20/9/2013: Ireland's Credit Risk Scores Improve Again

With some weak domestic economy figures out for Q2 2013, let's finish the week of Irish news with some positives. Euromoney Country Risk survey updates are in today and Ireland again posted improved scores:

Update: In a related news, Moody's put Ireland on stable outlook tonight: http://www.reuters.com/article/2013/09/20/us-ireland-moodys-outlook-idUSBRE98J10C20130920

20/9/2013: Domestic Economy: Continuing Its Sextuplet Dip in Q2 2013

Total Domestic Demand is defined as :

• Consumer Spending on goods and services + 
• Government Spending on Current (as opposed to capital) goods and services + 
• Gross Fixed Capital Formation (basically gross investment) + 
• Change in Stocks of goods and services in the economy. 

In a more old-fashioned way, it is Investment + Consumption + Net Government Spending.

Put differently, this is the domestic economy (excluding exports net of imports, and outflows of income to the rest of the world net of inflows of income from the rest of the world).

Now, here are the quarterly changes in the domestic economy from 2007 on, for real (constant prices) seasonally adjusted series:

I define 'dips' in the above series similar to the official definition of a recession: two consecutive q/q downward movements. Remember, we have been told since Q2 2010 that the Irish economy has 'stabilised' and even 'returned to growth'. Since then we had: eight quarters of contraction and four quarters of growth in Total Domestic Demand.

The two core drivers downward in the domestic economy on q/q basis are:

On the good news side, q/q increase in Personal Consumption component (above) and external trade (below):

And external trade showing strong performance on q/q basis, which, alas, only partially offsetting the decline recorded in Q1 2013...

And this concludes my analysis of the QNA for Q2 2013.

20/9/2013: H1 2013 QNA: Domestic Economy vs External Trade

In the previous two posts I looked at Q2 national accounts for Ireland in terms of headline GDP and GNP figures, y/y and q/q changes in the first post; and half-yearly figures analysis in the second post. The headline conclusion was that:

• Q2 2013 real (constant prices) GDP performance is weak, but posits some growth, pushing us out of official third dip recession. 
• Irish real GNP fell 0.1% in Q2 2013 compared to Q2 2012, having only marginally reversed the 6.01% y/y rise recorded in Q1 2013. 
• Broadly-speaking, H1 figures show continued economic performance within the new structural range of slower economic activity that set on with the 'recovery' of H2 2010 (the Celtic Canary period).
• Crucially, moving to less volatile half-yearly figures, Y/Y Irish real GDP fell 1.10% in H1 2013, marking a second consecutive 6-months period of declines (it was down y/y 0.75% in H2 2012 as well). 
• Y/Y Irish real GNP rose 2.87% in H1 2013, marking third consecutive 6-months period of increases in GNP.
• At current rates of growth (that is taking 3-year average, since current annual rate is negative), it will take us until 2029 before we can reach real levels of GDP consistent with the pre-crisis levels. 

Now, let's take a look at the underlying components of GDP and GNP from the expenditure side of the national accounts. Since we have half-yearly data, we might as well focus on longer-term, more stable series. For this purpose, let us also look at nominal (not real) values, so we have some idea as to actual activity on the ground, reflective of price changes, as well as volumes changes. There are several reasons for doing this:

1. Nominal values, expressed in current prices are actually linked to what we get paid, what we pay for and what the economy produces;
2. Nominal values are also reflective of what the Government spends, collects and what the potential for debt servicing is when it comes to economy's output; and
3. Nominal values are free from the impact of the inflation adjustments, which are made based on 'average' households and firms, rather than on what we do observe in the economy itself.

There are drawbacks to this analysis, so like everything else in economics, this is not intended to be 'completely and comprehensively' conclusive.

As can be seen from Chart above, Personal Expenditure on Goods and Services rose 0.4% y/y in H1 2013 - which is good news. However, the same was down on H1 2011 (recall that the Government is keen on claiming that consumer confidence and consumption spending rose during its tenure, which is obviously contradicted by the data we have). Compared to peak pre-crisis performance (peak referencing output peak, not specific series peak), we are down 10.61% on H1 2007.

Understandably, Government spending (net of tax receipts) is down when it comes to current goods and services (as opposed to capital goods and services): -2.11% on H1 2012, -4.27% on H1 2011 and -12.46% on H1 2007. You might think this is 'huge', but y/y over the first 6 months of 2013 our net current Government spending is down only EUR 278 million and when it comes to vast/deep cuts since 2007, H1 2007 spending was cut EUR1,754 million by the end of H1 2013.

Meanwhile, Gross Fixed Capital Formation (basically investment in the economy) is down 9.40% in H1 2013 compared to H1 2012, down 14.09% compared to H1 2011 and down 67.73% compared to H1 2007. The reductions in capital investment jun H1 2013 compared to H1 2007 are ten-fold the size of reductions in current Government spending at EUR17,542 million. For another comparison, reductions in personal expenditure on goods and services by households over the same period is EUR4,757 million.

Put in different terms, domestic economy is still falling, with no stabilisation in sight.

Next: external trade and GDP & GNP series:

Exports of goods and services - the only part of the economy that was booming (+15.94% in H1 2013 on H1 2007 and +5.44% on H1 2011) are hitting some bumps. H1 2013 posted a decline in total exports of 0.67% y/y. Meanwhile, imports of goods and services were up 0.08% y/y. As the result of this, our trade balance fell 2.32% y/y in Q2 2013 and is down 3.15% y/y for H1 2013. This is not good, as key Exchequer projections and debt sustainability analysis require healthy growth in trade surplus, not a decline. But more on this below…

GDP at current prices fell 1.49% in H1 2013 compared to H1 2012 and is down 0.28% on H1 2011 and down 15.26% on H1 2007. Recall that our real GDP fell 1.10% y/y in H1 2013. In other words, there is no growth in actual underlying activity. This is pretty bad. Actual euro notes we have in the economy's 'pockets' at the end of H1 2013 (as imperfectly measured by GDP) were fewer than at the end of H1 2012 and H1 2011. And these fewer euros were not worth more, either. I wouldn't call this 'stabilisation'.

Net factor income outflows abroad are falling as well and I commented on these in the previous posts.

GNP expressed in current market prices is 2.32% ahead in H1 2013 compared to H1 2012 and 2.92% ahead of H1 2011. This is good news, especially since GNP is a more accurate reflection of our real economy's output (also rather imperfect) than GDP. Not so good news: GNP is still down 17.53% on H1 2007. 

Chart below drills into the composition of our external trade:

The above clearly shows the massive swing of our external trade activities from goods sectors to services sectors. And on imports of goods side it shows the legacy of the consumption bust, which remains one of the two largest drivers for improved external trade statistics we see on national accounts.

Finally, total domestic demand: the measure of the economy that covers all domestic activities of private and government consumption and investment combined, plus chafes in stocks.

As the above shows, domestic economy continues to suffer losses in activity: Total Domestic Demand fell 0.95% in H1 2013 compared to H1 2012 and is down 3.05% on H1 2011. Compared to H1 2007, Total Domestic Demand is down 27.41%.

Summary: Bad news: Despite improvements in real variables in Q2 2013, domestic economy continued to contract in H1 2013, with domestic demand down compared to H1 2012, driven by declines in Net Government Current Expenditure and in Gross Fixed Capital Formation. Good news is that decline in domestic demand was ameliorated by a marginal increase in Personal Expenditure on Goods and Services. On the bad news side, exports of goods and services fell in H1 2013 compared to H1 2012. These changes, together with domestic demand movements resulted in GDP falling in H1 2013 compared to H1 2012. Lower rate of profits repatriation out of Ireland by the MNCs has resulted in an increase in GNP in H1 2013 compared to H1 2012.

In simple terms, if Irish economy were a student asking for a report card for H1 2013, I don't think there would be much on it worth boasting about. Let's hope H2 2013 will be different for the better.

19/9/2013: First Half 2013: Irish GDP and GNP growth divergence

CSO published Q2 national accounts for Ireland today and these are worth detailed analysis, which I will break up into a series of posts next. 

In the previous post, I covered headline GDP and GNP figures, y/y and q/q changes. As a reminder, the headline conclusions were that:

• In Q2 2013 Irish real GDP fell 1.17% on Q2 2012, marking the fourth consecutive quarter of real GDP contractions, the longest period of continuous contractions since the end of Q2 2010. 
• Irish real GNP fell 0.1% in Q2 2013 compared to Q2 2012, having only marginally reversed the 6.01% y/y rise recorded in Q1 2013. 
• On quarterly basis, seasonally-adjusted Q2 2013 real GDP rose 0.45% on Q1 2013, ending the third spell of the recession that lasted from Q3 2012 through Q1 2013. The expansion, however was weak and well below the one recorded during the previous recovery periods. 
• I am continuing to expect that Q3 2013 will post stronger performance than Q2 2013 with possible GDP q/q upside of closer to 1%.

Now, let's move onto H1 (first half of 2013) analysis.

Q2 2013 release allows us to look at half-annual GDP and GNP changes, something that removes some of the quarterly volatility and also brings us closer to the analysis that is relevant from the budgetary perspective. Remember, budgets are not based on quarterly forecasts, but annual ones.

H1 2013 GDP at constant prices seasonally adjusted fell 0.47% on H2 2012, marking the third consecutive half-yearly period of declines. Last time we had a half-yearly period of growth was in H2 2011.

H1 2013 GNP grew 2.17% over H1 2013 compared to H2 2012, marking the third consecutive 6-months period of growth. In other words, GNP perfectly countermoves against GDP. Why? Because of the changes in transfers of earned profits by the multinationals. 

Here's an interesting thing. The chart above shows three periods of Irish growth history (I am being sarcastic/humorous here, so no offence intended): 

1. The Celtic Tiger period - for which we have consistent data here is only covered by the period from 1997 through 2000: averaged H/H growth rates of 4.49%;
2. The Celtic Garfield period - which lasted roughly from 2001 through H1 2007; Celtic Garfield period growth averaged 2.51%; and
3. The Celtic Canary period (as the proverbial one in the EU's economic model coal mine) that started with the imaginary 'recovery' of 2010 and is running currently: averaged growth of 0.24% (do remember, that excludes the period of massive contraction between H2 2007 and H2 2009 when the average rate of growth was -2.0% H/H)

You can see that the slowdown in growth is not only due to the crisis, but appears to be structural in nature. The Canary part is because Irish economy's fundamentals are such that we should be growing at 3.5-4.5 percent annually. Yet we are growing at - say averaging Celtic Garfield and Celtic Canary periods - at 1.35-1.4 percent annually. This is the slowdown toward the European levels of growth for Ireland... something to think about?

Next, take a look at the levels of activity based on 6 months figures:

And now, let's talk about year-on-year changes in H1 2013:

• Y/Y Irish real GDP fell 1.10% in H1 2013 (in other words, against H1 2012), marking a second consecutive 6-months period of declines (it was down y/y 0.75% in H2 2012 as well). 
• Y/Y Irish real GNP rose 2.87% in H1 2013, marking third consecutive 6-months period of increases in GNP.
• Overall, H1 real GDP (non-seasonally-adjusted) was up 1.65% on H1 2010 when we first heard about the 'recovery' of Irish economy or 'stabilisation'. Thus over 3 years, our GDP grew 1.65% - producing average annual rate of growth of 0.55%. Not exactly stellar, but better than nothing.

Our current H1 2013 GDP is down 7.98% on peak levels, so we are still far away from recovering to pre-crisis levels in real terms. In fact, at current rates of growth (that is taking 3-year average, since current annual rate is negative), it will take us until 2029 before we can reach real levels of GDP consistent with the pre-crisis levels. When someone says we have a lost decade, what they really mean - in real GDP terms - is that we are likely to have lost 23 years. And that does not count the opportunity cost of foregone growth. That is one hell of a long 'lost decade'.

To summarise the above: Good news is: real GNP is up 2.87% y/y, and up for the third consecutive 6-month period. Bad news is: our real GDP is down 1.1% y/y and this marks second consecutive 6-month period of declines.

I expect growth to be positive in H2 2013, with y/y around 1.0-1.2%.  Which should push our full year growth closer to zero.

Stay tuned for more analysis of QNA results.

19/9/2013: Irish GDP and GNP: Q2 2013 & the 'end of the third recession'

CSO published Q2 national accounts for Ireland today and these are worth detailed analysis, which I will break up into a series of posts next. 

Starting with the headline GDP and GNP figures:

In Q2 2013 Irish real (constant prices) GDP fell 1.17% compared to Q2 2012, compounding the previous fall of 1.04% y/y recorded in Q1 2013. On an annual basis, this marks the fourth consecutive quarter of real GDP contractions, the longest period of continuous contractions since the end of Q2 2010. Currently, real GDP stands 7.83% below the historical peak.

At the same time, Irish real GNP fell 0.1% in Q2 2013 compared to Q2 2012, having only marginally reversed the 6.01% y/y rise recorded in Q1 2013. Despite a surprisingly robust rise in Q1, Q2 2013 real GNP stood 10.40% lower than pre-crisis peak.

The swing in the direction between GDP and GNP was driven in Q2 2013 by a 5.85% drop in the outflows of transfer payments to the rest of the world compared to Q2 2012, which compounded a massive 28.26% decline in the transfer payments recorded in Q1 2013. In other words, GNP improvements appeared to have been sustained by a massive parking of MNCs profits in Ireland. The reasons for this are unknown, but we can speculate that the MNCs are holding back profits from transferring out of Ireland due tot ax considerations and due to subdued global investment activities. It remains to be seen what happens to the GDP and GNP were the MNCs to begin once again actively exporting retained earnings.

Note: shaded periods show episodes of more than 2 quarters consecutive contractions (here on y/y basis, so these are not official recessions)

On quarterly basis, seasonally-adjusted series:

Q2 2013 real GDP rose 0.45% on Q1 2013, partially compensating for the 0.59% contraction in Q1 2013 and ending the third spell of the recession that lasted from Q3.2012 through Q1 2013. The expansion, however was weak and well below the one recorded during the previous recovery periods. For example in Q1 2010, the end of the second recessionary dip, GDP expanded by 0.82%. The end to one-quarter drop of Q2 2010 led to a GDP rise of 1.08% in Q3 2010, the end of one quarter contraction in Q4 2010 was followed by 1.48% expansion in Q1 2011 and 1.38% expansion in Q2 2011, even the end of Q1 2012 quarterly decline was marked by a 0.48% expansion in Q2 2012. In previous episodes, recovery that was associated with growth rates at below 0.7% q/q was swiftly followed by the subsequent quarter contraction in GDP. This suggests underlying weakness in the GDP performance in Q2 2013, although my personal expectation is that Q3 2013 will post stronger performance than Q2 2013 with possible GDP q/q upside of closer to 1%.

On GNP side, seasonally-adjusted real GNP fell 0.37% in Q2 2013 in q/q terms, ending two consecutive quarters of quarterly growth (Q1 2013 growth was robust 2.2% q/q and Q4 2012 growth was weak at 0.32%).

Two charts:

Note: shaded periods show episodes of more than 2 quarters consecutive contractions (here on q/q basis, seasonally adjusted, thus representing official recessions).

On historical comparison basis, table below summarises latest movements in GDP and GNP:

So a summary: we are officially out of the third dip of the Great Recession. This is a good news. 

Bad news is that this data is once again being paraded around as a sing of 'stabilisation' of economic activity. Alas, the first time we've heard this 'stabilisation' argument was in Q1 2010, when the main - longest and deepest - second dip ended. Since then, Irish economy has managed to grow by just 2.63% in real GDP terms and only 3.54% in real GNP terms. Since the onset of the recovery, we have posted average quarterly growth of only 0.18% (seasonally-adjusted figures) and this effectively means that the economy is in a stabilisation pattern closer to coma than to a sustained recovery.

Good note to all of this is that, as mentioned above, I do expect stronger activity to be recorded for Q3 2013 and possibly for Q4 2013 as well.

18/9/2013: Building & Construction Sector: Some Cautiously Positive Signs in Q2 2013

CSO released today Q2 data for production indices in Building & Construction. Here are some headline numbers:

Value of Production Indices:

• All building & construction production rose 4.23% q/q and is up 11.98% y/y. The Index is up 7.11% on Q2 2011, but is still down 76.64% on peak. Note: Q2 2012 was the absolute low. The index is now on the rise since Q3 2012 so we have nine months of increases. The rate of increase is significant, but the rise is from a very low level of activity to start with.
• Building ex civil engineering is up 8.2% q/q and 11.24% y/y. The series are down 3.88% on Q2 2011 and down 82.54% on peak. Note: Q2 2012 was the absolute low. The index is now on the rise only since Q1 2013 so we have to be cautious with interpreting any increases to-date.
• Residential building activity rose 2.25% q/q and is up 8.33% y/y. The activity level is now exactly at the level it last recorded in Q1 2012. The index is still down 92.0% on peak and is now up 8.3% on absolute low. This marks the second consecutive quarter of increases, which suggests that we are getting closer to calling a turnaround. The index is still down 10.78% on Q2 2011.
• Non-residential building activity is up 10.95% q/q and 13.22% y/y, but only 0.16% on Q2 2011. Relative to peak, activity is down 50.77%, but it is up 13.22% on absolute low. The series are volatile and we have only one quarter of increase consecutively, which means we should read this change with caution.
• Civil engineering activity is slightly down -0.13% q/q, but still up 12.59% y/y. Activity is now 31.79% ahead of Q2 2011 and the series are down 44.63% on peak and up 59.23% on absolute low. Timing of these series changes is more consistent with public spending and thus quarterly changes are not exactly very useful. 

Volume of Production Indices:

• All building & construction production rose 1.7% q/q and is up 11.16% y/y. The Index is up 4.37% on Q2 2011, but is still down 77.17% on peak. The index is now on the rise since Q3 2012 or nine months of consecutive increases. This suggests that price effects had a positive boost to value numbers shown above, but overall trend up is sustained on both volume and value sides.
• Building ex civil engineering is up 8.0% q/q and 10.76% y/y. The series are down 5.91% on Q2 2011 and down 83.54% on peak. The index is for just one quarter, so the same caution expressed about the value index applies to volume.
• Residential building activity rose 1.25% q/q and is up 8.0% y/y. The index is still down 92.2% on peak and is now up 10.96% on absolute low. This marks the second consecutive quarter of increases.
• Non-residential building activity is consistent with the value index performance, same as for civil engineering activity is slightly down -0.13% q/q, but still up 12.59% y/y. Activity is now 31.79% ahead of Q2 2011.

Overall: some positive news on total index and very cautiously positive news on ex-civil engineering data. Residential activity showing positive upside, but non-residential series are still bouncing along the bottom. Non-residential activity is showing some cautiously positive developments.

Charts to illustrate:

18/9/2013: Sovereigns at a Welfare State Funeral...

In my MSc in Management class today in UCD Smurfit School of Business I discussed with the students the issues of unfunded liabilities. In particular - the distinction between contractually obligatory liabilities and politically-granted ones.

The biggest difference is in the treatment of public servants' pensions as opposed to 'statutory' old-age minimum pensions. The former are contractually defined, the latter are not. And thus, the only way future European and US governments will be able to escape insolvency of their public spending systems - once the cost of ageing hits home - will be via a default on the latter.

I spoke about the same yesterday with an Austrian journalist.

And now we have this coming out of the Netherlands: http://www.independent.co.uk/news/world/europe/dutch-king-willemalexander-declares-the-end-of-the-welfare-state-8822421.html

Yes, at last, the honest Dutch blew the whistle on the Ponzi scheme that is politically-driven public financing of old age security. It. Is. A. Dream. just that... a dream. Not a contract, not a duty, not an obligation.

17/9/2013: CBI Sets New Targets for Mortgages Arrears Resolution

The Central Bank of Ireland has published new target for the mortgages resolution process: http://www.centralbank.ie/press-area/press-releases/Pages/CentralBankstatementonMortgageArrearsResolutionTargetsConcludedArrangements.aspx

The new target is that by the end of December 2013, 15% of mortgage holders in arrears above 90 days (as of the end of June 2013, ) should have "concluded agreements " completed. In March 2013, the Central Bank had requested offers of solutions to be made in respect of 20% of arrears cases, rising to 30% to Q3 and 50% by the end of December 2013. On foot of these targets, the Central Bank is now requiring that 15% of all arrears cases above 90 days should be concluded by the end of year.

March 2013 target of 20% offers of solutions by the end of Q2 2013 required the banks to submit formal offers on 19,575 principal residences mortgages accounts and 6,065 BTL accounts, while the new target of 15% concluded arrangement covers 14,681 principal residences mortgages accounts and 4,549 BTL accounts. In other words, the Central Bank’s combined targets are for the banks to issue formal offers of solutions to 25,640 accounts and achieve concluded arrangements on 19,230 accounts.

Detailed Central bank paper setting out original set of targets is available here: http://www.centralbank.ie/press-area/press-releases/Documents/Approach%20to%20Mortage%20Arrears%20Resolution%20-.pdf

IMHO will be issuing a more extensive press release on today's announcement later, stay tuned for the link.

16/9/2013: More pesky stuff on PMIs v Reality...

Readers of this blog would know that I have been skeptical about the Purchasing Manager Indices capacity to accurately track changes in the economic output, especially during the times of unstable trend or trend shift. The latest on the topic was recently covered here: http://trueeconomics.blogspot.ie/2013/09/1092013-pmi-and-real-economy-goldman.html

And here's the handy chart from Pictet neatly highlighting the same problem:

Not being a conspiracy theorist, I would not suggest that latest changes in Markit reporting of PMIs - and in particular dramatic shift away from actually providing broader public and analysts community with some hard numbers and in favour of providing more 'interpretations' of the data plus often unreadable charts has anything to do with the breakdown in PMIs correlations with actual activity... but it would be nice to have more accurate and data-focused releases.

Note: full Pictet note on industrial production in the euro area is here: http://perspectives.pictet.com/2013/09/13/euro-areas-industrial-production-data-back-to-reality/

16/9/2013: Call me, once granny kicks the proverbial...

Structural slowdown? What structural slowdown... not in France and in particular not in the French traditional way of making the living... by inheriting it...

The chart above comes from one of the leading researchers on income and wealth distributions, Thomas Piketty. The key to reading this chart is that as a fraction of total disposable income, inheritance flows are now back at the levels last seen in and around WW1 period. The good old days of the 19th century when landed gentry and hereditary wealth class were all the rage is back in the Liberte, Egalite, Fraternite dreamland of France. Or put in more brutish, American terms - work? why bother, when inheriting things is so much more fun than earning them by merit.

16/9/2013: Bigger Question than Answers: Euro Area Banks Funding

An interesting chart from Credit Suisse (h/t to Fabrizio Goria ‏@FGoria) on marginal funding costs of Euro area banks:

Four points to note:

1. Marginal funding costs are now in line (albeit with a bit of volatility) with the costs in 2004-2006 period. This should be good, right?.. But
2. Source of marginal funding is now exclusively CDS-backed as opposed to Euribor, and
3. Spread over the repo rate is still consistent with the 2008 and 2011 spikes and is not getting any better with recent rate cuts
4. LTROs helped, but their effect is no longer present and since late 2012 we are seemingly in a 'long-run' trend pattern or in an 'absent catalyst' base?

Question one is, if base rate creeps up, what will happen to funding costs? Question two is, if the US base creeps up, what will happen to euro area funding costs?

The latter is non-trivial: we've heard of the emerging markets rot on foot of 'tapering' talks...

16/9/2013: A Liquidity Slush or an Equity Switch?

Three more charts from BIS Quarterly (http://www.bis.org/publ/qtrpdf/r_qt1309a.pdf), showing the switch of liquidity out of the Emerging Markets into Advanced Economies...

 And then from the Advanced Economies bonds into Advanced Economies equities with a small bounce up on Emerging Markets equities side too...

Two thoughts:

1. There is no yield-driven bounce anymore, so pricing is not a huge help in this process; and
2. Is this the end of the debt bubble and the start of the equities rise (structural, not nominal rise, driven by shift in corporate funding models) or is this a temporary slush of liquidity?