15/12/2014: Don't Blink... or Russian Data Will Get You!

It seems you blink these days and Russian ruble slides: down 10%+ today alone against the USD and down massive 48.13% for the year so far:

Credit: @RobinWigg

Blink again: the Central Bank revises estimates for capital outflows: new estimates suggest Q4 outflows have accelerated again to the levels of Q1 2014, implying full year outflows of USD133.8 billion, basically on par with the disastrous 2008.

Credit: @Schuldensuehner 

You sneeze and... boom... new estimates for growth are coming out: down to -4.5% for 2015 or even 4.7% assuming oil prices staying at 'current' levels of USD60 per barrel (annual average).

Reach out for a cup of tea and as oil price plummets, so does the ruble. If we take RUB3500/barrel or RUB3720/ barrel estimates built into two revisions of the Budget, you have USD/RUB rate in 88-93 range.

Put kids to bed and 10.5% Central Bank rate goes up to 17% - on foot of an emergency: http://www.bloomberg.com/news/2014-12-15/russia-increases-key-interest-rate-to-17-to-stem-ruble-decline.html

Take a smoke break and Russian CDS are busting past the 30% CPD ceiling: http://trueeconomics.blogspot.ie/2014/12/15122014-russia-ukraine-cds-hitting.html

Analysts' nightmare, comedians' rich picking. And comedians are out, in force, pretending to be analysts - the host of geopolitical journalists are now all spotting 'economic analysis' on their webpages. It is going to get worse - Politburo 'Hats Readers' are now coming out with economics and finance analysis, so expect a massive crash...

In truth, as noted earlier (http://trueeconomics.blogspot.ie/2014/12/11122014-central-bank-of-russia-good.html) 100bps hike in CBR rate earlier this month was useless. Useless across the board. Tonight's hike to 17% is clearly a serious push for an attempt to stabilise the ruble and stem the capital outflows. But it won't do the trick either. Much of outflows is driven by bond redemptions. So is much of the demand for dollars. And in this scenario, all the interest rates are going to achieve is collapse investment.

In brief, we are now headed into the inevitable:

• Step 1: capital controls with limited exemptions for individual sectors and firms; and
• Step 2: debt redemptions break for companies directly impacted by the sanctions.
• Step 3 (or maybe it will be step 1 or 2): revise growth estimates for 2015 to -7%, because there won't be any domestic investment at 17% rates and there won't be any foreign investment at 49% devaluation rate, and there will be no government investment at capital outflows into USD130 billion and bond redemptions mounting (http://trueeconomics.blogspot.ie/2014/11/24112014-external-debt-maturity-profile.html). There won't be much of consumption as RUB heads toward RUB/EUR100 marker and banks are not lending.

Speed up your blinking, folks, and buckle your seat belts.

15/12/2014: Russia & Ukraine CDS Hitting Major Highs

Both Russian and Ukrainian CDS are going hyperbolic:

15/12/2014: BlackRock Institute Survey: North America & Western Europe, December 2014

BlackRock Investment Institute released the latest Economic Cycle Survey results for North America and Western Europe:

"This month’s North America and Western Europe Economic Cycle Survey presented a positive outlook on global growth, with a net of 52% of 84 economists expecting the world economy will get stronger over the next year, compared to net 47% figure in last month’s report." Back in October, the proportion was 43% and in September it was 55%. The consensus of economists project mid-cycle expansion over the next 6 months for the global economy - same as in October and November.

"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 Finland, Sweden and Norway." Norway featured as an exception in October report and November. Back in October and November reports, expected deviation from stronger trend was also reported for Belgium.

"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 Finland and Italy to be in a recessionary state, with the even split between contraction or recession for Greece, France and Portugal. Over the next 6 months, the consensus shifts toward expansion for both Finland and Italy." These results were broadly consistent with october and November reports.

"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." Again, this was in line with October and November reports.

 Note: Red dot denotes Austria, Canada, Denmark, Ireland, Spain and Switzerland.

For comparative purpose: October survey mapping 6 months out:

Previous report was covered here: http://trueeconomics.blogspot.ie/2014/10/6102014-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.

15/12/2014: BlackRock Institute Survey: EMEA, December 2014

BlackRock Investment Institute released the latest Economic Cycle Survey results for EMEA:

"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, Croatia and the Ukraine in a recessionary state, the outlook changes to expansion for Croatia over next two quarters." In previous survey, the same three countries were described as likely to remain recessionary.

"At the 12 month horizon, the consensus expecting all EMEA countries to strengthen or remain the same with the exception of Russia and the Ukraine. Globally, respondents remain positive on the global growth cycle with a net 58% of 43 respondents expecting a strengthening world economy over the next 12 months – an 28% increase from the net 30% figure last month. The consensus of economists project mid-cycle expansion over the next 6 months for the global economy."

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

Previous report was covered here: http://trueeconomics.blogspot.ie/2014/10/23102014-blackrock-institute-survey.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.

15/12/2014: Ruble's Continued Woes

And Ruble starts the week on a downside trend...  Two charts via @Schuldensuehner

In USD terms at 58.77 and in EUR terms at 73.21.

Predictably, interest rate hikes of last week are not holding the line (http://trueeconomics.blogspot.ie/2014/12/11122014-central-bank-of-russia-good.html)

14/12/2014: IMF (Emergency) Mission to Kiev

Given economic / fiscal position of Ukraine (see http://trueeconomics.blogspot.ie/2014/12/10122014-ukraine-greece-cds-flash-red.html) it is unsurprising that the IMF has dispatched a 'rapid response' team out to Kiev. Here's the IMF official statement on the visit:

Not to over-interpret the above, it suggests that the IMF is considering seriously further 'assistance' to Ukraine and that such a commitment will be based not so much on the progress of structural reforms to-date, but on the progress of the promises of reforms in the future.

Of course, it is hard to imagine Ukrainian authorities unrolling any big and binding reforms in the current climate and given short span of life of the new Rada to-date, so don't take the above comment as sarcasm - Ukraine needs assistance now and the promise of reforms is real, in my opinion. The only problem is that any assistance via IMF will be short-term (3 years or so) and will be in the form of debt, while what Ukraine really needs is longer-term funding and in a form of a Marshall Plan (even if in debt form, at least on terms of near-zero cost of funding and flexible maturity). Sadly, such preferential funding is unlikely to come...

14/12/2014: Irish Building & Construction Q3 2014: Another Quarter of Unconvincing Recovery

Indices for activity (volume and value) in Building & Construction sector in Ireland were published this week covering Q3 2014. Here are the details:

Across all Building & Construction sector:

• Value index for all Building & Construction sector rose to 108.6 in Q3 2014 - the highest reading since Q4 2009 and the second reading over 100.0 since Q4 2010. Year-on-year, index is up solid 11.38%, slightly slower than Q2 rise of 11.55%. The index, however, is still 70.88% below the peak.
• Excluding Civil Engineering, Building & Construction activity rose in value 103.4 in Q3 2014, he highest reading since Q4 2013 and up 9.77% y/y. This is the slowest rise in the index in 6 quarters. In Q2 2014, index rose 11.82% and in Q1 it was up 14.91%.
• In volume terms, all Building & Construction activity index reached 108.1 in Q3 2014, up 9.97% y/y, slightly below 10.37% growth in Q2 2014. Volume of activity in the sector is still 72.40% below the pre-crisis peak.
• Again, taking out Civil Engineering, the activity in the sector is growing at a slower pace in volume terms - up 8.43% y/y in Q3 2014 and down 80.03% on peak.

Chart to illustrate:

In basic terms, overall activity in the broad sector is running along a nearly flat trendline with some signs of very fragile recovery. And that is off the levels so abysmally low that one would require sustained 20%+ growth rates to achieve any meaningful gains.

Underlying the above trends, we have at least some life showing in the Residential Building segment. In Q3 2014, Residential Building activity index posted a 21.13% y/y rise in terms of value, reversing two consecutive quarters of decline. Still, value of activity in this sub-sector remains 90.5% lower than at the pre-crisis peak. In volume terms, the index rose 19.55% and is down 91% on pre-crisis peak. 

Two chart below show just how pathetic the recovery has been to-date in Residential Building & Construction sub-sector.

In summary, there is barely any life in the Building & Construction sector activity - measured against both volume and value of activity - across all sub-sectors, save Civil Engineering, where the falloff has been relatively shallower (down 26% on peak in Q3 2014 in terms of value and 28.5% in terms of volume). And, of course, the data is again contrary to the booming Construction Sector PMIs. What a surprise!

Interestingly, in non-Residential Building sector, activity is growing at the rates of just 2.33% y/y in terms of volume and 3.75% y/y in terms of value - despite the numerous 'good news' claims from Nama and the commercial real estate sector and despite the allegedly 'low' vacancy rates and rising rent rolls.

13/12/2014: CESIfo on Minimum Wage Effects in Germany

An interesting research note from Germany's CESIfo institute on the effects of minimum wage law change. The note, titled "Minimum Wage: German Firms Plan Price Increases, Staff Cuts and Reductions in Working Hours" is available (in German) here:
http://www.cesifo-group.de/DocDL/ifosd_2014_23_5.pdf

Basically, on January 1, 2015 Germany will implement a Federal minimum wage of EUR8.50/hour (see background here: http://www.bbc.com/news/business-28140594).

CESIfo undertook a survey of employers' expectations as to hiring and labour utilisation / demand changes expected following its introduction. The key point to note is that these are expectations reported by surveyed businesses, not the actual responses.

Per CESIfo German companies that will be affected by the minimum wage as of 1 January 2015 are planning to

• Increase their prices (26 percent)
• Reduce bonuses (23 percent), 
• Reduce payrolls (22 percent), 
• Reduce working hours (18 percent), and 
• Scale back investment activity (16 percent). 

Furthermore, "most companies are planning to implement a combination of these measures, and only 43 percent of the firms affected plan not to react at all… eastern German companies will be far more deeply affected than their western German counterparts by a ratio of 43 percent to 24 percent."

By sector, the impact is distributed as follows:

• "Service providers, and especially those in the catering and hotel industry, mainly intend to respond by increasing prices (31 percent)."
• "In retailing, responses to the minimum wage were primarily cited as staff cuts (29 percent) and shorter working hours (33 percent)."
• "In manufacturing, staff cuts (26 percent) ranked just above reductions in bonuses (23 percent) and raising prices (23 percent)."

So may be we'll see an uptick in German inflation in early 2015... to the delight of the ECB and the detriment of all of us reliant on its low interest rates... But it will be inflation of a different nature...

12/12/2014: Ruble's Euro Pain

A quick footnote to the yesterday's post on Central Bank of Russia move. RUB/EUR is also in pain territory just as RUB/USD:

Charts courtes of @Schuldensuehner 

12/12/2014: That Invisible Irish 'Trickle Down' Recovery: Consumers' View

In recent posts (see all five of them linked here: http://trueeconomics.blogspot.ie/2014/12/12122014-qna-q3-2014-irish-external.html) I covered in detail the latest official stats on Irish economic recovery/growth. The picture these figures present is of basically static domestic economy, with questionable quality 'exports-led recovery'.

So what's can one add to the above? Ah, just a couple of recent surveys.

Remember, the political meme is that the recovery is charging ahead and is trickling down to ordinary families and into the real economy. Which, naturally, suggests that households should be feeling better. If not fully 'great', at the very least better… So do they?

We can look at consumer confidence indicators from the ESRI to check. Alas, these are bearing negative relation with actual domestic demand. Still, on a shorter note, core retail sales have been rising recently - in volume - and a starting to show some life in value. Chart below illustrates just how weak the 'real recovery' has been despite the sentiment - as measured by ESRI - has been allegedly at all time highs:

But there are other surveys to look at.

Based on Amarach data: in April 2014, 41% of Irish people thought Ireland is a great place to live in. By November 2014 this rose to 56%.But less than half of us felt that there are
opportunities in Ireland for those who are prepared to seek them out (49% in November, still, a rise on 42% in April 2014). So the 'recovery' is not exactly the one where opportunities for betterment are being presented, even if we control for effort.

Good news is - people are getting more optimistic: in November, 56% of surveyed felt that better times lie ahead for the Irish economy, up on 48% in April. Hopium is a powerful drug, especially when dispensed in massive doses of Government-paid-for PR via all channels of traditional media. Allegedly, quality of life in Ireland is ranked as being high by a rising proportion of people too: from 48% in April to 56% in November, although we have no idea what this means, really, this should translate into a feel-good factor of sorts. Right? Well, let's give it a pause and think - the above are all issues relating to 'us' as a collective. Let's see what surveys said about personal.

View: "I feel angrier about austerity now than I have ever felt before." If things are so good at collective levels, surely they should good at personal level too? In November 2014, 49% of surveyed agreed with the above statement and only 16% disagreed. Wow! All the recovery and the goodies from the Budget 2015 and those feeling angrier with the state of our policies is outstripping those who do not by more than 3:1.

Confirming the above, 59% of Irish people felt that economic pressures are making them  depressed. Only 24% disagreed. 39% of Irish people felt that the economy (not the economists) is having a negative impact on their personal health. 29% disagreed. When asked of they feel being successful/very successful in managing their finances, 56% of us agreed back in September 2013, 50% agreed in April 2014 survey and 50% in November 2014 survey. So things are not getting better in terms of our perceived financial health over time. They are getting worse.

Do the people plan to 'vote' with their money for the recovery? Don't hold your breath, folks. Only 16% of us said they will loosen the purse strings a bit next year. 49% said they won't.

Here are some numbers on how we feel about the state of our financial affairs, not as a nation or as Troika

Well, the last line in the table above is telling.

But may be the above data is suspect? Well, why not check with the 'Optimists par excellence' from the ranks of Big 4 'consultancies'? Let's take a look at Deloitte. Surely they can see the optimism around?

Check out their H2 2014 Consumer Review. Here are the snapshots:

We feel, predominantly, no better about all major points of economic well-being today:

And we want to save more, spend less and borrow less:

So where's that 'trickle down' optimism contagion from all the feel-good policies the Government allegedly lavishing upon us all? Spot one beyond those jobs-for-life-and-pensions-for-free walls of the Government 'think tanks', if you can…

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.