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 46th 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.
Yep, go into economic slowdown and tighten credit supply growth. Nice.
