16/3/2015: Some new 2015-2018 forecasts for the Russian Economy

Amidst much of the (occasionally informed) speculation as to the whereabouts of Russian President Putin (see for example this rather informative piece: http://uk.businessinsider.com/what-is-putin-doing-2015-3?r=US#ixzz3UWqOOHLc), President Putin has finally reappeared from wherever he might have been over the last how-many days... Of course, his reappearance promptly led to some 'highly informed' Western analysts seeing President Putin's double...

The matters of conspiracy aside (for their endless supply makes their value trend toward absolute zero pretty fast), the Economy Ministry has been busy preparing new forecasts for Russia for 2016, trailing behind the recent forecasts from the Central Bank.

Minister Ulyukaev today said that the economic outlook for Russia is based on the view that Western sanctions will remain in place "at least over the period of 2015-2016" and "most likely, in the following years". Beyond this, the Minister said that 2016-2018 will likely see 2.5%-3% average rate of growth in real GDP and that 2016 growth is likely to be in the same range. New forecasts, according to Mr. Ukyukaev - currently in preparation stages - see economic recovery starting in 2016. This, if confirmed in the official forecasts, would represent a dose of optimism not matched by many independent analysts, and well in excess of the cautious gloom of the Central Bank (see below).

Meanwhile, as The Moscow Times (not a paper known for expressing pro-Kremlin sentiments) noted: foreign investors are heading back into Russian markets http://www.themoscowtimes.com/article/517481.html. I wish them well - they are in for a rough ride, but should enjoy some upside, on average. Do note some of the risks and concerns voiced at the end of the article.

Of course, amidst all this positivity, the real signs are pointing to growing concerns about the state of the economy.

Central Bank published forecasts show "at risk scenario" forecast of -5.8% contraction in GDP in 2015. This assumes average oil prices in the range of USD40-45pb.

Under the base scenario, oil prices are expected to average USD50-55pb in 2015, rising to USD60-65pb in 2016 and USD70-75pb in 2017. These assumptions support GDP growth forecast of -3.4% to -4.0% in 2015, followed by a contraction of -1.0% to -1.6% in 2016, and growth of 5.5% to 6.3% in 2017. In effect, these forecasts imply 2015-2017 growth of between 0.4% and 0.9%, cumulative. Under the base scenario, growth of 4.6% in 2017 would be required to get Russian economy back to the end-2014 levels.

The CBR forecasts decline of USD50 billion in its forex reserves to around USD307 billion in 2015 and no change in reserves in 2016. The balancing out of reserves is based on current account surplus forecast of USD90 billion in 2016 up on USD64 billion in 2015. CBR projects current account surplus of USD119 billion in 2017.

My view is that the above figures err on optimistic side. I expect Russian economy to shrink by around 4-5% in 2015, post GDP growth of between -1.5% to +0.5% in 2016 and grow by around 3% in 2017. I also expect CBR forex reserves to drop by around USD80 billion in 2015 and closer to USD40-50 billion in 2016 to USD225-230 billion at the end of 2017.



Note: a fascinating and exhaustingly detailed account of the short history of Russian Government and business struggles for who will be building the bridge to Crimea: http://www.forbes.ru/print/node/282637 (in Russian).

13/3/15: Irish Bilateral Trade in Goods with BRIC: 2014

Full year 2014 data on Irish bilateral trade in goods with the BRIC countries is showing some interesting changes to historical patterns worth highlighting. Let's start with country-specific analysis:

Russia: 

Irish exports to Russia (goods only) reached EUR722 million in 2014, up 13.3% y/y from EUR637 million in 2013. Over the last five years, Irish exports to Russia almost doubled, rising 198%. Russia now accounts for 21.6% of Ireland's total exports to BRIC economies, up from 8.2% in 2009. Trade balance with Russia (goods only) has risen more modestly to EUR496 million, up just 1.43%, marking the second highest bilateral trade balance with Russia (the highest one was achieved in 2012 at EUR503 million). Still, Ireland's trade balance with Russia is the largest for all BRIC and Irish exports to Russia now exceeds the combined exports from Ireland to Brazil and India for the fourth year in a row. Over the last 5 years, cumulative trade in goods surplus in favour of Ireland in trade with Russia stands at EUR2.085 billion.

Brazil:

Irish exports to Brazil fell from EUR262 million in 2013 to EUR256 million in 2014 (a drop of 2.3% that effectively reverses the rise of 2.34% recorded in 2013). As the result, 2014 exports to Brazil exactly matched EUR256 million level of exports achieved in 2013. Over the last 5 years, Irish exports to Brazil have grown only 21.2% cumulatively - the second worst performance in BRIC. As the result of sharper contraction in imports, Irish trade balance with Brazil actually managed to improve in 2014. 2014 trade in goods surplus for Ireland's trade with Brazil was EUR97 million as opposed to a deficit of EUR12 million recorded in 2013 and a deficit of EUR260 million recorded in 2012. Over the last 5 years, cumulative trade in goods deficit against Ireland in trade with Brazil stands at EUR7.9 million.


India:

Irish exports to India fell from EUR304 million in 2013 to EUR248 million in 2014 (a drop of 18.4% that significantly reverses the rise of 29.4% recorded in 2013). As the result, 2014 exports to India almost matched EUR235 million level of exports achieved in 2013. Over the last 5 years, Irish exports to India have grown only 56.5% cumulatively - the second best performance in BRIC after Russia. As the result of a small rise in imports, Irish trade balance with India actually managed to deteriorate in 2014. 2014 trade in goods deficit for Ireland's trade with India was EUR154 million as opposed to a deficit of EUR83 million recorded in 2013 and a deficit of EUR130 million recorded in 2012. 2014 was the worst deficit year in our bilateral trade with India since the data on bilateral trade became available in 1998. Over the last 5 years, cumulative trade in goods deficit against Ireland in trade with India stands at EUR673.7 million.


China:

Irish exports to China rose from EUR1,941 million in 2013 to EUR2,111 million in 2014 (a rise of 8.8% that largely reverses the fall of 10.4% recorded in 2013). As the result, 2014 exports to China almost matched EUR2,167 million level of exports achieved in 2013. Over the last 5 years, Irish exports to China have shrunk by 9.4% cumulatively - the worst performance in BRIC. Adding insult to the injury, as the result of a small rise in imports, Irish trade balance with China actually managed to deteriorate in 2014. 2014 trade in goods deficit for Ireland's trade with China was EUR1,370 million as opposed to a deficit of EUR1,150 million recorded in 2013 and a deficit of EUR693 million recorded in 2012. 2014 was the worst deficit year in our bilateral trade with China since 2008. Over the last 5 years, cumulative trade in goods deficit against Ireland in trade with China stands at EUR3,849 million.


Combined bilateral trade with BRIC:

Irish exports to BRIC markets (goods only) rose to EUR3,337 million in 2014, rising 6.2% y/y from EUR3,114 million in 2013 and virtually reversing the losses sustained between 2013 and 2012 to almost match 2011 level of EUR3,324 million. Over the last 5 years, exports from Ireland into BRIC economies rose 13.4% cumulatively - hardly an impressive performance. Meanwhile, Irish imports from BRIC rose from EUR3,900 million in 2013 to EUR4,268 million in 2014. As the result, Irish trade deficit with BRIC economies rose from EUR756 million in 2013 to EUR931 million in 2014. Thus, 2014 marked the worst trade deficit with BRIC economies since 2008. 5 year cumulative trade deficit between Ireland and BRIC currently stands at EUR2,445.8 million

Quite surprisingly, Irish bilateral trade in goods with Russia - subject to EU sanctions, US sanctions-induced lower propensity for US multinationals to engage in Russia, and subject to severe disruption of financial flows, including trade credits and insurance - has managed to substantially outperform our trade with other BRIC economies and expand by 20.8% y/y in terms of combined trade flows and 13.4% in terms of exports to Russia. The reason for this the longer-term nature of our exporters engagement in the Russian markets and more partnership-based approach to trade. Irish exports to Russia are strongly dominated by indigenous, smaller exporters who tend to secure longer-term relationship-based engagement in the market. In addition, Irish exports to Russia are strongly developed in the areas of food production and agri-food technologies - two sectors that saw growth in investment in Russia.

13/3/15: Emerging Markets Corporate Debt Maturity Squeeze

H/T to @RobinWigg for the following chart summing up Emerging Markets exposure to the USD-denominated corporate debt redemptions calls over 2015-2025. The peak at 2017 and 2018 and relatively high levels for exemptions coming up in 2016, 2019-2020 signal sizeable pressure on the EM corporates that coincides with expected tightening in the US interest rates cycle - a twin shock that is likely to have adverse impact on EMs' capex in years to come. With rolling over 2017-on debt becoming a more expensive proposition, given the USD FX rates and interest rates outlook, the EMs-based corporate sector will come under severe pressure to use organic revenue generation to redeem maturing debt. Which means less investment, less hiring and less growth.

The impossible monetary policy trilemma that I have been warning about for some years now is starting to play out, with delay on my expectations, but just as expected - in the weaker and more vulnerable markets first.

13/3/15: South Stream Redux: Rejecting the Hungarian-Russian Nuclear Power Deal

A pretty nasty confirmation of the overall hostile approach by the EU toward national autonomy in dealing with the energy markets by the member states came in yesterday. As reported in the FT: http://www.ft.com/cms/s/0/9a6467e2-c8c1-11e4-8617-00144feab7de.html#ixzz3UCYrZfix, the EU has blocked Hungarian deal with Russian Rosatom to develop and supply new nuclear energy facilities at Paks. The EUR12 billion, 1,200 MW facility was to be designed, built and maintained by Rosatom under a contract that is pretty bog-standard around the world and included (also standard) long term exclusive agreement to supply fuel. Paks current output accounts for 40% of total Hungarian electricity generation and the country effectively has no options other than either burn Russian gas, Polish and/or Ukrainian coal or using nuclear. Notably, Polish and/or Ukrainian coal is perhaps the dirtiest generation alternative available to Hungary.

As reported in the FT: "Many EU officials also expressed concerns that Moscow was using energy policy to divide Europe and undermine the bloc’s consensus on sanctions imposed on Russia over its actions in eastern Ukraine."

Which simply means that the EU is now arbitrarily exceeding its own sanctions and is using trade as a conduit for political influence.

It is worth noting that long-term supply agreement for fuel is a necessary part of the agreement that is part-financed (EUR10 billion) by Russian credits. Recovery of these credits is built-into the fuel supply contract.

Another thing worth noting: the EU rejection is not based on the separate concern as to the nature of procurement contract involved. Russia is not liable for the procurement procedures deployed by the Hungarian authorities that might have been in breach of the EU procurement rules.

Net impact: the EU rejection of the contract not on the basis of procurement rules violation, but simply because the EU does not like long term contractual fuel supply arrangements with Russia represents a drastic departure from the EU rhetoric of supporting free trade. Just as in the case with Nord Stream and South Stream pipelines, the EU is currently cartelising energy procurement and development policy (see earlier note here: http://trueeconomics.blogspot.com/2015/02/5215-gazproms-nord-and-south-streams.html). In addition, the EU is now clearly erring on the side of becoming completely unreliable trading partner for Russia, as even the areas not impacted by sanctions are now openly being used as a tool for strengthen sanctions impact.

The twin effect of these exchanges should accelerate Russian pivot East and South away from Europe. This pivot is costly to Russia, but it is also costly to the EU, signalling in the longer run EU's dropping out of the Asia-Pacific, Central Asian and Russian trade and investment blocks. For you may or may not be a fan of Russia or Moscow's policies, but what you cannot escape in all of this is the simple fact: EU has now fully politicised its energy markets. And if so, then who is to say it won;t do so in other markets? The ones that might be important to, say, India or China or Asia Pacific or Latin America? Who is to say that the current trade flows are a permanent and protected feature of the world that EU inhabits? And who is to say that the risk of EU politicising another sector - aviation? transport? industrial machinery? - under the pretence of creating another 'Energy' Union is a risk that the non-EU world should ignore in dealing with Europe?

11/3/15: IMF Approves Bailout 3.0 for Ukraine

IMF statement on Ukraine:

Backgrounders: http://trueeconomics.blogspot.ie/2015/02/18215-imf-package-for-ukraine-some.html and here: https://www.imf.org/external/np/sec/pr/2015/pr1550.htm

Key points to the above: IMF came through just-in-time after seeing Ukraine going down to the last USD 4.5 billion in reserves and only barely enough time to pay the loans due to be repaid to... IMF. In a sense, IMF decision avoids the risk of IMF engineering the most pesky form of sovereign default known to the humanity: a default on IMF debt. Congratulations, IMF.

The hope-filled IMF statement is worth reading, but apparently, Ms. Lagarde sees Minsk 2 agreements as "largely holding for now". Which is consistent with some reports but most certainly is at odds with the UK, US and Nato views.

Another part worth noting is IMF's continued insistence that Ukraine's economic collapse is just a temporary 'balance of payments' problem. And in line with delirium, IMF is lauding the Ukrainian authorities for allowing "the exchange rate to adjust", as if Kiev had not thrown every last bit of meagre reserves and every possible bit of capital controls at defending the exchange rate in a futile attempt to prevent such 'adjustment'.

That said, let us hope that Ukrainian economy is indeed provided some much needed support through this package and that the reforms, penned into the agreement, do not lead another Maidan.

11/3/15: Building & Construction Activity in Ireland: 2014

Irish Building and Construction industry production indices are out for Q4 2014 and full year 2014, so here is a quick look.

Quarterly data:

• All building and construction activity rose 6% y/y in Q4 2014 by value and 4.5% y/y by volume.Compared to series low, value is up 55% and volume is up 51%. However, compared to historical peak, value is down 70.2% still and volume is down 71.8%. Thus, the annual rise is not impressive: single digit growth off the base that is so low, we are still 36.3% below Q4 2000 in value and 52.8% below Q4 2000 in volume. Worse, Q4 2014 marks the slowest annual growth in value and volume since Q1 2013.

• Building ex-civil engineering index is up 9.8% y/y in Q4 2014 in value terms and is up 8.6% in volume terms. The series still trend 76% below historical peak in value terms and down 78 in volume terms. Compared to Q4 2000, the series are down 51.3% in value terms and 64% below in volume terms.
• Residential building production is up massive 36.9% y/y in value terms and 35.2% in volume terms. Again, however, the base of activity is low: the series are still down 76.0% on peak in value terms and down 88.9% in volume terms. Compared to Q4 2000, residential building activity is down 70.6% in value terms and down 79.3% in volume terms.
• Non-residential building activity fell 3.9% y/y in Q4 2014 in value terms and is down 5.17% in volume terms. The series are 15.3% below Q4 2000 levels of activity in value terms and are down 30.4% in volume terms.
• Civil engineering activity - the only area of activity where we have been performing relatively better over recent years - posted a decline of 1.6% y/y in Q4 2014 in terms of value of activity and a drop of 2.88% y/y in terms of volume of activity. However, compared to Q4 2000, the series still run 64% ahead in terms of value and 20.6% up in terms of volume.

On annual basis, 2014 was a better year for value of activity compared to volume.

• Across all building and construction sub-sectors, activity in 2014 was up 9.36% y/y in terms of value of production and up 8.29 in terms of volume. Both value and volume y/y growth rates were weaker in 2014 compared to 2013. Relative to annual averages for 2000-20002 period, activity across all sectors of construction is down 47% in value terms and down 58.7% in volume terms.
• Residential building activity in 2014 rose 19.0% y/y in value terms (improving on 11.5% growth in 2013) and by 17.5% in volume terms (also improving on 10.8% growth in 2013). However, as with quarterly figures earlier, activity is growing of extremely low base. Compared to 2000-2002 annual averages, 2014 activity in this sub-sector is still down 78.3% in value terms and down 69.0% in volume terms.
• Non-residential construction activity is up 8.3% y/y in value terms in 2014 (much worse than 19.4% rise recorded in 2013) and in volume terms activity is up 7.2% (also worse than 18.5% rise in 2013). Full year 2014 activity is still well below 2000-2002 annual averages (down 21.4% in value terms and down 31.7% in volume terms).

To conclude: 

1. Some welcome improvements in the building and construction sector, driven primarily by residential construction activities, but coming off extremely low base of activity in 2013. 
2. Key issue is how much of 2014 activity uplift was driven by planning permissions secured prior to major regulatory changes that are holding back current permissions activity. 
3. Another key issue is the apparent significant slowdown in 2014 rates of growth in activity compared to 2013 rates of growth. 
4. Third issue: despite still low levels of activity in the sector, builders appear to be chasing higher margins on price / value side, instead of lower cost projects.Thus value of activities is rising faster than volume for the second year in a row. If this scenario is sustained into 2015, we are unlikely to see construction sector gains translating into alleviating price appreciation pressures in the rental and house purchasing markets.

11/3/15: The looming computerisation of European jobs

Two and a half years ago (http://trueeconomics.blogspot.ie/2012/08/2882012-challenging-constant-growth.html), I highlighted the research by Robert J. Gordon on the secular slowdown in economic growth awaiting the global economy, linked to the 'flattening out' of returns to technological innovation hypothesis.

Recent research from the Bruegel Institute (see: http://www.bruegel.org/nc/blog/detail/article/1394-the-computerisation-of-european-jobs/#.VQAET3EABEU.twitter) attempted to provide some estimation of the related topic: the topic of jobs displacement via technological innovation.

This represents a very important and interesting piece of work, quantifying risk exposures across the European economies to computerisation, robotisation and automation trends. The map Bruegel provides clearly shows the link between lower value-added sectors activity share of country GDP and the risk of jobs displacement due to technological innovation. However, even at the lower end of displacement scale, 47-49 percent of jobs are at risk, and this is a significant number. Worse, as authors correctly (in my view) suggest, the impact will be more pronounced for lower quality jobs, more reliant on labour and less related to human capital and complementarity between human capital and technology. In other words, already sizeable economic impact is likely to be magnified by an even larger social impact.

This topic is one of the key ones to focus on when thinking about the future economic, social and political developments. Just to give you a taster for the thinking ahead of us: in the majority of peripheral economies and indeed across the EU, jobs losses during the recent crises - the Global Financial Crisis, the Great Recession and the Sovereign Debt Crisis - were relatively concentrated in lower skills end of jobs spectrum, although this concentration was not as high as the bias expected for exult from technological displacement of jobs. Still, the relatively benign polarisation of the employment markets during the crises produced a prominent backlash in political sphere across the EU, with strengthening of the extreme political forces. Now, imagine the effect a much more socially concentrated disruption will cause to the traditional political systems.

Note: some links to related research

• http://trueeconomics.blogspot.ie/2014/06/2462014-us-productivity-slowdown-its.html
• http://trueeconomics.blogspot.ie/2013/11/14112013-human-capital-age-of-change.html
• http://trueeconomics.blogspot.ie/2014/05/1552014-innovation-employment-growth.html
• http://trueeconomics.blogspot.ie/2013/11/11112013-great-tech-future-for-ireland.html
• And a series of links specific to the Financial Services sector being disrupted by technological innovation: http://trueeconomics.blogspot.ie/2015/03/8315-fintech-entrepreneurs-reshaping.html

10/3/15: Euro Area Growth Indicator Improved in February

In February, Eurocoin - a leading growth indicator from CEPR and Banca d'Italia posted a pretty decent rise to 0.23 from 0.16 in January. The 2 months average is now consistent with growth of 0.3-0.4 percent q/q.

This is the strongest reading in the indicator since July 2014. This time around, gains in Eurocoin indicator were based on improved exports and industrial activity, which is a much better indicator of actual underlying economic performance than gains from stock markets valuations that drove Eurocoin over previous months.

Nonetheless, Eurocoin remains well below its historical average of 0.32. 3mo average through February 2015 is 0.17 against 3 mo average through February 2014 of 0.32, so, once again, growth conditions, albeit improving, remain weak.

The above is confirmed by the recent weakening in the outlook for France. Yesterday, French Government lowered its forecast for Q1 growth from 0.4% to 0.3%.

As ECB went into its much hyped QE, the monetary policy remains firmly 'anchored' in zero growth corner:

10/3/15: Hedge Funds Returns: Part 3: Dealing with Funds and Benchmarks Selection

My latest post on measuring returns in the hedge funds industry is now available on LearnSignal blog: http://blog.learnsignal.com/?p=163

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.