7/7/2014: About those Global Growth Uplift Forecasts...

Last week, IMF updated its World Economic Outlook with a fresh upgrade to global growth forecast for 2015. Lot's of media miles have been travelled over this upgrade (here's one example). And, in fairness, the IMF might be right: there has been some firming up in global growth in recent months.

More significantly, the firming up is coming on foot of stronger performance of the advanced economies, where the cycle is now clearly indicating early stages recovery.

The same positive momentum has been confirmed in a number of expert surveys, e.g. BlackRock Investment Institute and McKinsey Global Institute and so on.

Still, just to be on the safer side, it is worth taking IMF forecasts in perspective. The Fund has been systematically wrong in its outlooks for Global and Advanced economies growth in recent years. Here is some evidence.

First: take the same period estimates (April-published estimates for the same year growth). These should be pretty easy to predict, as by the date of their release, the Fund has contemporaneous data flows on the economies (e.g. PMIs) and previous year dynamics pretty much sorted. Table below shows that, despite some data already being available, the Fund has rather varied experience with its estimates. And when it comes to the World Economy estimates, things have goo ten worse over the last three years, compared to the 5 years range.

Second, let's look at one year-ahead forecasts. Here, things are better in most recent three years, but they are not brilliant, especially when it comes to the Fund forecasts for the Euro Area. 3-5 year average over-estimate of growth is to the tune of 0.76-1.05% per annum. When it comes to World growth forecasts, these too turn out to be too optimistic, in the range of 0.56-0.60% annually.

Third: over two years forecasts, Fund's performance is worse: for the World economy forecasts tend to be on average more optimistic than the outrun by between 0.68% and 1.04% per annum. The same range for Euro Area is 1.19% to 1.53%.

Two charts illustrate the above. First: One-year ahead forecasts compared to outrun:

Next: 2008-2012 forecasts and 2013 (April) estimate for growth in 2013 compared to actual outrun:

Someone criticised my choice of the period covered, but the entire point of my argument here is not that the IMF is bad at forecasting (it is no worse than many other sources), but that forecasts at the times we live in are by their nature highly restrictive. That is, of course, not the notion one gets from reading business media reports of every IMF (or other major source) forecasts update.

So the net conclusion must be that there are indicators of global growth firming up… but I would't be rushing to buy on foot of IMF statements about 2015… At least not until there is a clear and established trend along which the forecasters can glide smoothly. When we need forecasts most, they are least useful… such is reality.

7/7/2014: Bitcoin: Swiss View vs EBA View

Three interesting links relating to Bitcoin:

1. Swiss authorities position on Bitcoin: http://leaprate.com/2014/06/23470/switzerlands-finma-grants-first-bitcoin-trader-license-to-sebx-deems-bitcoin-a-means-of-payment/
2. Swiss market view as contrasted by the EU view: http://leaprate.com/2014/07/23926/eu-opposes-switzerland-and-hits-bitcoin-instructs-banks-to-avoid-the-virtual-currency/
3. EBA position paper: http://www.eba.europa.eu/documents/10180/657547/EBA-Op-2014-08+Opinion+on+Virtual+Currencies.pdf (see page 22 for summary of identified risks)

4/7/2014: Fourth of July WLASze

This is WLASze: Weekend Links to Arts, Sciences and zero economics and in spirit of the 4th of July Day one hell of a 'Happy Birthday, America' webcards from deezen:
http://www.dezeen.com/2014/07/04/five-favourite-dezeen-american-architecture-projects-2014-4th-july/

My personal favourite: http://www.dezeen.com/2014/01/16/the-pierre-concrete-house-olson-kundig-architects/

And a bit of brilliant history of the Day when "treason was preferable to discomfort"... http://www.wired.com/2014/07/celebrate-the-4th-of-july-because-horse-flies/ Say, Thanks, America, to Tabanus Atratus, for the hotdogs and the fireworks and the football games in the parks... for the 4th of July:

Via http://www.wired.com/2014/07/celebrate-the-4th-of-july-because-horse-flies/

4/7/2014: Q1 2014: Domestic Demand dynamics

In the previous posts I covered the revisions to our GDP and GNP introduced by the CSO, top-level GDP and GNP growth dynamics, and sectoral decomposition of GDP.  These provided:

1. Some caveats to reading into the new data 
2. That the GDP has been trending flat between Q2-Q3 2008 and Q1 2014, while the uplift from the recession period trough in Q4 2009 being much more anaemic than in any period between 1997 and 2007. The good news: in Q1 2014, rates of growth in both GDP and GNP were above their respective averages for post-Q3 2010 period. Bad news: these are still below the Q1 2001-Q4 2007 averages.
3. Evidence that in Q1 2014, four out of five sectors of the economy posted increases in activity y/y. 

Now, let's consider Domestic Demand data. In the past I have argued (including based on econometric evidence) that Domestic Demand dynamics are most closely (of all aggregates) track our economy's actual dynamics, as these control for activities of the MNCs that are not domestically-anchored (in other words, they include effects of MNCs activities on Exchequer and households, but exclude their activities relating to sales abroad and expatriation of profits and tax optimisation).

Of the components of Domestic Demand:

• Personal Consumption Expenditure on Goods and Services stood at EUR19.915 billion in Q1 2014, which is up EUR42 million (yes, you do need a microscope to spot this - it is a rise of just 0.21% y/y. Good news is that this is the first quarter of increases in Consumption Expenditure after four consecutive quarters of decreases. Previously we had a EUR125 million drop in Personal Consumption Expenditure in Q4 2013 compared to Q4 2012.
• Net Current Government Expenditure stood at EUR6.614 billion in Q1 2014 which is EUR167 billion up on Q1 2013 (+2.59% y/y) and marks third consecutive y/y increase in the series.  Over the last 6 months, Personal Consumption fell by a cumulative EUR83 million and Government Net Current Expenditure rose EUR617 million. Austerity seems to be hitting households more than public sector?..
• Gross Domestic Fixed Capital Formation (basically an imperfect proxy for investment) registered at EUR6.864 billion in Q1 2014, up EUR191 million y/y. Which sounds pretty good (a 2.86% rise y/y in Q1 2014) unless one recalls that in Q4 2013 this dropped 11.35% y/y. Over the last 6 months Fixed Capital Formation is down EUR798 million y/y in a sign that hardly confirms the heroic claims of scores of foreign and irish investors flocking to buy assets here.
• Exports of Goods and Services, per QNA data, stood at EUR47.164 billion in Q1 1014, up strongly +7.41% y/y, the fastest rate of y/y growth since Q1 2011 and marking fourth consecutive quarter of growth. I will cover exports data in a separate post, as there is some strange problem with QNA data appearing here.
• Imports of Goods and Services were up too, rising to EUR37.635 billion a y/y increase of EUR2.086 billion.  
• Over the last 6 months, cumulatively, y/y Exports rose EUR4.970 billion and Imports rose EUR3.741 billion.
• Total domestic demand (sum of Personal Expenditure, Government Current Expenditure, Gross Fixed Capital Formation and Value of Physical Changes in Stocks in the economy) stood at EUR33.828 billion. This represents a y/y increase of just EUR335 million or 1.0%. This is the first quarter we recorded an increase since Q4 2013 saw a y/y drop in Total Domestic Demand of 3.83%. Over the last 6 months, cumulatively, Irish domestic economy was down EUR1.087 billion compared to the same 6 months period a year before.

The above are illustrated in the two charts below:

Lastly, let's take a look at nominal data, representing what we actually have in our pockets without adjusting for inflation. Over Q1 2014, nominal total demand rose by EUR499 million y/y, while over the last 6 months it is down EUR570 million y/y. So in effect all the growth in Q1 2014 did not cover even half the decline recorded in Q4 2013. One step forward after two steps back?..

Chart below summarises nominal changes over the last 6 months and 12 months.

4/7/2014: Q1 2014: GDP & GNP dynamics

In the previous posts I covered the revisions to our GDP and GNP introduced by the CSO and sectoral decomposition of GDP. The former sets out some caveats to reading into the new data and the latter shows that in Q1 2014, four out of five sectors of the economy posted increases in activity y/y. These are good numbers.

Now, let's consider GDP and GNP data at the aggregate levels.

First y/y comparatives based on Not Seasonally-Adjusted data:

• GDP in constant prices came in at EUR44.445 billion in Q1  2014, which marks an increase of 4.14% y/y and the reversal of Q4 2013 y/y decline of 1.15%. 6mo average rate of growth (y/y) in GDP is now at 1.49% and 12mo average is at 1.14%. Over the last 12 months through Q1 2014, GDP expanded by a cumulative 1.13% compared to 12 months through Q1 2013.
• Net Factor Income outflows from Ireland accelerated from EUR7.013 billion in Q1 2013 to EUR7.584 billion. Given the lack of global capes, this suggests that MNCs are booking more profit out of Ireland based on actual activity uplift here, rather than on transfers of previously booked profits. But that is a speculative conjecture. Still, rate of profits expatriation out of Ireland is lower in Q1 2014 than in Q1 2012, Q1 2011 and Q1 2010, which means that MNCs are still parking large amounts of retained profits here. When these are going to flow to overseas investment opportunities (e.g. if, say, Emerging Markets investment outlook improves in time, there will be bigger holes in irish national accounts).
• GNP in content prices stood at EUR36.861 billion in Q1 2014, up 3.35% y/y and broadly in line with the average growth rate over the last three quarters. This marks the third consecutive quarter of growth in GNP. Over the last 6 months, GNP expanded by 2.98% on average and cumulative growth over the last 12 months compared to same period a year before is 2.67%.

Two charts to illustrate:

The above clearly shows that the GDP has been trending flat between Q2-Q3 2008 and Q1 2014, while the uplift from the recession period trough in Q4 2009 has been much more anaemic than in any period between 1997 and 2007.

The good news is that in Q1 2014, rates of growth in both GDP and GNP were above their respective averages for post-Q3 2010 period. Bad news is that these are still below the Q1 2001-Q4 2007 averages.

GNP/GDP gap has worsened in Q1 2014 to 17.1% from 16.4% in Q1 2013. The same happened to the private sector GNP/GDP gap which increased from 18.3% in Q1 2013 to 19.1% in Q1 2014. This implies that official statistics, based on GDP figures more severely over-estimate actual economic activity in Ireland in Q1 this year, compared to Q1 last.

Chart to illustrate:

Switching to Seasonally-Adjusted data for q/q comparatives:

• GDP in constant prices terms grew by 2.67% q/q in Q1 2014, reversing a 0.08% decline in Q4 2013 and marking the first quarter of expansion. 6mo average growth rate q/q in GDP is now at 1.30% and 12mo at 1.26%. 
• GNP in constant prices terms grew by 0.48% q/q in Q1 2014, a major slowdown on 2.24% growth in Q4 2013. Q1 2014 marked the third quarter of expansion, albeit at vastly slower rate of growth compared to both Q3 2013 and Q4 2013. 6mo average growth rate q/q in GNP is now at 1.36% and 12mo at 1.34%. 

Chart to illustrate:

Finally, let's re-time recessions post-revisions.

Red bars mark cases of consecutive two (or more) quarters of negative q/q growth in GDP and GNP:

4/7/2014: Q1 2014: Sectoral Growth Decomposition

In the previous post I covered the revisions to our GDP and GNP introduced by the CSO. Setting the caveats set out in this discussion aside, what are the core underlying dynamics in the National Accounts?

Let's deal with sectoral distribution of output, expressed in constant factor cost terms:

• Agriculture, forestry & fishing sector output registered EUR1.042 billion in Q1 2014, which is up 11.2% on Q1 2013. Pricing effects contribute to the improvement which is now running at double digits y/y for three quarters consecutively. Compared to Q1 2011, output in this sector is up 15.3%, although activity remains below 2006-2007 average (some -6.5% lower).
• Industry output is at EUR11.462 billion, which is 2.1% ahead of Q1 2013. This marks first quarter of increases and the pace of expansion is not exactly fast. Compared to Q1 2011 output in the Industry is up only 2.9% and compared to @006-2007 average it is down 9%.
• Distribution, Transport, Software and Communication sector activity is at EUR9.775 billion in Q1 2014, up 8.0% y/y, marking the first quarter of increases after four consecutive quarters of y/y declines. The sector is down 2.5% on Q1 2011 and is -7.8% below 2006-2007 average.
• Public Administration and Defence sector activity is at EUR1.495 billion in Q1 2014, down 2.0% y/y for 21st consecutive quarter of y/y decreases. The sector is now down 7% on Q1 2011 and 16.6% below activity in 2006-2007.
• Other Services (including Rents) are up at EUR17.064 in Q1 2014, a rise of 3.9% y/y and marking 12th consecutive quarter of increases. Sector activity is now up 11% on Q1 2011 and is up 10.2% on 2006-2007 levels. All of this is down to MNCs operating in ICT services sector and much of the increase on 2006-2007 levels is accounted for by tax optimisation, not by real activity.
• Within Industry, Building & Construction sub-sector posted EUR0.719 worth of activity in Q1 2014, which is 7.6% ahead of Q1 2013, marking a slowdown in the rate of growth from Q2-Q4 2013. The sub-sector now posted expansion over the last 6 consecutive quarters. Still, Q1 2014 activity is 4.8% behind Q1 2011 and is down 57.1% on 2006-2007 average.
• Also within Industry, Transportable Goods Industries and Utilities sub-sector activity registered at EUR10.744 billion in Q1 2014 - an increase of 1.8% y/y and the first quarter of expansion. The sub-sector activity is now up 3.4% on Q1 2011 and is basically unchanged on 2006-2007 average.

So in the nutshell, only two sectors activity is currently running at above 2006-2007 average levels: Other Services (aka ICT Services MNCs) and Transportable Goods Industries & Utilities. All other sectors are running below 2006-2007 levels.

Charts below illustrate y/y growth rates in the sectors:

4/7/2014: Croke Park Country Booes...

After several requests, here is a quick estimate of Dublin economy's losses due to cancellation of Garth Brooks concert (disclosure: as a classical music fan, I have no idea what this guys sings about, genuinely, but MrsG says he is 'a really good country singer').

Estimates are:

For the laughs, of course, purely for the laughs - don't go out shorting Government bonds on this loss...

Update: in spirit with ESA 2010 framework, I do need to add illicit transactions and associated activities to the above, so here they are:

And the grand total is: EUR39.3 million. That excludes, obviously, reaffirming Summerhill and adjoining areas as the pivotal centres for certain 'buziness' activities - the reputational capital loss to the Dublin City Centre that is hard to estimate...

3/7/2014: Irish GDP Q1 2014: Riches of Drugs Trade & R&D 'Investments' Raining Upon Us

CSO published revised Quarterly National Accounts now in compliance with Eurostat latest requirements based on European System of National and Regional Accounts (ESA) framework. This resulted in an uplift in GDP and GNP figures due to two main sources:

• ESA 2010 framework changed the treatment of research and development (R&D) expenditure. Per CSO: "Under ESA95, R&D expenditure was treated as an ancillary cost to the main production of an enterprise, while under ESA2010, R&D expenditure is recognised as capital investment." This is rather stretching: a business 'invests in R&D' and the outcome is either unsuccessful or successful. In the case of unsuccessful outcome, R&D allocation gets written off, so it does not register in business activity as a negative entry offsetting wages and purchases paid for in the process of R&D expenditure being undertaken. In case of success, the resulting IP or product are entered in either as new capital or new value added. Again, these are not netted against R&D spending, as far as I understand. So R&D spending as investment implies double counting the expenditure as value added over time. Looks questionable to me.
• ESA also requires that an estimate for illegal activities should also be included in GDP calculations. This is not separated into a different line-item in QNA, so we have no idea where these additions were made. Also, significantly, it is unclear how imports of illegal goods and services are factored in - are these accounted for on gross imports side? Are these netted out of GDP calculations?

The adjustments resulting from these two changes are large. Overnight, 2013 GDP growth is now +0.2% as opposed to -0.3% before the above revisions kicked in. That's a swing of half of a percentage point!

More than that: In 2013, Irish GDP was supposed to have been EUR164 billion before the revisions. Hookers, illegal drugs, all other sorts of stuff that would land you in Mountjoy, plus R&D reclassifications pushed this to EUR174.8 billion - a full EUR10.8 billion richer we are not, but the Government now has a claim to make that we are and it is all thanks to the FG/LP 'leadership' and all this sort of publicity.

This is just meaningless. Country output comparatives and analysis across years and levels have been now rendered effectively bogus by the combination of
1) Massive tax transfers by the services sector MNCs
2) Massive profits shifting by the traditional MNCs
3) Estimates (or rather guesses) of the illicit trade activities; and
4) Politically correct treatment of R&D spending.

It is worth noting that in Ireland, R&D expenditure has been repeatedly questioned due to the suspicion that much of it (especially for indigenous companies) involves 'investments' in process and management R&D - i.e. activities that normally have nothing to do with invention or creation of anything new, but rather have more to do with marketing and sales.

With this in mind, one simply cannot ignore the National Accounts releases, so in the next few posts I will start analysis of the new, revised data.

Bear in mind, however, that today's 'gains' reported for Q1 2014 are artificial or superficial or plain bogus and have little connection to the reality on the ground. We are not made better off by counting cocaine sales and trips to 'Happy Endin' massage parlours and we are not being made richer by spending on R&D - we might get returns on that R&D, but these returns would count into the normal (pre-revision) GDP when they do take place.

2/7/2014: Irish PMIs Q2 2014: Services, Manufacturing, Construction & Composite Index

In two previous posts I covered Services PMI (here) and Manufacturing PMI (here) for Ireland for June 2014.  June data provides us also with Q2 average levels of activity as measured by PMIs, so let's cover this here.

Q2 2014 Manufacturing PMI averages came in at 55.5, marking the fourth consecutive quarter of readings above 50.0. Q1 2014 Manufacturing PMI averaged at 53.7. Q2 2014 average is now the highest of any quarter since Q1 2011.

All of this indicates that Industry contribution ex-Construction to the GDP should posting growth over H1 2014. And this is good news.

Services Q2 2014 PMI came in at 62.1 - rapid pace of growth - up on 59.9 in Q1 2014 and significantly up on 54.3 in Q2 2013. Again, these are strong indicators of growth in the sector in H1 2014 

And this growth accelerated in Q2 compared to Q1: in Q1 2014 y/y expansion in Services PMI was 10.4% and in Q2 2014 it rose to 14.4%, also in Q1 2014 Manufacturing PMI rose 7.2% y/y and in Q2 this rate of growth was 12.4%.

Finally, Construction PMI (we have these with one month lag, so Q2 figures are based on April-May averages, firmed up substantially, reading 61.9 in Q2 2014 compared to 57.6 in Q1 2014 and 42.4 in Q2 2013. Year on year rates of growth a massive: 28.8% in Q1 2014 and 45.8% in Q2 2014.

All in, the data for Q1 appears to be in line with growth registered in QNA realised today (more of this later) and Q2 is encouraging in so far as it shows acceleration in growth on Q1.

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.