7/10/2014: Subsidies Rained on Irish Agriculture: 2013

Recently, CSO published accounts for Irish Agricultural sector for 2013. And what a reading these make.

"In 2013, net subsidies accounted for 66.8% of agricultural income (operating surplus) at state level." In other words, say 'thanks EU' for paying 2/3rds of our farmers' income (or whatever you might call it)...

"In the Border, Midland and Western region, net subsidies accounted for 108.8% of agricultural income, while in the Southern and Eastern region net subsidies accounted for 51.0% of agricultural income." Net subsidies accounted for 176.7% of operating surplus in the Midlands.

A table breaking down the above:

Net Subsidies fell from EUR1.801 billion (73.6% of income) in 2011 to EUR1.63 billion (73.4% of income) in 2012 to EUR1.505 billion (68.8% of income) in 2013. So over 2011-2013, net subsidies shrunk by 16.4%. Meanwhile, operating surplus (income) fell from EUR2.447 billion in 2011 to EUR2.221 billion in 2012 before rising slightly to EUR2.254 billion in 2013 - a net loss over 2 years of 7.9%.

Chart to illustrate net subsidies share of income:

Good thing we have EU taxpayers to sustain these levels of productivity in our indigenous champions of traditional life...

7/10/2014: IMF on Global & Euro Area Growth: Cloudy with 40% chance of a storm

My analysis of the IMF 2014-2015 forecasts for the global economy and euro area are now available on Learn Signal Blog: http://blog.learnsignal.com/?p=62 

6/10/2014: BlackRock Institute Survey: EMEA, September 2014

BlackRock Investment Institute released the latest Economic Cycle Survey results for North America and Western Europe (covered here: http://trueeconomics.blogspot.ie/2014/10/6102014-blackrock-institute-survey-n.html). Here are the survey results for EMEA:

"The consensus of respondents describe South Africa, Croatia, Slovenia, Russia and the Ukraine in a recessionary state, with an even split of economists gauging Romania to be in a recessionary or contraction phase. Over the next two quarters, the consensus shifts toward expansion for Russia and South Africa. At the 12 month horizon, the consensus expecting all EMEA countries to strengthen or remain the same with the exception of Turkey, Slovenia, Hungary and the Ukraine."

Global: "respondents remain positive on the global growth cycle with a net 50% of 36 respondents expecting a strengthening world economy over the next 12 months – an 9% decrease from the net 59% figure last month. [There was also a net decrease from 85% two months ago]. The consensus of economists project mid-cycle expansion over the next 6 months for the global economy."


Two charts to illustrate:

Previous month results are here: http://trueeconomics.blogspot.ie/2014/08/2382014-blackrock-institute-survey-emea.html

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.

6/10/2014: BlackRock Institute Survey: N. America & W. Europe, September 2014

BlackRock Investment Institute released the latest Economic Cycle Survey results for North America and Western Europe. Here are the main points (emphasis and comments are mine):

"This month’s North America and Western Europe Economic Cycle Survey presented a positive outlook on global growth, with a net of 55% of 98 economists expecting the world economy will get stronger over the next year, compared to net 59% figure in last month’s report [and 81% in July survey]."

Global outlook: "The consensus of economists project mid-cycle expansion over the next 6 months for the global economy. At the 12 month horizon, the positive theme continued with the consensus expecting all economies spanned  by the survey to strengthen or stay the same except France, Finland and Belgium.

Regional outlook: Euro Area: "Eurozone is described to be in an expansionary phase of the cycle and expected to remain so over the next 2 quarters. Within the bloc, most respondents described Greece, Italy and France to be in a recessionary state [same outcome was recorded back in August survey], with the even split between contraction or recession for Belgium and Finland [in August survey, this applied to Portugal and Finland]. Over the next 6 months, the consensus shifts toward expansion for Greece and Italy [with Italy being a new addition to this list compared to August survey]."

US and North America: "Over the Atlantic, the consensus view is firmly that North America as a whole is in mid-cycle expansion and is to remain so over the next 6 months." [Same result as in August survey].


Two charts to illustrate:

Previous month results are here: http://trueeconomics.blogspot.ie/2014/08/2382014-blackrock-institute-survey-n.html

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.

6/10/2014: Ifo Forecast for Euro Area Economy: Q4 2014 and Q1 2015

Germany's Ifo institute released its joint forecasts for Euro area economy through Q1 2015. Here are the details:

"In Q3 2014, economic activity is expected to increase again, but only moderately, as geopolitical concerns are still strong and seem to affect investors’ confidence. GDP is projected to increase by 0.2% in the Q3 and Q4 2014, and expand by 0.3% in Q1 2015."

But, the Ifo warns about "increased asymmetries across euro area economies. The recovery is expected
to be mainly driven by a gradual improvement in domestic demand conditions. Private investment is expected to restart over the forecast horizon triggered by improved liquidity conditions and lower cost of capital, after the sharp adjustment following the financial crisis. The rise in production activity and increasing demand for new production capacity will be the main factor underpinning the recovery. Consumption prospects remain positive, albeit subdued, as the recovery in the labor market is projected to be gradual. Under the assumptions that the oil price stabilises at USD 97 per barrel and that the dollar/euro exchange rate fluctuates around 1.28, the headline inflation is expected to increase only marginally over the next two quarters, remaining significantly below the threshold of 2%."

On the risks side: "Key downside risks to this scenario comprise the effective recovery of investment and the increases in the savings rate of private households owing to deleveraging. A weaker external demand from emerging economies, especially from Asia and Latin America, as well as a greater impact of international tensions in Eastern Europe and the Middle East, might also be a drag on the exports and investment."

Summary of forecasts:

All of which acts a nice prelude to tomorrow's release of the IMF WEO update for October. I'd say expect (given World Bank previously released forecasts) some downgrades to growth expectations...

5/10/2014: US Removes Russia from GSP Access as Biden Admits US 'Leadership' over Europe

This week, amidst generally holding ceasefire in Ukraine and with Russia continuing to constructively engage in the multilateral process of normalisation of Eastern Ukrainian crisis, the US leadership once again shown its hand on the issue of Russian relations with the West. Instead of pausing pressure or starting to return trade and diplomatic relations toward some sort of normalisation, the US actually continued to raise pressure on Russia.

First, earlier in the week, the US issued a decision to terminate Russia's designation as a beneficiary developing country in its Globalised System of Preferences (GSP) - a system that allows developing economies' exporters somewhat 'preferential' access to the US markets at reduced tariffs. This decision was notified on May 7th and officially published by the White House on Friday when it came into force.

The US GSP is a program designed to aid economic growth in developing economies (more than 100 countries and territories) by allowing duty-free entry for up to 5,000 products.

According to the White House statement, President Obama "…determined that Russia is sufficiently advanced in economic development and improved in trade competitiveness that it is appropriate to terminate the designation of Russia as a beneficiary developing country effective October 3, 2014."

The likely outcome of this is, however, uncertain. Russian exports to the US in the categories covered by the GSP programme are primarily in the areas of strategically important materials, including rare-earth metals and other key inputs into production for US MNCs. The same MNCs can purchase these inputs indirectly from outside the US. So, if anything, the White House decision is harming its own companies more than the Russia producers by de facto raising the cost of goods with low degree of substitution.

While, personally, I do not think Russia is a developing country - it is a middle income economy - in my opinion, the best course of diplomacy (in relation to trade) is opening up trade markets and reducing (not raising) trade barriers. This is best targeted by lowering tariffs first and foremost in the areas where private (not state) companies supply exports. GSP is a scheme that should be expanded to include all economies, not just developing ones and the US and Europe should pursue more open trade with Russia and the rest of the CIS. Sadly, the Obama Administration is using trade as a weapon to achieve geopolitical objectives (notably of questionable value, but that is secondary to the fact that trade should not be used as a weapon in the first place, but as a tool for helping achieve longer term objectives closer economic and social cooperation).


In a related matter, the US VP, Joe Biden, openly confirmed this week that the US has directly pressured its European allies to impose sanctions against Russia. On October 3rd, speaking at Harvard University, Joe Biden said that: “It is true - they [European countries] did not want to do that [impose sanctions against Russia] but again it was America’s leadership and the President of the United States insisting, oftentimes almost having to embarrass Europe to stand up and take economic hits to impose cost,” the vice president said.

So, apparently, there was quite a bit of discord in the Western 'unity' camp over the actions against Russia. Which makes you wonder: was that resistance based solely on the European countries concern for the economic impact of sanctions on their own economies, or was it a function of their scepticism over the actual events in Ukraine (the nature of the latest Ukrainian 'revolution'? the role of the Western powers in stirring the conflict? the role of Russian in the conflict? etc)? Or may be all of the above?..


One way or the other, the US is driving a dangerous game. It is pursuing extremely aggressive course of actions against Russia with no concrete road map for de-escalation, no specific targets for policy and no back up strategy for addressing the adverse effects of isolating Russia in other geopolitical issues, such as ISIS, Middle East, Iran, North Korea and so on.

4/10/2014: IMF on Russia: What Never Hurts Repeating...

As predicted (see here: http://trueeconomics.blogspot.ie/2014/09/2992014-russian-economy-briefing-for.html) IMF came in weighing heavily on the doom for its outlook for Russian economy this week.

In its "Russian Federation: Concluding Statement for the September 2014 Staff Visit" report from  October 1, 2014, the Fund notices (quite a sharp eyesight there) that: "Geopolitical tensions are slowing the economy already weakened by structural bottlenecks."

According to the IMF, the solution is for the Central Bank of Russia (CBR) to "tighten policy rates further to reduce inflation and continue its path towards inflation targeting underpinned by a fully-flexible exchange rate." Investment is falling down, capital flight de-accelerated but remains a problem, deposits are desperately needed for the banks to stay liquid (absent foreign funding sources and coming bonds maturities), so has to kill the economy to keep economy alive dilemma...

On fiscal side, things are ok-ish: "While the projected overall fiscal stance is appropriately neutral in 2015, the needed fiscal consolidation should resume in the following years… The proposed federal budget, which is consistent with the fiscal rule, envisions a loosening in 2015. However, this is offset by a tightening at the sub-federal levels. This strikes an appropriate balance between the need to consolidate in the medium term, with the non-oil deficit remaining near historical high, and the need for supportive fiscal policy in the face of the current downturn." And as I noted in the note linked above: "The use of the National Wealth Fund for domestic infrastructure projects may be appropriate to consider if done in the context of the budget process and subject to appropriate safeguards. The diversion of contributions from the fully-funded pillar weakens the viability of the pension system, creates disincentives to save, and dilutes the credibility of the fiscal rule."

On growth: "The economic outlook appears bleak. GDP is expected to grow by only 0.2 percent in 2014 and 0.5 percent in 2015." Not as gloomy as the World Bank but uuuuugly…
Drivers, predictably are:

• "Consumption is expected to weaken as real wages and consumer credit growth moderate." No… wait… they are already weak and moderated… 
• "Geopolitical tensions—including sanctions, counter-sanctions, and fear of their further escalation—are amplifying uncertainty, depressing confidence and investment. Capital outflows are expected to reach USD 100 billion in 2014 and moderate somewhat but remain high in 2015." Again, no surprises here.
• "Inflation is projected to remain over 8 percent by the end of 2014 mostly due to an increase in food prices, caused by import restrictions, and depreciation of the ruble. In the absence of further policy actions, inflation is expected to stay above target in 2015." That we know too. No surprises here. 

On banks, pretty much same as I have been saying: "Increased oversight and heightened financial stability remain a priority. Banks and the corporate sector are facing a challenging environment due to the weak economy, limited access to external financing, and higher financing costs. Existing financial buffers together with appropriate policy responses by the CBR have limited financial instability thus far. Nonetheless, the current uncertain environment could create difficulties in individual banks and businesses, even in the near term. In case of acute liquidity pressures, emergency facilities should be temporarily offered to eligible counterparties, against appropriate collateral, priced to be solely attractive during stress periods."

On structural side, I would have expected more clarity. Instead, we have more generalities: "Despite the slowdown, the economy is expected to have limited excess capacity owing to structural impediments to growth… Even if [geopolitical] uncertainty dissipates next year, domestic demand and potential growth are projected to remain weak in the medium term due to insufficient investment and deterioration in productivity. Potential growth is projected to be about 1.2 percent in 2015, reaching 1.8 percent in 2019, with downside risks. Structural reforms are needed to provide appropriate incentives to expand investment and allocate resources to enhance efficiency. Protecting investors, reducing trade barriers, fighting corruption, reinvigorating the privatization agenda, improving competition and the business climate, and continuing efforts at global integration remain crucial to revive growth."

Then again, all this you could have heard at our briefing breakfast for IRBA… to stay ahead of the IMF analysis… 

3/10/2014: East Asian Crisis, European Disaster: Tale of Two Recoveries

My post for Learning Signal blog on IMF report covering East Asian Crisis of the 1990s comparatives to the Euro area crisis 2007-present is available here: http://blog.learnsignal.com/?p=55 

3/10/2014: Ireland: Quarterly PMIs and Composite Activity Index: Q3 2014

As promised in the previous post, covering monthly Services PMI (http://trueeconomics.blogspot.ie/2014/10/3102014-services-pmi-for-ireland.html), here is my analysis of quarterly data and my own Composite Activity Index across manufacturing and services sectors, as well as construction sector.

All data reported is based on my calculations using Markit/Investec PMIs.

In Q3 2014, Manufacturing PMI averaged 56.1 which is up on 55.5 average for Q2 2014 and is up on Q3 2013 average of 51.9. Q3 2014 marks the 5th consecutive quarter of expansion in the series.

Services PMI stood at 62.1 in Q3 2014, unchanged from 62.1 in Q2 2014 and up on 58.7 Q3 2013 reading. This quarter marked 15th consecutive quarter of above 50 readings in PMI.

Construction PMI (data through August so far only) is at 62 in Q3 2014, up on 61.2 in Q2 2014 and 51.0 in Q3 2013. This marks 5th consecutive quarter of expansion in the sector.

Composite Activity Index is now at 60.35 in Q3 2014 ex-Construction, up on 60.16 in Q2 2014 and on 59.95 in Q3 2013. This is 18th consecutive quarter of composite indicator above 50.0. Including construction, Composite Activity Index is at 60.38, up on Q2 2014 reading of 60.18 and up on Q3 2013 reading of 56.81.

Chart to illustrate:

On a note of caution: showing just how weak the PMI indices are in predicting Irish growth, here are two charts plotting log changes in PMIs against log changes in GDP and GNP. In all cases, explanatory power of changes in PMIs is weak when it comes to matching the outcomes in growth in the real economy. The same qualitative results hold for levels of PMIs against log changes in GDP and GNP and to levels of PMIs against actual GDP and GNP levels.

3/10/2014: Services PMI for Ireland: September 2014

Markit/Investec released their Services PMI for Ireland today. I covered Manufacturing PMI release here: http://trueeconomics.blogspot.ie/2014/10/1102014-irish-manufacturing-pmi.html

On Services side:

• MNCs-driven activity in the sector expanded once again, with PMI for September rising to 62.5 from 62.4 in August and almost matching 62.6 reading in June.
• 12mo MA is now at 60.9 - which is simply unbelievable, given the overall economy performance over the last 12 months. Predictably, of course, there is somewhat little connection between the survey - weighted heavily on MNCs side, such as ICT Services giants we house in Ireland - and the real economy.
• 3mo average (Q3 2014 average) is at 62.1 which is identical to Q2 2014 average and is ahead of Q3 2013 average of 58.7. In other words, judging by the figures coming out of PMIs, Irish services economy is growing roughly at 7-8 percent per annum. Good luck spotting that on the ground.

Still, the above chart clearly shows that whether connected to real lives or not, Services economy is now averaging growth rates (post-crisis) that are above those recorded in pre-crisis period. This suggests two things:

1. There has been a significant switch in economic activity in favour of services (dominated by the dynamics in ICT Services); and
2. There has been a larger gap opening up between the real economy and tax optimisation-based economy.

I will blog on composite performance on quarterly basis, pooling together both Manufacturing and Services PMIs next, so stay tuned.

3/10/2014: Russian Services & Composite PMIs: September 2014

Russia Services and Composite PMIs were released today by Markit/HSBC for September.

I covered relatively poor performance of the Manufacturing PMI here: http://trueeconomics.blogspot.ie/2014/10/1102014-russian-manufacturing-pmi.html and comparatives between BRICs for Manufacturing were discussed here: http://trueeconomics.blogspot.ie/2014/10/2102014-bric-manufacturing-pmis-things.html

On Services PMI side:

• September PMI came in at 50.5 which is basically unchanged on 50.3 in August and signals weak growth (statistically, this reading is not significantly different from 50.0).
• 3mo MA is now at 50.2 (barely above 50.0) although that is an improvement on Q2 2014 reading of 47.6, yet poorer than Q3 2013 reading of 50.7.

On Composite PMI side:

• Composite PMI declined marginally from 51.1 in August to 50.9 in September, still staying ahead of 50.0. Both readings were, however, statistically not significantly different from 50.0, implying weak expansion in output.
• Q3 average is at 51.1, which is a lot better than 48.3 average for Q2 2014 and is ahead of 50.4 average in Q3 2013.

Chart below shows three PMIs together and identifies October-November 2012 are the period of trend shift toward falling PMIs.

Overall, activity remains subdued across all sectors of the Russian economy and growth signals from PMIs suggest that this year growth is likely to be in the range of around 0.4-0.5%.

Comparatives with BRICs are coming up later today, so stay tuned.

2/10/2014: That Oil Price Shock: Russia

In a recent Russian Economy briefing (http://trueeconomics.blogspot.ie/2014/09/2992014-russian-economy-briefing-for.html) I highlighted the risk of oil price changes on Russian economy. Here is a chart showing dramatic elevation of these risks:

via @MacrobondF