24/7/2014: Looking for that Property Price Bubble: Dublin, June 2014

Irish Residential Property Price Index for June is out today. Headlines are burning hot with

• 12.5 hike in prices nationwide (y/y);
• June m/m rise of 2.9% - faster than 2.3% in May
• Dublin property prices up 3.3% m/m and 23.9% y/y
• Dublin House prices up 3.1% m/m and 24.4% y/y

There is no avoiding the talk about a 'new bubble'.

In the past, I clearly said that in my view:

1. Current levels of prices are not signalling bubble emergence in Dublin
2. Rates of increases in Dublin prices are concerning, but levels are yet to break away from the national historical averages
3. Trend-wise, we are way below the levels of Dublin prices consistent with normal long-term behaviour in the series.

Here are updated charts on long-term trends.

First, looking at annual series and applying two trend assumptions: actual inflation and ECB target (long-run inflation). By both metrics, we are still below (using 3mo MA through June 2014 as 2014 figure) equilibrium, but rate of convergence is accelerating:

On monthly basis, here are historical series, linking ESRI and CSO data sets:

As above clearly shows, Q2 2014 levels of prices in Dublin are barely above 2000-2002 average.

So the dynamics can signal a bit of an exuberance on the market demand side, but levels are still very much conservative compared to longer-term trends.

22/7/2014: Shaping a Road Map for Resolving the Ukraine Impasse

With the conflict in Ukraine is tumbling toward a breaking point (http://trueeconomics.blogspot.ie/2014/07/2172014-conflict-over-ukraine-is-now.html), it is heartening to see the Guardian wading into Ukrainian crisis dimension with a proposed solution that actually attempts to bridge the gap between Eastern Ukrainian separatists, Kiev, Moscow and the West:
http://www.theguardian.com/commentisfree/2014/jul/21/putin-save-face-mh17-russian-leader-ukraine-rebels

As readers of this blog know, I have called for a staggered reforms approach based on "elections + Aid & Development Programme + referendum" formula since February this year:
http://trueeconomics.blogspot.ie/2014/02/1922014-ukraines-political-economy-is.html and http://trueeconomics.blogspot.ie/2014/02/622014-what-does-future-hold-for.html

The dynamics have changed a bit since the original suggestions, but the nature of the required compromise did not. To move on from the civil war situation toward peaceful resolution of the political and economic crises Ukraine faces, the nation needs:

1. Immediate bi-lateral ceasefire agreement backed solidly and enforced by EU and Russia; both acting as guarantors and enforcers of the agreement on the sides of, respectively, Kiev and Donetsk;
2. Following the ceasefire, Ukraine needs structured and facilitated peace talks;
3. Peace talks must start with the opining positions of both sides recognising ex-ante: secured national integrity of Ukrainian state, full recognition of the legitimacy of the current Government in Kiev, recognition of the need for regional-level direct democratic decision making in shaping the future political configuration of Ukraine;
4. Kiev must, up front, recognise the need for local referenda in determining the future outlook of political institutions in Ukraine, while separatists must recognise that the future referenda cannot be held on the basis of secession, but must be grounded within the confines of the united Ukraine. Kiev also must recognise the need for full recognition of the rights of Russian and other ethnic minorities and there has to be external monitoring group set up to oversee such recognition is implemented. Much of this already enshrined in law in Ukraine, but Ukrainian laws are held in low regard in the East;
5. The talks must produce a road map - including timings - for: A) local referenda on the structure of regional relations with Kiev; and B) constitutional - nationwide referendum - aiming to reform and confirm constitutional institutions of the state; 6) Before any referenda can be held, there is a need for a normalisation period, during which reconstruction and development of the regions can take place. Funding for this should be supplied by the guarantors of the peace process (EU and Russia) on the basis of the World Bank-administered loans with referential conditions (Marshall Plan);
6. EU and Russia must engage in a multilateral (EU, Ukraine, Eurasian Union) coordination of trade and investment policies aiming to prevent disintegration of Ukraine's trade and investment capabilities in either market.

The above are not the only conditions for launching a successful institutions-building exercise in Ukraine, but they are the central ones.

The key point is that, as the Guardian puts it: "we cannot afford a decade of cold war. It’s time to swallow hard, and bring the region’s dominant powerbroker inside the tent, to help ensure the integrity of Ukraine – and peace in Europe."

22/7/2014: Remember that Fiscal Compact? Well, Don't Remind Europe...

Remember the Fiscal Compact? Yes, the one where debt/GDP ratio should be at 60% and the countries with ratios in excess of 60% must take 1/20th of the excess in adjustment down in debt per annum? So a country with 130% debt/GDP ratio is committed to an annual reduction of (130-60)/20=3.5% of GDP in year 1 and so on...

Oh, yes, the Fiscal Compact underpins the macroeconomic stability in the Euro area, making the euro as a currency 'sustainable'…

Oh yes, and the latest figures from the Eurostat on Government debt show that…

1. 18 out of EU28 countries have seen increases in Government debt/GDP ratios in Q1 2014 compared to Q1 2013.
2. 9 countries have posted increases in excess of 5% of GDP.
3. Year on year: the highest increases in the ratio were recorded in Cyprus (+24.6 pp), Slovenia (+23.9 pp), Greece (+13.5 pp) and Croatia (+9.9 pp), while the largest decreases were recorded in Poland (-7.7 pp), Germany (-3.2 pp), the Czech Republic (-2.2 pp), Latvia (-1.4 pp) and Belgium (-0.9 pp).
4. 15 EU28 countries had Government debt/GDP ratio in excess of 60%
5. EA18 Government debt in Q1 2013 stood at EUR8.793 trillion or 92.5% of GDP. In Q1 2014 this was EUR9.056 trillion or 93.9% of GDP. That is excluding intergovernmental debt. Adding this, Q1 2013 debt/GDP ratio was 94.6% and this rose to 96.3% in Q1 2014.

Good to see the Fiscal Compact holding so much better than the Maastricht Criteria.

So in the Age of European Austerity, savage cuts to public spending are resulting in rising debt at a rate of 1.7 percentage points of GDP per annum. One might wonder, were it not for the savage Austerity, where the debt levels might have been?

Full Eurostat release here: http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-22072014-AP/EN/2-22072014-AP-EN.PDF

21/7/2014: Conflict Over Ukraine is Now Heading for a Breaking Point

So far in the Ukrainian civil war, my view of the Russian economy has been that

1. We are witnessing a structural slowdown in economic growth that has little to do with Ukraine;
2. Sanctions imposed on Russia have been largely indifferent to the Russian economy;
3. Reputational damage from the Ukraine conflict was manageable; and
4. Despite the above, Russian economy is starting to show stress arising from the country increasing isolation in the advanced economies' markets (finance and trade).

Events of last week - the downing of MH17, most likely by the Eastern Ukrainian separatists, and prior to that a new set of escalating U.S. sanctions, based on what may or may not be reasonable demands for more Kremlin pressure on separatists - are changing the overall risk outlook.

Specifically, the economic and geopolitical risks are now mutually reinforcing and this pushes us into the final spiral of conflict before we either see a major active de-escalation or a massive spiralling of the conflict out of control.

Here are some links worth reading on the topic of changing risks:

• Bloomberg report of rising pressures within Russian elite circles: http://www.bloomberg.com/news/2014-07-20/russian-billionaires-in-horror-as-putin-risks-isolation.html
• Bloomberg View contribution by @Bershidsky http://www.bloombergview.com/articles/2014-07-21/flight-mh17-victims-bodies-were-looted-or-maybe-not that sums up very well the simple and ugly reality that we will not, in all likelihood, know exactly the core facts about what happened to MH17 and who is responsible.
• WSJ report on Russian response theory of what happened to MH17: http://online.wsj.com/articles/russia-presents-its-account-of-malaysia-airlines-flight-17-crash-1405952441 [Note: my view is still, on balance, that probabilistically separatists shot down MH17]
• WSJ report on MH17-related U.S. disclosures: http://online.wsj.com/articles/ukraine-knew-of-separatists-air-defense-capabilities-say-officials-1405781508 [Note: on June 29, Russian news agency Itar-TASS reported as much, so the U.S. intelligence is redundant: http://itar-tass.com/mezhdunarodnaya-panorama/1287030 except for one thing, the U.S. is accusing Russia of supplying BUK to the separatists, while separatists claimed they captured BUKs at the Ukrainian military base they overrun. Ukrainian Government confirmed the base was overrun and that it had BUKs, but first denied that any BUKs were taken over. The Ukrainian military subsequently said they disabled BUKs that separatists captured. Let's remember, the disabled WW2 tank that stood as a monument for some 7 decades has been easily restored by the separatists into a functioning one.] In addition, the report outlines U.S. theory of the BUK acquisition and deployment.

• WSJ report on lack of cohesion and institutional governance frameworks in the separatists' camps: http://online.wsj.com/articles/disaster-highlights-disorder-among-separatists-1405902562

The key takeaways from the above two links are the following:

1. The entire conflict between Russia and the West at this stage is pure PR-war, with reports and information from all sides coming with heavy doses of assertions, conjectures and accusations, factual evidence un-collaborated and unverified by any third parties and even 'watchdog' organisations (usually self-appointed media and new media organisations) now trenchantly partisan or employing trenchantly partisan analysts and reporters;
2. Russia is in a poor strategic [and moral] position to defend itself even in cases where it might be right; and
3. The demands from the U.S. (and to a lesser extent, Europe) relating to future actions by Russia are rapidly becoming detached from reality (see below).

The reasons why the U.S. demands are starting to reach the realm of absurd are two-fold. 

Firstly, prior to MH17 downing, U.S. demanded that Russia compels the Eastern Ukrainian separatists to surrender to the Ukrainian forces. This, with no conditions, no prospect of peace talks and no constraints onto what Ukrainian forces might do to those surrendering. Ukrainian forces are currently carrying out strong military actions against the separatists and there is no peace talks on offer. In these conditions, no authority can compel them to voluntarily and unilaterally surrender. [Note: just to prevent a torrent of abuse from trolls, my view is they should surrender.] 

Secondly, we do not know if President Putin has any control over the Eastern Ukrainian separatists, irrespective of whether or not Russia served as a power base for them in the past. The separatists are fragmented, poorly organised and coordinated. It is doubtful if there is a central authority that can simply issue an order to stand down. Even if Russia had power of compulsion over the separatists at the times when peace talks were on the table (which is questionable as separatists did not seem to change their course when Russia recognised the Ukrainian Presidential election and when Russian Duma rescinded its authorisation of the President to use force to protect Russian-ethnic populations), today, cornered separatists are unlikely to listen to Kremlin unless Moscow can act as a credible guarantor of their safety at the peace talks.

The above implies that we are at a breaking point in the crisis:

• The U.S. demands may be no longer feasible, and the U.S. is escalating these demands. 
• Russia's opposition to these demands is becoming highly rhetorical and politically unacceptable to the U.S. 
• Russian leadership costs of compliance with the U.S. demands is now rising and might, at some point, exceed the costs of non-compliance. 
• In the mean time, there is absolutely no pressure from the European or U.S. side onto Kiev to offer any conditions to separatists that can guarantee their lives and a peace process. we have no reliable information what acts toward 'collaborating civilians' and separatists Ukrainian forces are carrying out. We have no reliable information as to the casualties on the ground in Eastern Ukraine. We have no reliable information how prisoners taken by the Ukrainian army are treated. We do know that Kiev counts on 'volunteer' units to participate in combat. And we were told before that these units have been at least rhetorically conditioned to kill 'Russians'. We have no idea is Kiev controls these units and what actions toward civilians and enemy combatants they take.

In simple terms, Russia is being forced into a corner by the U.S., separatists are forced into their own corner by all the parties involved; and everyone somehow expects the crisis to be resolved, while Kiev is left to carry out whatever it wants or can or both.

Someone needs to step back from the brink. My preference would be if de-escalation happened simultaneously from the U.S. and Russian sides, with both applying pressure on both Kiev and separatists to bring them to the peace talks. Guarantors of these talks should be EU, U.S. and Russia.

21/7/2014: Sources of FDI into Russia 2007-2013

An interesting chart: sources of FDI into Russia 2007-2013

Note the fifth in line: Ireland with major uplift in 2011-2013. Data is from the Central Bank of Russia.

Via @RencapMan

Update: via @QZ, a chart showing the opposite flows: Russian investments abroad:

21/7/2014: Why a Wave of Low-Pay Public Sector Jobs Applications?

Employment stats and claims have puzzled many in recent months. Government claimed variable numbers at different points in time, ranging between jobs created at 61,000 to 67,000 and so on. Much analysis has been provided of these claims and other numbers on this blog and many other, often divergent, often close-enough and so forth. All, however, points to the fact that jobs are being added in the economy and that at least some of the declines in unemployment rate are down to new positions being posted and filled.

Which raises a hugely surprising question: if private sectors jobs are being created, why is there such a huge surplus of unemployed applying for jobs in the private sector? Evidence of the latter is not systematic and not regular, but here is one snapshot: http://www.independent.ie/irish-news/news/28500-scramble-for-civil-service-jobs-at-11-an-hour-30444949.html

Note that the public sector jobs being rushed-at are not at the top or even the middle of pay & perks distribution. These are roughly EUR11/hour jobs, at the bottom of the career ladder and the recruits face the prospect of:

1. Higher taxes,
2. Lower non-wage benefits, 
3. Increased workloads (compared to the incumbents and past employees), and
4. Prospect of slower career progressions (early retirements took out a large share of senior employees and their positions are being filled internally, without any prospect of younger recruits qualifying for them).

One answer is that for all the changes in employment stats we had over the recent months, we still have huge levels of unemployment and underemployment as the legacy of the crisis. On underemployment side, take the percentages of workers in working less than full-time hours as a share of total employment pool. In Q1 2008, 7.5% of all workers in employment worked less than 20 hours/week, in Q1 2014 the percentage was 8.1%. Over the same period of time, % of workers working 20-29 hours per week rose from 10.9% to 12.8%, percentage working 30-34 hours per week rose from 4.3% to 4.5%. Percentage of workers working more than 35 hours per week dropped from 66.4% to 61.9%. Counting in those working less than full-time hours and those on variable hours, 38.1% of our employment pool are not in full-time employment against 33.6% back in Q1 2008. 

In Q1 2008, there were 113,600 individuals who considered themselves underemployed, in Q1 2014 the number was 258,100. And there are 46,500 more people who are working part-time and consider themselves underemployed today compared to Q3 2008 (earliest we have data for), while numbers of working-age adults not in the labour-force are still up 121,300 on Q1 2008.

And in the core age categories, applying for these jobs, the percentage of 15-24 year old unemployed relative to total population of that age group was 9.58% in Q1 2008. This stood at 25.31% in Q1 2014.

In other words, it is easy to forget that things are still very ugly when it comes to employment situation in Ireland.

21/7/2014: Russian Economy 1995-2008: Growth Drivers and Future Potential

Very insightful paper on Russian economic growth - sources and drivers - over the period of 1995-2008. "When high growth is not enough:
Rethinking Russia’s pre-crisis economic performance" by Ilya Voskoboynikov and Laura Solanko (BOFIT Policy Brief 6/2014: www.bof.fi/bofit_en) looks at the role of labour productivity, capital deepening and tech/multifactor productivity contributions to growth.

Here are some of the findings:

"The Russian economy experienced a long period of growth from the mid-1990s to the 2008 financial crisis with annual GDP per capita growth averaging 3.7 % between 1995 and 2008." So spectacular growth compared to pre-1995 period and this much is known.

"According to the prevailing narrative, this growth was mainly driven by sustained increases in multifactor productivity stemming from removal of distortions created under the planned Soviet economy."

But was it?

"Using newly available, internationally comparable, data and the growth accounting methodology of Timmer and Voskoboynikov (2014), we argue that average annual multifactor productivity growth amounted to 2.6% over the period. This remarkably high growth indicates that productivity growth accounted for about 56% of Russia’s economic growth in the 13 years before to the global financial crisis."

More: "We found that MFP growth explained over 70 % of total value-added growth in the period 1995–2001, but less than 50% in the 2003–2008 period. As the contribution of labor held relatively constant at around 10%, our finding implies that increases in capital inputs, and, consequently, investments to fixed capital, have been even more important than previously thought for economic growth in Russia."

Capital deepening and upgrades are the core drivers on both value added and productivity growth sides. What about sectoral decomposition?

"Detailed analysis of industry-level data reveals that economic growth has been driven by two broad sectors: extended oil & gas and high-skill-intensive (HSI) services."

Per oil & gas sector: "Our analysis clearly shows that growth in the extended oil & gas has been driven by increases in capital inputs, i.e. investments into fixed capital. Given the huge investments in oil and gas pipelines, oil export terminals, and the commissioning of new gas fields commissioned in past decade, we find this quite plausible."

On High-Skill-Intensive sectors side: "Since the end of our data sample in 2008, investment growth has slowed in the wake of the global financial crisis and increased uncertainly over the general business climate in Russia. The rapid growth in HIS services such as financial services largely represented a catching up with more advanced markets. The level of multifactor productivity in relation to German levels in the high-skill intensive sectors climbed from just 12% at the start of the observation period to almost 50% at the end."

Key conclusion: "Neither rapid growth in investment in the extended oil & gas sector nor rapid catching-up in technology intensive service industries is likely to spur Russia’s growth in the next decade. This underlines the urgency of identifying and exploiting new growth drivers for Russia."

I am not sure I agree. For a number of reasons:

1. MFP and capital productivity growth have been concentrated in high-skills services and energy sectors. Next, there is room for substantial modernisation of capital base one technological utilisation in other sectors. That is a major potential source for growth into the future decade or two.
2. Labour productivity growth has ben sluggish and lagging the MFP growth. This is primarily down to demographic effects, which are by now being extinguished. This opens up new frontiers for growth in labour productivity in all sectors of economy, but primarily in sectors other than high-skills services and energy.
3. Structural reforms, if enacted, can open up Russian markets as platforms for exports to the Eurasian Economic Union states - a potential that is already there and can be further enhanced with suitable reforms.

So even from the top-level view, there are at least three major growth drivers that are yet to be explored.

20/7/2014: The New Scariest Chart in Economics: June 2014 Update

Some time ago I started tracking the New Scariest Chart of the Crisis - the one plotting duration of unemployment in the U.S. and here is the latest monthly update:

Data on which the above is based is here:

Background to the chart is here: http://trueeconomics.blogspot.ie/2014/06/662014-king-of-scariest-charts-is-dead.html

19/7/2014: Trueconomics Cited in FT

Delighted and proud that FT is quoting the blog on European banks woes: http://www.ft.com/intl/cms/s/0/de39b744-0e61-11e4-a1ae-00144feabdc0.html#axzz37pQsLLmF

July 18, 2014 1:03 pm

Reality check for European banks

By Christopher Thompson and Andrew Bolger

Constantin Gurdgiev at True Economics says while current monetary and investment climates remain supportive of lower yields, markets are starting to show an increasing propensity to react strongly to negative newsflows. Investors’ view of the peripheral states as being strongly correlated in their performance remains in place, especially for Spanish, Portuguese and Greek sovereigns and corporate issuers.

“The markets are jittery and are getting trigger-happy on sell signals as strong rises in bond prices in recent months have resulted in sovereign and corporate debt being overbought by investors,” says Mr Gurdgiev.

Nice birthday present for myself. Thanks, FT!

19/7/2014: Irish Roads: Worse than Chile, better than Namibia?

So... after two decades of extensive road building on foot of EU and domestic money, Ireland's road system (based in a country with mild climate, no extreme temperatures variations and no seismic activities) is ranked right below that of Chile (seismically-active, extremely mountainous and extreme weather-impacted terrain) and one place above Namibia...

Source: http://www.bloomberg.com/quicktake/money-for-highways/

They should have tried parts of Sandymount and Ballsbridge where, despite the two areas being amongst the most exclusive real estate locations in the country, cars lose tyres and damage suspension on craters and poor pavement and worn-out speed bumps. Not that there is no such evidence across the entire country, of course...

19/7/2014: Some Early Signs of Crimean Economy Suffering Sustained Slowdown

A very interesting data coming out of Crimea - early indicators of the cost of Crimea's incorporation into Russia: http://www.infox.sg/others/frame/krym-prishel-v-upadok/

Roughly translating some parts of the article:

Tourism is suffering in Crimea - the sector is the cornerstone of the regional economy, but over the first 6 months of 2014, number of visitors to Crimea fell ca 29.5% y/y at 1,772,000 visitors as opposed to the same period of 2013 when Crimea received 2,515,000 visitors. The issue, of course, is not solely down to Crimea's accession to Russia - given the state of civil war in Ukraine and the collapse of the country economy, there can be expected a massive reduction in the number of travellers to all parts of Ukraine. Given recessionary dynamics in Russia, there also can be expected to be fewer tourists visiting all Black Sea resorts over this summer.

According to Ukrainian estimates, overall number of Ukrainians travelling to the Black Sea resorts (including those in Ukraine proper) is projected to fall by some 30% this year due to deepening economic crisis and falling real incomes.


The collapse of tourism to Crimea is probably a temporary phenomena. And much of it is due to disruptions in transport routes. For example, ferry crossings from Russian mainland rose 2.8 times, air traffic rose 1.6 times. However rail transport numbers fell 2.8 times. Rail goes via Ukrainian mainland, so this is not surprising. There is no land connection to Crimea from Russia and ferry and airlines capacities are very limited, although they will be expanded over time. The bridge, linking Crimea to Russian mainland will likely take 2 years to build and estimated costs range from USD2 to 4 billion.

As the result, at the start of the tourism season, Crimea's resorts reported 63% vacancy rates.

In the past, roughly two thirds of visitors to Crimea were Ukrainian nationals, with one third being Russian nationals. While the former are understandably cancelling their plans to vacation in Crimea, the latter are finding it difficult to get to the resorts: majority of Russian visitors in the past opted to travel either by car or by rail - both of these routes are now firmly blocked. Meanwhile, airports in Crimea are too small to accommodate significant numbers of visitors and their capacity is now already stretched to the limit. Two major carriers Transaero and Dobrolet are reporting 100% and 98-99% loads on their flights.

While much of this suggests that the problems with tourism sector are temporary, there are some worrying parallels across all sectors of Crimean economy. Apparently, lack of compliance with certification relating to EU requirement that any exports from Crimea can be accepted only if they bear certification from Ukraine, is reducing industrial output in Crimea. And European sanctions that ban exports from Crimea are hitting the sector hard. In the past, EU accounted for over 35% of total exports from Crimea. Now this is down to USD5.9 million and accounts for just 10.2% of total exports. Largest shares of exports to EU go to Germany (4.5%) and Hungary (2.1%), while Austria, France, Poland, the Netherlands and Lithuania accounted, jointly for 3.6%. Exports were heavily concentrated in industrial machinery, chemicals and agricultural goods. Meanwhile, shipments to Russia are rising, but slower than the decline is exports to EU.

Overall, the problems in tourism sector appear to be much more significant than in the industrial and agricultural sectors but these problems appear to be linked to:

1. Temporary transport links problems;
2. Decline in travel in Ukraine and Russia due to the economic slowdown; and
3. Much more longer term issue of Ukrainian tourists switching away from Crimea.

19/7/2014: Global Innovation Index 2014: Ireland vs 'Periphery'

In the previous post I gave detailed breakdown of Ireland's performance in Global Innovation Index 2014. I used small open economies and Switzerland (the world's highest ranked economy) as a reference group.

Here, primarily for the reason of convention, are the comparatives of Ireland's performance relative to the Euro area 'peripheral' states:

Clearly, Ireland is a much stronger performer in Innovation than all other 'peripheral' states. This is neither surprising nor unexpected. Crucially, the gap is wider today than in 2007-2008 and the gap is rather persistent over time. Average ex-Ireland 'peripheral' state rank was 34st in 2014 against Ireland's 11th, this is a very significant gap. This gap increased from 16-19 points on average for 2007-2010 period to 32 points in 2012 and 23 points in 2014.

Furthermore, it appears that even if we are to abstract away from the metrics very heavily influenced by the tax optimising MNCs, Ireland (under such a metric closer to 20th-23rd position in the World rankings) would still post a stronger performance than any other 'peripheral' state (best - Spain at 27th).