2/7/2014: Irish Services PMI: June 2014

Markit/Investec released PMI for Services for Ireland, so we can update now monthly series for both Manufacturing (see post here) and Services, as well as (in the follow up post to come next) the Composite Activity Index for the economy.

On Services PMI side:

• Main activity indicator firmed up to 62.6 from 61.7 in May, marking the highest level of PMI since February 2007. 
• 3mo MA is now at 62.1 against previous of 59.9. Year on year, 3mo MA is up 7.8 points
• Compared to the full sample average (54.1) current activity levels are running well above the levels consistent with 'normal' growth and these are statistically significantly above the expansion line. 

As chart below shows, we are now into expansion territory for both indices, which is a marked change on June 2013 and June 2012.

Next post will cover Q2 data for Services and Manufacturing PMIs and Composite Index.

2/7/2014: Russia Services & Composite PMI: June 2014

Russia Services PMI (Markit & HSBC) is out today for June 2014, posting a reading of 49.8 - virtually indistinguishable from zero growth. 3moMA is now at 47.6 against previous 3moMA at 49.6. In April-June 2013, 3mo MA was 51.1.

June marked the fourth consecutive month of Services PMI below 50.0 and the index has been posting slowdown in the economy since October 2012, with first negative growth signals coming through in Summer 2013.

With improved manufacturing reading (see earlier post here), the Composite PMI for the Russian economy strengthened to 50.1 in June from 47.1 in May. May 2014 marked the lowest reading in the index since May 2009, so not surprisingly, activity showed a slight bounce back. At current levels, however, the economy is not showing signs of recovery.

3mo MA as of June is at 48.3 and 3mo MA for the previous 3 months is at 49.2. Both contrast against the 3mo MA through June 2013 at 51.2/

Again, the slowdown in activity is marked from October 2012.

2/7/2014: Live Register by Nationality: June 2014 and Q2 2014

In the previous two posts (linked here) I covered top level data on Live Register for June 2014, and the Government "Score Card' comparatives between Q2 2014 and Q1 2011 when the current Coalition came to power. This post covers some details relating to foreign nationals on Live Register.

As of June 2014, there were

• 398,813 people officially on the Live Register (in other words, excluding those who received Live Register supports but were enrolled into State Training Programmes). This marked a decline of 8.39% y/y
• Of the above, 331,463 were Irish Nationals, representing 83.1% of total Live Register counts. Year on year, June 2014 numbers of Irish Nationals on LR is down 8.12% which is less than overall decline in the LR. A year ago, Irish Nationals represented 82.9% of total LR counts. So proportionally, Irish Nationals are now slightly more prevalent on LR than a year ago.
• In June 2014, there were 67,350 non-Irish Nationals on the LR, representing 16.9% of the total LR counts. This represents a decline of 9.73% y/y. A year ago in June 2013, non-Irish Nationals represented 17.1% of the LR.
• 15,034 UK nationals were on LR in Ireland in June 2014, representing a y/y decline of 10.0%, the second sharpest drop of all nationalities groups.
• There were 3,751 EU15 (ex-Ireland & UK) nationals on the LR in June 2014, virtually unchanged (up on 3,750) on June 2013.
• There were 36,772 Accession States (EU-12) nationals on the LR in June, representing a decline of 9.5% y/y. In June 2014, nationals of the Accession States accounted for 9.2% of the total LR counts, down from 9.3% in June 2013. In other words, proportionally, the numbers of Accession States nationals on LR have dropped more significantly than the decline in LR itself. This category posted the third steepest decline in LR numbers.
• Non-EU nationals listed on LR amounted to 11,793 as of June 2014, a decline of 12.8% on June 2013. Proportionally, they accounted for just under 3% of the LR total counts in June 2014, down slightly on just over 3.1% in June 2013. This category posted the overall steepest rate of decline in LR numbers y/y.

Charts to illustrate:

A table below summarises changes in quarterly averages terms for Q2 2014:

This largely confirms the same observations made about June 2014 figures.

2/7/2014: Live Register: Changes on Q1 2011 & Government 'Score Card'

In the previous post I covered Live Register (top numbers) for June. Here, as promised, a sort of 'Score Card' for the Government tenure period - looking at the LR performance over the period from Q1 2011 through Q2 2014. This is summarised in the table below:

Note one simple exercise, taking the rate of improvement in figures over either 3 years and a quarter (entire tenure of the Government) or over the last 12 months (quarterly averages basis), we can look at the number of years we are still away from getting the LR and its underlying components to some sort of a 'norm' (selected as the average of 2007-2008 period). Two things are evident from this exercise:

1. The task ahead is still awfully large and in no case are we out of the storm until around 2019-2020; and
2. The task is being made easier in recent months as things have been improving more rapidly

This confirms my earlier analysis that the current crisis does not appear to be as easily solvable as the one of the 1980s (you can see some of this here).

It would not be fair to criticise this Government for the problem of unemployment. And it would be wrong not to recognise the fact that the numbers are improving and the rate of improvement has accelerated in the last 18 months. Still, noting the caveats to the improvements that I cited in the earlier post on this subject, and considering the effect of State Training Programmes on LR (the cornerstone of Government labour market policies endorsed fully by the Troika) there is more of this road yet to travel than what has been marked over the last 3 years.

2/7/2014: Live Register: June 2014

Live Register figures for June 2014 are out today, so here are some updates.

Seasonally un-adjusted LR stood at 398,813 in June 2014, which is down 8.39% y/y down 36,544. In May 2014 the LR was down 7.81% y/y so June marks an improvement in the rate of Live Register declines.

Factoring in participants in State Training Programmes, total number of individuals in receipt of Live Register supports in June 2014 was 473,700 which is 5.68% lower (28,521) than in June 2013. The rate of decline in total Live Register Recipients numbers moderated in June, since in May 2014 it fell 6.98% y/y.

Chart to illustrate:

June marked the slowest rate of LR declines (when factoring in State Training Programmes participants) since February 2014. However, since December 2013, the annual rates of decline in LR+STP numbers have run above 5%, every month, against average 2.57% declines in January-November 2013.

On the other hand, official LR declines hit record in June, dropping 8.39% y/y, the steepest rate of annual decline since the crisis began.

All of the above are positives, but subject to two caveats:

1. We do not know how much of the LR reduction is down to emigration
2. We do not know how much of it is down to exits from the labour force.

Data for labour force itself comes with a quarterly lag, so all we have to go by currently is Q1 2014 figure, when the labour force rose to 2,146,300 compared to 2,137,500 in Q1 2013 - an increase y/y of 8,800. Rising net labour force could have come from younger workers coming into the LF for the first time (some of them are not finding jobs, some are) and it can mean that older workers who exited the LF are coming back. We do not know net drivers for the 8,800 increase, so we cannot speculate as to what effect on LR this has had.

What we do, however, know (with 1 quarter lag, again) is that LR recipients as share of labour force is still trending above 2008-present average and although it is coming down, the proportion remains stuck above 20%. 

2008-present average for LR+STP as % of labour force is 21.1%, current June 2014 reading is at 22.1% (assuming labour force for Q1 2014), and March 2014 reading was 22.0% - very close to June (March figure is based on Q1 2014 data, so it is more likely to be correct). In June 2013 this proportion was 23.1% and in March 2013 it was 23.9%, which means we have some improvement. However, we are still far from 1998-2007 average of 9.5%.

So the good news is: LR is down. Better news is: much of the decrease is not due to State Training Programmes. Bad news: there is still a lot of road left to travel before we get anywhere near normal levels of LR and the progress is not rapid.

Government 2011-present scorecard on LR - in the next post.

1/7/2014: Russia Manufacturing PMI: June 2014

Russia's Manufacturing PMI (released by Markit and HSBC, full release here) showed that contraction in Manufacturing moderated to 49.1 in June 2014, compared to 48.9 in May 2014 - a move that is statistically not significant. The index remains below 50.0, although in the range where deviation from 50.0 is also not statistically significant, signalling continued mild contraction/stagnation in Russian manufacturing.

This marks 8th consecutive month of sub-50 readings and over the last 12 months there was only one month with a reading above 50.0 (back in October 2013). While geopolitical crisis in Ukraine is weighing on Russian economy, the decline in performance set on around May-July 2013, well before the instability in Ukraine manifested itself.

3mo MA through June is now at 48.8, which is marginally slower rate of contraction than signalled by the 3mo MA through March (48.3) and is substantially worse than 3mo MA of 50.9 recorded in April-June 2013.

1/7/2014: Irish Manufacturing PMI: June 2014

June Manufacturing PMI for Ireland (released by Markit and Investec) posted a small gain, rising to 55.3 from 55.0 in May. 3mo MA is now at 55.5 and this is above the previous 3mo MA through March 2014 which stood at 53.7. 12mo MA is at 53.7 which implies that we have positive growth in manufacturing over the last 12 months. 3mo MA through June 2014 is above same period averages for 2010-2013.

Chart to summarise the series:

We are now on an upward trend from April 2013 and series are running above 50.0 marker thirteen months in a row:

And expansion remains statistically significant and well ahead of the 'recovery' period average:

All are good signals. Too bad Markit would not release more detailed sub-indices numbers, which prevents me from covering trends in Employment, Profit Margins and New Orders data.

One caveat: rate of improvement in June (m/m) was just 0.3 points, which is below 12mo average of 0.4 points and 3mo MA of m/m changes in the index are now -0.1 points, which is a slowdown on 3mo MA through March 2014 (+0.7 points) and on 3mo MA through June for 2013 and 2012.

30/6/2014: The Euro Plus Pact: Getting Causality Between Current Account and Competitiveness Backwards

Gabrisch, Hubert and Staehr, Karsten, new paper published by ECB and titled "The Euro Plus Pact: Cost Competitiveness and External Capital Flows in the EU Countries" (February 18, 2014, ECB Working Paper No. 1650. http://ssrn.com/abstract=2397789) looks at the effectiveness of the Euro Plus Pact which was approved by 23 EU countries in March 2011 and came into force shortly afterwards.

Emphasis in bold in the quotes is mine.

"The Pact stipulates a range of quantitative targets meant to strengthen cost competitiveness with the aim of preventing the accumulation of external financial imbalances."

According to the authors: "The rationale behind the Euro Plus Pact is evident in its original name, the Competitiveness Pact, and also in its current subtitle: “Stronger economic policy coordination for competitiveness and convergence” (European Council 2011, p. 13)."

In virtual obsession of European policymakers with internal competitiveness expressed in terms of cost of labour and production, "Deteriorating cost or price competitiveness in individual countries is seen as a source of economic and financial instability. This view is directly stated in the conclusions from the European Council meeting at which the Euro Plus Pact was adopted (European Council 2011, p. 5): "The Euro Plus Pact […] will further strengthen the economic pillar of EMU and achieve a new quality of policy coordination, with the objective of improving competitiveness and thereby leading to a higher degree of convergence […].""

The authors use Granger causality tests and vector autoregressive models "to assess the short-term linkages between changes in the relative unit labour cost and changes in the current account balance. The sample consists of annual data for 27 EU countries for the period 1995-2012." This allows them to explore the direction and size of the short term linkages between cost or price competitiveness and external capital flows in the EU countries.

"The analyses are particularly pertinent given the adoption of the Euro Plus Pact… The underlying rationale is that deteriorating cost competitiveness is an important factor behind the accumulation of current account deficits and financial vulnerabilities." Thus, the "participating countries must take measures to improve their cost or price competitiveness and thereby reduce the likelihood of financial imbalances accumulating."

First, authors use Granger causality tests to determine "whether lagged values of one variable help explain the other variable when autocorrelation and country fixed effects are taken into account." The result is: lagged changes in the current account balance help explain changes in unit labour costs, while there is no effect in the opposite direction. The results hold for all 27 EU countries, for the EU15 countries and for 10 EU countries.

Second, vector autoregressive models confirmed "qualitative results are in all cases very similar to those of the Granger causality tests. …"

In other words, "changes in capital flows appear to affect cost competitiveness in the short term, while changes in competitiveness appear to have no effect on capital flows in the short term." This is important, as many policy analysts (e.g. Bruegel) and European policymakers (from Commission to national governments) routinely express the view that external imbalances are the result of poor competitiveness, especially in the periphery and especially in the context of driving the momentum of the financial crisis and the great Recession.

Here is what the authors have to say on this: "Increasing capital flows from the core to the periphery of Europe may partly explain the deteriorating cost competitiveness in many countries in Southern and Central and Eastern Europe as well as the improving cost competitiveness in many countries in Northern Europe [prior to the Crisis]. The reversal of these capital flows after the outbreak of the global financial crisis may lead to ensuring changes in cost competitiveness."

But more crucially, there seems to be no reverse direction of causality: pursuit of greater competitiveness does not seem to be a correct prescription for achieving external balances. "...the measures in the Euro Plus Pact to restrain the growth of unit labour costs may not affect the current account balance in the short term."

Now, wait, that is ECB research paper that says 'restraining growth in unit labour costs' (aka: improving competitiveness) may not do much for external balances… Hmm… did anyone hear that Euro Plus Pact tree fall?

And moving beyond the past: is anyone monitoring flows of 'capital' to the 'periphery' in the form of extremely depressed Government debt yields that are prevailing today? Cause you know, that competitiveness might be falling next time we look…

29/6/2014: Tech & Science Migrants & Native Workers: US Evidence

Tech specialists and ICT specialists hired from abroad into countries like Ireland are seen, by the policymakers, as a necessary and sufficient evidence of growth in employment and domestic economic well-being. The reason for this is often found the argument that lack of local skills will result in higher labour costs and lower competitiveness of the sector and, thus, lead to outflow of ICT-linked FDI and reduced MNCs activity in the economy.

Part of this rationale is correct. Part is wrong. I recently posited, in my Sunday Times ex-column and in a WSJ op-ed, the thesis that in Ireland's case, tax optimisation by ICT MNCs is equivalent to a resource curse, whereby excessive amounts of financial resources flows into attracting and retaining skilled workers, resulting in underinvestment in other sectors of economy. Beyond this, the Government, grown accustomed to windfall revenues from the tax optimising MNCs has lower incentives to focus on developing indigenous and highly competitive specialisation.

Setting aside these more complex arguments, what is the effect of the skilled ICT and tech and R&D workers immigration on domestic economy?

Peri, Giovanni and Shih, Kevin Yang and Sparber, Chad, in their recent paper titled "Foreign Stem Workers and Native Wages and Employment in U.S. Cities" (May 2014, NBER Working Paper No. w20093) looked at the effects of the Scientists, Technology professionals, Engineers, and Mathematicians (STEM workers) immigration into the US. Per authors, STEM workers "are fundamental inputs in scientific innovation and technological adoption, the main drivers of productivity growth in the U.S."

In their paper, the authors attempt to "identify the effect of STEM worker growth on the wages and employment of college and non-college educated native workers in 219 U.S. cities from 1990 to 2010. In order to identify a supply-driven and heterogeneous increase in STEM workers across U.S. cities, we use the distribution of foreign-born STEM workers in 1980 and exploit the introduction and variation of the H-1B visa program granting entry to foreign-born college educated (mainly STEM) workers."

Key findings:

• "We find that H-1B-driven increases in STEM workers in a city were associated with significant increases in wages paid to college educated natives." In other words, shortages of specialist skills (signified by intensity of inflow of STEM migrants) do bid up wages for similarly-educated (in degree attainment and also in skills similarities) natives. This agrees with my argument that far from driving down labour costs for skilled workers not just in STEM-related sectors, but across all educated workforce, STEM-targeted immigration is associated with higher labour costs. Often, this is seen as being driven by complementarity between STEM skills and related services professionals (legals, accounting, sales, marketing, etc). But is that the case of signalling value of their degrees going up in the market, or is it the case of their skills value going up? One way or the other, more STEM immigrants seems to do nothing to improve labour costs competitiveness.
• "Wage increases for non-college educated natives are smaller but still significant." So wage inflation is not moderated by STEM migration, even if we control for skills. In other words, all sectors of city economy are facing rising costs in the presence of STEM immigration. This, of course, is not an argument of causality, but it is also not the evidence that would be consistent with an argument that STEM immigration induces gains in labour competitiveness.
• "We do not find significant effects on employment." In other words, jobs creation is not what happens when you open up targeted skills-driven migration. And, by converse, it is not impacted by restricting it. Which begs a question: every month Irish ministers present jobs announcements by STEM-intensive ICT services companies as evidence of employment creation. Every time they do so, they omit consideration of what higher cost of skilled and unskilled workers is doing to the rest of the economy. Should they be concerned with the latter at least as much as with the former? The study evidence suggests they should.
• "We also find that STEM workers increased housing rents for college graduates, which eroded part of their wage gains." Ah, can that be a reason why rents are inflating in Dublin, especially in the areas where STEM-equivalent skills are at the highest premium (IFSC and South Docklands corridor)? In summary, therefore, higher employment and immigration of STEM workers seems to be associated with higher costs of living for all workers. Is it correct to posit a question of spillovers or externalities that arise from greater share of new employment going to skilled ICT immigrants onto the long term residents of the country or city? If yes, then the logic suggests that there should be consideration of transfers from the immigrants under STEM programme to at least those natives and long term residents who do not gain in wages enough to compensate them for the rising cost of living.

Overall, authors conclude that "Together, these results imply a significant effect of foreign STEM on total factor productivity growth in the average US city between 1990 and 2010." Which is, of course, good. But it does not tell us if this TFP growth actually spreads across the entire economy or stays within STEM-intensive sectors. We do not know if TFP gains in STEM sectors are not offset by labour competitiveness losses in the rest of the host economy. And, crucially, it does not tell us if the above questions, posited in the bullet point comments, can be answered unambiguously in favour of more STEM-linked immigration.

29/6/2014: What a Difference a Year of ECB Activism Makes...

Mapping decline in CDS and implied probabilities of default for Euro area 'peripherals' over the last 12 months:

Largest declines: Greece, followed by Portugal, Spain, Italy and lastly Ireland. Timing of declines and divergent macrofundamentals of these countries suggest that drop in CDS has little to do with internal policies and performance of individual states - the 'periphery' is still being priced jointly. The decline in risk assessments of the 'peripherals' is primarily down to common policy, aka: the ECB.

On the other hand, if we are to distinguish within the 'peripherals', we can identify 3 sub-groups of countries:

• Weakest and stand-alone: Greece
• Mid-range weakness, also stand-alone: Portugal
• Stronger 'peripherals': Ireland, Spain and Italy

29/6/2014: Mid-Summer CDS Dreams: Ukraine v Russia

One of these countries has a brand new Association Agreement with the EU... and a fresh probability of sovereign default of 41%... another one (with probability of default at 11.9%) does not...

In two years from June 2012 through June 2014, Ukraine's probability of default declined 1.47% as the country received massive injections of funds from the IMF, US and EU. Russia's probability of default fell 3.89% over the same time. For comparatives: Ukraine's June probability of default is running at around 41%, Serbia's at 17.6%. Ukraine is currently the worst rated sovereign (by CDS-based probability of default) of any state with an Association Agreement with EU.

29/6/2014: London Property Markets: A Safe Haven After All

A fascinatingly interesting study looking into London property markets from the point of view of safe haven properties. Badarinza, Cristian and Ramadorai, Tarun, "Preferred Habitats and Safe-Haven Effects: Evidence from the London Housing Market" (April 17, 2014, http://ssrn.com/abstract=2353124) uses "a new cross-sectional approach, motivated by the insight that investors may have different "preferred habitats" within a broad asset class."

The study deploys this strategy "on large databases of historical housing transactions in London, finding that economic and political risk in Southern Europe, China, the Middle East, Russia, and South Asia helps explain price and volume dynamics in the London housing market over the past two decades. Safe-haven effects on the London housing market are long-lasting and significant, but temporary. The method also uncovers intriguing insights about cross-country variation in preferred habitats within London."