15/7/2014: Construction Sector PMI: Q2 2014

June PMI for Construction industry were out this week. Good discussion of some monthly data on this topic here.

Here are quarterly averages through Q2 2014:

• Total Activity index is up 3.6 points to 61.2 in Q2 2014 compared to Q1 2014. The index is up significantly - by +18.8 points - on Q2 2013.
• On average we have fourth consecutive quarter of growth in the sector activity and in three of these quarters, the index was statistically significantly above 50.0 expansion mark.
• Based on these figures we are in a confirmed recovery in the sector and in Q2 2014 this accelerated substantially. Which is good news.
• Housing Activity sub-index rose to 61.9 - marking rapid growth - and is now up 2.8 points on Q1 2014 and 17.1 points on Q2 2014. Again, we are into fourth consecutive quarter of above 50 readings and, as above, this is the third consecutive quarter of statistically significant readings above 50.0.
• Commercial Activity sub-index rose to 61.5, up 2.8 points on Q1 2014 and 20 points on Q2 2013. Same dynamics over the last four quarters as in the case of the Total Activity index and Housing Activity sub-index.
• Civil Engineering index is a drag on overall growth picture, averaging 44.9 over the Q2 2014, up 4.2 points on Q1 2014 and up 12.1 points on Q2 2013, but still below the 50.0 line. This is expected, as the Government continues to destroy public investment at an alarming rate.

Chart to illustrate:

15/7/2014: Mispriced Investment and Risk: Ireland & Euro Area

Whenever Irish Government and media talk about the fabled hordes of investors wondering around Ireland looking for anything to put their money into, all this talk makes me wonder: why are the actual numbers coming out of capital formation side of the National Accounts showing only weak, leafless 'improvements'? Even with reclassifications of R&D costs as 'investment', and with the FDI (some of which does count as 'domestic') and retained profits (some of which, if reinvested, also count as 'domestic').

Well, I bet the IMF should be wondering too. Because in its latest Euro Area analytical paper, the Fund shows that Irish Gross Fixed Capital Formation in Q1 2014 was the second lowest (relative to 2007 levels) after that of another 'recovering' miracle: Greece.

Meanwhile, Ireland is benefiting from low interest rates (compared to its 'peripheral' counterparts) despite having the largest net debt pile of all euro area economies (although Irish rates are rising):

Run by me again that point where, in theory, higher risks are priced via higher cost of capital?

Or that point where equity valuations should be reflective of debt exposures?

15/7/2014: Covenant-lite Debt Mountain & the Great Unwinding...

Recently, I wrote about IMF findings that the corporate and household debt mountains in the euro area remain unaddressed. Here is the World Gold Council chart on issuance of new covenant-lite corporate debt in the US:

The new age of complacency is emerging, defined by the ease of debt raising and low volatility:

Which, of course, can mean only two things:

1. There will be reversals out of status quo.
2. Low volatility implies reduced returns on investment and capital. This, in turn, implies lower investment and capital, which means lower growth and higher inflation into the future

With a caveat that we do not know the timing of the above changes, one has to keep in mind that the longer the status quo pre-1&2 remains in place, the worse 1&2 will be.

So there it is, a set up for gradual, painfully stagnant and prolonged unwinding of the extraordinarily accommodative monetary policies of the recent past...

14/7/2014: Some Facts on Web-Enabled Russian Consumers

Some interesting data from Google on internet-enabled consumers in Russia:

14/7/2014: As Far As Debtor Nations Go… All That FDI

There are more interesting revelations in the IMF survey of the Euro Area when it comes to Ireland. Let's imagine what we think of the Emerald Isle… no, not Guinness and not music or the Temple Bar… let's think of FDI. 

• It is huge, right? Right. 
• It is a marker of huge source of our success, right? Right-ish. 
• It is making us richer as a nation, right? Err…

Ok, IMF provides a neat table summarising euro area economies as net creditors (the ones for which Net Foreign Assets held in the economy - private and public - are positive, so the world 'owes' them and associated with this, they have a positive, with exception of Malta, current account, averaging over 1999-2013) and debtors (the ones for which Net Foreign Assets are negative and so they owe, net, to the world, with their current account balances being negative on average over long period of time).

So Ireland is FDI-rich - we have lots of foreign assets that we can call upon as ours, right? Hmm… judge by the table:

And now notice two things:

1. Our Net Foreign Assets position is a whooping -105% of GDP, less disastrous than that of only two other countries: hugely indebted Greece and heavily indebted and less open Portugal;
2. Our current account averages at a deficit, of -0.6% of GDP which is benign compared to all other debtor economies, but that said, even at the best performance (maximum) we have generated a current account surplus of just 3.1% of GDP which is… no, not spectacular… it is ranked tenth in the euro area.

Do tell me if this consistent somehow with the evidence that Ireland's external balances are strong indicators of our economy's structural successes, as Irish and Brussels analysts are keen claiming?

But IMF soldiers on. In the following table in the same report it shows us the Average Real Return Difference between Foreign Assets and Liabilities Euro Area Economies. Now, what should we expect from our successes with FDI? That returns to assets inside Ireland should be in excess of returns on Irish assets held abroad. We are, after all, more successful in using investment (FDI) than other countries. What do we get? Exactly the opposite:

Note per above, our real return difference is a whooping 2.8 percentage points - largest after Greece and Slovak Republic. We know what is happening in Greece's case, but what on earth is happening with Slovak Republic case? Why, the same thing that is happening with Ireland: exports of returns via FDI.

So the above simply means we pay more on our liabilities than we get from our assets. In household finances sense... we are going broke...

Is this a problem? Why yes, it is. Here's IMF: "On average, many creditor economies saw negative real return differences between their foreign assets and liabilities, acting as a drag on their net foreign asset positions and also suggesting possible gains from portfolio rebalancing, either by shifting away from foreign towards domestic assets, or by changing the composition of their foreign assets and liabilities, away from euro area debtor economies. At the same time, many debtor economies had large negative real return differences on average, reinforcing their large net foreign liability positions and making adjustment more of an uphill climb."

That said, things are improving - our current account is now in stronger position than in the 2002-2007, but that is largely because of our consumption of imported goods dropping. Still, things are improving...

14/7/2014: Irish Banks are Open for Lending... when no one is looking?

Remember all the Irish banks advertorials in the media about the lending easing they engaged in when it comes to SMEs? The story, as it is being told by the banks, is that our banking system is approving credit to SMEs and that the SMEs just don't apply or don't draw down the loans approved.

Here is IMF chart from today's Euro area survey on the reasons for adverse outcomes of loans applications:

So we have: Irish banks are refusing loans to SMEs at rates second only to Greece. And applications fall short of business expectations at a rate that exceeds that of Greece, so overall, tightness of credit supply to SMEs in Ireland is just as abad as it is in Greece, and worse than in any other 'peripheral' economy.

But never mind, real cost of capital is now back rising in Ireland, so we can expect some additions of grey bars to the above chart too...

All with the blessing of our policymakers who keep talking about higher and higher margins for the banks...

13/7/2014: Up, Down the Current Account Ladder

For quite some years now, Irish Governments have been keen promoting Ireland's 'unique' external balances performance that, allegedly, made us so distinct from other 'peripheral' countries. Our external balances were booming, we were told by the Government. Ireland's external surpluses are its unique strength, said the boffins at the Brussels think tanks. We are not like Portugal or Greece or Spain when it comes to the 'real' 'competitive' economy.

The hiccup of course, is that this rhetoric was ignoring few little pesky facts, such as the source of our external trade 'competitiveness' or the shifting composition of our trade. Nonetheless, it had some teeth: we started with a much higher base of exports in the economy and stronger external balances than other 'peripheral' states.

Still, in the world of crisis-related 'adjustments', the rate of change matters as much as the starting levels. And judging by IMF data, our rate of improvement in external balances is not that unique:

Per chart above, trade-attributed current account adjustments (the pink bar) for Ireland are higher than for any other peripheral economy. But net adjustments (accounting for income and transfers) are only third highest. This, in part, is due to the fact that vast majority of our exports are supplied by companies that increasingly ship more profits out of Ireland (and this is even worse if we are to account for profits temporarily retained in Ireland by the MNCs).

Still, good news: our trade balance is doing well. Better than any other 'peripheral' in the sample...

13/7/2014: Household Debt Mountains

In the earlier post (here) I covered IMF data on Non-Financial Corporations debt, comparing Spain and other 'peripherals' with Ireland. And here is one other comparative: for household debt

I know, I know... it doesn't matter, really, that households are being tasked with funding Government debt first, their own debt later. All is sustainable...

One caveat: per my understanding, the above does not include household debts transferred to investment funds, as data for Ireland comes from ECB, which does not include data not covered by the CBofI, which does not include household mortgages and other debt sold to institutions not covered by the banking licenses in Ireland. So there, keep raising taxes and reporting higher revenues as a 'success' or 'recovery'... because household debt does not matter... until it matters...

13/7/2014: Ireland v Spain: Property Markets Signal Fundamentals-Linked Growth Potential

Two charts showing why Ireland can expect more robust correction in the property prices post-crisis trough:

First, investment in new construction:

The above shows that Irish construction investment dropped more significantly than in the case of (relatively comparable) Spain. This implies that we have been facing longer and deeper reductions in new stock additions than Spain, implying greater pressures on new supply.

Second, House Price to Income ratios (ignore caption):

Irish property prices have fallen more relative to income than Spanish prices. Which implies that penned up demand is greater in Ireland.

So there you have it, two (not all, of course) fundamentals driving prices recovery up in Ireland and both have little to do with the potential bubble dynamics.

Note: above charts are from IMF's Article IV Consultation Paper for Spain.

13/7/2014: Deflating That Corporate Debt Deflation Myth

This week, the IMF sketched out priorities for getting Spanish economy back onto some sort of a growth path. These, as in previous documents addressed to Irish and Portuguese policymakers, included dealing with restructuring of the corporate debts. IMF, to their credit, have been at the forefront of recognising that the Government debt is not the only crisis we are facing and that household debt and corporate debt also matter. As a reminder, Irish Government did diddly-nothing on both of these until IMF waltzed into Dublin.

But just how severe is the crisis we face (alongside with Spanish and Portuguese economies) when it comes to the size of the pre-crisis non-financial corporate debt pile, and how much of this debt pile has been deflated since the bottom of the crisis?

A handy chart from the IMF:

The right hand side of the chart compares current crisis to previous historical crises: Japan 1989-97; UK 1990-96; Austria 1988-96; Finland 1993-96; Norway 1999-05; Sweden 1991-1994.

So:

• Irish corporate debt crisis is off-the-scale compared to other 'peripherals' in the current crisis and compared to all recent historical debt crises;
• Irish deflation of debt through Q3 2013 is far from remarkable (although more dramatic than in Spain and Portugal) despite Nama taking a lion's share of the development & property investment debts off the banks.

Now, remember the popular tosh about 'debt doesn't matter for growth' that floated around the media last year in the wake of the Reinhart-Rogoff errors controversy? Sure, it does not... yes... except... IMF shows growth experience in two of the above historical episodes:

First the 'bad' case of Japan:

 So no, Japan has not recovered...

And then the 'good' case of Sweden:

Err... ok, neither did Sweden fully recover... for a while... for over a decade.

13/7/2014: A Miracle of Reformed Banks Operating Costs Performance

We are all familiar with the fact that Irish banks are aggressively deleveraging and beefing up their profit margins. This much has been set out in regulatory and policy provisions (e.g. PCARs) and lauded by the Irish policymakers as a sign of improvements in the banking sector. Alas, the same cannot be said about operating costs in Irish banks. This metric, in fact, has not been given much attention in Irish media and by Irish politicians. So in their place, here's the latest from the IMF (special note on Spain published this week):

Wait... what?! Irish banks cost-to-income ratio is hanging around 80%, well ahead of all other 'peripherals'. Is the Irish economy (borrowers) sustaining excessive costs and employment levels in Irish banks? Why, yes, it appears so... 

11/7/2014: BlackRock Institute Survey: EMEA, July 2014

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

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

The consensus of respondents describe Russia, the Ukraine and Croatia be in a recessionary state, with an even  split of economists gauging Kazakhstan and South Africa to be a in a recessionary or contraction. Over the next two quarters, the consensus shifts toward expansion for Kazakhstan and South Africa.

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

At the 12 month horizon, the consensus expecting all EMEA countries to strengthen or remain the same with the exception of Russia, Kazakhstan, Turkey, Hungary and the Ukraine.

Globally, respondents remain positive on the global growth cycle with a net 85% of 34 respondents expecting a  strengthening world economy over the next 12 months – an 14% increase from the net 71% 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.