiple Cause (MIMIC) model that allows for simultaneous causality effects across a number of variables.

The analysis is conducted on a cross-section of 85 economies. The study focuses "on international financial linkages that may have both allowed the crisis to spread across economies, and/or provided insurance. The model of the cross-economy incidence of the crisis combines 2008–2009 changes in real gross domestic product (GDP), the stock market, economy credit ratings, and the exchange rate. The key domestic determinants of crisis incidence that [considered] are taken from the literature, and are measured in 2006: real GDP per capita; the degree of credit market regulation; and the current account, measured as a fraction of GDP. Above and beyond these three national sources of crisis vulnerability, [Rose added] a number of measures of both multilateral and bilateral financial linkages to investigate the effects of international financial integration on crisis incidence."

The study covers three questions:

• First, did the degree of an economy’s multilateral financial integration help explain its crisis? 
• Second, what about the strength of its bilateral financial ties with the United States and the key Asian economics of the People’s Republic of China, Japan, and the Republic of Korea? 
• Third, did the presence of a bilateral swap line with the Federal Reserve affect the intensity of an economy’s crisis? 

"I find that neither multilateral financial integration nor the existence of a Fed swap line is correlated with the cross-economy incidence of the crisis. [Pretty damming for those who argue that the crisis was caused / exacerbated by 'global' nature of the financial markets and for those who claim that 'local' finance is more stable. Also shows that the Fed did not appeared to have subsidized european and other banks, but instead acted to protect domestic (US) markets functioning.] There is mild evidence that economies with stronger bilateral financial ties to the United States (but not the large Asian economies) experienced milder crises. [This is pretty interesting since so many European leaders have gone on the record blaming the US for causing crises in European banking, while the evidence suggests that there is the evidence to the contrary. Furthermore, the above shows that we must treat with caution the argument that all geographic diversification is good and that, specifically, increasing trade & investment links with large Asian economies - most notably China - is a panacea for financial sector crisis cycles.]"

Core conclusion: "more financially integrated economies do not seem to have suffered more during the most serious macroeconomic crisis in decades. This strengthens the case for international financial integration; if the costs of international financial integration were not great during the Great Recession, when could we ever expect them to be larger?"

Here's a snapshot of top 50 countries by the crisis impact:

Quite thought provoking. One caveat - data covers periods outside Sovereign Debt crisis period of 2010-present and the study can benefit from expanded data coverage, imo.

11/3/2012: New Car Sales - no sign of improving demand

Recently released data for new vehicles registrations for February 2012 shows continued lack of demand for durable / large-ticket items in Ireland. Here are the summaries - all data refers to the cumulative January-February sales for each year referenced (note, CSO does not provide seasonal adjustments, to yoy comparatives is all we have to go here on):

Pretty abysmal. The uptick in demand in 2011 is now appearing to be exhausted, despite the fact that many in the industry have expected a rise in 2012 registrations due to 2013 license plate effects.

Please, note - this flies in the face of the anecdotal claims that there are thousands of wealthy cash buyers holding back on domestic investment, as large ticket items demand is usually strongly correlated with domestic investment. In January 2012, car prices fell 2.4% yoy in Ireland, following a 2.6% annual decline in prices in December 2011 and 3.5% drop in November 2011. In other words, prices are going down, and demand is going down as well. Not exactly 'thousands waiting to pounce' on better deals, then...

8/3/2012: Economy on a flat-line: Sunday Times 4/3/2012

This is an unedited version of my article in Sunday Times March 4, 2012.

This week, the conflicting news from the world’s largest economy – the US, have shown once again the problems inherent in economic forecasting. Even a giant economy is capable of succumbing to volatility while searching to establish a new or confirm an old trend. The US economy is currently undergoing this process that, it is hoped, is pointing to the reversal in the growth trend to the upside in the near future. The crucial point, however, when it comes to our own economy, is that even in the US economy the time around re-testing of the previously set trend makes short-term data a highly imperfect indicator of the economic direction.

In contrast to the US economy, however, Irish data currently bears little indication that we are turning the proverbial corner on growth. It is, however, starting to show the volatility that can be consistent with some economic soul-searching in months ahead. Majority of Irish economic indicators have now been bouncing for 6 to 12 months along the relatively flat or only gently declining trend. Some commentators suggest that this is a sign of the upcoming turnaround in our economic fortunes. Others have pointed to the uniform downward revisions of the forecasts for Irish growth for 2012 by international and domestic economists as a sign that the flattening trend might break into a renewed slowdown. In reality, all of these conjectures are at the very best educated guesswork, for our economy is simply too volatile and the current times are too uncertain to provide grounds for a more ‘scientific’ approach to forecasting.

Which means that to discern the potential direction for the economy in months ahead, we are left with nothing better than look at the signals from the more transparent, real economy-linked activities such as monthly changes in prices, retail sales and house price indices, and longer-range trade flows statistics, unemployment and workforce participation data.

This week we saw the release of two of the above indicators: residential property price index and retail sales. The former registered another massive decline, with residential property prices falling 17.4% year on year in January 2012, after posting a 16.7% annual decline in December 2011 and 15.6% decline in November 2011. With Dublin once again leading the trend compared to the rest of the country, there appears to be absolutely no ‘soul-searching’ as house prices continue to drop. House prices, of course, provide a clear signal as to the direction of the domestic investment – and despite all the noises about the vast FDI inflows and foreign buyers ‘kicking tyres’ around empty buildings and sites – this direction is down.

More interesting are the volatile readings from the retail sales data.

The headline indices of retail sales volumes and values for January 2012, released this week were just short of horrific. Year on year, retail sales declined 0.34% in value terms and 0.76% in volume terms. Monthly declines were 3.7% across both value and volume. Relative to peak, overall retail sales are now down 25% in value terms and 21% in volume. January monthly declines in value and volume were the worst since January 2010. Stripping out motor trade, on the annual basis, core retail sales fell 1.94% in value terms and 2.74% in volume terms, although there was a month-on-month rise of 0.3% in value index. Monthly performance in volume of sales was the worst since February 2011.

Looking at the detailed decomposition of sales, out of twelve core Retail Businesses categories reported by CSO, ten have posted annual contractions in January in terms of value of sales. The two categories that posted increases were Fuel (up 5%) and Non-Specialised Stores (ex-Department Stores) (up 1.7%). The former posted a rise due to oil inflation, while the latter represents a small proportion of total retail sales – neither is likely to yield any positive impact on business environment in Ireland. In volume terms, increases in sales were recorded also in just two categories. Non-Specialised Stores sales rose 1.0%, while Pharmaceuticals Medical and Cosmetic Articles rose 1.5% year on year. Overall, only one out of 12 categories of sales posted increases in both value and volume of sales. All discretionary consumption items, including white goods and household maintenance items posted significant, above average declines in a further sign that households are continuing to tighten their belts, cutting out small-scale household investment and durables. The trend direction is broadly in line with November 2011-January 2012 3-months averages, but showing much sharper rates of contraction in demand in January.

The above confirm the broader downward trend in domestic demand that is relatively constant since Q1 2010 and is evident in value and volume indices as well as in total retail sales and core sales. More importantly, all indications are that the trend is likely to persist.

One of the core co-predictors – on average – of the retail sector activity is consumer confidence. Despite a significant jump in January 2012, ESRI consumer confidence indicator continues to bounce along the flat line, with current 6 months average at 56.5 virtually identical to the previous 6 months average and behind 2010-2011 average of 57.3. Based on the latest reading for consumer confidence, the forecast for the next 3 months forward for retail sales is not encouraging with volumes sales staying at the average levels of the previous 6 months and the value of sales being supported at the current levels solely by energy costs inflation.

Lastly, since 2010 I have been publishing an Index of Retail Sector Activity that acts as a strong predictor of the future (3 months ahead) retail sales and is based both on CSO data and ESRI consumer confidence measures, adjusted for income and earnings dynamics. The Index current reading for February-April is indicating that retail sales sector will remain in doldrums for the foreseeable future, posting volume and value activity at below last 6 months and 12 months trends.

Which means that the sector is likely to contribute negatively to unemployment and further undermining already fragile household income dynamics for some of the most at-risk families. During the first half of the crisis, most of jobs destruction in both absolute and relative terms took place in the construction sector, dominated by men. Thus, for example, in 2009 number of women in employment fell 4.2%, while total employment declined 8.1%. By 2010, numbers of women in employment were down 2.8% against 4.2% overall drop in employment. Last year, based on the latest available data, female employment was down 2% while total employment fell 2.5%. In other words, more and more jobs destruction is taking place amongst women, as further confirmed by the latest Live Register statistics also released this week, showing that in February 2012, number of female claimants rose by 3,479 year on year, while the number of male claimants dropped 8,356 over the same period.

The misfortunes of the retail sector are certainly at play in these. Per CSO, female employment in the Wholesale and Retail Trade sector has fallen at more than double the rate of overall retail sector employment declines in 2010 and 2011. Relative to the peak, total female employment is now down 10.2%, while female employment in retail sector is down 17.9%.

Traditionally, acceleration of jobs destruction amongst women is associated with increasing incidences of dual unemployment households. This is further likely to be reinforced by the increasing losses of female jobs in the retail sector, due to overlapping demographics and relative income distributions. Such development, in turn, will put even more pressure on both consumption and investment in the domestic economy.

CHART

Source: CSO and author own calculations

Box-out:

The forthcoming Referendum on the EU Fiscal Compact will undoubtedly open a floodgate of debates concerning the economic, social and political implications of the vote. Yet, it is the economic merits of the treaty that require most of the attention. A recent research paper by Alessandro Piergallini and Giorgio Rodano from the Centre for Economic and International Studies, University of Rome, makes a very strong argument that in the world of distortionary (or in other words progressive) taxation, passive fiscal policies (policies that target constitutionally or legislatively-mandated levels of public debt relative to GDP) are not feasible in the presence of the active monetary polices (policies that focus solely on inflation targeting). In other words, in the real world we live in, the very idea of Fiscal Compact might be incompatible with the idea of pure inflation targeting by the ECB. Which is, of course, rather intuitive. If a country or a currency block were to pre-commit itself to a fixed debt/GDP ratio, then inflation must be allowed to compensate for the fiscal imbalances created in the short run, since levying higher taxation will ultimately lead to economic distortions via household decisions on spending and labour supply. Given that ECB abhors inflation, the Fiscal Compact must either be associated with increasingly less distortionary (less progressive) taxation or with the ECB becoming less of an inflation hawk.

8/3/2012: ECB - policy dilemma remains

Much has been said, following today's ECB rates decision, about 'reappearing' inflation. Alas, much of that is, in my view, pure invented excuse. Inflation, if anything, is currently moderating - still well above the target, but declining. It his 2.7% in May-June 2011, then 3.0% in September-November and is running at 2.5-2.4% now (by my estimates for February). January inflation was the lowest since August last year.

While I personally think that we are facing inflationary pressures in medium term future, I don't see the urgency for tightening monetary policy today or for holding rates at 1%, unless one is to think that liquidity injected via LTROs into the banking system will start percolating into the real economy. The latter is unlikely to happen any time soon, in my view.

So what does the latest decision tell us about the ECB policy direction? Not much, if we are to go by the numbers. Instead, the latest decision continues to reinforce what I would term policy 'psychosis' - the situation whereby the ECB is clearly stuck between two targets (one acknowledged, aka inflation, another implicit, aka economic growth).

Charts illustrate:

First consider leading growth indicator and the relationship to ECB repo rate:

Growth conditions in the euro area clearly suggest rates at below 1%.

Now - inflation:

Inflation conditions clearly point to rates well above 2%.

I've highlighted this policy dilemma before and so far, there is nothing that has changed. So it's not about 'inflation threat' and it is not about 'growth support' - the ECB policy appears to be a clawback on LTROs...