8/3/15: Euro area crisis timing: a problem of definition

Here is an interesting article comparing Euro area debt crisis and Latin American debt crisis: https://www.stlouisfed.org/~/media/Publications/Regional%20Economist/2015/January/PDFs/sovereign_debt.pdf

One question that is persistently present in the literature is about timing the start of the Euro area crisis. The problem is manifold:
1) Different countries have gone into crises in different years;
2) Different aspects of the crises define different sub-crises across various macroeconomic parameters

Here is my stab at the comprehensive definition:

And a legend and some counts stats:

8/3/15: FinTech Entrepreneurs Reshaping Finance: Euromoney

An interesting article on FinTech developments as drivers for change in the financial services: http://www.euromoney.com/Article/3433436/Technology-The-fintech-entrepreneurs-reshaping-finance.html?LS=Twitter&single=true via Euromoney.com.

In recent months, I wrote about FinTech sector extensively for the LearnSignal blog here: http://trueeconomics.blogspot.ie/2014/11/25112014-fin-tech-unraveling-retail.html as well as digital disruption in retail banking sector: http://trueeconomics.blogspot.ie/2015/02/18215-digital-disruption-and.html plus fintech innovation on trading side: http://trueeconomics.blogspot.ie/2014/11/3112014-tech-innovation-in-finance.html

And here is a link to BBC coverage of the Irish FinTech scene: http://trueeconomics.blogspot.ie/2014/09/2692014-bbc-covering-irish-fintech.html

7/3/15:Euro Area GDP per capita: the legacy of the crisis

I have posted previously on the decline in GDP per capita during the current crises across the euro area states, the US and UK. Here is another look:

Let's take GDP per capita at the peak before the crisis.

For some countries this would be year 2007, for others 2008. Keep in mind, many comparatives in the media and by analysts treat the peak as 2008. This is simply not true. Only 89countries of the sample of 20 countries comprising EA18, plus US and UK have peaked their GDP per capita in real terms in 2008, the rest peaked in 2007. Hence, for the former countries, the GDP per capita decline started in 2009 and the for the latter in 2008. Now, take GDP per capita declines cumulated over the years when the GDP per capita was running, in real terms, below the peak. Again, the sample of the countries is not homogeneous here: for some countries, GDP per capita regained pre-crisis peak by 2011 (Germany, Malta and Slovak Republic), by 2013 (Austria and U.S.) and by 2014 (Latvia). For all the rest of the countries, the GDP per capita peak was not regained through 2014.

Now, let's plot the overall cumulated losses over the years of the crisis (over the years from the crisis start through either the year prior to regaining pre-crisis GDP per capita levels for the countries where this was attained, or through 2014 for the countries that did not yet recover pre-crisis levels.

Chart below plots these in euro terms (remember, this is loss through end of crisis or 2014 per capita) (note figures for UK and US are in their respective currencies, not Euro):

Thus, per above, in Greece, cumulative GDP per capita losses during the crisis (through 2014) amount to around EUR42,200, while in Malta cumulative losses from the start of the crisis through the end of the crisis in 2011 amounted to around EUR500 per capita.

Since the crisis was over, before 2014, across 6 countries (in other words the regained their pre-crisis peak GDP per capita levels in inflation-adjusted terms), it is worth to note that through 2014, in these countries, losses have been reduced.  In Austria, through 2014, cumulative losses on pre-crisis GDP per capita levels stood at EUR 2,107 per capita, in Germany there was a cumulative gain of EUR4,078 per capita, in Latvia a cumulative loss of EUR5,696 per capita, in Malta a cumulative gain of EUR1,029 per capita, in Slovak Republic a cumulative gain of EUR1,352 per capita and in the U.S. a cumulative loss of USD258 per capita

Taking the above figures covering either gains  or losses from the start of the crisis in each country through 2014 as a percentage of the pre-crisis peak GDP per capita, the losses/gain due to the crisis through 2014 amount to:

And that chart really tells it all. 

7/3/15: Irish Services Sector Activity & PMI: January 2015

Irish Services Activity Index for January came out yesterday, offering some interesting data reading.

Contextually: Services PMI has averaged 62.2 in the 3 months through February 2015 and it averaged 61.9 for the period of 3 months through November 2014 - both showing blistering growth in the sector.

Now, January Services Activity Index came in 12.6% ahead of the same level in January 2014. 2 mo average through January (comparative to PMI averages we have) is 119.6 which is 9.44% ahead of 3mo average through the same period of 2014. This is rapid growth and it accelerated in December-January as chart below shows.

The acceleration was broadly-based:

• Information and Communication sub-sector activity rose 21.2% y/y with a massive 10.2% jump in m/m terms in January alone. The sub-sector growth rate is around 8.11% y/y in terms of 3mo average through January.
• Professional, Scientific and Technical sub-sector activity posted a big 14.0% jump y/y in January and was up 11.8% m/m. 3mo average through January was up 13.1% y/y.
• Wholesale and Retail Trade etc sub-sector activity rose 8.8% y/y and 9.5% m/m - also strong growth, although 3mo average through January was up weaker 7.2% y/y.
• Transportation and Storage sub-sector activity rose 8.4% y/y but was down 1% m/m, having previously posted rapid growth in November and December. 3mo average through January 2015 is up 16.5% y/y.
• Accommodation and Food services activity was up 14% y/y and down 0.33% m/m in January, with 3mo average through January 2015 standing 13.9% above 3mo average through January 2014.
• Administrative and Support services activity rose only 2.9% y/y and was down 0.8% m/m, with 3mo through January 2015 up just 2.1% y/y.

So, in summary - January figures show a very surprising (and thus suspicious) jump in overall activity across a number of sectors. CSO provides no explanation as to this jump nor any warnings on it. My suspicion is that we are seeing the effects of the infamous 'knowledge development box' introduction in Budget 2015 with MNCs pushing forward more aggressive tax optimisation strategies through it, whilst maintaining previous tax arrangements. I will post a small note on this later, so stay tuned.


Now, an update of the validity of PMIs as a measure of Services Activity recorded in the sector. Table below shows correlations between Services Activity Indices and Services PMIs

As the table shows, there is very little relationship between Services PMIs performance (I also did same analysis for rates of change in the indices that show even worse performance for PMIs as indicators of current or future actual activity) and actual Services sector activity. Out of 84 correlations, 53 are either negative of statistically zero and only 13 have strong positive correlation with either levels of activity or growth in activity. Crucially, PMIs perform stronger (relatively speaking) in correlations with levels of activity, rather than growth rates in activity (in which they perform absolutely disastrously across all time horizons and lags). About the only areas where PMIs are useful in relating to the level of activity (but not growth in activity) are: strongly with ICT, weakly with Admin & Support services and overall Services. Which suggests strong bias in PMIs toward MNCs-dominated ICT services sub-sector. Another miserable point for PMIs: they are more indicative of contemporaneous activity than providing insight into future activity.

7/3/15: Fitch on Russian Banks: January data

Earlier this week, Fitch Ratings published 'Russian Banks Datawatch', covering banks' balance sheet data as of 1 February 2015. Fitch Ratings noted the following key developments in January:

• "Corporate loans increased by RUB2.2trn (6.5%) in nominal terms in January", down -0.9% "after adjusting for 23% rouble depreciation against the US dollar"
• "Retail lending dropped by a moderate RUB46bn (-0.4%) in nominal terms", but fell -1.1% in USD terms. Majority of banks are deleveraging at a rate of 1-4%
• "Customer funding grew by RUB3.5trn (8.2%) in nominal terms", down only -0.1% "net of currency valuation effects as RUB328bn outflow from retail accounts was only partially compensated by RUB264bn inflow of corporate (excluding government entities) funding"
• CBR funding: "Banks repaid about RUB1trn of state funding in January, which had become expensive after the Central Bank of Russia (CBR) increased the key interest rate to 17% from 11.5% in December 2014 (before cutting it slightly to 15% in February 2015)". Note: these repayments offset official forex outflows recorded in the months when banks borrowed funds. As a reminder, when a bank borrows in forex from the CBR, the borrowing is recorded as forex outflow. When the bank subsequently repays the funds in forex, the repayment is entered as forex inflow. But if the bank repays borrowings in RUB, the repayment is registered as an inflow in RUB.
• Actual CBR funding deleveraging by the banks was even steeper: Banks repayment of RUB1trn is broken down into (1) "RUB1.6trn decrease of CBR funding" offset by (2) "RUB0.6trn increase in deposits from the Ministry of Finance, regional and federal budgets". Note: as deposits are liabilities, higher holdings of official deposits within the CBR account counts against the CBR balance sheet.
• Fitch notes that going forward, "This trend [of net repayment of CBR loans] is likely to continue unless the CBR lowers the key rate further ...CBR funding of the sector in foreign currency has become significant, totalling USD21bn (of which USD9.5bn was provided to Otkrytie) at 1 February 2015".
• Banks' profitability: "The sector reported a RUB34bn net loss in January (-6.2% annualised ROE). Alfa-bank significantly outperformed the sector with a net income of RUB30bn mainly due to FX-revaluation gains. Among state banks only Sberbank reported net income, at RUB3.7bn, while others were loss-making: VTB group had a loss of RUB21bn, Gazprombank RUB8bn and Russian Agricultural Bank RUB4bn. Retail banks performed poorly, and most were loss-making..."
• Banks capital ratios: "The average total capital ratio (10% required minimum) of the 100 sample banks decreased by 54bps in January. As at end-1M15, seven banks in the sample (of those publishing capital ratios) had a total capital ratio below 11% [one of them] Fondservisbank (10.4%), was put under CBR temporary administration in February."
• Capitalisation forward: "The announced state recapitalisation measures of over RUB2trn should moderately support banks' capitalisation, although these will be available primarily for larger banks" In other words, expect push for more banks consolidations from Q2 2015.

Summary: corporate lending is up in RUB terms but down in USD terms, retail lending is down both in RUB and USD terms. Deposits up in RUB terms and flat in USD terms, Profitability down significantly and the sector is generating net losses. Capitalisation down with a number of smaller banks heading closer to regulatory minimum, implying that recapitalisation funds will have to be used pretty soon and sector conslidation is likely to accelerate.

6/3/15: US NPF: Another Feel-Good Print with Bitter Aftertaste

My take on the US Non-Farm Payroll numbers in few tweets with some RTs:

Good news:

Why German cars? Because:

And bad: the unemployment rate falling to 5.5% means Fed hike moves closer and this, perversely, means Government debt cost for the US is going to rise (I know, I know, it is perverse, but...):

 But the 'bad' gets worse:

The above mans that US now has historically high level of people who are not in the labour force - some 98.9 million all ... meanwhile...

 ...aaaand.... jobs increases are not in higher value-added sectors:

 

 So to sum this all up:

 Done.

5/3/15: Russian Economy: External Trade, Inflation and Wages

Quick digest of top news relating to Russian economy:

Customs receipts for Russian Federation in February 2015 reached RUB393.7 billion down 30% y/y. January-February receipts were RUB840 billion or 19.6% down y/y. Full year 2014, customs receipts amounted to RUB7.1 trillion - up 8.5% y/y.

Much of the decline is down to imports collapse: imports were down over 2014 by USD29 billion or 9.5% y/y to USD286 billion in 2014 from USD315 billion in 2013. Only three countries saw increased exports into Russia: U.S., Kazakhstan and Brazil. Largest declines in export to Russia were in Ukraine (31.9%), Japan (19.5%) and Belarus (15.6%). By category of imports: largest declines in Russian imports were in passenger vehicles (21.9%), heavy transport equipment and agricultural equipment and machinery (22.3%), engines and power trains (13.2%), household appliances (20%), milk and dairy products (17.5%), pharmaceuticals (13.1%), and alcoholic beverages (12.3%). Imports categories that posted y/y increases in 2014 were: computer equipment (8.6%), telecommunications equipment (6.9%), household chemicals (4.4%) and heating equipment (3.8%).

Given decline in external trade, largest adverse impact of the Russian crisis is being felt in Armenia and Ukraine.

• Armenia received remittances from Russia to the tune of 10% of its GDP in 2012, which fell to around 6% by the end of 2014. Armenia's net exports into Russia accounted for roughly 3% of GDP, while Russian investors account for roughly 50% of total foreign investment stocks.
• Ukraine received remittances from Russia amounting to 2.1% of GDP in 2012 and Russia accounted for roughly 25% of Ukrainian exports. Russian investors account for around 5% of the stocks of foreign direct investment in Ukraine.

Inflation: January inflation printed at 3.9% m/m, or 15% y/y. February 2015 inflation reached 16.7% y/y. Food prices rose 23.3% y/y in February, against 6.9% y/y inflation in food prices in February 2014. M/m February inflation was 2.2% m/m, suggesting potentially a slowdown in the rate of inflation. Some shorter term data suggest that over the first week of March, weekly CPI stood at 0.2% - the lowest weekly reading since October 2014. Good news, for many, bad news for many more: vodka prices fell 0.4% in February.

Wages: A recent survey by a large recruitment company, the Hay Group, showed that 75% of businesses are planning to raise wages in 2015. RBC has details (in Russian): http://top.rbc.ru/economics/04/03/2015/54f706b39a7947103b521853 E-commerce enterprises are planning largest wage hikes (+11.3% on average), followed by Industry sector (+10%), media (9.7%), chemical sector (+9.4%). None of the wage hikes planned are matching expected inflation: Central Bank of Russia forecasts 2015 year-end inflation at 12-12.4% and average inflation during 2015 at 15.8%.

An interesting report in RBC on the proposals for economic reforms from the Russian Union of Industrialists and Entrepreneurs (sort-of Russian IBEC), РСПП (see here: http://top.rbc.ru/economics/04/03/2015/54f724ea9a79472c640c6f5e). According to RSPP, Government response to the crisis should focus on achieving further liberalisation in the economy. First pillar of the proposals focuses on early stage reforms, especially those aiming to stabilise the financial situation in the corporate sector. Second pillar contains 73 specific Government and regulatory decisions that should be suspended to reduce their adverse impact on corporate sector.



Note: those who are interested to learn more about the above topics or the business and economic environment in Russia can contact me to arrange a more in-depth one-on-one briefing.

5/3/15: The Troika Tale of Irish Debt

Irish debt figures, despite all the 'positivity' chatter from the Merrion Street of late, have been making rounds across the analysts' notes (see, for example, McKinsey global debt research published recently) and the Troika assessments. Years of 'deleveraging' and 'permanent restructurings' or arrears, rounds of sovereign debt re-engineerings and 'burden reductions'... all in, the latest assessment of the Irish economy by the EU is telling the tale (see full document here: http://ec.europa.eu/europe2020/pdf/csr2015/cr2015_ireland_en.pdf):

At the end of Q3 2014, household debt stood at EUR171.1 billion down less than 20% (actual decline 19.5%) on peak at the end of 2008. Corporate debt amounted to EUR344.4 billion, down 11.7% on peak attained in H2 2012.

Here's the EU assessment: "Private sector debt started to decline but is still considerably higher than the euro area average. Private sector non-consolidated debt amounted to EUR515.3 billion (283.5% of GDP) in the Q3 2014, down 10.6% from a peak of EUR576.6 billion in mid-2012. The correction begun since 2013 follows the excessive build-up between 2002 and 2011, when private indebtedness rose from about 120 % of GDP to over 320% of GDP [chart above]. Most of this increase can be attributed to the corporate sector amid expanding activity of multinationals and a growing number of SMEs taking on property-related debt. It grew by almost EUR300 billion between 2002 and 2012 (a 276% increase), while that of the household sector increased by about half of that amount (a 218% increase)."

And what about those multinationals? "...even taking [the MNCs effect on corporate debt] into account, Irish corporate debt levels as a percentage of GDP continue to exceed the euro area average by about 80%." Oh dear...

Households? Household "sector remains among the most indebted in the euro area at 91.5% of GDP. Survey data show that 56.8% of Irish households are indebted, and 33.9% of them have a mortgage on their main residence". And the deleveraging process? Why, it is effectively coming out decreased consumption and investment: as pay-down of debt "was not matched by an increase in disposable income: as it remains subdued and consumption is still recovering, overall debt levels remain high... This is partly because average earnings remain relatively flat. Two thirds of all Irish mortgage holders continue to benefit from favourable ’tracker’ interest rates that keep the cost of mortgage servicing low."

The last bit begs a question: what happens when interest rates rise? The gas bit of all this Troika talk is that there are no estimated effects of rising interest rates on sustainability of Irish private sector debt. As if the rates will never, ever, for sure, for certain can rise again.

Pass the Kool-Aid jug, folks... for here's that sorry chart from the McKinsey folks that tells the tale of Irish 'deleveraging' in colour:

And do note that Singapore has control over its currency and interest rates that we don't, a huge ex-pat population that we don't, and all the MNCs trimmings that we do.

Gulp... gulp...

5/3/15: Baltic Dry Index: Slight Gain, Still in Pain

With all the 'feel good' PMI readings of late, Baltic Dry Index has improved slightly (index gained 1.08% yesterday) from the historical lows of 509.00 on February 18 to 559.00 close yesterday.

Still, year on year, the index is down from 1391.00 to 559.00

In rather miserable 2013 on this date, BDI was at 806.00 and on the same day in 2012 it was at 782.00, in 2011 around 1382.00 and so on.

It will take a hell of a lot more 'improvement' to get us back to even remotely normal trading conditions.

5/3/15: Russian Oil & Gas: production and exports

Russian energy exports in the year of economic sanctions -  a nice survey Oil Price (h/t to @RussiaInsider) via http://oilprice.com/Energy/Energy-General/Impotent-Western-Sanctions-Fail-To-Disrupt-Russian-Energy-Exports.html.

Basic summary: volumes are up (coal), holding (uranium). But, tellingly, no discussion of oil and gas exports. Reason: both are under twin pressures of price and sanctions. So a quick add-on:

• Oil revenues: switching wells off in Siberia in the winter is tricky, risky and hard to do, so the black gold continues to flow even at current prices. But 2014 oil exports revenues were down 11.4% to USD153.8 billion and volume of exports was down 5.6% y/y to 223.4 million tons. 
• Oil production: OPEC estimates Russian oil production to decline by 70,000 bpd in 2015 with exports declining by 60,000 bpd y/y. Meanwhile some industry players have much more gloomy outlook: Lukoil sees a possible drop in Russian production of 800,000 bpd by the end of 2016: http://www.reuters.com/article/2015/03/03/russia-crisis-lukoil-idUSL5N0W537K20150303. Meanwhile, December 2014 saw a sharp rise in Russian oil exports to 4.4 million bpd as the Government cut export duty from 59% to 42%. New duty covers also 2015, so we can expect some support for production levels. OPEC estimated Russian production volumes to average 10.58 million bpd, with Q1 2015 forecast of 10.6 million bpd and Q2 forecast of 10.54 millions bpd.
• Gas: full year estimates for Gazprom exports are down 18.6% y/y to USD54.73 billion, volume of exports down 12.1% to 172.6 billion cubic meters. Average contracted price in 2014: USD317 per 1,000 cubic meters, down 7.5% y/y.
• Gas plans: Russia has been aggressively shifting new contracts for supplies to Asia Pacific and Turkey. By Energy Ministry estimates, Russian gas exports to Asia will rise from 14 bcm in 2014 to 130 bcm in 2035 and oil and coal exports will more than double.
• Worth noting the increasing switch in favour of refined petroleum products exports, discussed here: http://www.reuters.com/article/2014/12/09/russia-oil-exports-idUSL6N0TS1XV20141209
• Overall trade impact of the above was to drive down exports revenues to USD782.9 billion or down 7% y/y. Trade surplus was USD210.9 billion in 2014.
• If imports remain where they were in 2014, and oil price averages of 2015 at USD45 pb, Central Bank of Russia estimates a decline in exports revenues (and trade balance) os around USD 160 billion - painful, but still leaving the country in a trade surplus.

4/3/15: Irish Manufacturing & Services PMIs: February 2015

With all recent work-related excitement, I have delayed analysis of the Irish PMIs until now. So here's a look at the latest numbers.

Services PMI slipped slightly from the dizzying 'knowledge development box'-induced highs of 62.5 in January (62.6 in December) to still dizzying 61.4 in February. The slip-up is a minor hiccup on otherwise uninterrupted 'walk along the ceiling' the series been performing since April 2014. 3mo average performance of 62.2 in 3 months through February 2015, compared to already impressive 61.9 for 3mo average through November 2014 and up 1.9 points on vertigo-inducing 3mo average through February 2014.

Of course, these are strange numbers. More telling, probably are m/m changes. In last two months, PMIs posted m/m declines that now fully offset preceding 2 months rises. So things are flat in terms of growth momentum. One wonders how much of the level performance is attained by forex valuations? And how much is attained by MNCs activities in a handful of sub-sectors, as opposed to the firms trading in the indigenous economy? How much of the activity is down to tax optimising activities of the MNCs vs how much of it is down to actual and real activity by the MNCs? Alas, we won't ever know the answer to these questions.

Reports don't mention forex or currency valuations. Investec did comment that increases in employment were recorded in all four of the "segments of the services industry surveyed by this report (TMT, Business Services, Transport & Leisure and Financial Services)". But we have no comparatives or even levels reported to us on employment or any other subcomponent of PMIs anymore.

Manufacturing PMI, meanwhile, posted an acceleration in growth from 55.1 in January 2015 to 57.5 in February 2015, more than offsetting m/m loss of 1.8 points in January 2015. 3mo average through February 2015 was 56.5, which is marginally stronger than 3mo average through November 2014 at 56.2 and 3.4 points ahead of 3mo average through February 2014.

Again, we have no idea what is driving these strong figures and what the breakdown is between MNCs and indigenous firms. How much of this performance down to 'contract manufacturing' - a new MNCs trick that is so distorting our national accounts, even IMF had to comment on it? How much is down to usual activities of double-Irish-knowledge-box etc?

Chart combining the two indices (in terms of their deviations from 50.0 expansion line):

And a chart showing continued close co-movement in two sectors PMIs along with evolution y/y and 24 months:

Overall: numbers are high and impressive. Questions remain as to what these numbers are really telling us, but on their surface they do suggests that somewhere serious growth is happening in something. May this translate into real growth in the Domestic Demand...

4/3/15: Composite Activity Indicators for BRIC & Russia: February

Having covered Manufacturing PMIs (http://trueeconomics.blogspot.ie/2015/03/2315-bric-manufacturing-pmi-february.html) for BRICs and Services PMIs (http://trueeconomics.blogspot.ie/2015/03/4315-bric-services-pmis-stronger-growth.html), let's take a look at the data for combined metrics of two sectors.

First, table below summarises the changes in Manufacturing and Services PMIs across all BRICs:

Markit - the source of both PMI data sets - also reports Composite PMI of their own. My data is based on same inputs but takes a more simple approach of combining the two data points for each country. This allows me to take each economy aggregate performance across the sectors and group these economies into BRIC group by weighing their combined PMIs score by each economy's relative position in the global economy.

Here are the results:

And for BRICs excluding Russia:

The above charts show two things:

1. BRICs overall contribution to global growth is positive but weak, although it registered an improvement in February 2015 compared to January.
2. Russia acts as a drag on global and BRICs growth. Major divergence between Russia and other BRICs started in January 2014, which, incidentally tells us that the talk about Russia not belonging to BRIC group on the basis of some structural or trend considerations is bonkers. Until January 2014, co-movement between BRICs ex-Russia and Russia is very strong and divergence from January 2014 on is clearly linked to geopolitical crisis and oil price collapse, rather than due to structural decoupling between BRICs ex-Russia and Russia.