22/1/2014: 2013 - A Kinder Year for Peripheral CDS...

2013 was a kind year for Irish CDS... but it was an even kinder one for CDS of the countries from which, allegedly, Ireland decoupled, e.g. Italy and Spain...

Oddly enough (for those claiming Ireland's 'uniqueness' in terms of positive performance) the year was even kinder for Slovenia - a country that is only starting to move into a crisis mode:

And even lots-of-pain-for-little-gain Greece and Cyprus managed to pick up some positive momentum:

So the entire thesis for the 2013 CDS markets in euro area 'periphery' is really about global chase for yield squeezing more and more funds into 'peripheral' bonds and bidding down risk valuations of the said paper. This re-assessment of risks has little to do with underlying reforms or fundamentals on the ground in the countries and more to do with the exuberance of investors pushing cheaper funds into every corner of financial universe.

The good news is - this has a positive effect of lowering longer-term borrowing costs. The bad news is - this presents a threat of reforms fatigue. But we know this much already. After all, the sovereigns are not immune from the effects of QE...

21/1/2014: Davos: Outdated Irrelevance of Banality?

If you do need to know exactly why the World Economic Forum at Davos is a vacuous undertaking, go no further than this:

The top 5 risks the #WEF survey delivers to us as a break-through insight into the future from all this 'intellectual' elite gathering in Swiss Alps this week are so... how should I put it mildly... banal? well-rehearsed? predictable? all of the above?

If we already know what Davos is just setting 'ahead' for the discussion, what on earth can be the point of following this global navel gazing ego fest?..

More to the point: Water crisis, Climate change, High unemployment, and Fiscal crises all have been at the core of Davos discussions in previous years. Apparently, the Greats of this World still can't resolve any of them. Time to fuel up that Learjet, cause pressing 'risks' are upon us...

21/1/2014: No Special ICT Services Tax, but Double-Irish is Back in the News

Fresh instalment of 'Non-tax Haven' double-Irish news: http://www.ft.com/intl/cms/s/0/ec659cec-81ef-11e3-a600-00144feab7de.html#axzz2r17cBb9C

To track back numerous links on the topic, follow this link: http://trueeconomics.blogspot.ie/2013/12/26122013-italys-illegal-measure-takes.html

21/1/2014: Four Reasons to Worry About Income Inequality

Not being a fan of 'relative poverty' concept for a number of economic reasons, here's my real concern:

Source for both charts: http://www.oxfam.org/sites/www.oxfam.org/files/bp-working-for-few-political-capture-economic-inequality-200114-summ-en.pdf

The core concerns I have are that

• Extreme disparities of wealth and income distributions can lead to inequality of opportunity and, as the result, to non-meritocratic distribution of wealth and income over generations. 
• Extreme divergence in wealth and income distributions can lead to the decline of democratic participation and thus to a rise in political extremism.
• Extreme differentials in income inequality the wake of a major economic crisis compound long-term effects of the crisis and reduce the rate of recovery, including structural recovery.
• In the current crisis, the core cost of the crisis befell the highly indebted households, primarily from middle and upper-middle classes, plus lower-skilled unemployed. Exit from the crisis, therefore, requires repairing their balancesheets more robustly than the balancesheets of the top 1% earners. The fact that we are witnessing the opposite effect tells me that the underlying causes of the crisis have not been addressed. We have wasted trillions in scarce economic resources and achieved preciously little for it.

19/1/2014: McKinsey Study of European Education System

McKinsey published this week a large study on the jobs markets outcomes of higher education.

The basic conclusion is that from employment point of view, European education is - on 'average' - not exactly fit for purpose.

I know, this is bordering on soliciting nasty responses from Irish academic establishment. Last time I dared criticise some of the practices witnessed in our higher education, I had triumphant academics denouncing myself across their blogs, as if the louder the chorus, the closer to truth the arguments get. Still, caveats on McKinsey research aside, the paper does present worrying conclusions and some evidence.

Read it for yourselves here:
- Global study: http://mckinseyonsociety.com/downloads/reports/Education/Education-to-Employment_FINAL.pdf
- European study: http://mckinseyonsociety.com/downloads/reports/Education/A4E2e_DOWNLOAD_BOOK_FINAL.pdf

Note that Ireland is not explicitly covered in the study, so any analysis would have to be on the foot of comparatives to other systems. I am not going to provide this here.

In the nutshell, McKinsey suggests that educated Europeans are lacking basic work skills and that European education system is suffering from poor access, high cost, poor career planning and development, and lack of applied skills focus.

Evidence:  "The conventional wisdom, of course, is that the financial crisis and slow growth are the reason so many are finding it difficult to find stable, full-time work of the kind that will allow them to raise families and evolve into productive adulthood. This is true, of course, but it is not the whole truth."

"Youth unemployment was at a high level in many countries long before the financial crisis began to bite. Compared to unemployment in the general population, youth unemployment is stubbornly high in Europe... For the EU as a whole, the youth unemployment rate has not dropped below 17 percent at any point this century." In other words: "… economic conditions are not to blame for the frustration of employers as they evaluate the skills of young applicants."

Per McKinsey survey: "Only four in ten employers surveyed, in widely different countries and industries, reported that they were confident they could find enough skilled graduates to fill entry-level positions."

Why? "In Germany, …32 percent of employers surveyed said that lack of skills is a common reason for leaving entry level positions vacant, because the labour market is tight; only 8 percent of youth are unemployed". On the opposite side of the youth unemployment spectrum: in Greece "…more than 55 percent of youth are unemployed. Even so, our survey found that 33 percent of employers regularly leave vacancies open because they cannot find the skills they need."

McKinsey concludes that "…a lack of job-readiness skills— even in countries with slack labour markets—is hindering employment for young people. In effect, many employers choose not to hire, rather than take a risk on spending time and money training them."

"The shortage of skills is also holding back employers. In each one of the countries surveyed except the United Kingdom, more than a quarter of employers said that lack of skills has caused significant problems for their business. It is particularly interesting to note that in the countries with the highest youth unemployment, such as Greece, the proportion of employers reporting lack of skills as a problem was generally higher."

When you read McKinsey reports, the core problems with education-based skills development are striking.

"The most important barrier to enrolling in post-secondary education is cost. Although university tuition fees are generally highly subsidised in Europe, many students find the cost of living while studying still too high to sustain."

Applied skills? "...in a number of countries, vocational courses are not subsidised and can therefore be prohibitively expensive."

"A second barrier is a lack of information. Except in Germany, fewer than 25 percent of students in Europe said they received sufficient information on post-secondary courses and careers. In Europe, where many young people make a decision between vocational and academic paths at around age 15, such information is crucial."

Obviously, why would academic institutions bother with career advice when education is not about achieving any employment / career/ economic / business outcomes, as such outcomes pollute the pristine world of academia? Remember, we have academics who are proudly denouncing the pressures for skills and aptitude from the economy.

Not surprisingly, with the above attitudes, learning real trades and skills is a 'dirty' thing. "A third is stigma. Most of those surveyed said they perceived a social bias against vocational education even though they viewed it as more helpful to finding a job than an academic path. Fewer than half of those who wanted to undertake a vocational course actually did so."

On basic skills shortages: "...building the right skills, too many students are not mastering the basics, with businesses reporting a particular shortage of “soft” skills such as spoken communications and also problems with work ethic."

Now, really, folks... spoken communications and work ethic... obviously outrageously neo-con demands...

"Furthermore, too many young people are taking courses that lead to qualifications for which there is reduced demand. In Spain, for example, the number of people employed in construction has dropped 62 percent since 2008, but the number of students graduating in architecture and building increased 174 percent since 2005."

There are serious issues with 'chasing demand' view of education, issues arising due to long lags to completion of education, changes in trends in demand for skills etc. But there are also real problems here - lack of serious career guidance and development not only in the last year of education, but also in the first year, and before entering the third level institution.

Ok, you hear the shouting going on in academia, "we are no slaves to business" and "employers would say so"… but the problem is that even students themselves are noticing. Chart below illustrates:

There's loads more to read in the reports, so I encourage you do that... Valerian drops can be purchased in your local (to the University or IT school you are teaching at) pharmacy...

18/1/2014: WLASze: Mathematics of Birds, Internet of Robots, Architecture on the edge, & Hannah Höch Retrospective

This is WLASze: Weekend Links on Arts, Sciences and zero economics.


A very well-written essay on natural optimisation, the case of migrating birds:
http://arstechnica.com/science/2014/01/doing-math-on-the-fly-birds-form-the-flying-v-for-efficiency/

Favourite quote: "It may be that birds have sensory abilities we weren’t previously aware of. It might also be that ibises, and possibly other birds, have an innate ability to do the required mathematics, quite literally, on the fly: judging the distance to the next bird and counting wingbeat cycles as they go." Good luck solving that optimisation problem in your head, folks…

And while on the topic of mathematics for birds, here's another bit, on distribution of territorial rights amongst sea birds: http://www.futurity.org/sea-birds-do-math-to-divvy-up-turf/

What's the PISA score for birds mathematical abilities, anyone?


Mathematics is language, and language is about communications. Pair together cold logic of simple dynamic systems (linear learning) and complex mechanics (robotics) and you have an untapped demand pool for communications between robots… Which begs a question: why not create an 'internet for things'?.. Why not, indeed, when one can easily be conceived as a cloud-based system...
http://scinewsblog.blogspot.ie/2014/01/robots-can-now-communicate-over-world.html
Skynet it is not. At least it is not yet. But as more humanity decamps for Mars in the future, who knows, may be the planet of Earth will succumb to an apocalyptic vision of robots-dominated machines-led Skynet?.. I personally prefer mathematics for birds to internet for robots… kind-of less menacing and more beautiful at the same time...


Earlier this month, AIA, American Institute of Architects named best projects of the year its Honor Awards: http://www.dezeen.com/2014/01/13/2014-aia-institute-honor-awards-winners-announced/
My favourite is, as usual, residential project (I love the challenge of site/scale/space/aesthetic that residential and small-scale public buildings provide):

Here's more on that project: http://www.archdaily.com/255187/the-pierre-olson-kundig-architects-2/


It seems I can't escape birds themed posts today, so here's the one that flips fly fishing upside-down… or at the very least adds some serious challenge to it:
http://scinewsblog.blogspot.ie/2014/01/fish-catches-bird-in-flight-video.html
Those of you who know about fly fishing would appreciate the sheer challenge of replicating this with a fly rod… weight 18 won't cast out a fly to simulate a bird… no way… we need some more serious gear for that…


St Petersburg in the news - the city got a Faberge museum, courtesy of Viktor Vekselberg: http://www.iskusstvo-info.ru/event/item/id/67

Meanwhile, Sundance Festival gets Russian treats… http://rbth.co.uk/arts/2014/01/17/russia_standouts_at_sundance_33331.html


A new retrospective in London that is beyond 'worth visiting' - it is a must-see… "In the 1910s, German artist and feminist Hannah Höch was the lone woman among Berlin’s avant-garde Dada movement, the raucous group responsible for naming a men’s urinal Fountain and turning it into one of the most influential artworks of the last century. Though she hung out with art stars like Piet Mondrian, they never quite saw her as an equal--artist Hans Richter once smugly dismissed her as “the girl who procured sandwiches, beer, and coffee, on a limited budget.”"

Time lapsing to today, Höch is now recognised as one of the most important Dadists in the history of art, and yet rarely profiled in solo shows. This makes a major new exhibition at London’s Whitechapel Gallery that showcases over 100 works by Höch from the 1910s until her death at age 88 in the 1970s. Run to http://www.whitechapelgallery.org/exhibitions/hannah-hch

Enjoy!

18/1/2014: Portugal 'doin Dublin' or going for broke?

A very interesting interview with David Slanic, CEO of Tortus Capital Management LLC on Portugal's sovereign debt sustainability and the need for further debt restructuring.

http://janelanaweb.com/trends/portugal-needs-a-national-salvation-pact-with-a-short-mandate-to-restructure-the-sovereign-debt-david-salanic-tortus-capital/

Is Portugal really that close to restructuring as to pre-borrow reserves forward? Or is it pre-borrowing to do what Dublin did and exit in H2 2014 with no precautionary line of credit?..

Signals from the CDS markets? No evidence of serious markets concerns so far...

18/1/2014: Ireland's Credit Upgrade: Some Background

Moody's upgraded Irish sovereign debt ratings last night. My analysis is here: http://trueeconomics.blogspot.ie/2014/01/1812014-moodys-upgrade-for-ireland.html

Couple additional of points in relation to the upgrade.

Here's the current Western Europe league table in the Euromoney Country Risk Survey, placing Ireland at the top of the peripherals:

This is a consensus view across ECR group of economists and analysts and the core downward risk source for the ratings is Economic Assessment. Ratings upgrade will most likely translate into a higher score on Credit Rating, pushing us closer to France into the 2nd tier.

The upgrade was predictable and overdue. Two weeks ago I run the analysis of CDS spreads over 2012-2013 period (here: http://trueeconomics.blogspot.ie/2014/01/512013-euro-periphery-in-cds-markets.html) and the core conclusion relevant to today's news is in the last bullet point of the post.

• Irish CDS since the beginning of 2012 are carrying heavier weighting on probability of default estimates: in the last two charts, our CPD is priced along the mid envelope of (CDS, CPD) quotes, while Greece implies underpricing of the probability of default (along the lower envelope). Our probability of default is slightly over-estimated compared to Portugal and Spain, but is in line with Italy. This potentially relates to the point raised above in relation to speed of our CPD declines over 2013: we might be experiencing an over-due repricing (very slight) in the relationship between the CDS levels and implied estimates of the probability of default.

In other words, the CDS pricing was signalling lower probability of default for Ireland. And it was predictable on the basis of core fundamentals as well. Here's from the post back in March 2013:
http://trueeconomics.blogspot.ie/2013/03/1532013-irish-banks-still-second.html "my view is that we are due an upgrade, but a single notch one, to reflect economic decoupling from the peripherals".

So to reiterate: the upgrade was

1. Overdue
2. Expected
3. About right on the side of the change in the rating
4. A good net positive on expected markets impact, and
5. Enhancing stability of our debt, with medium-term expectation for lower borrowing costs (this will not play out right away, as Ireland's debt maturity profile is long-dated).

Meanwhile, this week's Euromoney ECR note on FY2013 credit risks shows continued drag on ratings in the euro area:

The full analysis (restricted access) is here. My quote on the above is about the general sense of complacency at the euro area 'leadership' level:

My full comment given to ECR on the 2013 results is here:

Euro area:

Euro area remained the weakest economic region globally, over the entire 2013, with a number of countries struggling with high unemployment, recessionary macroeconomic conditions, extremely low and near-deflationary price pressures and operating in the monetary environment still characterised by anaemic growth in money supply and tight credit markets. Based on the latest data, euro area is the only region world wide that is expected to post negative real GDP growth in 2013. 

The fact that this abysmal performance comes alongside relatively benign output gap, compared to other regions, and amidst overall improved global economic outlook, signals structural nature of the Great Recession in the euro area. In addition to the weak macroeconomic performance, euro area continued to suffer from acute leadership deficit - a fact that did not go unnoticed by the analysts. 

In 2013, eurozone's leadership effectively shifted from the risk-management mode that underpinned relatively rapid and robust rhetorical responses to the crisis in 2012, to a navel-gazing mode. Few of the policy proposals tabled over 2012 in response to the sovereign debt and banking sector crises were implemented or fully structured in 2013. The monetary policy, while remaining  relatively accommodative, continued to deploy the very same measures used in previous years, with little improvement in the credit supply conditions on the ground, at the level of the real economy. Thus, monetary growth was subdued and retail interest rates margins over the policy rate continued to rise, making credit to euro area enterprises and households both less available and more expensive.

Sub-regional:

The focal point of the euro area adverse news flow over 2013 has shifted from the so-called PIIGS to the relative newcomers to the crisis-stricken periphery: Cyprus and Slovenia. With Cyprus' depositors bail-ins setting a new benchmark for private sector burden sharing that will serve as a template for the euro area future crisis resolution measures, Slovenia has been desperately attempting to avoid a formal Troika bailout of its weak banking system. As the result, the country saw significant deterioration in macroeconomic environment over 2013. 

In the second half of 2013, with growth starting to return to core euro area economies, the centre of gravity in the Great Recession moved to economically weak Italy and France and away from the recovery-bound Ireland and Spain. In fact, 2013 macroeconomic and fiscal performance by the former warrants significant improvements in its credit scores, while the latter is starting to gain ground in terms of stabilising external trading conditions, while lagging on fiscal side. The expectation, therefore, is for continued decoupling of Ireland from the weaker peripherals sub-group as signalled by the CDS spreads and bond yields to-date.

Overall, Italy remains the weakest large euro area economy, member of the Big 4 countries of the eurozone, with virtually no growth and no reforms compounded by the risk of renewed political instability. Current expectation is for the real GDP contraction of 1.8% in 2013 following a 2.37% decline in 2012. Italy is also the only large euro area economy that is expected to post a fall in overall exports of goods and services in 2013 and, along side Spain, reduction in levels of employment across the economy. As the result of its poor growth performance, Italy is likely to post the only increase in the net government deficit for 2013 of all big euro area states, leading to an increase in the country debt/GDP ratio to 132.3%. The key to the country deteriorating credit risk scores, however, rests with the general markets perception that Italian political leadership remains incapable to deliver any meaningful structural reforms. 

Meanwhile, France is showing all the signs of deepening deterioration in manufacturing and core services activity since the onset of Q4 2013. French economy is currently once again on the edge of another recessionary dip and unemployment is poised to post further increases in Q4 2013-Q1 2014. At the same time, like Italy, French leadership appears to be stuck in 'neutral' when it comes to fiscal and structural reforms - a situation that is likely to spillover into a twin crisis of anaemic growth conditions and renewed industrial unrest in early 2014 (in 2013, French unemployment rate exceeded that recorded in Italy in 2012). With nearly zero structural adjustment underway, France's current account remains in deficit (-1.6% of GDP in 2013), while general government gross debt is now at around 93.5% of GDP, up on 90.2% in 2012, and heading higher in 2014. France also has second largest primary deficit of all larger euro area economies, as well as overall Government deficit that is in excess of that recorded in Italy. With public and household finances in tatters, France is likely to finish 2013 with lowest end-of-year inflation of all big euro area economies, pushing the country closer to deflation.

18/1/2014: Moody's Upgrade for Ireland

Moody's Investor Services upgraded Irish sovereign ratings tonight in a move that was expected by the analysts (http://trueeconomics.blogspot.ie/2013/09/2092013-irelands-credit-risk-scores.html) and was overdue.

Moody's release on this is here: https://www.moodys.com/research/Moodys-upgrades-Irelands-sovereign-ratings-to-Baa3P-3-outlook-changed--PR_290559?WT.mc_id=%40moodysratings

Key takeaways from the release:

1. Rationale for the upgrade: "The two main drivers for the upgrade are: (1) The growth potential of the Irish economy, which together with ongoing fiscal consolidation is expected to bring government debt ratios down from their recent peak; (2) The Irish government's exit from its EU/IMF support programme on schedule, with improved solvency and restored market access.
2. On growth potential: "Moody's expects a stronger expansion of net exports in the next few years as the negative impact lessens from the expiry of key pharmaceutical patents and as Ireland's major trading partners register more robust growth. Improved competitiveness ...since the 2009 recession, contributing to the shift from large current account deficits before the crisis to the current surpluses. Moreover, there are signs of a revival in domestic demand as household savings rates come down from historic highs. Foreign direct investment also remains extremely strong, attracted by Ireland's innovative and flexible labour force, and the housing sector appears to have stabilized."
3. On fiscal side: "The second driver of the upgrade is the Irish government's exit from its three-year economic adjustment programme in mid-December 2013. Its ability to do so without a precautionary credit line reflects that the government's reform agenda stayed largely on track throughout the programme, despite weaker than expected domestic and external economic conditions. The government regularly outperformed quantitative fiscal goals, which helped it regain and retain market confidence. Similarly, Moody's expects that Ireland will be able to address its excessive deficit (i.e. bringing it sustainably below 3% of GDP) by 2015."

Readers of this blog would know my views as to the risks associated with some aspects of the above assessments. However, the risks are unlikely to play out over the next 12 months horizon and are not carrying significant probability to derail overall low-growth recovery trend. So, in my view, Moody's is justified in shifting ratings up to Baa3 from Ba1.

On risks side, moody's cite: "That said, the clean-up of the banking system's non-performing loans is still in the early stages. In 2013, the Central Bank of Ireland (CBI) used its increased powers to establish a schedule requiring banks to resolve mortgage and SME loan arrears on a sustainable basis. The CBI is also demanding that banks strengthen collection efforts from customers who are able to pay. In the meantime, however, these mortgage resolutions are likely to increase foreclosures, impairing profitability and potentially dampening the housing market recovery."

Agree with their view, though other risks also exist, beyond the mortgages resolution process and banking sector performance.

Nice bit about the upgrade - it comes after Moody's delayed any changes to Portugal's ratings last week, a move that was interpreted by some analysts as a signal that the agency could have left Ireland's debt ratings unchanged as well.

My view on the ratings is that Ireland is moving into the same category of debt as Belgium (aptly, along with Belgium's longer term growth trajectory of ca 1.5% pa and Belgium's long-term struggle of shifting out of the 100% debt/GDP ratio for sovereign debt). It is a net gain for us, given the scale of the crisis we are starting to recover from.

Note: a H/T & thanks to Conrad Bryan @conradbryan and Dave Ryan @MailPidgeon for alerting me to Moody's action this late at night.

17/1/2014: BlackRock Institute Survey: N. America & W. Europe, January

BlackRock Investment Institute released its latest Economic Cycle Survey for EMEA region was covered here: http://trueeconomics.blogspot.ie/2014/01/1712014-blackrock-institute-survey-emea.html.

Now, on to survey results for North America and Western Europe region. emphasis is always, mine.

"This month’s North America and Western Europe Economic Cycle Survey presented a positive outlook on global growth, with a net of 83% of 109 economists expecting the world economy will get stronger over the next year, marginally higher than 81% reported in December. The consensus of economists project mid-cycle expansion over the next 6 months for the global economy."

"At the 12 month horizon, the positive theme continued with the consensus expecting all economies spanned by the survey to strengthen except Portugal, which is expected to remain the same."

Of note:

• Ireland is now moved into the middle of 'growth distribution' from previous position firmly ahead of the entire region. Italy and Spain are now posting stronger expectations than Ireland.
• Eurozone expansion expectations are still lagging those of the UK and the US.
• Germany continues to lead the Eurozone expectations.

Out to 6 months horizon: "Eurozone is described to be in an expansionary phase of the cycle and expected to remain so over the next 2 quarters. Within the bloc, most respondents expect only Greece to remain in a recessionary phase at the 6 month horizon."

"Over the Atlantic, the consensus view is firmly that North America as a whole is in mid-cycle expansion and is to remain so over the next 6 months."

Red dot denotes Austria, Germany, Norway and Switzerland



Note: these views reflect opinions of survey respondents, not that of the BlackRock Investment Institute. Also note: cover of countries is relatively uneven, with some countries being assessed by a relatively small number of experts.

17/1/2014: BlackRock Institute Survey: EMEA, January

BlackRock Investment Institute released its latest Economic Cycle Survey for EMEA region. Emphasis is mine.

"With caveat on the depth of country-level responses, which can differ widely, this month’s EMEA Economic Cycle Survey presented a bullish outlook for the region."

The consensus of respondents describe Slovenia, Croatia, Egypt and, the Ukraine to be in a recessionary state and expected to remain so over the next 6 months except for Croatia, where there is an even split between expansion and contraction.

Note: Red dot represents Czech Republic, Kazakhstan, Hungary, Romania, Israel, Poland and Slovakia

At the 12 month horizon, the positive theme continues with the consensus expecting all EMEA countries to strengthen with the exception of Turkey. So Russia is improving 6mo forward improvement in outlook on current phase (see above chart), but Ukraine is expected to remain in a late cycle recession. Out at 12mo horizon, Ukraine is still expected to underperform Russia.

Note Slovenia's performance expectations. It is worth noting that the IMF is releasing Slovenia's economy's assessment, so it would be interesting to take a comparative look at the Fund expectations.


Globally, respondents to the EMEA survey "remain positive on the global growth cycle with a net 82% of 61 respondents expecting a strengthening world economy over the next 12 months – an 8% increase from the net 75% figure last month. The consensus of economists project mid-cycle expansion over the next 6 months for the global economy."

Note: these views reflect opinions of survey respondents, not that of the BlackRock Investment Institute. Also note: cover of countries is relatively uneven, with some countries being assessed by a relatively small number of experts.

17/1/2014: Goods Exports: A Story of Irish Tax Arbitrage Mode of Growth?

I covered monthly and annual trends in Irish Trade in Goods statistics yesterday (http://trueeconomics.blogspot.ie/2014/01/1612014-trade-in-goods-november-2013.html), noting that

1. Irish exports of goods are continuing to shrink - not grow at a slower rate, but grow at a negative rate - over 2013
2. Irish trade surplus in goods is now in negative growth territory for the third year in a row.
3. Past resilience of Irish trade in goods statistics was predominantly down to the collapse in imports.

In the past, I have argued that we are likely to witness further deterioration in external balance for Ireland once the domestic economy moves back into growth cycle (imports of consumer goods and capital goods will all rise). Given the overall problematic situation with domestic disposable after-tax income, this implies that we can lose the only pillar supporting our debt sustainability (external balance) if capex ramps up, while employment creation and wages growth is lagging. In other words, a jobless recovery on foot of capex expansion can end up being a pyrrhic victory for Ireland.

To see this, consider imports/exports ratio in the economy (to remove monthly volatility, we use half-yearly aggregates):

Following a large jump in the ratio of exports to imports on foot a significant decline in imports, we are now running below the historical trend. This suggests that our exports of goods are becoming less, rather than more, tax-efficient (which, of course, is consistent with pharma sector decline in our exports of goods). Good news is that this means our exports are also potentially becoming better anchored to real value added carried out in this economy, and less tax arbitrage-driven. But the bad news is that at the same time, exports growth rates are collapsing:

And the decade-averages, shown in the chart above are telling this story.

This is worrying... doubly so because what is taking place of our good exports is the 'success' story of our ICT services sector, which is growing on foot of tax arbitrage. We are replaying the same 'advantage' as before - instead of developing successful, value-added based exporting model we are just switching from one tax arbitrage play to another. ICT manufacturing tax arbitrage of the 1990s gave way to Pharma tax arbitrage play of the 2000s, which is now giving way to ICT services tax arbitrage play of the 2010s...