24/9/2012: Irish Building & Construction decline v EU27

Last post on Irish Building & Construction sector data for Q2 2012. Here are the comparatives for EU member states based on current activity (through Q1-Q2 2012) compared to 2006-2007 peak levels:

No need to comment on the above...

24/9/2012: Irish Building & Construction Sector Activity Q2 2012

And in another post prompted by @stephenkinsella tweet, here's an update on CSO data for Irish Building & Construction sector activity:

Ex-Civil Engineering:

• Value index fell to 17.6 in Q2 2012 from 18.7 in Q1 2012, marking 5.88% decline q/q and down 15% y/y.
• H1 2012 Value index is down 12.11% on H2 2011 and down 13.78% on H1 2011.
• Value index fell to 15.5% relative to the peak and volume index declined to 14.66% of the peak level
• Volume index dropped to 15.6 in Q2 2012 down on 16.7 in Q1 2012, marking a 6.59% decline q/q and 16.6% decline y/y. 
• H1 2012 volume index was down 13.17% on H2 2011 and down 14.55% on H1 2011.
• Both Value and Volume indices are now down on an annual basis for 22 consecutive quarters.

Civil Engineering:

• Value of Civil Engineering activity rose from 58.4 in Q1 2012 to 62.7 in Q2 2012 (+7.36% q/q) and advanced 11/4% y/y, registering the first annual rate of increase after 15 quarters of contraction.
• H1 2012 value index rose +1.68% on H2 2011 and is up 5.21% on H1 2011.
• Volume of activity also grew from 52.3 in Q1 2012 to 55.8 in Q2 2012 (+6.69% q/q and +9.8% y/y) also breaking for the first time annualized contraction period of 18 quarters.
• H1 2012 volume index rose 0.93% on H2 2011 and is up 4.75% on H1 2011.

Residential and non-residential:

• Residential construction value index fell from 9.1 in Q1 2012 to 8.6 in Q2 2012 (-15.7% y/y and -5.49% q/q). H1 2012 index was down 9.69% on H2 2011 and down 16.51% on H1 2011. Relative to peak, the index is now down 92.45%.
• Residential construction volume index fell to 7.7 in Q2 2012 from 8.3 in Q1 2012 (decline of 7.23% q/q and down 17.2% y/y). The index is now down 92.53% on peak.
• Non-residential construction value index fell from 55.4 in Q1 2012 to 51.5 in Q2 2012 (-14.7% y/y and -7.04% q/q). H1 2012 index was down 14.41% on H2 2011 and down 12.23% on H1 2011. Relative to peak, the index is now down 58.23%.
• Non-residential construction volume index fell from 49.4 in Q1 2012 to 46.0 in Q2 2012 (-15.8% y/y and -6.88% q/q). H1 2012 index was down 15.12% on H2 2011 and down 12.48% on H1 2011. Relative to peak, the index is now down 58.89%.

To sum up: rates of decline are (annually) in double digits and/or accelerating in Q2 2012 in Residential (value and volume), Non-residential (value and volume) and ex-Civil Engineering (value and volume). Residential construction is now at 8.6% of 2005 levels in value terms and 7.7% of 2005 levels in volume terms. Non-residential construction is now at 51.5% of 2005 levels in value terms and 46% in volume terms. Civil Engineering activity is now at 62.7% of 2005 levels in value terms and at 55.8% in volume terms. All activity ex-civil engineering is now down to 17.6% of 2005 levels in value terms and 15.6% in volume terms.

24/9/2012: Euro peripherals Building & Construction activity

Here's a chart updating to latest data index of Building & Construction sector activity in the peripheral euro area states:

As inspired by @StephenKinsella: "Ouch!"

24/9/2012: Italy's debt overhang effect

Via @FGoria on twitter, this chart on Italy's potential GDP and output gap:

Shows brilliantly the cost of Italy's public debt overhang as a steadily falling potential GDP growth and sustained structural recession since ca 1990-1992. Better yet, shows that even cheap liquidity in the naughties failed to produce any real effect on the economy.

Now, keep in mind, Italy is suffering solely from the Government debt overhang, with relatively benign debt levels on household and corporate balancesheets, and with relatively functioning banking system.

23/9/2012: Euro area bonds supply Sept-October 2012

5 weeks from September 14th - cumulated gross supply of sovereign bonds of €70.5bn and €57.3bn of redemptions and coupons:

And supply calendar

All courtesy of Morgan Stanley

20/9/2012: Russian stock market performance for September

Danske analysis of emerging markets performance for September - a nice chart:

Spot RUB - Russian markets.

20/9/2012: Is 'Johnny the Foreigner' at fault? Q2 Irish trade results

In the real world, confronted with the unpleasant truth, we usually react with a denial of the facts and a desperate search for someone else, other than ourselves, to blame for the misfortune. Today's QNA data release triggered exactly this basic psychological reaction. With no reason for it, other than 'let's get Johnny the Foreigner out to blame', some of the favorite economists of our Minister for Finance decided that 'Irish economic growth is suffering from the slowdown impacting our main trading partners'.

Right... and Lehmans caused Irish banks collapse and bungalows prices deflation... that sort of malarky.

Now, that is either an uninformed error of judgement, or an outright lie, folks. In reality, exactly the opposite is happening - our external trade is still booming, while our internal, home-made depression is still raging.

I wrote about the domestic activity collapse already earlier (here's the link). Now, let's take a look at the activity arising from the allegedly falling demand from our trade partners.

First in current prices terms:

• Exports of goods & services from Ireland to the rest of the world hit €45.01 bn in Q2 2012, up 6.21% y/y. This marks a slowdown in growth from 7.4% y/y growth in Q1 2012, but nonetheless, in Q1 2012, Irish exports of goods and services hit an absolute record since Q1 2006. I wouldn't be going around saying that a historic record is... err... a drag on our growth.
• Exports of goods alone rose 1.26% y/y in Q2 2012, down on the 4.02% rate of annual growth in Q1 2012, but still posting an absolute record for any quarter since Q1 2006.
• Exports of services rose 11.46% y/y in Q2 2012, faster than already blistering growth of 11.11% y/y in Q1 2012. Again, volume of exports of services hit an absolute record level for any quarter since Q1 2006.

But maybe the 'Johnny the Foreigner' baddy is pushing down Ireland's growth in real terms? Ok, in constant terms:

• Exports of goods & services from ireland rose 2.06% y/y in Q2 2012, posting, yep, you know this much already, an absolute record in level terms for any quarter since Q1 2006.
• Exports of goods did fall off y/y - declining 4.42%. Which amounts to a drop of €973 million which is less than €3bn plus lost to patent cliff. So, err... the demand from US, UK and EA has nothing to do with this, but rather patents expiration in pharma sector drives the decline.
• Meanwhile exports of services grew, in constant prices terms, by a massive 9.05% in Q2 2012 compared to the same period of 2011.

As the result of these gains and also as a function of our own (not US, UK, EA, etc) demand collapse (marked by the decline in imports), our trade balance (the net positive contributor to our GDP and GNP) has actually expanded. 

Irish trade surplus has grown by a massive 18.98% in Q2 2012 in current prices terms and by impressive 14.47% in constant prices terms. Things are actually so good when it comes to 'Johnny the Foreigner Demanding Irish Exports' that our services sector posted an absolute historical record surplus in Q2 2012 of €1,387mln - for only the third time in the series history since Q1 2006. Our total trade balance surplus reached €11.391bn in Q2 2012 - by far the largest surplus reading in any quarter since Q1 2006. This is 14.1% higher than the previous quarterly record attained in Q3 2011.

Here are two charts to summarize trade balance changes:

The problem, of course, that our Green Jersey folks are not too keen on acknowledging is that overall, Johnny The Foreigner thirst for Irish goods and services has preciously little connection to our GDP activity. But that, illustrated below, is a different story.

20/9/2012: 'Flat growth' and the shrinking Irish economy

Ok, folks... the latest batch of news from CSO and the official 'Green Jerseys' reaction to same would have made a fine candiate for a Nobel literature prize, were they published in a single tome with a heading Literature of Absurd on it...

We have our routine 'Housing market has bottomed out' shrills from the property pushers in the media - despite the fact that property prices continue to fall. We also have the metronome-like 'Unemployment has stabilized' tale, a chapter of gargantuan efforts to avoid mentioning the fact that fewer and fewer people actually work in Ireland, earning living and paying taxes.

Today we have a new pearl: 'Irish economy is growing once again, albeit slowly'.

Complete porkies, if you ask me. Here's the plain and simple reality of what's going on:

In constant market prices terms, Irish GDP based on constant factor cost (in other words, the real activity in the economy carried out by MNCs and domestic enterprises, net of taxes, gross of subsidies) grew 2.3% (+€819 mln) q/q in Q2 2012. Alas, as usual, q/q growth is... err... mostly meaningless. Instead, y/y comparative shows this metric shrinking €300mln (-0.8%).

What's the dynamic here? Oh, not good, either. In Q2 2011, y/y real GDP (constant factor basis) grew 3.21% y/y. In this quarter it shrunk 0.8% y/y... a negative growth swing of 4 percentage points!

Now, adding taxes (net of subsidies) to the above figure produces official real GDP (GDP expressed in constant prices terms). This stood at €40.327 billion in Q2 2012 up €744 mln on Q1 2012 (+1.9% q/q) but down 1.1% (-€442mln) y/y. Now, wait, folks... so official GDP is down y/y. Not up.

What's the dynamics of this change? Oh, well, in Q2 2011 official real GDP was up 2.86% on same period in 2010, so Irish economic growth has overall deteriorated in Q2 2012 compared to same period a year ago by a whooping 3.9 percentage points.

Next step is for us to subtract from our real GDP outflows of payments abroad (net of inflows of income from abroad) - the so-called Net Factor Income From the Rest of the World adjustment. Bear with me here. It is important.

In Q2 2012 we, as economy, have managed to send out €7.219 billion in factor payments abroad, net of what we received from abroad. Sounds a lot? Not really - this is down on €8.397bn in Q1 2012 (which added €1,178mln to our GNP) and it is down €1,385 mln on Q2 2011 (which adds same amount to our GNP compared to Q2 2011 levels).

What the above means? Here's the punchline to reality: as the result of €744mln increase in our GDP and a €1,178mln decrease in our payments abroad, our GNP officially expanded by €1.922bn in Q2 2012 q/q. Meanwhile, due to a contraction in real GDP of €442mln offset by reduction in outflows of income abroad of €1,385mln, our GNP rose €943mln (+2.9%) y/y in Q2 2012.

Thus, real economic activity in Ireland fell, y/y in Q2 2012, but because the MNCs have decided to expatriate less income out of Ireland in Q2 2012, our GNP actually rose.

Why would MNCs decide not to expatriate much of profits? For a number of reasons:

1. Lack of capital investment around the world means corporates have no incentive to move profits out of Ireland outside the immediate objective of boosting reported profits at home;
2. Booming equity markets in the US mean that there is no immediate pressure for US MNCs operating here to ship retained profits out of Ireland's tax heaven;
3. Fall-off in pharma exports from Ireland also took a bite out of the retained profits here.

Any of these have any tangible effect on our real economy? Not really. Actually - none whatsoever. 

In real economic terms, Irish economy shrunk in Q2 2012 by 1.1% (real GDP terms) y/y and that is it, folks. 

One more note. In seasonally adjusted, constant prices terms:

• Personal Consumption of Goods & Services has hit absolute record low in Q2 2012 of €19,598mln for any quarter since Q1 2007.
• Net Expenditure by Central and Local Government on Current Goods and Services has hit an absolute low of €5,934mln in Q2 2012 for the entire period since Q1 2007.
• Gross Domestic Fixed Capital Formation has hit a record low of €3,427mln
• Exports of Goods and Services have posted a contraction on Q1 2012 but are up €1 billion on Q2 2011
• Imports of Goods and Services have posted a q/q contraction of €1.7bn and are now at a historical low for any Q2 period of 2007-present period
• Total domestic demand is now at the absolute lowest point for any quarter since Q1 2007 and is down €1.6bn on Q1 2012 and €1.9 billion on Q2 2011.

This is not flat growth, folks. This is shrinking real economy.

Note: I will post updated charts later tonight. Stay tuned.

18/9/2012: Irish exports credit guarantee

Leaves you speechless:

I am hearing that Irish Gov Exports Credit Guarantee Scheme requires +2% fee for participation to be paid by SMEs.

Risk-weighting of such schemes=0%, as this is a de facto re-insurance scheme with Government assuming liability only in third teer in the worst case scenario.

UK equivalent Scheme=-1%.

Thus Irish-UK differential for companies successfully exporting = +3% surcharge to the disadvantage for Irish SMEs.

Really, it appears we do tax our SMEs successes and then call this 'support' policy!

17/9/2012: Russian economy shows signs of pressure build up

Big jump in producer price inflation in Russia (via fxstreet.com link here):

This confirms build up of inflationary pressures (see note on CB of Russia latest move in tightening monetary policy last week: link here).

Meanwhile, industrial production posted a slowdown in growth in August, rising 2.1% y/y after posting 3.4% growth in July, but ahead of .9% in June. The slowdown was concentrated primarily in Electricity, Gas and Water sector (+0.2% y/y) and the Mining & Quarrying sector (+0.8% y/y), with Manufacturing sector expanding at 4.1% y/y. M/m industrial output fell 0.7% in August, reversing gains of 0.8% in July. So far, January-August 2012 cumulated growth in Industrial Production stands at 3.1% y/y.

Twin effects of slower growth and rising producer prices suggest that either the slowdown might accelerate over time with inflation on the costs side (wages) feeding into reduced capacity of the producers to absorb twin pressures of shrinking exports demand and rising cost base.

On the other hand, we have continued general upward trend in Russian equity markets:

MICEX up from 1389 3mo ago to 1532 currently. The market is betting on temporary nature of the slowdown?

IMF has indicated they might downgrade Russian growth forecasts for 2013-2014 on foot of continued build up of pressures from European demand for Russian exports.

16/9/2012: Who pays for the Banks Guarantee? Irish Mortgage Holders

Another interesting snippet from the IMF report on Ireland's performance:

"The already low net interest margin fell by 40 basis points in Q1, to 0.8 percent of average assets. Though funding costs fell by 35 percent from Q4 2011 reflecting the actions of a leading bank to lower deposit rates, this was not enough to compensate for weakening interest income due to higher loan impairments and the drag from low yielding tracker mortgages. The ELG fee remained high, at 110 basis points in Q1, absorbing some 40 percent of the net interest margin (up from 28 percent in Q4 2011)."

What does this mean?
1) Banks are suffering from lower margins due to declines in ECB rate having an adverse impact on their tracker mortgages book. They compensate by soaking savers (deposit rates down) and ARMs (adjustable rate mortgages are up).
2) Instead of allowing banks more funds to cover mortgages losses, the (1) above - soaking of savers and ARMs - goes primarily to fund Mr Noonan and the State (via ELG fees paid by the banks for the Guarantee cover to the Exchequer).

Great. As a holder of an adjustable rate mortgage, I get taxed by Mr Noonan once on household charge (soon to be replaced by a property tax) and  via ELG. Well done, 'low tax Government'. Of course, I am also being used to subsidize tracker mortgages, including buy-to-lets.

16/9/2012: IMF on PCARs and banks recaps

In the latest IMF Article IV Consultation paper on Ireland, the fund made some interesting observations on the ongoing Irish property bust. Here are some of these:

Firstly a chart showing where we are at in terms of current declines in property prices relative to other crises and in duration:

Next, there's a very revealing statement on the banks recapitalizations process (PCAR 2011) in relation to mortgages arrears (the statement that predates Professor Honohan's expression of doubt that PCARs were robust enough to all dealing with the mortgages arrears):


"Residential mortgage arrears continue to rise, but remain within the assumptions for bank recapitalization. As of end March 2012, almost 14 percent of the total principal balance of owner occupied residential mortgages outstanding was affected by arrears of 90 days or more, broadly doubling since end 2010. [Note: IMF seemingly had no desire to update their analysis for more up-to-date H1 2012 data released by CBofI and CSO (see here and here) before they published the Article IV paper].

Nonetheless, the overall arrears balance, together with developments in house prices and
unemployment, remain within the adverse scenario of the Prudential Capital Assessment Review (PCAR) that guided bank recapitalization in 2011.

[Italics are mine. The reason why I find this important is that the banks were not recaped to the adverse scenario requirements, but to the baseline scenario requirements plus cushion. The difference is significant: Overall, Blackrock estimated that BlackRock lifetime loan losses post-deleveraging would amount to €27,522 million in baseline case rising to €40,119 million in adverse case. Of these, the Central Bank assumed that only €20,014 million will take place pre-2014 in the baseline case and only €27,722 million in adverse case. That's a difference of €7 billion right there. The CBofI then made some additional assumptions and determined that €18.7 worth of capital will be needed by the banks overall. Clearly, given that this was less than what the banks estimated themselves to be the case (banks own forecast provisions totalled €17.04-22.23bn for baseline to adverse scenario cases), the CBofI 'imposed' additional 'cushion requirements' to raise overall capital requirement under PCARs to €24bn. But, wait, that is not consistent with the adverse scenario that IMF is referencing above, which is €27.7bn! So the banks were not recapitalized to the adverse scenario levels and IMF is using this term 'adverse' here to rather politely point out to the Irish authorities that the proverbial sh*t might be hitting or about to hit the fan.]

More so: "It is notable that about half of total arrears arise from loans that have already been
restructured, although part of these arrears could have arisen prior to each loan restructuring, so the effectiveness of rescheduling of distressed loans is unclear." [Now, we know this much ourselves - in H1 2012, more than 52.65% of already restructured mortgages were in arrears (see here)].

"Repossessions and voluntary surrenders of property are also very low, cumulating to 0.2 percent of the stock of mortgages on owner-occupied dwellings in the 11 quarters to March 2012. This is consistent with the one-year moratorium on repossessions of primary residences  under the Code of Conduct on Mortgage Arrears, but may also reflect a need to buttress the repossession framework."

Some charts:

Two things to note here: table above includes voluntary surrenders of properties, something that CBofI does not ordinarily publish in their mortgages arrears data, and the chart below shows just how thin the margins are on PCAR 'stress scenario'.

So things, according to the IMF, are for now within the parameters of the adverse scenario and, per chart above, within the stress scenario. Which seems to be just about ok, when it comes to PCAR injections to-date. But crucially, there is stress building up here. Only 1 year into the programme of recapitalizations, the banks are close to hitting the wall again.