25/6/2014: Irish Residential Property Prices: May 2014

CSO published Residential Property Price Index today for May 2014. Lots of various headlines reporting double digit gains in property prices and lauding general recovery in the market, as usual.

Let make some sense of the data as we have it:

Point 1: National house prices: Index was at 70.1 in April 2014 and this rose to 71.7 in May 2014. April reading was just a notch above 70.0 in December 2013. In other words, for all annual gains, we were just about back to the level prices were in December last year. In May, this rose above December 2013 levels, and closer to September-October 2011 average.

I would not call this a 'recovery', yet, especially since we have drawn another 'u' around December 2013-April 2014.

That said, relative to peak prices are down 45.1% and are up 11.9% on crisis period low. Cumulated gain over last 24 months is only 9.47% which equates to annual average growth in the 'recovery' period of just 4.63%. Again, given the depth of decline from the peak, this is not a 'bubble'-type recovery.

3mo moving average was down through April 2014 at -0.23% compared to 3mo period through January 2014, but in May this moved into positive territory of +0.86% compared to 3mo average through February 2014.

Current national prices are 26.9% below Nama valuations (inclusive of LTEV and risk cushion) so for Nama to return profit on average acquired loan it will need ca 27.4% rise from here on. At current running 24 months growth rate, that will require roughly 6 years.

Point 2: National property prices ex-Dublin: the index reading is at 68.2 barely up on 68 in March 2014. Compared to crisis trough, the index is now only 3.2% up. Cumulated rate of growth over 24 moths through April 2014 is negative at -1.02%. 3mo MA through May 2014 is 1.02% below 3mo MA through February 2014. In other words, nationally (excluding Dublin) things are not getting better.

Point 3: Dublin properties, despite all the talk about 'new bubble' and 'boom' are only now in line with those nationally (chart above shows this much). In other words, Dublin 'boom' is a correction for much steeper decline in Dublin properties relative to the rest of the country.

Point 4: Dublin all properties index is now at 72.2 in May, which is up on 69.3 in April 2014, and is the highest reading since February 2011.

Relative to peak, Dublin properties are still down 46.3% although they are now 26% above the crisis trough. Cumulated gain in Dublin over 24 months through May 2014 is 23.6% which equates to roughly 11.2% annual rise - robust and clearly signalling recovery, in contrast to ex-Dublin markets.

But, 3mo MA through April 2014 was % below 3mo MA through January 2014, while 3mo AM through May 2014 is 2.66% up on 3mo MA through February 2014, which shows some volatility in the index and can be a sign of the rally regaining some momentum or seasonal effects combining with some improved economic news or simply volatility taking hold of the recent data. Simple answer - we have no idea what is going on.

Crucially, as chart above shows, apartments segment of Dublin market is showing weaker growth over the last 6 months than houses segment. This is surprising, given rapid rises in rents and reported shortages of accommodation.

So here you have it: for all the hoopla about 'mini-bubble' etc, things are still very much shaky:

• Growth in Dublin is strong, but so far consistent with the market catch up with more conservative price declines to trough in the rest of the country. 
• Meanwhile, outside Dublin, things are solidly dead.

24/6/2014: Planning Permissions in Ireland: the 'Recovery' is Still Worse than the 1980s Crisis

There are many drivers for planning permissions applications in Ireland, including traditional ones (economic fundamentals, demand, credit supply availability etc) and idiosyncratic (changes in planning regime etc). Not to comment on either of these, here are the latest stats (through Q1 2014) on the subject.

Q1 2014 registered an uplift in total number of planning permissions granted, which rose y/y by 17.0%. This sounds like a large number, except the problem is - it comes off such a low base that Q1 2013 actually was an absolute historical low for planning permissions for any quarter since Q1 1975. In real terms, as the chart below clearly shows, since Q1 2011 through Q1 2014, maximum number of planning permissions granted barely reaches previous historical low in Q1 1988. That's right: the worst of the 1970s-1980s is the best of 2011-present range. In fact, Q1 2014 'improved' activity in terms of planning permissions is 11.7% lower (that's right - lower) than 1975-1999 lowest point.

Dwellings permissions are currently sitting 38.9% below their absolute low of 1975-1999 period, although these did rise 3.36% year on year.

In terms of total square meters relating to permissions granted, things are no better. Year-on-year volume of permission granted by square meters is down 20% for all applications. From Q1 2011 through Q1 2014, total square meters of permissions granted have been trending basically in line with the lowest levels reached in the 1980s.

I am not sure if anyone can tell with any degree of confidence as to what the effect of new regulatory regimes is on these numbers, but one thing is very clear - the recovery is not to be seen anywhere in the above numbers, yet. Despite some reports in the media and from the industry suggesting that things are getting better and better.

24/6/2014: US Productivity Slowdown: It's Structural & Nasty

"Productivity and Potential Output Before, During, and After the Great Recession" a new paper by John Fernald (NBER Working Paper No. 20248, June 2014) looks at the U.S. labor and total-factor productivity growth slowdown prior to the Great Recession in the context of the slowdown "located in industries that produce information technology (IT) or that use IT intensively, consistent with a return to normal productivity growth after nearly a decade of exceptional IT-fueled gains". In a sense, the paper reinforces the point of view that I postulated in my TEDx talk last year dealing with the 'end' of the Age of Tech (here: http://trueeconomics.blogspot.ie/2013/11/14112013-human-capital-age-of-change.html).

Fernald opens the paper with a set of two quotes. One brilliantly describes the core question we face:
"When we look back at the 1990s, from the perspective of say 2010,…[w]e may conceivably conclude…that, at the turn of the millennium, the American economy was experiencing a once-in-a-century acceleration of innovation….Alternatively, that 2010 retrospective might well conclude that a good deal of what we are currently experiencing was just one of the many euphoric speculative bubbles that have dotted human history." Federal Reserve Chairman Alan Greenspan (2000)

Fernald argues that "The past two decades have seen the rise and fall of exceptional U.S. productivity growth. This paper argues that labor and total-factor-productivity (TFP) growth slowed prior to the Great Recession. It marked a retreat from the exceptional, but temporary, information-technology (IT)-fueled pace from the mid-1990s to the early 2000s. This retreat implies slower output growth going forward as well as a narrower output gap than recently estimated by the Congressional Budget Office (CBO, 2014a)."

Figure 1 from the paper illustrates how the mid-1990s surge in productivity growth indeed ended prior to the Great Recession. The rise in labor-productivity growth, shown by the height of the bars, came after several decades of slower growth. But, notes Fernald, "in the decade ending in 2013:Q4, growth has returned close to its 1973-95 pace. The figure shows that the slower pace of growth in both labor productivity and TFP was similar in the four years prior to the onset of the Great Recession as in the six years since."

And things have been bad since. Labour productivity growth (slope of liner trend below) is now on par with what we have been witnessing in 1973-1995, and shallower than in 1995-2003. But the trend is still close to actual performance, which signals little potential for any appreciable acceleration:

Beyond labour productivity, things are even messier. Charts below plot the Great Recession against other recessions in terms of productivity, output and labour utilisation:

Notes: For each plot, quarter 0 is the NBER business-cycle peak which, for the Great Recession,
corresponds to 2007:Q4. The shaded regions show the range of previous recessions since 1953. Local
means are removed from all growth rates prior to cumulating, using a biweight kernel with bandwidth of 48 quarters. Source is Fernald (2014).

All of the above show the cyclical disaster that is the current Great Recession, but crucially, they show poor recent performance in Labour Productivity, exceptionally poor performance in Hours of Labour used, disastrous performance in Total Factor Productivity… in other words - historically problematic trends relating to productivity, labour utilisation and tech-related productivity in the current recession compared to all previous recessions.

But more worrying is that, as Fernald notes: "That the slowdown predated the Great Recession rules out causal stories from the recession itself. …The evidence here complements Kahn and Rich’s (2013) finding in a regime-switching model that, by early 2005—i.e., well before the Great Recession—the probability reached nearly unity that the economy was in a low-growth regime."

So what's behind all of this slowing productivity growth? "A natural hypothesis is that the slowdown was the flip side of the mid-1990s speedup. Considerable evidence… links the TFP speedup to the exceptional contribution of IT—computers, communications equipment, software, and the Internet. IT has had a broad-based and pervasive effect through its role as a general purpose technology (GPT) that fosters complementary innovations, such as business reorganization. Industry TFP data provide evidence in favor of the IT hypothesis versus alternatives. Notably, the euphoric, “bubble” sectors of housing, finance, and natural resources do not explain the slowdown. Rather, the slowdown is in the remaining ¾ of the economy, and is concentrated in industries that produce IT or that use IT intensively. IT users saw a sizeable bulge in TFP growth in the early 2000s, even as IT spending itself slowed. That pattern is consistent with the view that benefiting from IT takes substantial intangible organizational investments that, with a lag, raise measured productivity. By the mid-2000s, the low-hanging fruit of IT had been plucked."

This a hugely far-reaching paper with two related implied conclusions:

1. Prepare for structurally slower growth period in the US (and global) economy as the last catalyst for growth - tech - appears to have been exhausted; and
2. The Age of Tech is now in the part of the cycle where returns to innovation and technology are falling, while returns to financial assets overlaying tech sector are still going strong. The classic bubble scenario is being formed once again, as always on foot of disconnection between the real economic returns to the assets and asset valuations. This bubble will have to deflate.

24/6/2014: ECR Ukraine Risk Assessment

Ukraine keeps diving deeper and deeper into the economic crisis territory (via ECR):

So per above, the country is now in the lowest ranking tier in terms of risks. And it is significantly underperforming its peers:

Risks scores composition is abysmal on Political and Economic Assessments (none have much to do directly with the external threats and all are already pricing in any positives from the latest Presidential elections):

23/6/2014: Euro Area Investment Funds Stats: April 2014

ECB has released April 2014 data on Investment Funds flows in the Euro Area. The release is available here: http://www.ecb.europa.eu/press/pdf/if/ofi_201404.pdf.

From the top-line:

1. In April, the amount outstanding of shares/units issued by euro area investment funds (ex-money market funds) was €68 billion higher than in March 2014.
2. In terms of the breakdown by investment policy, the annual growth rate of shares/units issued by bond funds was 4.0% in April 2014. Transactions in shares/units issued by bond funds amounted to €15 billion in April 2014. The annual growth rate and monthly transactions of equity funds were 7.3% and €21 billion respectively in April 2014. For mixed funds, the corresponding figures were 9.1% and €13 billion.
3. The kicker is in comparing growth rates in April 2013 against growth rates in April 2014. These are shown in the chart below:

The basic point is that growth is slower (transactions on buy side are smaller) and this is true for all funds, except Equity Funds. This change comes on foot of February-March 2014 when transactions were larger than in the same period of 2013.

So we have alleged economic recovery associated with slower growth in investment funds activity. Not a reason to worry, yet, but certainly a reason to ask if the recovery has been already priced in by the markets?..

21/6/2014: IMF 'Waived' Sustainability Requirement in Lending to Euro Area Countries

IMF paper, published yesterday now fully admits that the Fund has 'waived' its own core requirements for lending under the core programmes in euro area 'periphery'. More importantly, the criteria for lending that was violated by the Fund is… the requirement that "public debt be judged as sustainable with "high probability”" under new lending programme.

The paper is available here: http://www.imf.org/external/np/pp/eng/2014/052214a.pdf

Quoting from the IMF report: "In the sovereign debt crises of the 1980s, concerted financial support from the private sector was a standard feature of Fund-supported programs, most of which were within the normal access limits. By contrast, the spate of capital account crises that began in the mid 1990s occurred at a time when the creditor base had become much more diffuse, and the Fund’s strategy sought instead to entice a resumption of private flows through programs involving large-scale Fund and other official resources. While this strategy worked well in some circumstances, it failed to play its catalytic role in cases where, amongst other factors, the member's debt sustainability prospects were uncertain." 

Thus, the Fund clearly recognised that probabilistically, extended lending can only work where there is some confidence that the borrower debts post-lending by the IMF, are sustainable. In other words, the Fund agreed that there is the need for more extensive lending (in some cases), but that such lending should, by itself, not push beyond sustainability levels of debt. Were it to do so, the Fund would have required restructuring of the sovereign debt to reduce levels to within sustainability bounds.

This is how this 'bounded' lending beyond normal constraints was supposed to work: "In response to this varied experience, and to ensure effective use of its resources, the Fund concluded that decisions to grant access above normal limits should henceforth be guided by defined criteria. These were established in the 2002 Exceptional Access Policy, [EAP] which included a requirement that public debt be judged as sustainable with "high probability.” The framework applied initially only in capital account cases, but in 2009 became applicable to all exceptional access decisions."

Now, fast forward to the Fund entanglement in euro area debt/default politics: "When Greece requested exceptional access in May 2010, the policy would have required deep debt reduction to reach the high probability threshold for debt sustainability. Fearing that such an operation would be highly disruptive in the circumstances prevailing at the time, the Fund decided to create an exemption to the high probability requirement for cases where there was a high risk of international systemic spillovers—an exemption that has since been invoked repeatedly in programs for Greece, Portugal, and Ireland."

Elaborating on this, the paper states: "An important rigidity of the EAP came to the fore when Greece requested financial support in early 2010. When “significant uncertainties” surrounding the sustainability assessment prevented staff from affirming that debt was sustainable with high probability, the existing EAP framework would call for a debt reduction operation to deliver such high probability as a condition for the provision of exceptional access. In the case of Greece, where the high probability requirement was not met, however, there were fears that an upfront debt restructuring would have potentially systemic adverse consequences on the euro area. Given the inflexibility of the EAP, and the crisis at hand, the Fund decided to create an exemption to the requirement for achieving debt sustainability with a high probability when there was a “high risk of international systemic spillovers”. Since then, the systemic exemption has been invoked 34 times by end-May, 2014 in the three EA programs for Greece, Portugal, and Ireland."

Note that the systemic exemption has been invoked 34 times in just four years, in all cases in relation to euro 'periphery'. That is a lot of 'we can't confirm sustainability of debt levels post-programme, so we won't look there' invocations. More significantly, did anyone notice these invocations in IMF country reports that repeatedly assured us, since 2010 on, that things are sustainable in these countries?

Conclusion: the Fund now fully admits that its lending to Greece, Portugal and Ireland:

1) Required (under previous conditions) deep restructuring of sovereign debt; and

2) Was carried out in excess of the already stretched sustainability bounds.

The Fund loaded more debt onto these economies than could have been deemed sustainable even by its already stretched standards of 2002 EAP.

20/6/2014: Household Disposable Income: Great Recession 2007-2011

Excellently spotted by @stephenkinsella - a chart from The Economist blog mapping changes in disposable incomes across a set of advanced economies over 2007-2011 period:

Link to the post: http://www.economist.com/blogs/graphicdetail/2014/06/daily-chart-13?fsrc=rss

As I mentioned on Twitter, good news "Ireland is not Greece"... kind of...

20/6/2014: Some recent media links for TrueEconomics

Few recent media links citing TrueEconomics or/and myself:

1. Finfacts on Mortgages Arrears in Ireland: http://www.finfacts.ie/irishfinancenews/article_1027769.shtml Delighted to see my analysis cited by Finfacts.
2. CityAM citing TrueEconomics post on duration of US unemployment: http://www.cityam.com/blog/1402402353/uks-scariest-chart-dead-gdp-finally-passes-pre-crisis-peak
3. TechInsider citing from my CNBC interview on EU Commission investigation of Apple Inc tax practices in Ireland: http://www.techinsider.net/apple-inc-aapl-starbucks-corporation-sbux-taking-advantage-of-tax-benefits-in-europe/115804.html video of my interview is also linked at the bottom of the post.
4. The Washington Times cites from TrueEconomics post on Russia-China gas deal: http://www.washingtontimes.com/news/2014/may/25/russias-putin-gains-strategic-victory-with-chinese/?page=all the original post referenced is here: http://trueeconomics.blogspot.ie/2014/05/2152014-russia-china-gas-deal.html

No links to mainstream Irish media.

19/6/2014: Biggest Brands: 2000-2013

A fascinating look at evolution over time of most powerful brands (via Bloomberg):

Click to enlarge

Amazing decline of Nokia and Intel, and rise of Google and Apple, stability of IBM and weakening of Microsoft, the steady rise against adverse publicity of McDonald's, vanishing of AT&T and wild ride of Disney... and so on.

19/6/2014: Nominal Consumption in Ireland: 6 years of uninterrupted declines

As I blogged yesterday, Eurostat released data on individual consumption and GDP per capita for EU28 for 2013. There are different metrics for measuring income and spending per capita and I blogged on the Actual Individual Consumption and GDP per capita indices relative to EU28 yesterday here.

Updating the database for the other metric: Nominal Expenditure per Inhabitant, Actual Individual Consumption in Euro terms, here are the results:

Over recent years, Ireland sustained significant declines in consumption spending per person living in the country. How severe were these declines? Compared to pre-crisis average (2003-2007) our consumption was down 2.8% in 2013. This is the second most severe impact of a recession on households' consumption after Greece.

As the result of this decline, our ranking has deteriorated as well. In 2008, Ireland's consumption per capita ranked third in the EU28. In 2013 and 2013 we ranked 11th. If in 2007 Ireland's households' consumption exceeded that of the EU15 average by more than 31%, in 2013 this declined to only 5%.

Lastly, in raw numbers terms, our consumption expenditure per inhabitant in 2013 stood at EUR21,565 - below that of any other advanced euro area economy, save the 'peripherals'.

At its peak in 2007, our consumption expenditure per inhabitant was EUR24,978. More ominously - and in line with the dynamics in Domestic Demand reflected in our National Accounts - Irish individual consumption has now declined in nominal terms in every year starting from 2008, although the rate of decline y/y dropped to 0.19% in 2013, against decline of 0.32% in 2012, 0.48% in 2011, 2.9% in 2010, 9.9% in 2009 and 0.35% in 2008.

Remember: we have booming consumer confidence, claims of improving retail sales (not much of evidence of such) and generally positive outlook on the economy… and yet, consumption (aka demand) is declining, year after year after year for six years straight... uninterrupted.

18/6/2014: IMF's Growth Forecasts for Ireland: Consistently More Bearish

This the fifth and last post on IMF's assessment of Irish economy released today.

In previous posts, I covered IMF's assessment of Irish banks (here), Irish banks prospects with respect to the ECB stress tests (here), Irish households' balance sheets (here) and growth projections (here).

This time around, lets take a look at IMF's past and present forecasts for growth. These are presented as charts, plotting evolution of growth forecasts from June 2011 through June 2014.

First, IMF's GDP growth forecasts. You can see the deterioration of outlook year on year into 2014 for all three forecast years. IMF claims that things will finally improve in 2015 when GDP growth is forecast at 2.4%. But last year, the Fund forecast 2014 growth (not 2015) at 2.2% and in 2012 the Fund expected 2014 growth to be 2.6% and so on. 

In simple terms, Fund's forecast published in June 2011 saw Irish real GDP growing by a cumulative 9.8% in 2014-2016. A year ago in June 2013 that same forecast fell to 7.8%, and today's forecast is down to 6.74%. Some material difference, disregarding the fact that GDP levels from which the above growth rate have been computed are already lower than assumed back in 2011 or 2013.

Next: Domestic Demand (a combination of private and public consumption, and public and private investment):

The upgraded forecast for 2014 compared to the Fund predictions published a year ago is a welcome sign. But at 1.1% y/y growth this is hardly consistent with anything more than a stagnation. However, after 2014, the Fund is still projecting ver-lower rates of growth compared to its previous forecasts. In June 2011, the Fund projected 2014-2016 cumulative growth in Domestic Demand to be 7.3%. In June 2013 that same projection was 4.9% and this time around it shrunk to 4.2%.

Next up: exports growth:

Again, things are going South: in June 2013 the forecast for 2014 growth rate in exports was 3.5%. In June 2014 it is down to 2.5%. Back in June 2011, IMF predicted that over 2014-2016 Irish exports will rise 15.4%, this June the prediction is 10.5%.

What all of this means in actual cash terms? Here are projections for Nominal GDP: 

So in nominal terms, IMF was projecting 2014 GDP to be at EUR165.5bn back in June 2011, at EUR171bn in June 2012, at EUR173.4bn in June 2013 and the Fund's latest projection for 2014 nominal GDP is…  EUR167.7bn. Now, note: growth rates in 2015-2016 discussed at the top of this post come on these levels, so we have lower growth off the lower base. Unimpressive as they are, GDP growth rates are even made worse by the continuous decrease in the base off which they are computed.

And to top it all up, over 2014-2016, IMF expected Irish GDP to total EUR542.9 billion back in June 2013. 12 months later that forecast is down to EUR520.9 billion - down EUR22 billion over 3 years. Puts things into perspective, really, no?

However, IMF also provides us (since 2012) with handy forecasts for GNP growth. These are summarised here:

And you get the picture by now: things are getting worse and worse and worse in the minds of the Fund forecasters.

So while the media might celebrate the fact that IMF produced relatively benign outlook for 2014-2016 in its latest assessment of our economy, keep in mind: their projection used to be for the economy to reach EUR188.7 billion by 2016 when they did this exercise 12 months ago, today the expect that number to be EUR179.5 billion. That's 4.5 years of austerity at EUR2 billion that is being planned for 2015…

18/6/2014: IMF on Irish Economic Growth: Sunshine is Still Awaiting the Future

Per IMF: "Growth is expected to firm to about 2.5  percent from 2015, with a gradual rotation to domestic demand despite little support from credit initially. Risks appear broadly balanced in the near term, but are tilted to the downside over the medium term, in part owing to risks to reviving financial intermediation which is important for sustaining job rich domestic demand growth."

Ah, the dreams… Firstly, actual IMF projection is for growth ow 2.4% not 2.5% in 2015. That 2.5% based on Fund own forecast will only arrive in 2016, not 2015. Secondly, per IMF previous forecasts (see next post), that 2.5% growth was supposed to hit us in 2015 (based on December 2013 forecast), reach 2.7% in 2015 based on June 2013 forecast and reach 2.5% in 2014 based on June 2012 forecast… so that 2.5% growth is, as before, still a mirage on the horizon...

"Strong domestic indicators and an improving external environment support staff projections for real GDP growth of 1.7 percent in 2014. Recent World Economic Outlook projections put growth of Ireland’s trading partners at 2 percent, driving export growth of 2.5 percent." Oops… but a tar ago the Fund said in 2014 we shall have 3.5% exports expansion… In fact, the fund downgraded Irish exports growth from 3.7% in 2015 to 3.6% between December 2013 and today's forecasts.

"Final domestic demand is expected to expand by 1.1 percent, led by investment, with significant upside potential given the investment surge in the second half of 2013. A modest ó percent increase in private consumption reflects rising incomes driven by job creation and improving consumer confidence. Public consumption will remain a drag on domestic demand as public sector wage costs continue to decline under the Haddington Road agreement." Wait… so consumption and domestic investment are booming. And IMF is moving forecast for 2014 for final domestic demand from 0.4% in December 2013 to 1.1% now. But materially, IMF forecast did not change that much: it was 1% for 2014 in June 2013, 1.1% in June 2012 and 1.4% in May 2011. And this is against a shallower GDP base since then! In other words, growth is improving forward because it disappointed in the past...

Summary:

Neat summary of risks around recovery: "prospects appear broadly balanced in 2014–15 but tilted to the downside over the medium term. Staff’s growth projections lie at the bottom end of the forecast range for 2014, and near the median for 2015, with sources of upside to both exports and domestic demand. Key risks include:

• External demand. Ireland’s openness (exports at about 110 percent of GDP) makes it vulnerable to trading partner growth, such as a scenario of protracted slow global growth, or if escalating geopolitical tensions were to notably affect EU growth.
• Financial market conditions. The substantial spread tightening despite high public and private debts faces some risk of reversal, perhaps linked to a surge in global financial market volatility. Although the direct fiscal impact would be modest owing to long debt maturities, adverse confidence effects would likely slow domestic demand.
• Low inflation. Ongoing low inflation in the euro area would lower inflation in Ireland, slowing declines in debt ratios and dragging on domestic demand in the medium term.
• Bank repair shortfalls. As firms’ internal financing capacity is drawn down, sustaining domestic demand recovery will depend increasingly on a revival of sound lending, where substantial work remains ahead to resolve high NPLs to underpin banks’ lending capacity."

Surprisingly, IMF lists no risks relating to households or SMEs, despite pointing at these in relation to the banks. Which implies that the Fund sees no difficulty arising in the households and SMEs sectors from banks aggressively pursuing bad debts, but it sees risk of this to the banks. I am, frankly, puzzled.

You can see the virtual flat-lining of Irish economy in 2012-2013 here:

Next post: IMF growth projections: a trip through the years...