25/3/15: Irish Residential Property Prices Fell Marginally in February

The residential property price index from CSO covering Irish property markets has posted second monthly contraction in February, falling from 80.3 in January to 80.0 last month. With that, y/y on growth rate in Irish residential property prices has slowed from 15.54% in January to 14.94% in February, the first sub-15% reading since September 2014. In effect, property prices in Ireland have now fallen back to the levels between September and October 2014. Cumulated gains in property prices over the last 24 months are now totalling 24.22% or an annualised gain of 11.46%, outpacing growth in the economy by roughly 5-fold.

Based on Nama valuations formula, residential property prices are now somewhere 18.5% below Nama business model expectations.

Prices of all residential properties excluding Dublin  remained static in February at 74.8, same as in January and up 8.25% y/y, marking a slowdown in the y/y growth from 9.20% recorded in January.


The decline in national prices was driven by Dublin prices, which fell for the second month in a row from 82.2 in January to 81.6 in February. This is the lowest index reading since September 2014 and marks a slowdown in y/y growth rates to 21.43% - the slowest rate of growth since April 2014. Still, cumulated expansion in Dublin residential property prices over the last 24 months is blistering 37.6% (annualised rate of 17.3%).

Within Dublin segment:

• Houses were the driver to the downside in overall property prices, with houses price index for Dublin standing at 86.0 in February 2015, down from 86.9 in January 2015 and back to the levels of September 2014. Y/y rate of growth in Dublin house prices fell from 21.7% in January to 21.1% in February, although over the last 24 months hose prices in Dublin are still up cumulatively 37.6% (+17.3% annualised). 
• Apartments prices in Dublin rose in index terms to 72.2 in February from 70.8 in January, erasing the declines that took place during Q3-Q4 2014. Cumulated gains in Dublin apartments prices over the last 24 months stand at 37.5% (+17.3% annualised) and y/y prices are up 24.5% - the fastest growth rate in 3 months.

Few charts to illustrate the above trends:

 Lastly, summary of price changes on pre-crisis peak and y/y:

Despite all the talk about the new bubble in house prices in Ireland, three themes remain true:

1. Property prices are still far below fundamentals-justified levels. In Dublin, undershooting of long-run (inflation-linked) prices is around 26-27%.
2. Property price increases are worryingly high, especially in the Dublin segment, warranting some ongoing concern; and
3. Moderation in property prices and downward correction over the last two months, driven by Dublin (but likely to translate into similar outside Dublin with a lag), predicted on this blog before, is a welcome change. However, I suspect we will see renewed increases in property prices later this year, albeit at rates more sustainable in the longer run.

24/3/15: There's no number left untouched: Irish GDP, GNP and economy

According to Bloomberg, US companies are stashing some USD2.1 trillion of overseas cash reserves away from the IRS: http://www.bloomberg.com/news/articles/2015-03-04/u-s-companies-are-stashing-2-1-trillion-overseas-to-avoid-taxes?hootPostID=ffda3e167ae0ebabc3da4188e9bd22de

Ireland is named once in the report in a rather obscure case. Despite the fact we have been named on numerous other occasions in much larger cases. But beyond this, let's give a quick wonder.

1) Last year, exports of goods in Ireland leaped EUR89,074 million based on trade accounts with Q1-Q3 accounts showing exports of EUR66,148 million compared to the same period of 2013 at EUR65,381 million - a rise of 1.01% or EUR767 million. Full year rise was EUR2,075 million. So far so good. Now, national accounts also report exports of goods. These show: exports of goods in Q1-Q3 2013 at EUR69,731 million and exports of goods in Q1-Q3 2014 at EUR78,835 million, making y/y increase of EUR9,104 million. Full year 2014 - EUR108.989 billion a rise of EUR15.98 billion y/y. The discrepancy, for only 3 quarters, is EUR8,337 million or a massive 6.1% of GDP over the same period. For the full year it is EUR19.92 billion or 11% of annual GDP. Much of this difference of EUR19.92 billion was down to 'contract manufacturing' - yet another novel way for the MNCs to stash cash for the bash… IMF estimated the share of contract manufacturing to be at around 2/3rds of the annual rise in Q1-Q3 figures. Which suggests that around EUR7.4 billion (once we take account of imports of goods) of Irish GDP rise in 2014 was down to... err... just one tax optimisation scheme. That is EUR7.4 billion of increase out of EUR8.275 billion total economic expansion in the MiracleGrow state of ours.

2) Last month, Services activity index for Ireland posted a massive spike: overall services activity rose 12.59% y/y, the dynamic similar to what happened in Q2-Q3 last year with goods exports (Q1 2014 y/y +8.2%, Q2 2014 y/y +12.9% and Q3 2014 y/y +17.9%). Even more telling is the composition of Services growth by sectors: wholesales & retail trade sector up 8.83% (a third lower than the overall growth rate), transportation and storage - ditto at 8.4%, admin & supportive services +2.91%. Accommodation and food services posted rapid rise of 14.03% and professional, scientific & technical activities rose 13.97%. Meanwhile, tax optimisation-driven information & communication services activity was up 21.15%. What could have happened to generate such an expansion? Anybody's guess. Mine is 3 words: "knowledge development box" - a non-transparent black-box solution for tax optimisation announced as a replacement for the notorious "double-Irish" scheme. So let's suppose that half of the services sectors growth is down to MNCs and will have an effect on our 'exports'. In Q3 2014 these expanded by 13.4% y/y and in Q2 by 10.8% - adding EUR5,560 million to exports. January data on services activity suggests, under the above assumption, roughly the same trend continuing so far, which by year end can lead to a further MNCs-induced distortion of some EUR11 billion to our accounts on foot of Services sectors exports.

Take (1) and (2) together, you have roughly EUR21-22 billion of annual activity in the export areas of services and goods sectors that is likely (in 2015) to be down to MNCs washing profits through Ireland through just two schemes.

Then there are our factor payments abroad - what MNCs ship out of Ireland, in basic terms. As our total exports of goods and services been rising, the MNCs are taking less and less profit out of Ireland. Chart below sums these up. While profitability of MNCs is rising - a worldwide trend - Ireland-based MNCs remittances of profits are falling as percentage of exports. 2008-2012 average for the ratio of net remittances to exports is 18%, which suggests that even absent any uplift in profit margins, some EUR27.5 billion worth of profits should have been repatriated in Q1-Q3 2014 instead of EUR22.16 billion that was repatriated - a difference of EUR5.36 billion over 3 quarters or annualised rate of over EUR7.1 billion. Factoring in seasonality, the annualised rate jumps to closer to EUR8 billion.

On an annualised basis, for full year 2014, exports of goods and services from Ireland rose y EUR23.28 billion year-on-year, while net exports rose EUR3.784 billion. Meanwhile, profits repatriations (net) rose only EUR719 million. Aptly, for each euro of exports in 2013, Ireland's national accounts registered 74.2 cents in net factor payments abroad. In 2014 this figure hit historical low of 69.1 cent.

My guess is, MNCs have washed via Ireland close to EUR30 billion worth of profits or equivalent of 17.1% of 2013 full year GDP and close to 16.5% of 2014 GDP. Guess what was the GDP-GNP gap in 2013? 18.5 percent. And in 2014? 15.4%. Pretty darn close to my estimates.

Let's check this figure against aggregate differences in 2008-2014 GDP and GNP. The cumulated gap between the two measures, in nominal terms, stands at EUR201.3 billion, closer to EUR204 billion once we factor in seasonality in Q4 numbers to the estimate based on Q1-Q3 data. The above estimate of EUR29.97 billion in 'retained' profits implies, over 7 years a cumulated figure of EUR209.8 billion, or a variance of EUR827-1,200 million. Not much of a margin of error. I'll leave it to paid boffins of irish economics to complete estimates beyond Q3 2014, but you get the picture.

And now back to points (1) and (2) above: how much of the Irish growth in manufacturing and services - growth captured by one of the two exports accounts and by the likes of PMI metrics and sectoral activities indices is real and how much of it is an accounting trick? And what about other schemes run by the MNCs? And, finally and crucially, do note that contract manufacturing and knowledge development box types of tax optimisation schemes contribute to both GDP and GNP growth, thus completing the demolition job on Irish National Accounts. There is not a number left in this economy that is worth reading.


Update: we also have this handy graphic from the BusinessInsider (http://uk.businessinsider.com/us-corporate-cash-stashed-overseas-2015-3?r=US) charting the evolution of U.S. MNCs stash of cash offshore:

Ah, those U.S. MNCs err... FDI... mattresses...

23/3/15: Deflation... Dumbflation... It's Real Purchasing Power That Matters

I have written in the recent past about the bogus debate surrounding the 'threat of deflation' in the euro area. You can see my view on this here in the context of Ireland: http://trueeconomics.blogspot.ie/2015/02/27215-deflation-and-retail-sales.html and here in the broader context: http://trueeconomics.blogspot.ie/2015/02/18215-inflation-expectations-and.html.

And now Bloomberg weighs in with the similar: http://www.bloomberg.com/professional/kc-post/ecbs-failure-reach-inflation-target-blessing/

To quote: "The strengthening recovery [in the euro area] should add some inflationary pressure — although readings are likely to remain in negative territory for some months, with lower energy prices still feeding through the production pipeline. This month, the ECB revised down its 2015 inflation forecast to zero. Assuming nominal earnings grow at the same pace seen over the last few quarters, the upward trend in real pay should persist in 2015.

Households are likely to react — even if with some lag — to the purchasing-power bonus. Household consumption, which makes up about 55 percent of GDP, has been somewhat muted lately, only contributing to growth by an average 0.1 percentage point over the last seven quarters. That’s less than half what it used to bring in during the pre-crisis years. The re-emergence of this large growth driver should help to strengthen the 2015 recovery. Negative inflation is a welcome shortcut, meaning the region doesn’t have to wait for a decline in unemployment to see a revival in domestic consumption."

Bingo!

23/3/15: German Exports-led Recovery and Two BRICs

Because exports-led recovery is the only thing, besides hopium, that sustains the euro area (although there are some rumblings on the horizon of awakening consumers and even corporate investment), here are two charts worth considering:

First up, German exports to China:

Source: @FGoria

Self-explanatory. Next: German exports to Russia:

 Source: @FGoria

Self-explanatory.

Why we need QE? Because even though it is too late to drink water once kidneys have failed, it is patently no more feasible to drink schnapps.

23/3/15: EM Currencies on the rise

Today's week-on-week changes in emerging markets currencies vis-a-vis the USD:

Source: @komileva

And for the Ruble, this with zero CBR interventions.

23/3/15: Credit, Domestic Demand and Investment: Euro Area in Three Charts

Three interesting charts outlining the big themes in Euro area economy:

First the 'limping leg' of the euro recovery: credit. Chart below shows decomposition and dynamics in corporate credit, with Q1 2015 reading so far pointing to a very robust demand for credit, and (even more importantly) credit driven by fixed investment. This should provide some support for Domestic Demand, albeit at the expense of re-leveraging the economy via bank channel (as opposed to leverage-neutral equity or non-bank credit, such as direct debt issuance):

Source: @FGoria

The importance of investment uplift is hard to underestimate in the case of the euro area, as the next chart clearly illustrates:

 Source: @FGoria

And this translates into depressed Domestic Demand (C+G+I bit of the national accounts):

Source: @FGoria

The gap between U.S. and the euro area is understandable. But the gap between Japan and the euro area is truly shocking, once one considers the state of the Japanese economy and the sheer magnitude of monetary stimulus that Japan had to deploy to push its Domestic Demand up from 2011.

In simple terms, the above charts show some revival in the euro area fortunes. In more complex terms, one has to wonder what this revival hinges on. In my opinion, we are seeing a bounce in credit creation that is not sustainable given the state of the global economy (with global trade flows remaining weak) and the conditions of households across the euro area (with domestic consumption and household investment still weak). 

22/3/15: Ukraine: disastrous growth figures

Ten quarters of shrinking GDP, out of 11 last. Ukraine:

Source: FT

When's the next 'rethink' by the IMF of the debt projections?..

21/3/15: Two Pesky Facts and Russian 'Liberal Democracy' Dream

Here's a problem, folks. Let's take two facts:

1. Vladimir Putin's approval ratings are currently in the upper 80s: http://www.bloombergview.com/articles/2015-03-16/a-year-after-crimea-putin-stands-strong  
2. Russia ranks as the third country in the world in terms of access to internet: http://www.pewglobal.org/2015/03/19/1-communications-technology-in-emerging-and-developing-nations/

Which gets you thinking.

If Russian public opinion is down to Kremlin propaganda and media control, then how come Russians, enjoying wide access to internet, are not rushing to their web browsers for the alternatives presented  in the Western free press (including in Russian), the independent Russian press (which does exist) and in the new media (which is very rich, diverse and widely available in Russian)?

In the USSR days, when there was no internet and there was no access to foreign publications, media etc and when the Soviet authorities actively suppressed access to foreign broadcasts, while closed borders were enforced for the few who dared to smuggle in foreign press, many Russians tuned to these voices. I grew up regularly listening to the BBC Russian Service and Voice of America and Radio Liberty. Many of my friends and their families did as well. Apparently, today, the survivors of the same channels - available freely - have very little impact on Russian public opinion. Why?

Russian culture is culture of extreme scepticism over authority. Scepticism that borders on cynicism. And Russian culture is a culture of kitchen politics (in modern world perfectly facilitated by social networks and alternative media). Russians have access to these sources at a rate of access that is extremely high and open. And yet their views remain non-liberal in the Western context of this term.

Is today's state of traditional media control reinforcing what is already a prevalent Russian public view: the set of beliefs that are largely consistent with those espoused by the Kremlin? Is it possible that Kremlin is not necessarily actively altering the public opinion, but rather tailoring its own positions to that opinion, while reinforcing existent biases? Can it be that such tailoring of policies is more democratic than the liberal alternative that has no popular support in Russia?

In this, who wags what? The proverbial dog of Moscow, the proverbial tail of the nation or the bone of free media access dangled on the web?

The uncomfortable nature of this problem is that in the West, we are told to believe in the potency of the Russian liberal opposition (which has access to internet and uses it extensively to promote ideas, sketches of policies and even more actively - acts of protest and own image) and that this liberal opposition is democratically anchored. We are told that, were the opposition leaders given a chance, they would win democratic mandate from the people to change and reform Russia. We are told that once Putin is gone, Russia will embrace change led by the liberal opposition. And yet, where is the evidence to support any of this?

I sympathise with the principles and values espoused by some of the opposition leaders (not all, since there is a huge range of views these leaders hold). But, any serious observer of Russian politics and economics will quickly discover that the liberal opposition is incapable of providing a properly designed reforms agenda. I cannot find credibly structured and costed alternative budgets, legislative proposals, regulatory white papers etc - all that we, in the West, tend to associate with functional opposition. The opposition cannot even provide its potential base with a coherent core message, beyond the incessant talk about the need for more democracy, the need for drastic (but unspecified) anti-corruption reforms, and the need for more liberalisation of everything.

While the Russian Government can also be very sketchy on policies impact assessments ex-ante their adoption, at least it provides some data that can be used to measure their effectiveness in the medium term. Russian liberal opposition? Not much, if any.

Western democratic opposition parties publish own policies, own alternative budgets, factually comment on Government policies and produce alternative ideas that are tested in the public domain. Russian liberal opposition is predominantly pre-occupied with promoting itself to its own support base. When personality clashes abate for short periods of time, what is left in the public view is the talk about big ticket changes (opening up to foreign investors, achieving peace and partnership with the West, combatting corruption etc - all good ideas), but no tangible, specific, cost-benefit weighted proposals. The opposition can freely use internet to promote such analysis and proposals. It does not. Instead, it uses the web for sloganeering. An average Russian interested in, say, the expected impact of liberalisation of the domestic monopolies (or near-monopolies) on, say, unemployment is left with vacuum of data, estimates and insight. One cannot expect any, even remotely rational person, to vote for the opposition leaders promoting such a policy, unless that person is fully insulated from any potential fallout from it. Hence, the core support base for the liberals in Russia is... yes, the urban upper middle class

In other words, we, in the West, are being told to trust the dream that has very little basis in reality and feasibility, and despite alleged claims of democratic nature has very little support within the electorate. It all reminds us of the policy that promoted regime change in Iraq as the means for creating a functional democracy there, to be led by the liberal Iraqi opposition. It didn't happen thus, not because we didn't try, but because we couldn't find liberal opposition capable of governing. We based our expectations of Baghdad on a naive dream and we missed the real Baghdad by a mile. Ditto for Cairo, ditto for Tripoli, ditto for Kabul... keep counting.

Yes, Russia is not Iraq - neither philosophically, nor ethically, nor socially, nor economically, nor politically, nor historically, nor culturally, nor geopolitically. In all of these terms it is more complex, statehood and institutionally more developed and stronger. Which means the pretty dreams of the post-regime change nirvana are even more out of touch in the case of Russia than they were in Iraq.

In the Soviet days, people of Russia could have been excused for not actively pursuing the alternative because they didn't know better - they had no access to alternative media, internet and to Western 'voices'. Yet, they desired such access and sought it whenever it was available. Today, Russians support the values represented by Putin, even though they are not actively denied access to alternatives. It is uncomfortable for the Western ideologues of regime change, but it is thus.

Here are some of the opinion polls on public approval ratings for various Russian parties and politicians:

Political parties first:

Yes, the hope of liberal opposition is clearly alive... in the minds of the West, but not in the minds of the Russian voters. About the only two - very remote - democratic choice alternatives per Russian voters are: Communists and LDPR (nationalists). The entire liberal alternative is about powerful enough (if they concentrated all their votes on Moscow alone) to win a couple of seats in the city government.

Politicians next:

And once again, there is no sight of liberal alternatives anywhere in the positive trust territory. And, incidentally, none were present even before the Crimea and during the 'softer' power periods of the Kremlin rule. The entire political spectrum besides Vladimir Putin, even if it were to include Putin's closest allies, does not reach 34% of the voters in terms of trust.

Which brings us back to the first two facts: Russian voters have access to alternatives (even if imperfect, but certainly much wider than their access to the same during the Soviet era); no they do not support any of these alternatives. Firstly, as Hertzen once said: "Who is to blame?" and lastly. as Lenin put it: "What is to be done?"

Just some food for thought...


Update: Here is a 2012 article from WaPo on the weak performance by Russian liberal opposition in the Presidential polls: http://www.washingtonpost.com/world/europe/russian-opposition-weak-at-polls/2012/10/14/60f7f9a8-1638-11e2-9855-71f2b202721b_story.html

21/3/15: Irish patents filings Q4 2014

Latest data on Irish patents, courtesy of NewMorningIP.com: chart below shows a decline in total patents filings in Q4 2014 compared to Q3 2014 with Q4 2014 patents counts at 699 down from Q3 2014 count of 786. Of these, Irish invention patents were down to 321 in Q4 2014 from 331 in Q3 2014, but up on 236 a year ago. In Q4 2014, Irish inventors accounted for 45.9% of total Irish patents filed, with Irish enterprises and individuals filing only 247 patents - the lowest for any quarter since Q1 2014, but ahead of the disastrously poor performance in Q4 2013 (188 Irish enterprises & individuals patents). Irish academia produced 74 patents in Q4 2014, the highest reading since Q3 2013, but still accounting for only 10.6% of total patents filed in Ireland.

Chart to illustrate:

21/315: Russia Forex Reserves: Down Another Week

Based on weekly data for the week of March 13, 2015, Russian Central Bank forex reserves fell to USD351.7 billion, down USD5 billion on previous week. The reserves are now down 28.7% (USD141.5 billion) y/y. Compared to the same week a month ago, the reserves are down 4.5% (USD16.6 billion).

The rate of weekly changes in reserves (USD5 billion) is slower than in the week of March 6th (USD6.3 billion) but well ahead the 3mo average weekly decline (USD4.61 billion) and 6mo average (USD3.57 billion).

Two charts to provide some historical comparatives in terms of period averages relative to both levels and rates of change.

It is worth noting that there have been virtually no Forex interventions (Ruble rate defence: http://www.cbr.ru/Eng/hd_base/Default.aspx?Prtid=valint_day and http://trueeconomics.blogspot.ie/2015/03/20315-central-bank-interventions-in.html) from CBR in February and March and there have been ongoing de-dollarisation of the household funds in February (http://trueeconomics.blogspot.ie/2015/03/18315-russian-deposits-dollarisation.html) that is likely continued in March (reducing forex deposits and cash holdings), which implies that declines in reserves are down to the following drivers:

1. changes in euro and other currencies, as well as gold and non-dollar denominated assets, valuations for assets held by the CBR - in other words the potential adverse effects of dollar exchange rates against other currencies, and changes in asset values due to changes in US bonds markets;
2. demand for Forex from corporates and banks (all of which would be in the form of loans from the CBR to these entities) all of which is associated with deleveraging the external debt; and
3. potential fiscal demand for forex.

20/3/15: Central Bank Interventions in Ruble Markets down to Zero in February

Don't hear much of "Panic at the Central Bank of Russia" reports as of late in the Western media - the ones that whipped into frenzy Russia 'analysts' back in November-December? Why, no surprise:

Per latest data, CBR interventions in forex markets defending the Ruble have shrunk in February 2015 to zero for USD and zero for EUR. Yep, zero.

Oh, and the table above shows, the panic of November-December 2014 Ruble crisis - real as it was - was not as bad as CBR supporting Ruble prior to the free float and during the peak of Crimean crisis.

So was the decision to let Ruble float wise? You decide. On the trend, it saved CBR some USD8.5 billion and EUR1.2 billion, even counting in December 2014 crisis.

20/3/15: Russia: Agri-food Sector and Falling Real Household Incomes

As BOFIT reported last week, 2014 marked the first year since 1999 crisis when Russian households experienced a decline in real household income. In 12 months through December 2014, real (inflation-adjusted) incomes declined by around 1% y/y, with the rate of decline accelerating to 5% y/y in November-December 2014, at the peak of the Ruble crisis. Even at the depths of 2008-2009 crisis, Russian real household incomes stayed in positive growth territory, as chart below illustrates:

One area of severe squeeze on actual (nominal) incomes has been in the public sector. As BOFIT noted: "As recently as 2013, public sector wages were rising nearly 20% a year. By the end of 2014, however, on-year nominal wage growth had fallen to zero, while inflation was running at 11.4%. Hence, real wages in the public sector fell substantially." Private sector wages shrunk by around 2% in dealt terms, y/y. Pensions rose by about 10% y/y in 2014, still below inflation increases.

As BOFIT reported: "The average 2014 wage (excluding grey-sector wages) was about €650 a month. In January this year, due to a massive drop in the value of the ruble, the average monthly wage was only about €450. The average pension last year was €220 a month, but in January, that amount had fallen to just €150."

Going forward, both public and private sectors are facing tough times in terms of wages growth. Meanwhile, composition of inflation - especially rapid inflation in food and other staples prices - is more significantly impacting retirees. As the result of inflation in food sector, Rosstat has revised its formula for the cost of consumer goods and services basket, increasing the relative weight of food by almost 1 percentage point to 37.3% of the total household spending. This means that going forward, higher inflation in food sector will have greater impact on CPI. And we can probably expect that higher inflation. 2014 was near-record crop year that is unlikely to repeat. Meanwhile, Russian agriculture is suffering from dire need of modernisation capes that is nowhere to be seen. There is some room for imports substitution via increased domestic production and via alternative supplies from outside the EU, US and other economies that imposed sanctions and suffered Russian counter-sanctions, but that substitution is severely limited by:

1. Bottlenecks in supply expansion in Russia; and
2. Lower exports revenues due to high oil prices.

Neither has much to do with sanctions: in the current oil price environment, lending to Russian corporates, even if it were available outside sanctions, would have been very subdued and expensive.

To lift production in the sector, the Government needs to simultaneously:

1. Increase capital investment supports to the producers;
2. Open and incentivise markets for agri-food production and supply sectors in Russia to foreign investment (lifting sanctions on imports of food will do absolutely nothing to food prices, as imports pricing will be linked to forex rates and cost of capital);
3. Set up long-term targeted incentives for Russian producers to increase output quality and volumes (preferably via tax system and streamlined land ownership, as well as improved access to markets). Less arbitrary enforcement of regulations would also help; and
4. In distribution and retailing, local authorities in a number of larger urban centres have tightened and consolidated control over retail markets, resulting in higher margins for retailers, lower margins for producers and cutting off producers' access to direct sales to consumers, especially for smaller producers. This should be reversed.