12/12/2014: QNA Q3 2014: Irish External Trade: Of Dodgy Numbers & Export-led Recovery

Here is the fifth post on QNA detailed analysis, covering sectoral distribution of activity in Q3 2014.

• My post on the top level results for Q3 2014 is here: http://trueeconomics.blogspot.ie/2014/12/11122014-q3-2014-irish-growth-broadly.html
• The second post covering sectoral performance by broader sectors of economy is here: http://trueeconomics.blogspot.ie/2014/12/11122014-qna-q3-2014-sectoral-activity.html
• The third post covered aggregate GDP and GNP growth figures for y/y and q/q comparatives: http://trueeconomics.blogspot.ie/2014/12/11122014-qna-q3-2014-real-gdp-gnp.html
• The fourth post covered Domestic Demand - the glories of Investment, Consumption & Government Expenditure:  http://trueeconomics.blogspot.ie/2014/12/11122014-qna-q3-2014-domestic-demand.html

Now, onto the analysis of external trade figures. Again, y/y comparatives based on non-seasonally adjusted data. All in constant euros.

Exports of Goods and Services rose EUR53.084 billion in Q3 2014 up massive 15.52% y/y, which marks an acceleration in growth compared to Q2 2014 when the same rose 13.05% y/y. Over the 6 months through September 2014, compared to the same period of 2013, exports of goods and services rose 14.27%. This is huge growth and it comes in the face of serious global trade flows slowdown and currency headwinds.

Which, of course, begs a question: what on earth is going on? Let's try an decipher.

Exports of goods posted a print of EUR27.797 billion in Q3 2014, up 18.40% y/y and an increase on already rapid rate of growth of 16.05% recorded in Q2 2014. Over the last 6 months, exports of goods rose 17.20% y/y. This growth contributed EUR3.885 in exports in Q2 2014 and further EUR4.320 billion in Q3 2014. In other words, exports of goods growth accounted for roughly EUR8.205 billion out of the EUR13.317 billion expansion in exports of goods and services.

The balance was delivered via expansion in exports of services. These grew to EUR25.287 billion in Q3 2014, up 12.51% y/y and an improvement on 9.92% growth recorded in Q2 2014.

So exports are booming. Remember, over Q2 2014 these rose by EUR6.185 billion (of which EUR3.885 billion came from goods side of trade) and in Q3 2014 these grew by EUR7.132 billion (of which EUR4.32 billion came from good side of trade).

Here's a problem folks. Based on External Trade statistics, the value of merchandise trade in Q2 2014 was EUR22.833 billion not EUR28.095 billion recorded in the National Accounts. And in Q3 2014 the value of goods exports recorded in the trade accounts was EUR22.123 billion, not EUR27.797 billion recorded in the National Accounts. And more crucially, in National Accounts goods exports expanded at a rate of 16.05% y/y in Q2 2014 and then by 18.4% in Q3 2014. Meanwhile, in exports statistics from trade accounts the same growth rates were 3.64% y/y in Q2 and 0.95% y/y in Q3.

Remember, in Q2-Q3 2014, National Accounts book increases in exports of goods to the tune of EUR8.205 billion. In Trade Accounts, the same figure is EUR1.01 billion.

Of course, the two numbers are not exactly comparable, and there is a normal (or more like average) difference between the two, which is around EUR1 billion per quarter. But here we have EUR7 billion difference over 2 quarters.

Now, we've heard about 'strange' practices of outsourcing production by the MNCs, the pharma companies beefing up cost base shifting and other polite society's ways to create activity where none exists. May be the discrepancy is down to that. Or may be not. May be someone forgot the abacus and decided to count things using Mayan 'alphabet'… I do not know. But EUR6 billion unexplained 'gaps' are a bit too much for confidence building when it comes to reading GDP figures.

Still, let us soldier on.

As you would have noticed from the previous post, our 'recovery' ain't doing too well when it comes to people actually having much cash to spend. But we do have, at least officially, a recovery in exports. Let's chart the two:

And plotting exports and imports:

Chart above shows a curious situation: There has been a massive jump in exports in Q2-Q3 2014, but there has been no corresponding growth in imports. Now, keep in mind - imports include inputs into production of exports. And, oh silly us, they also include consumption goods. So how can there be such a dynamic trailing of exports relative to imports? Answers that are possible:

1. Imports are not growing or may be even shrinking on the consumer demand side (plausible, given lack of real growth in private consumption); and/or
2. Exports are growing per-unit of imports - which can only be down to the miraculous productivity growth or in plain terms - tax optimisation.

So, down to trade balance:

Overall trade balance for Ireland posted EUR11.714 billion print in Q3 2014 - up EUR1.536 billion in Q3 2013 (+15.09%) after having posted a rise of EUR1.774 billion (+17.28%) y/y in Q2 2014. Over 6 months through September 2014, Trade Surplus increased by 16.2% y/y (+3.26 billion). Which is mighty impressive.

All of this surplus was down to our huge surplus on the side of trade in goods. Trade in goods surplus rose by EUR2.694 billion in Q2 2014 (+26.4% y/y) and it was up again by EUR2.975 billion in Q3 2014 (up 30.70% y/y). Over the period of six months through September 2014, trade surplus in goods added EUR5.669 billion (+28.5% y/y) to our GDP figures.

Which is huge.

Meanwhile, trade deficit on Services side has expanded in Q3 2014 to EUR950 million from a surplus of EUR489 million in Q3 2013 - a swing of EUR1.439 billion in deficit. In Q2 2014, trade deficit on services side stood at EUR1.193 billion compared to EUR223 million deficit in Q2 2013. This meant that over the period of 6 months through September 2014, cumulated deterioration in trade balance in services in Ireland amounted to EUR2.409 billion.

All in, we have, as the first chart above shows, a robust 'exports-led' recovery. But, per discussion earlier, this recovery is suspect as it cannot be confirmed even remotely by the official trade statistics coming out of trade accounts. As Bill Gross says: "Something's fishy."

11/12/2014: QNA Q3 2014: Domestic Demand - Roasted Chicken vs Flying Phoenix

Here is the second post on QNA detailed analysis, covering sectoral distribution of activity in Q3 2014.

• My post on the top level results for Q3 2014 is here: http://trueeconomics.blogspot.ie/2014/12/11122014-q3-2014-irish-growth-broadly.html
• The second post covering sectoral performance by broader sectors of economy is here: http://trueeconomics.blogspot.ie/2014/12/11122014-qna-q3-2014-sectoral-activity.html
• The third post covered aggregate GDP and GNP growth figures for y/y and q/q comparatives: http://trueeconomics.blogspot.ie/2014/12/11122014-qna-q3-2014-real-gdp-gnp.html

Onto my favourite set of QNA data - covering Domestic Demand. Remember that by definition, Domestic Demand comes closest to measuring true extent of Irish economic activity because it combines public and private consumption, public and private investment and net exports. So let's take a look at what's going up and what's taking water.

All data is based on seasonally unadjusted, constant prices terms.

Personal expenditure on goods and services - aka domestic consumption other than Government consumption - stood at EUR20.278 billion in Q3 2014 in real terms which is just EUR9 million above where it was in Q3 2013. In other words, personal consumption grew by a miserly 0.044% in Q3 2014 compared to Q3 2013. Basically - there is no growth here. In Q2 2014, personal consumption expanded at a rate of 1.2% y/y, so we have a major slowdown in spending growth. Over the last 6 months covered by data, personal consumption expanded by a poorly 0.615% - hardly a sign of economy returning to health, let alone a Celtic Phoenix rising.

Net Current Expenditure by Government fared even worse than personal expenditure: it fell EUR91 million in Q3 2014 compared to Q3 2013, down 1.36%, having posted an increase of 5.88% in Q2 2014. Over the last 6 months through September 2014, Government consumption rose 2.15% which is faster than the increase in personal consumption, confirming the simple fact: Irish austerity is more about hammering households than reducing current spending by the Government. Still, the Celtic Phoenix looks more like a roasted chicken with 2.15% growth y/y over 6 months period.

As an aside, one must wonder why in the year of European and local elections would Government spending go up robustly in the quarters relating to elections campaigns while crashing thereafter? Hmm... of course, we do have the New Politics, right?..

Gross Domestic Fixed Capital Formation - the fabled 'Nama-land' and 'foreign investors' and 'sizzling property markets' meme - grew at a rate of 7.8% in Q3 2014 compared to Q3 2013, which is fast, but not as fast as 19.21% recorded in Q2 2014. Over the last 6 months, domestic investment expanded by 13.33%. Which suggests we have found a Phoenix in flight. Except, err… the levels of investment: in Q3 2014 these were at EUR6.592 billion - the 20th lowest reading in any quarter since Q1 2008. That is the 20th lowest quarter out of 28 quarters of the crisis. If we are to look at pre-crisis levels, we'd have to go back to Q3 1998 to find as low of a reading or lower than the one we attained in Q3 2014.

Adding the above three categories together gives us Final Domestic Demand. This measure of the economy grew by 1.20% y/y in Q3 2014. Not too bad, but not quite brilliant. Especially since it marks a slowdown on growth achieved in previous quarter (+5.39%). In 6 months through September, however, Final Domestic Demand expanded 3.25%. Again, not too shabby.

Throwing in changes in the value of stocks transforms Final Domestic Demand into Total Domestic Demand. This posted growth of 4.67% y/y in Q2 2014 and it shrunk at a rate of -0.12% y/y in Q3 2014. Over 6 months through September 2014, Total Domestic Demand expanded by only 2.21%.

So domestic demand growth is slowing down - across all segments. And by one metric it is actually shrinking. Once again, one has to draw two conclusions:

• We are seeing falling growth signs in the economy; and
• In some segments of the economy, negative growth is now presenting itself once again.

Can anyone recall if Phoenix is supposed to be flying straight back into the fire?..

Stay tuned for the analysis of external trade figures next.

11/12/2014: QNA Q3 2014: Real GDP & GNP Growth Dynamics

Here is the second post on QNA detailed analysis, covering sectoral distribution of activity in Q3 2014.

• My post on the top level results for Q3 2014 is here: http://trueeconomics.blogspot.ie/2014/12/11122014-q3-2014-irish-growth-broadly.html
• And the second post covering sectoral performance by broader sectors of economy is here: http://trueeconomics.blogspot.ie/2014/12/11122014-qna-q3-2014-sectoral-activity.html

Now, onto a closer look at the GDP and GNP aggregates.

First, non-seasonally adjusted data, allowing for year-on-year comparatives.

• In Q3 2014, taxes net of subsidies amounted to EUR5.103 billion which is up 4.33% (+EUR212 million) on Q3 2013
• GDP in real terms reached EUR45.972 billion in Q3 2014, which is 3.54% higher than in Q3 2013. This is the slowest rate of GDP growth in y/y terms since Q4 2013 when GDP contracted 1.15%. Overall, GDP growth in Q3 2014 in y/y terms was less than half the rate of growth in Q2 2014.
• In Q3 2014, GNP stood at EUR38.52 billion which represents a growth of 2.49% y/y - the slowest rate of growth since Q2 2013.
• Excluding taxes and subsidies, private sectors GDP (GDP netting out taxes and subsidies) few strongly in Q3 2014 - which is the good news - rising 4.18% y/y. This is slower than Q2 2014 growth of 6.66%, but is better than Q1 growth of 3.55%.

GNP/GDP gap at the end of Q3 2014 stood at 16.21% which is the lowest in 3 quarters. Private sectors GNP/GDP gap also fell - reaching 18.23%, down from 19.18% in Q2.

Now, consider seasonally-adjusted data, allowing for quarter-on-quarter comparatives:

• In Q3 2014, seasonally-adjusted GDP grew at the rate of 0.0793% which marks the slowest rate of q/q growth since Q4 2013 when real GDP contracted q/q. The rate of growth in Q3 was 14 times lower than in Q2 and almost 36 times lower than in Q1 2014. In effect, the economy - measured by real GDP - stood still in Q3 2014.
• Meanwhile, in Q3 2014, real GNP expanded by 0.472% which marks weak, sub-period average growth and the second consecutive quarter of very poor GNP performance: in Q2 2014 GNP expanded by just 0.23% on q/q basis. 
• Last healthy growth in q/q terms for real GNP was back in Q1 2014 when it expanded by 1.86%.

Quarter-on-quarter growth terms signal official recessions (defined as two consecutive quarters of negative growth). Charts below map relative GDP and GNP performance in q/q terms by each quarter, identifying strong expansions, weak expansions and contractions. As charts clearly show, in GDP terms, we are currently in the first quarter of sub-average growth after Q1-Q2 above average growth periods. In GNP terms, we are into third consecutive quarter of sub-average growth.

Once again, broadly-speaking, we are witnessing a slowdown in growth momentum (bad news), but are still managing to stay in non-negative growth territory (good news).

Stay tuned for more Q3 QNA analysis later.

11/12/2014: QNA Q3 2014: Sectoral Activity

Here is the first post on QNA detailed analysis, covering sectoral distribution of activity in Q3 2014.

Note: I covered top level results here: http://trueeconomics.blogspot.ie/2014/12/11122014-q3-2014-irish-growth-broadly.html

Based on seasonally unadjusted data expressed in constant prices (real terms).

Overall all sectors output amounted to EUR40.868 billion in Q3 2014 which is 3.44% higher than in Q3 2013. This marks a significant slowdown on Q2 2014 growth that clocked at 6.53% y/y, but is marginally above Q1 2014 y/y growth at 3.23%.

For the first nine months of 2014, output of all sectors is up 4.41% compared to the same period in 2013. A very healthy number, albeit moderated by the following factors:

1. ESA2010 application is boosting (superficially) business activity relating to R&D allocations, now counted as investment; 
2. Ongoing shift in MNCs patterns of activity here, including (but not limited to) outsourcing of production; and
3. Ongoing shift of the externally trading economy in favour of ICT services, heavily reliant on profit shifting and tax optimisation.

Agriculture, Forestry & Fishing sector output stood at EUR989 million in Q3 2014, which is down 1.59% y/y - the worst performance since Q2 2013. In Q2 2014 y/y growth in the sector was massive 12.43% and in in Q1 2014 it was 3.74%. Over the first nine months of 2014, activity in the sector expanded 5.47% y/y.

Industry, including Construction, output stood at EUR10.281 billion in Q3 2014, which is up 1.96% y/y - a slowdown on Q2 2014 growth rate of 6.47% but an improvement on Q1 2014 decline of 4.97%. Over the first nine months of 2014, activity in the sector expanded only 1.11% y/y, which is weak. Meanwhile, Building & Construction sub-sector output stood at EUR895 million in Q3 2014, which is up 7.31% y/y - a slowdown on Q2 2014 growth rate of 9.54% and on Q1 2014 growth of 9.73%. Q3 2014 growth is the weakest since Q1 2013. Over the first nine months of 2014, activity in the sector expanded 8.76% y/y, which is ok-ish, given abysmally low levels of overall activity. Current level of activity is comparable to Q1-Q3 1997.

Distribution, Transport, Software & Communications output stood at EUR10.832 billion in Q3 2014, which is up 6.39% y/y - a healthy reading. Nonetheless, Q3 growth represents a slowdown on Q2 2014 growth rate of 11.46% and on Q1 2014 growth of 10.67%. Over the first nine months of 2014, activity in the sector expanded by a hefty 9.4% y/y, which is a good news.

Public Administration and Defence output stood at EUR1.572 billion in Q3 2014, which is down 1.26% y/y, against Q2 2014 growth rate of 3.75% and on Q1 2014 growth of 3.67%. Over the first nine months of 2014, activity in the sector expanded by 2.02% y/y in real terms.

Other Services (including rents) output stood at EUR17.622 billion in Q3 2014, which is up 3.67% y/y, against Q2 2014 growth rate of 2.69% and on Q1 2014 growth of 3.85%. So this sector showed acceleration in y/y growth rates. Over the first nine months of 2014, activity in the sector expanded by 3.48% y/y in real terms.

Summary of changes y/y is shown below in the table.

In summary: only one sector of the economy posted higher rates of growth in Q3 2014 compared to Q2 2014. Two sectors of the economy posted declines in activity y/y against four sectors that posted increased activity. This contrasts with all sectors posting growth in Q2.

Stay tuned for further analysis of QNA figures later tonight.

11/12/2014: QNA Q3 2014: Irish Growth Broadly De-accelerates

CSO-released preliminary estimates for Q3 2014 show:

- GDP "remained practically unchanged in volume terms on a seasonally adjusted basis compared with Q2 2014"
- GNP increased by 0.5% on Q2 2014
- GDP rose 3.5% y/y in Q3 2014
- GNP rose 2.5% y/y in Q3 2014.

By sectors and categories of expenditure:
- Other Services increased by 1.7% q/q
- Building and construction increased by 3% q/q
- Distribution, transport, software and communication decreased by 0.2%
- Industry (excluding Building and Construction) decreased by 0.9 per cent
- Public administration and defence also decreased by 5.6%
- Capital Investment decreased by 0.8% y/y
- Net exports made a negative contribution of €55m.
- Government expenditure decreased by 0.9 per cent q/q
- Personal expenditure was unchanged q/q

Overall, a very poor reading compared to previous ones and a poor reading in absolute terms.

More detailed analysis to follow.

11/12/2014: Central Bank of Russia: The Bad & The Ugly...

In recent weeks, Russian Central Bank has issued a number of statements relating to interest rates policy. These included 

- Repeated concerns with inflation that hit 9.1% in latest data readings

- Concerns with effects of higher interest rates on investment

- Concerns with Ruble valuations (although much more muted compared to previous months); and

- Concerns with capital outflows.

Today, CBR hiked rates by 100 bps to 10.5%. Which is a contradictory move because:

1) 100 bps is clearly not going to be enough to arrest Ruble decline and slow down capital outflows

2) 100 bps will not be enough to dent inflation in the short run; and

3) 100 bps is strong enough to put even more breaks on investment.

Following the announcement, Ruble weakened against the USD and CBR upped its warnings on Q1 2015 inflation saying it might hit above 10%. Economic growth slowdown warning followed with CBR saying 2015-2016 growth outlook now risks 0% GDP expansion.

 Charts courtesy of @Schuldensuehner and @guardian 

We now have both the Bad and the Ugly, with the Good nowhere to be seen.

11/12/2014: TLTRO2: Misfiring that Bazooka... Again

Second round of TLTROs take up at EUR129.84bn. Prior market consensus expectation was for EUR130bn, with range of EUR 200 billion 'bulls' expectation and EUR 100 billion 'bears':

- Morgan Stanley at EUR120-170 billion, 

- Deutsche at EUR170 billion

- Citi at EUR165 billion

- BNP at EUR140-180 billion

- JPM at EUR190 billion

- BAML at EUR130 billion

So 'bears' have it. New tranche of TLTROs as expected better than the 1st tranche (http://trueeconomics.blogspot.ie/2014/09/1892014-quite-disappointing-tltro-round.html) but still disappointing. Back in September, I expected two tranches to amount to close to EUR300 billion. We now have less than EUR213 billion. This is a massive undershooting on expectations for majority of markets analysts. One of Draghi's 'big bazookas' is currently misfiring charcoal instead of bullets, placing more pressure on the ECB to get into QE-like actions in January.

10/12/2014: Russian CDS: Not a Happy Day

While Ukraine CDS were the worst performing worldwide today (http://trueeconomics.blogspot.ie/2014/12/10122014-ukraine-greece-cds-flash-red.html) Russian CDS were also under pressure.

As noted by @Schuldensuehner Russian CDS reached above 402 and the implied 5 year cumulative probability of default rose to 24%.

Here's updated chart plotting evolution of Russian and Ukrainian CDS:

There is a strong negative relationship between the price of oil and Russian CDS:

So with oil dipping below USD65/bbl today, things were bound to get touchy.

10/12/2014: Ukraine & Greece CDS Flash Red... again...

It's another 'Oh dear' moment for Greece as the country slides into another political mess:

And still, with CDS widening by a massive 5.63% in one day, Greece is still performing better than Ukraine, which is facing a report from the IMF estimating fiscal shortfall of USD15 billion on top of what the Fund already previously estimated to be USD17 billion (http://www.cnbc.com/id/102254994#).  Now, the total expected cost of underwriting Ukraine is at USD42 billion and counting.

I estimated before that Ukraine will require around USD55-60 billion in supports and the number still stands. As I suggested on numerous occasions over the year, Ukraine needs a Marshall Plan, not a short-term lending facility.

Here is the summary of changes in Ukraine's (and Russian) CDS:

5/12/2014: ECR on Russian Economy

Euromoney Country Risk on Russian economy under oil shock:

"Large oil producers, such as Russia, with undiversified economies and where political and other problematic factors prevail, are already seeing heightened risk that reflects their vulnerability.

Russia is facing a perfect storm of sanctions, falling oil prices and a currency in freefall since it was floated by the central bank to avoid further foreign-reserves depletion.

Its score has fallen sharply, taking the sovereign down 17 places and into the fourth of ECR’s five tiered categories equivalent to a B- to BB+ credit rating.

Russia has ample reserves, exceeding $400 billion, and the budget balance is cushioned somewhat from lower oil prices by the countervailing effect of the rouble’s slide.

Yet it seems inevitable now, with investment down, that Russia’s economy will contract in 2015.

Household disposable incomes will fall sharply as inflation and unemployment escalate, weighing on consumer spending. Rising dollar interest costs exacerbating debt rollover risks will burden the banks already managing depositor withdrawals."

A handy chart:

4/12/2014: The Good, The Weak, The Bad & The Ugly: BRIC PMIs

Combined Services and Manufacturing PMIs for BRIC economies.

First summary in a table:

And in a chart for combined (simple sum and average):

Key points:

• Brazil is tanking on both 'fronts'
• Russia is tanking on services 'front'
• China is weak
• India is gaining speed.

3/12/2014: Russia, Ukraine CDS are climbing

As twitted earlier, Russia is figuring at the top of the daily movers charts in CDS markets today with its sovereign CDS spread on Germany up at 378.45 rising 6.36% d/d (+22.64bps) with current cumulative 5-year probability of default estimated at 22.76%.

Ukraine made it to number 3 in today's moves with its stats far far worse: 5 year spread at an eye-opening 1,779.20 bps up 3.01% d/d (+51.99 bps) and cumulative 5-year probability of default at 67.53%.

Big jumps for both on last week's close:

And massive jumps compared to Q1 2014:

(click on the chart to enlarge)
Note: all data via S&P Capital IQ

No comment on the data.