11/1/2014: Trueeconomics cited in Expresso

Trueeconomics cited in today's Expresso article on euro area peripheral bonds:
http://expresso.sapo.pt/grecia-e-portugal-lideram-descida-dos-juros-da-divida=f850116.

11/1/2014: Don't mention the 'D' word in the Eurozone, yet...

Bloomberg this week published a note analysing the GDP performance of the euro area countries during the Great Depression and the Great Recession: http://www.bloomberg.com/news/2014-01-06/europe-s-prospects-looked-better-in-1930s.html. The unpleasant assessment largely draws on the voxeu. org note here: http://www.voxeu.org/article/eurozone-if-only-it-were-1930s.

Perhaps the most important (forward-looking) statement is that in the current environment "complying with the EU's debt-sustainability rules will entail severe and indefinite budget stringency, clouding the prospects for growth still further". This references the EU Fiscal Compact and 2+6 Packs legislation.

And on a related note, something I am covering in the forthcoming Sunday Times column tomorrow (italics in the text are mine and bold emphasis added):

"What are the fiscal lessons? First, avoid deflation ... at all costs. ... Beyond that, the options in theory would seem to be financial repression, debt forgiveness, debt restructuring and outright default. Financial repression, the time-honored remedy, would seem to be out of bounds... and EU governments aren't yet ready to contemplate the alternatives [debt forgiveness, restructuring and defaults]. At some point, they will have to. In the 1930s, the situation didn't look so hopeless."

But why would the default word creep into the above equation?

Update: and another economist calling for debt restructuring/default denouement: http://www.voxeu.org/article/why-fiscal-sustainability-matters#.UtJWBR7i-nh.gmail
I know, I know - everything has been fixed now, so no need to panic...

11/1/2014: US Jobs Losses & Some Bad Omens for Europe...

Via @calculatedrisk blog, we have an updated chart comparing jobs destruction in the US for the Great Recession against the previous downturns (post-WWII):

I noted before that in addition to highlighting the severity of the Great Recession, this chart also shows that since 1981, downturns in the US have been marked by ever-extending duration of periods of jobs losses recovery.

Another worthy note is to point out that the US economy is now in 71st month of jobs levels below pre-crisis peak, which means that the US has already clocked almost 6 years of jobs losses. On current trend, it will be around 8-9 more months before the US fully recovers to the pre-crisis jobs levels. Given labour force and demographic changes during the crisis, and given pre-crisis long-term trends in jobs creation now foregone due to the crisis, the US is unlikely to regain the pre-crisis trend levels of employment any time in the next 5 years if not longer. That's the so-called 'lost decade' extending to more like 12 years or beyond.

And the US is in a much better shape than Europe... which is on aggregate is in much better shape than the 'peripherals'... 

10/1/2014: Ifo forecast for Euro area economic growth Q1-Q2 2014

German Ifo institute published its projections for euro area economic outlook for 2014. Here are the details:

• "As projected, GDP in the Eurozone expanded by a meagre 0.1% in Q3 2013, as export growth fell sharply."
• "Economic activity is expected to accelerate modestly over the forecast horizon (+0.2% in Q4 2013, +0.2% in Q1 2014 and +0.3% in Q2 2014) with a gradual shift in growth engines from external to domestic demand."
• "Continued tight fiscal policy in many member states together with persistent labour-market slack conducing to a stagnant real disposable income will lead to limited private consumption growth."
• "Investment is forecast to increase thanks to the gradual acceleration in activity and the need to renew production capacity after a marked phase of adjustment."
• Under the assumptions that the oil price stabilizes at USD 110 per barrel and that the euro/dollar exchange rate fluctuates around 1.36, headline inflation is expected to remain well below 2% (0.9% in Q1 2014 and 1.1% in Q2 2014)."
• "The major upside risk to this scenario is a stronger than expected investment growth, led by improved access to credit."
• "A stagnation in private consumption triggered by continued labour market weakness and weaker external demand in emerging economies are key downside risks."

Full details available here: http://www.cesifo-group.de/ifoHome/facts/Forecasts/Euro-zone-Economic-Outlook/Archive/2014/eeo-20140110

Some charts.

First, for unimpressive growth outlook for the recovery forward, compared to the past, both pre-crisis and 2010-2011 period:

Summary of forecasts:

Inflation outlook, as a bonus offering the reflection on just how poorly the monetary policy in the euro area been performing: remember the ECB mandate is to keep inflation at below but close to 2%...

Core inflation above is matching the target solely in 2007-2008, off-target or close to being off-target in parts of 2006 and 2012, significantly off-target in H2 2009-Q1 2011 and Q2 2013-on. ECB updated forecasts for inflation are at 1.4 percent in 2013, 1.1 percent in 2014 and 1.3 percent in 2015, which means ECB is expecting inflation to miss its target for the next 2 years at least.

Here's a chart of the latest survey indicators for economic conditions in the euro area - current and forward looking from the Ifo network and the EU Commission:

10/1/2014: Irish Industrial Production & Turnover: November 2013

Production for Manufacturing Industries for November 2013 in Ireland was up 13.0% on October 2013 and on an annual basis production increased by 15.9%. Turnover rose 1.2% in November 2013 when compared with October 2013 and an annual basis turnover increased by 0.7% when compared with November 2012.

These are big numbers. Which is good news. But they come with huge volatility in the series overall, so better comparative is on 3mo rolling basis. Here things are less pleasant:
- The seasonally adjusted volume of industrial production for Manufacturing Industries for the three months September 2013 to November 2013 was 0.1% higher than in the preceding quarter.
- Year on year All Industries production indices for 3 months period through November were still up robustly by 7.3%
- Turnover was 0.2% lower.

Per CSO: "The “Modern” Sector, comprising a number of high-technology and chemical sectors, showed a monthly increase in production for November 2013 of 13.4%. There was a monthly increase of 0.4% in the “Traditional” Sector."

Good news here is that y/y figures for production are up on a 3mo basis. Chemical and pharmaceuticals sector posted 21% rise. Basic metals a gain of 23.9%. But Food products fell 0.3% and Beverages fell 8.3%. Also, Computer, electronic, optical and electrical equipment production shrunk 16.2%.

Poor news came on q/q dynamics side. For September-November 2013, compared to 3 months period through August 2013, Capital goods production was down 3.6%, Intermediate goods production was up just 0.2%, Consumer goods production fell 1.0% with Durable Consumer Goods output down 30.4% and Non-durable Consumer Goods up 4.8%.

Full details here: http://www.cso.ie/en/media/csoie/releasespublications/documents/industry/2013/prodturn_oct2013.pdf

Summary:

10/1/2014: Top 5 Global Economic Risks of 2014: Sunday Times, January 5

This is an unedited version of my Sunday Times column for January 5, 2013.


2014 is the year of hope, arriving on foot of a renewed momentum in the economies of the U.S., U.K. and, since the beginning of the last quarter, the euro area. As welcome as these positive developments might be, any serious case for the economic fortunes revival in 2014 will have to stand against a rigorous analysis of risks and opportunities that are likely to emerge this year. Some are short-term; others are longer running themes signifying profound evolutionary transformations in the world of advanced economies.

Here are my top five picks for the economic risks and opportunities that are likely to mark 2014 the Year of Change.


1. Growth Challenge in Advanced Economies:

Core challenge faced by Ireland over 2014 and beyond is delivering sustainable rates of growth in excess of those recorded over the last decade.

Looking at growth in the GDP per capita reveals several worrisome trends.

Irish growth rates from 2005-through 2013 are running below the levels observed during 1980-1994. With a period of structural catching up with the euro area standard of living well behind us, the task ahead for Ireland is finding new sources for long-term growth.

The above challenges are compounded by the fact that our core trading partners are experiencing structural slowdown in their own economies. We are witnessing continued structural decline in the longer-term rates of growth in real GDP per capita across the advanced economies of the euro area that started in 1995. More immediately, the US and UK economies' recovery in the wake of the latest recession is slow, compared to the recessions experienced in the early 1990s and 1980s. Thus, Ireland is also facing the challenges of opening up new geographies, beyond our traditional trading partners in advanced economies, for exports and shifting more indigenous firms to exporting.

Currently, Irish medium-term growth outlook (2014-2018) implies growth rates that are some 3 times lower than those recorded in 1990s. A sustainable recovery from the crisis will require us delivering economic growth rates closer to those attained in the 1990s. Meanwhile, we are struggling to reach growth levels of the 1980s.

2. Medium-term Changes in Employment and Skills Demand

Significant reshaping of the advanced economies' labour force expected in 2012-2022 reflects the shifts in growth toward more human capital-intensive growth.

Increasing specialisation is changing Manufacturing and challenging both the U.S. companies operating in Ireland and Irish indigenous producers. In addition, the ICT Services sector is increasing demand for narrowly-defined specialist capabilities, leading to accelerating depreciation of the ICT sector skills and potential for reduction in overall levels of employment in the sector. The resulting contraction in demand for older skills will be magnified by the widening gap between in-demand new workers and legacy ICT employees.

The downsizing of the state sector will continue. The first wave of reductions during the Great Recession was driven by organic attrition, implying little improvement in productivity amidst staff losses. In the December Gallup poll, 72 percent of U.S. respondents identified 'Big Government' as the biggest threat to the country future, up from 52 percent in 2009. In Ireland, per Edelman Trust Barometer, trust in Government has remained at 15 percent in 2012-2013, ranking the Government alongside the banks as the least trusted institutions. The next wave will see a push for improved productivity, resulting in gradual reduction in employment levels in the sector and simultaneous shift in demand toward higher-skilled public sector workers.

On the other hand, Ireland is likely to gain from the Leisure and Hospitality, and Healthcare sectors growth on foot of ageing population across the major economies. The latter presents both a challenge and a major opportunity. Capturing global demand growth for Healthcare and Social Assistance services will require greater deployment of e-Health, remote health and other data-intensive, ICT-reliant healthcare tools. We are also likely to gain from renewed capital investment in the wake of strengthening global economic recovery. Financial services (chiefly IFSC), and Professional and Business services (especially innovation-focused internationally traded services), will gear up for rising demand. Education will remain a core driver for skills development and human capital investment.

3. Governments' Leverage Up, Banks Leverage Down

With its banking sector deleveraging largely completed, the U.S. economy is enjoying a credit-driven recovery. Both, the U.S. banks and the Federal Government are also increasing their access to global funding markets.

In contrast to the U.S., euro area banks are continuing deleveraging, while financial fragmentation is pushing national banks into greater isolation. With credit on decline for nineteen consecutive months, euro area economies remain starved of working and investment capital and capital markets integration is rapidly collapsing.

All along, buildup in public debt continues unabated without delivering a meaningful uplift in domestic investment activities. While in the U.S. public debt increases are supporting public investment and private consumption, euro area government leveraging up is primarily funding unemployment supports, public pensions and banks, with share of investment spending in total Government expenditure declining. As the result, euro area gross investment as percentage of GDP has declined from 21 percent over 2000-2002 to less than 18 percent in 2013. In the advanced economies ex-euro area gross investment slightly rose from just under 24 percent of GDP in 2000-2002 to 24.2 percent in 2013.

These trends act to reduce Irish exports of capital goods and investment-related services and undercut availability of credit in the domestic economy. The risk for 2014 is that the forces of financial fragmentation will remain at play across the euro area. The opportunity is the market readiness for entry of new investment and lending intermediaries.

4. Irish Labour Income Trends

Between 2008 and 2013, labour income share of Irish GDP has declined from 48 percent to 41 percent, implying a loss of roughly EUR3.3 billion in the domestic economy. This decline was driven primarily by re-orientation of GDP growth away from labour-intensive domestic sectors to MNCs-led exports of ICT and financial services.

As the result, declines in labour income have outpaced declines in value added in the economy, implying a transfer of income from the employees to the corporate and state sectors.

Taxes increases have compounded this effect, leading to a significant decline in household investment and consumption.

Over 2014-2016, Ireland faces a major challenge in rebuilding household financial positions and income to achieve sustainable levels of household debt, private investment and consumption. This can only be delivered by reducing the burden of taxation faced by the households, which puts us straight on the collision path between our corporate and wealth taxation policies, and the income tax policies reforms needed to restart the domestic economy.

Good news: by taking radical approach to rebalancing our tax system, we can do both – deliver sustainability-focused reforms and reboot the domestic economy. Bad news: our political and economic elites are too reliant on the status quo to secure their power to be able to structure and implement such reforms.

5. Monetary Policy Unraveling

2014 will mark the beginning of the end to unorthodox monetary policies deployed during the crisis.

This month, the U.S. Fed will begin gradual tapering of its purchases of the Government bonds. In advance of this, futures on 3 months Treasuries have been losing value since November. Meanwhile, euribor - the interest rate charged by top euro area banks for loans to each other - has been moving up relative to the ECB policy rate.

The ECB rates have now been in divergence from their historical mean for record 60 months. For now, Frankfurt is concerned with deflationary risks in the economy. Short-term eurodollar 3 month forward curve is pricing in euro devaluation in the short term and higher yields in the U.S. However, the return to historical norms for the ECB is only a matter of time. This will see rates rising over time toward the pre-crisis average of 3 percent from the current 0.25 percent.

For Ireland, normalisation of monetary policies presents significant risks. Rising interest rates, especially if compounded by the banks' drive to increase their lending margins, can derail nascent recovery, depress investment and destabilise once again the residential mortgages, including many that are deemed to have been ‘sustainably restructured’ prior to interest rates rises. In addition, higher yields on Government bonds will take a huge toll on Exchequer finances.

Unless this re-pricing in the bonds markets comes at the time of high growth in the Irish economy, the process of unwinding of global accommodative monetary policies can put us through a severe test, possibly as early as late 2014.

10/1/2014: Ambrose Evans-Pritchard on Euro area's miracle of recovery

A very good article by Ambrose Evans-Pritchard on the fallacy of European 'leaders' view of the peripheral countries economic stabilisation: http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100026365/barroso-triumphant-as-jobless-europe-wastes-five-precious-years-of-global-recovery/

Some caveats:

1. AEP argues that Ireland had the capacity to withstand domestic blowout caused (as he correctly states) by the monetary policy mismatch. His argument for this is that "Ireland is highly competitive (second best in EMU after Finland on the World Bank gauge)." The problem, of course, is that WB competitiveness indicator is superficial - it hardly reflects the reality on the ground when it comes to credit supply (non-existent in the economy, yet highly ranked in WB study), openness of domestic markets (not measured), access to public procurement (not measured), extent of domestic indirect taxes (not measured), security of domestic property rights (pensions or insurance contracts, anyone?), etc etc etc. 
2. AEP argues correctly that Ireland has high levels of exposure to international trade. And this is sustaining the macro-level recovery in the economic aggregates (GDP etc), but this has virtually no effect on the ground - the domestic economy is stagnant and most of the improvements that do take place are down to Malthusian contraction: emigration, jobs destruction, tax and charges hikes, rip-off via state-controlled prices and other measures that continue to shift private sector resources to fund the Exchequer. Ireland has had virtually no real reforms in the way domestic (public and private) business is conducted.
3. AEP acknowledges some of the above problems, saying that "But even if Ireland can make it without debt restructuring (and that is not certain), the underlying erosion of the workforce through hysteresis from mass unemployment – and from mass migration to the UK, US, and Australia – has greatly damaged the long-term growth potential of the economy." This is spot on. One qualifier, however - Ireland already had three rounds of debt restructuring: two rounds of restructuring Troika debts (terms extensions and rate reductions) and one round of restructuring banks-linked debt (Promissory Notes). These provided, in some cases real and in some temporary, relief to the fiscal funding side of the equation. It is, however, in no way certain that we will not need more restructuring.

Key is that AEP 100% correct in saying that:
"At the end of the day, Ireland was forced by the EU authorities to take on the vast liabilities of Anglo-Irish to save the European banking system in the white heat of the Lehman crisis, and the EU has since walked away from its pledge to help make this good. The Irish people have been stoic, disciplined, even heroic. They have survived this mistreatment. To cite it as a vindication of EU strategy sticks in the craw."

And per future, I couldn't have said it better myself:
"Europe is one external shock away from a full-blown deflation trap, and one recession away from an underlying public and private debt crisis. Nothing has been resolved. Aggregate debt ratios are higher than they were before the austerity experiment. In the end there will still have to be a "Brady Plan" like the Latin American debt write-offs at the end of the 1980s, but on a far larger scale and with far more traumatic effects on the European body politic. So celebrate today while the sun is still out, and dream on."

Let me add that Europe is one internal shock away from the above too. All that is needed is a massive wave of financial repression to derail the common currency's faltering monetary structure and push the banking sector back into contraction. The debt levels - private and public - are dramatic enough for the economy to succumb to either external or internal shocks. And one certainty we have is that shocks do happen.

9/1/2014: Live Register: December 2013

Live Register for December was published earlier this week. Let's take a look at the recent changes and trends.

Using seasonally-adjusted data:

• December 2013 LR stood at 402,800, lowest reading since May 2009 and down 6.7% y/y. October 2013 reading was down 6.2% on October 2012, so strong downward trend is clearly present.
• Good news is that in 2013 the LR declines came alongside increases in labour force participation. In Q3 2013, LR averaged 416,100, down 19,633 y/y, while labour force participation increased 16,300. We don't have data for labour force participation for Q4 2013 year, so that comparative will have to wait.
• Over Q4 2013, average Live Register numbers fell 2.39% on Q3 2013 average and was down 6.15% year on year. The latter marks acceleration in LR declines : in Q3 2013 LR average was down 4.51% y/y.
• Overall seasonally-adjusted LR declined 28,800 y/y in December and was down 3,300 m/m.

Under-25 years of age: 

• Number of LR recipients under 25 years of age stood at 62,400 in December 2013, down 11.6% y/y (-8,200) and down 900 on October 2013.
• Stripping out some volatility, Q4 2013 average was down 3.46% q/q and 11.1% y/y for those under 25 years of age.

Casual and Part-time Workers: 

• 81,382 casual and part-time workers were on the Live Register in December 2013, down 7.6% y/y
• On a quarterly averages basis, Q4 2013 figure was 4.2% lower than Q3 and 6.5% lower than Q4 2013.

Coupled with lower jobs creation for the younger workers and slower growth in part-time employment reported in Q3 2013 QNHS data, the above facts suggests that significant share of overall improvement in the Live Register can be down to exits from the LR that are neither registering as unemployed nor employed. This, of course, would mean they are either dropping off unemployment schemes due to expiration of benefits and/or emigrating. Alas, we have no real data on what happens to those who exit the LR schemes.

However, we do have data on State Training Programmes (STPs) participation - counting individuals who do receive LR financial supports, yet are not counted as being on LR. Do note, we also have a lag in reporting of these numbers with the latest data currently available for November 2013.

• In November 2013, 85,738 individuals were in STPs - up 2% (+1,677). M/m STPs participants rose 1,100, accounting for almost 1/3 of the 3,500 decline in overall live register in October-November 2013.
• Combining STP participants and official LR counts, total number of those on unemployment supports in December 2013 stood at 488,538 (using November LR figure) against November count of 491,838.

On average, in Q4 2013, 23% of Irish workforce was in receipt of unemployment assistance, up on 22.2% in Q3 2013 and down on 23.1% in Q2 2013. In Q4 2012 the same proportion was 24.1%.

The good news is that even accounting for those on STPs, Live Register total has fallen back in 2013. In Q4 2013 average total LR+STPs numbers were down ca 4.7% y/y (assuming there is no dramatic change in STPs numbers when these are reported for December).

Some trends next.

First overall LR and LR with training programmes included:

Both are off-peaks (good thing, assuming it is happening not by throwing people into poverty), but while Official Live Register is trending strongly down, once training programmes are included, the downward trend is shallower.

Live Register for under-25 year olds:

Again, good trend - downward and strong - stronger rate of recovery than in the early 1990s. Of course we also have more outflows due to emigration today than in the 1990s.

Overall, 25 year-olds as proportion of total Live Register today are at their historical low of 15.4%:

9/1/2014: Danske EM: Russian Economic Outlook 2014

Danske Emerging Markets out with their outlook for Russian economy for 2014. Here are two core snapshots with my brief comments (click on the image to enlarge):

All good. Concern is that credit growth (consumer credit) is still high, although from relatively low levels. On optimism for 2014 side, there might be a rebound. Certainly the projections for oil and energy prices and basic commodites are better and improving. But 'Sochi Effect' is questionable. See here on the timings of the economic impact of the London Olympics: http://trueeconomics.blogspot.ie/2012/10/18102012-some-tough-love-from-stats-for.html and here's something on the Olympics Effect in the longer run (aka no effect): http://trueeconomics.blogspot.ie/2012/08/282012-bit-of-olympic-bubble.html

And a spot-on bit on monetary policy:

One bit - I do not think there will be a dramatic fall-off in inflation.

Here are two core charts:

9/1/2014: Public Lecture in Biochemisty and Immunology

Fascinating stuff:

The School of Biochemistry & Immunology in TCD:  public lecture in Biomedical Frontiers series. 

Professor Ken Mok, "Who da mule? - Smuggling molecules across (biological) borders
" 

Key topics:

• Why is basic research important? 
• Can we really predict which 'horses' (= specific application areas) to bet on in the long run? 
• Telling "a factual story in protein folding/misfolding research where a potential drug-transporting 'mule' - rather than 'horse' - was serendipitously found through basic studies. Widespread interest in this protein-fatty acid complex is growing due to its remarkable properties of selectively killing cancer cells while leaving healthy, differentiated cells intact."

Event details
:

Date: Wednesday 15th January  
       

Time: 6:30pm
       

Venue: Stanley Quek Theatre, Trinity Biomedical Sciences Institute, Pearse Street
       

All welcome and admission is free

Details: http://www.biochemistry.tcd.ie/news/publiclectures.php

9/1/2014: New vehicles licenses in 2013

New vehicles licenses for December 2013 were published yesterday, so we can now update figures for full year 2013.

In 2013, number of all vehicles (new and used) licensed in the state rose 13.12% compared to 2012. 2012 marked the trough of the crisis period licensing and 2013 marked the best year for the Motor Trade since 2008. However, compared to peak, all vehicles licenses were still down 50.88% in 2013.

Of the above, new private cars licenses declined 6.44% y/y, although these were up 31.1% on crisis period trough. New private cars licensed in the State posted their second worst year since the onset of the crisis in 2013 and are currently down 68.3% on peak.

New goods vehicles licenses rose 1.56% in 12 months through December 2013 compared to full year 2012, potentially signalling some improvement in the business activity in the economy. These are now 9.68% above their crisis period trough, but are still down 76.1% on pre-crisis peak.

Chart to illustrate:

8/1/2014: Weakness in Retail Sales extended into November 2013

Retail sales data was out for November 2013 today. Here's the top of the line analysis:

• On seasonally-adjusted basis, core retail sales (ex-motors) posted a slight rise in value of sales from 95.5 in October to 96 in November. 
• Year-on-year value of retail sales (ex-motors) are down 0.1%.
• Core retail sales in volume terms stood at 101.4 in November, up of 100.1 in October.
• Year-on-year volume of retail sales index rose 1.6%
• Meanwhile, the ESRI Consumer Confidence indicator declined to (still massively optimistic) 71.0 in November from 76.2 in October. A year ago, the CCI was at 63.8.

3mo period through November 2013 compared to 3mo period through August 2013:

• Value index marginally down at 95.6 against 96.1 prior;
• Volume index marginally up at 100.5 against 100.4;
• Consumer confidence index up robustly at 73.4 against 68.5 prior

Thus, in the nutshell, Consumer Confidence rose over the year, while retail sales  basically stagnated. 

My own Retail Sales Activity Index:

• On 3mo basis up at 105.6 in September-November 2013 against 103.9 in June-August 2013;
• Up 0.54% mom - in line with 0.52% rise in Value index and up 2.75% y/y

It is worth noting that stripping out motor trade, automotive fuels and bars,

• Value of retail sales fell 0.98% in the 3mo through November compared to 3mo through August
• Volume of retail sales rose 0.06% in the 3mo through November compared to 3mo through August

The above suggests that p[rice reductions in there entail sector in September-November 2013 had no effect on increasing retail sales, compered to the 3 months of June-August 2013.