18/1/2013: Iceland's U-shaped Recovery

Back in December, there was quite a bit of controversy stirred around by a short note about the failures of the so-called Icelandic model for dealing with the crisis. The note - a blogpost (and I have no link to it right now) - was alleging that much of the reforms in Iceland were not voluntarily chosen by the Government (which is true), did not result in significant debt relief for homeowners (due to mortgages markets structure differences) and did not produce significant improvements in the economy.

At the time, some readers of the note in Ireland went on to accuse myself of 'talking up' Iceland to promote my 'personal agenda'.

Aside from the above accusations being complete and unadulterated bulls**t (I never said Iceland did everything right or that all of Iceland's policies should be adopted in Ireland), they were based on the reading of one blog post.

Not to stir up any controversy, here's a link to the Danske Bank note on Iceland's economy from December 2012. I am not going to make any judgements here - just read the note. I am reproducing few charts below for those unwilling to read through the entire report.

Quote:

"The recovery of the Icelandic economy has been challenged by the deteriorating conditions in the European trading partners, which account for a large share of the Icelandic exports. It looks like growth in Iceland will perform above most of Europe over the next few years and that its recovery will continue but the level is still well below the pre-crisis level. We expect growth rates of 2.5% y/y in 2012 and 2.2% in 2013. It is also worth noting that recent national account revisions showed that growth in 2011 was adjusted down.

While investment activity and inventories have been rather volatile recently, private consumption has held up relatively well and 2012 should show about 3.8% y/y growth. We expect it will slow somewhat in the following years, to a growth level just below 3%. Investment activity should be fairly solid too and we expect growth rates of about 8-9 % y/y in 2012 and 2013, perhaps with a slightly increasing trend.

Inflation remains above the central bank’s 2.5% target, and has been so for a while, but inflationary pressures have eased somewhat in 2012 and we expect this trend to continue. Our forecast for the GDP deflator is currently 3.7% y/y in 2012 and 3.1% in 2013.

As the economy has been undergoing recovery, the labour market has improved significantly too. While we do not see this trend ending, we do expect it to slow gradually  as the unemployment rate comes down. Consequently, our year-end unemployment rate forecast is 5.8% for 2012, falling to 5.3% in 2013"

Here you go: Iceland's U-shaped recovery and Danske's forecasts for 2013-on:

And for the commentariate loving to accuse me of just dropping numbers to 'fool the readers' - I am not giving a commentary on the above precisely because you accuse me too often of commenting. 

17/1/2013: Transparency & Budgetary Processes

An interesting statement by Nessa Childers, MEP:

I completely agree - all budget-related submissions and proposals should be made public and the Department of Finance should publish them all on their site, linked to Budget documentation. This issue is not only about transparency and lobbying (which are very important), but also about public access to ideas and potential foregone options presented to the Government.

16/1/2013: Irish Car Sales and German Exports Declines

Latest data from Ireland on new vehicles purchases is quite revealing of the broader problems faced by the German economy - a snapshot of what happens to exporting engine when demand in its trading partners slumps.

Let's run through some numbers.

• Overall demand for new vehicles in Ireland has fallen off the cliff in recent years. In 2007 we imported 180,754 new private cars, of which 54,703 came from Germany. Of all German cars imported, 17,394 came from 'luxury' carmakers (Audi, BMW, Mercedes and Porsche). In 2012 we imported 76,256 cars, or 57.8% down on the peak. Of the cars we did import, German automakers accounted for 23,529 vehicles, with German 'luxury' carmakers selling 8,728 vehicles here. 
• In summary, 2007-2012 changes in cars imports were -57.8% for all vehicles, -30.3% for Audi, -51.8% for BMW, -65.8% for Mercedes, - 69.1% for Opel, -84.5% for Porsche and -53.5% for Volkswagen.
• Between 2007-2011, due to aggressive sales promotions and due to skew to the income distribution in Ireland (preserving higher-range incomes more than mid-range), German car makers have managed to increase their share in the overall Irish market, with all German manufacturers' combined market share rising from 30.3% in 2007 to 30.9% in 2012, and 'luxury' makers' share rising from 9.6% in 2007 to 11.4% in 2012.

Nonetheless, there is huge opportunity cost of Irish recession to German automakers. Let's make some assumptions and estimate this cost:

1. Since 2000 and 2007 represent two peak years in terms of cars demand pre-crisis, dropping them from consideration, let's take an annual average demand for 2001-2006 as the 'old normal'. This amounts to 157,261 annual vehicles sales in total, of which 12,814 vehicles sales should accrue annually to German premium car makers and 41,166 sales to all German car makers.
2. Using the above average, we can estimate cumulative sales losses over 2009-2012 as 326,515 total vehicles not sold by all car makers, 75,626 vehicles not sold by all German carmakers and 20,863 vehicles not sold by German 'luxury' or premium car makers.
3. Assume that, on average, a new vehicle in Ireland sells for EUR22,500 per vehicle, inclusive of taxes, while an average 'premium' German vehicle retails for EUR42,500 opera vehicle, average non-premium German vehicle retails for EUR22,500-27,000 range, while Porsche sells an average vehicle for EUR70,000.
4. Based on (3) we have foregone / opportunity cost in EUR terms of cumulated EUR7,347mln for all motor trade (EUR1,837mln annual average) over 2009-2012. Of this, EUR2,275mln opportunity cost carried by all German car makers (EUR569mln annually on average), and of the latter EUR919mln cumulative (EUR230mln annual average) of the opportunity cost carried by German 'luxury' or premium car makers.

Now, let's put this into Euro-wide perspective. Obviously not all economies have experienced as dramatic collapse in sales of new cars as Ireland. But majority of economies did experience a fall-off. Given that Ireland accounts for under 2% of the euro area economy, and assuming that on average, euro area decline in sales was running at 1/10the rate of Irish market decline, German automakers should be some EUR3,100-3,200mln out of pocket on gross sales, annually, on average since 2009-2010.

The above of course is a crude calculation, as it disregards the issue of profit margins, which have probably shrunk, as car advertising had to accelerate in order to support sales. One example would be Audi, which has managed to increase its sales in the Irish market in 2012 compared to 2011 - the only German premium car makers who has managed to do this - on foot of very aggressive advertising campaigns. In addition, sales promotions and discounts, as well as sales of more smaller and less luxury models and fit-outs have also most likely contributed to lower profit margins. 

Here are some charts to illustrate the above.

16/1/2013: US Labor Market Q4 2012 in one chart

And another stunning chart from http://oregoneconomicanalysis.wordpress.com/2013/01/11/visualizing-labor-markets/
showing the overall summary of data on the US Labor Markets compared to Q4 2007 and Q4 2009 to current state.

16/1/2013: Some charts on US unemployment: Financial Crises v Recessions

Two absolutely fascinating charts showing just how different is the current Great Recession from the previous recessions and how the financial crises disruptions are much longer lasting structural in nature when it comes to unemployment than traditional recessions.

(Source: http://oregoneconomicanalysis.wordpress.com/2012/09/24/checking-in-on-financial-crises-recoveries/ )

First, financial crises:

And now, run-of-the-mill recessions:

And financial crises duration in terms of unemployment levels:

The above charts should really be a wake up call to the European 'leaders' still pretending that the recovery is only a matter of short time stroll through deficits reductions.

Here is a link to an excellent presentation (from April 2012, albeit) by the US Treasury on the crisis responses to-date, showing the complexity and the sheer magnitude of these responses. To anyone familiar with the EU response to the crisis - these amount at best to 1/10th of the scale/scope of the US responses.

Here's a telling comparative:

It is also telling to read the level of realism in the US Treasury's presentation as to the problems remaining in the economy that is virtually unparalleled with the reports from the EU and some National Governments (e.g. Ireland).

15/1/2013: ARRA - some evidence of a US welfare trap

A very interesting paper by Casey Mulligan of UofChicago on the effects of the American Reinvestment and Recovery Act (ARRA) - the act that underpinned early stage stimulus to the US economy and extended unemployment benefits.

In the paper, Mulligan estimates "distributions of marginal labor income tax rates for unemployed household heads and spouses …for three benefit and tax rule scenarios:

1. Actual rules under the ARRA, 
2. "Rules as they would have been if they had not been changed since 2007" (in other words 'no ARRA' scenario), and 
3. "Rules as they might have been with a bigger fiscal stimulus."

Conclusion: "About three million unemployed, with a variety of tax situations, had more disposable income while unemployed than they would have by accepting a job that paid 80-100 percent of their previous one. The number would have been less than one million under 2007 rules, and about eight million under a bigger stimulus."

Thus, per Mulligan, "Tax obligations and foregone unemployment insurance about equally erode the rewards from retaining a job, or starting a new one."

Source: Mulligan, Casey B., The Arra: Some Unpleasant Welfare Arithmetic (December 2012). NBER Working Paper No. w18591. Available at SSRN: http://ssrn.com/abstract=2186320

15/1/2013: Some data and ideas on Russian economy

Russian economy quick summary of some latest stats and some disconnected ideas:

• Q3 2012 real GDP +2.9% y/y down from +4% in Q2 and +4.9% in Q1 2012.
• Expected Q4 2012 GDP growth +2.5%
• November 2012 GDP growth of +1.9% y/y inflation-adjusted
• Q1-Q3 2012 GDP +3.5% y/y
• Q3 2012 consumption +5.1% y/y down from +6.9% in Q2
• Expected full year consumption growth +4% y/y.
• Consumer confidence down to lowest in 18 months (since Q2 2011) in Q4 2012 at -8, Q3 2012 reading was -6.
• Industrial production is up +1.9% y/y in November, manufacturing activity +4%, manufacturing PMI at lowest level in 14 months in December at 50.0
• Services PMI down to 56.1, from 57.1 in November
• Composite PMI at 54.1 - a 4 months low.

Inflation is still a major headache for the Central Bank Rossii, with the level above the target, despite being close to historical lows:

• Headline inflation at 6.6% in December against 6.1% y/y in 2011, making 2012 the second best year in terms of inflation in over 20 years.
• Food inflation is 4.4% for 2012, tobacco up 21.2%. 6% crops failure due to drought in 2012 is taking the blame. Non-food inflation was 5.6% and services inflation at 5.4%.
• Meat and poultry led food inflation (+8.3%), brad and eggs prices up 6.2%.
• Alcoholic beverages prices were up 10.1%

Some consumption trends - food:

• 2012 per capita food consumption (local currency) = +8.7%; forecast compound annual growth rate (CAGR) to 2016 = +10.2%
• 2012 beer volume sales = +2.8%; forecast CAGR to 2016 = +2.9%
• 2012 mass grocery retail sales (local currency) = +24.4%; forecast CAGR to 2016 = +28%

All good news for Irish exporters as food represents a strong component of our exports to Russia (see latest data here).

Central Bank raised inflation target for 2013 from 2012-set 4.5-5.5% for 2013 to 5-6% set on December 29th. 2012 target set in December 2011 was 5-6% range.

Capital outflows remain a problem in 2012:

• 2012 capital outflow stood at $56.8bn - the fourth highest yearly outflow since collapse of the USSR, with $9.4 billion outflows in Q4 2012, up on Q3 outflows of $7.6bn and Q2 outflows of $6.4bn, but down on massive $33.3bn outflows in Q1 2012.
• Net outflows were now recorded every year since 2007.
• Banks recorded an inflow of $23.6bn in 2012, in part pushed up by privatization of Sberbank ($5.2bn)
• Net outflows in non-banking sectors of economy amounted to $80.4bn in 2012.

I do expect moderating capital outflows from Russia in 2013 and still expect strong capex in Russia. Ruble valuations are likely to remain strong despite the Central Bank interventions. At any rate, the CB is likely to moderate interventions in the currency markets as it moves to inflation targeting by 2015 from current FX targets.

On the net, I am still bullish long-term on Russian Government (and corporate) bonds:

• Recent decisions to open rubles-denominated bonds sales to foreign investors via Euroclear Bank and Clearstream International will continue pushing yields down. Renaissance Capital estimated recently that OFZs (ruble-denominated state bonds) yields can fall 50-80bps in 2013
• In 2012, OFZs returned 1.12% against 0.38% for Brazil, 1.36% for India and 0.03% for China.

15/1/2013: Risk Taking Up, Cash Down

In contrast to CFA members cautious optimism (see here), markets bullishness is hitting historical highs:

via @Pawelmorski

And understandably, cash is not the King (see second chart here).

15/1/2013: Ireland-Russia Bilateral Trade: Jan-Oct 2012 data

Some good data on Irish bilateral trade in goods with Russia. A graph and a table to summarise:

Details in CSO release here.

Very robust rise in exports (+17.6% y/y in Jan-Oct 2012) and in trade surplus (+24.6% y/y). Balance in favour of Irish indigenous sectors, with food & drink sector exports exceeding those of medical devices and pharma and chemicals.

15/1/2013: CFA Survey 2013: cautious optimism, equities exuberance?

CFA Institute annual survey of economic conditions was published yesterday and here are some core snapshots (full study available here):

Expectations change in favor of economic expansion:

 Interestingly, continued stronger optimism in EMEA as opposed to APAC, weaker optimism in APAC than in AMER, and EMEA as the core driver for growth expected. Another interesting point, although consistent with path dependency, is continued stronger growth expectations for Advanced economies as opposed to the Developing ones.

Euro area crisis continuation is the largest source of overall risk to global capital markets, at 37%, followed by concerns over economic conditions. CFA Members were divided on their expectations concerning the euro area crisis, with 23% expecting crisis easing, 35% expecting worsening and 42% expecting crisis conditions to remain at the levels of 2012. In other words, 77% expect no improvement in the euro area. An interesting snapshot into both path dependency of forecasts and anchoring of expectations is that most optimistic responses came from worst hit countries: Spain (53% expecting improvement) and Italy (46%), as well as from two countries least impacted: France (43%) and Germany (43%). Least optimistic countries are all outside the euro area: Russia (45%), UAE (41%), the US and Singapore (both at 39%) and S. Africa (38%).

Optimism about local economy expansion went up, slightly, from 42% in 2012 to 45% in 2013.

 The following chart plots the % of members indicating the biggest risk to their own local market in 2013.

And on Asset Class performance, equity seems to be king, as I predicted some time ago on foot of the long term decline in debt and liquidity over-supply globally:

Overall, 50% of respondents expect equities to provide highest total expected return, up on 41% in 2012. Asia Pacific region led in equities outperformance expectations (41% in 2012 on 30% in 2012). Cash saw a significant drop in expectations.

No major surprises then: the balance is between continued and ameliorating crisis, plus liquidity surplus sloshing into equities. The former is yet to play out, the latter has already begun.

14/1/2013: Irish Savings Rates - Q3 2012

Data for Irish Savings rates for Q3 2012 has been released by the CSO (see release here). Instead of rephrasing the release, lets take a look at the underlying data (link to data is provided on page 1 of the release).

First off: household savings and consumption expenditures, seasonally-adjusted:

Per chart above (all in current market prices, so no inflation adjustment, but seasonally-adjusted)

• Disposable income rose in Q3 2012 to EUR23,002 million - up EUR486mln (+2.16%) q/q after expanding EUR385mln (+1.74%) in Q2 2012. This is good news. Year-on-year, income is up EUR1,158mln (+5.30%) and this follows up on EUR823mln increase y/y in Q2 2012 (+3.79%).
• Historical comparatives for total disposable income are also looking good. Average income since Q1 2008 was EUR22,984mln, so we are close to that in the latest figures. We are also ahead 2010 average (EUR22,198mln), 2011 average (EUR21,693mln), but below 2008 average (EUR25,061mln) and 2009 average (EUR23,310mln).
• Final consumption expenditure in Q3 2012 stood at EUR19,319mln up EUR64mln (+0.33%) q/q partially reversing decline of -EUR77mln (-0.40%) q/q in Q2 2012. Year-on-year, consumption spending was up EUR217mln in Q3 2012 (+1.14%) after posting a y/y decline of -EUR165mln (-0.85%) in Q2 2012.
• In longer range averages terms, latest consumption reading is just about at the average level for 2012 (EUR19,302mln), slightly below 2011 average of EUR19,362, and below 2008 average (EUR22,264mln), 2009 average (EUR19,836mln) and 2010 average (EUR19,532mln).
• Gross household savings stood at EUR3,684mln in Q3 2012, up EUR423mln (+12.97%) q/q and this follows EUR463mln rise (+16.55%) in Q2 2012. Year-on-year, household savings rose EUR942mln (+34.35%) in Q3 2012 after posting a EUR988mln (+43.47%) y/y rise in Q2 2012/
• So far, Q1-Q3 2012 average savings run at EUR3,248mln - ahead of all annual averages, save for 2009 when they reached EUR3,475mln.

Saving ratios:

• As the result of the above, the household savings ratio (ratio of gross savings to total disposable income) rose from 14.48% in Q2 2012 to 16.02% in Q3 2012. This represents an increase of 1.53ppt q/q (following a 1.84% rise q/q in Q2) and a y/y rise of 3.46ppt (down from the y/y rise of 4.00% in Q2 2012).
• Longer-term comparatives suggest the return of strong precautionary savings motive (as shown in the chart below). More specifically, adjusting for growth variation in Irish GDP, longer-term savings ratio consistent with economic recovery for Ireland should be in the range of 8.6-11.9%. We are now well above that range. More significantly, even taking shorter period deleveraging pressures in 2008-present crisis, the savings ratio averages at around 14.10%, lower than the current 16.02%. 2012 average savings ratio through Q3 is 14.38% against 2008-2011 average of 11.9%. By all metrics, Q3 2012 looks like a return of the precautionary savings motive for households.

However attractive it might appear to make an argument that savings ratio is too high amongst Irish households, one must consider the fact that our households are:

1. Under immense pressures to deleverage out of extremely high debt ratios (an objective consistent with banks stabilisation objective of the Government and with Troika concerns about debt levels, as well as with the goal of restarting household investment cycle)
2. Household savings = banks deposits and I doubt there is out there a single Irish politician brave enough to suggest we need less of the latter
3. Current act as the main driver for supporting gross national savings from complete and total collapse. Do recall that national savings = national (domestic) investment (ex-FDI). And do recall that in Ireland, SMEs are funded by domestic savings (at least equity, non-debt funding component). Which means that were we to have meaningful investment activity here, we need to encourage and support, not discourage and tax, savings.

On this note, let's take a look at seasonally unadjusted data for aggregate savings in the economy:

The chart above shows clearly that:

• Total savings in the economy declined to EUR7,320mln in Q3 2012 (down EUR559mln or 7.09%) q/q, but rose EUR1,747mln (+31.35%) y/y. In Q2 2012 there was an annual rise of 28.71% or +EUR2,199mln.
• Excluding financial corporations, the real economy's savings fell EUR452mln (-8.05%) q/q in Q3 2012, but a re currently up EUR1,851mln (+55.84%) y/y, against Q2 2012 annual rise of EUR910mln (+19.3%).
• The chart above shows that once we exclude financial corporations, savings actually are running much closer to long-term trend and that the trend is moving up, toward rising savings once again. This upward trend was established around Q1-Q2 2011 and as we shall see shortly is not necessarily signalling a major departure from the long-term established trends (se chart below).

The decomposition of savings into sectors shows that:

• Household savings rose modestly q/q in Q3 2012 (absent seasonal adjustment) and are up significantly y/y (+26.6% in Q3 2012), although that rise was well-matched by 26.0% increase in Q2 2012.
• General Government continued to dis-save (accumulate debt) in Q3 2012, shrinking national savings by EUR2,331mln (more than 9 times the rate of dissaving, as the rate of saving in the households). Year on year, the Government has managed to post EUR423 increase in dissaving (+17.2%).
• Financial Corporations also showed dis-saving in Q3 2012 or EUR107mln compared to Q2 2012 and EUR104mln (4.6%) compared to Q3 2011.
• Non-Financial Corporations posted savings of EUR4,930mln in Q3 2012, up EUR1,606mln (+48.3%) on Q2 2012 and up EUR1,215mln (+32.7%) on Q3 2011. 
• Thus, savings increase in Non-Financial Corporations outpaced savings increase amongst the Households by the factor of almost 6 in quarterly terms and by 1.2 in annual terms. If the Irish Government (and some analysts) are concerned with high savings rates, they are better off targeting companies accounts not household ones. But I doubt they are likely to start calling for a savings tax on MNCs.

Two charts below show long-term trends in savings components by sector. I reproduce two charts to show best-fit models and comparable models.

The charts above very clearly show that since about mid-2005, long term trend in Government savings diverged from those for Non-Financial Corporations and Households. Specifically, National savings became positively dependent on Households and real Companies and negatively impacted by the Government. In other words, current high Household savings rates are a saving grace for the economy that suffers from extreme pressures of Government deleveraging.

The third chart above clearly shows that Households contribution to total savings in the economy counter-moved with Government contributions, supporting the overall savings activity. In fact, correlation between Government savings and Household Savings averaged remarkable -0.91 in the period 2002-present and statistically-indistinguishable -0.89 since Q3 2006 through present. Over the same period of time, correlation between Government savings and Non-Financial Corporations savings runs at slightly lower -0.88 historically and -0.86 since Q3 2006.

14/1/2013: Irish Construction PMI - December 2012

The latest stats for Construction Sector PMI for Ireland are out (link here) and the data is not encouraging. At 43.0, the rate of decline in the sector activity was slightly down in December 2012, compared to November and October 42.6 readings. In fact, the rate of decline was the lowest since May 2012 when the index reading was 46.3. However, despite this, Construction sector activity continued to show uninterrupted contraction for 41 months in a row (the records available to me only go back to August 2009).

Overall sector PMI is currently below12mo MA of 43.84 (2011 average was 44.42, ahead of the 2012 average). PMI in December was ahead of 3mo MA of 42.73, but not statistically significantly so, and ahead of 6mo MA of 42.17.

As shown above, rate of decline has moderated in all 3 core components of the overall index:

• In Housing sub-sector, index finished 2012 on 45.8, an improvement m/m from 44.2 in November and better than 3mo MA (44.47), 6mo MA (42.82) and 12mo MA (42.49).
• In Commercial sub-sector, index ended December at 41.3 - a gain on 39.8 in November, but below 3mo MA (41.73), below 6mo MA (42.65) and below 12mo MA (45.16)
• In Civil Engineering, index rose to 35.2 (still massively below 50 line that would mark zero growth) from 31.1 in November. The index is ahead of 3mo MA (32.33), ahead of 6mo MA (33.42) and below 12mo MA (36.86).

Correlations between different index components are shown below:

Overall, Construction Sector activity is still contracting, albeit contraction rate has moderated somewhat. In December 2011, the index stood at 49.9 (virtually zero growth signal), while in December 2012 it was at 43.0 (clear contraction). Housing subsector registered the only monthly expansion at 52.3 (since 2009) in December 2011, contrasted by an outright decline of 45.8 in December 2012. Commercial subsector activity showed nearly zero growth at 49.8 in December 2011 against an outright and deep contraction of 41.3 in December 2012. And Civil Engineering posted a substantial contraction reading of 37.7 in December 2011, more than matched by an even deeper contraction of 35.2 in December 2012.