9/4/15: Expresso on IMF's WEO Update: Secular Stagnation is Here

Portugal's Expresso on IMF's 'secular stagnation' evidence via April 2015 WEO Update (Chapter 3): http://expresso.sapo.pt/a-receita-do-fmi-mais-infraestruturas-mais-inovacao-mais-produtividade=f918917. With my comments...

My view in full:

IMF findings on potential and long-term growth trends in the advanced economies published as a part of the April 2015 WEO update confirm what we have already known for some time: the ongoing economic growth slowdown is not only structural in natural, but is permanent, in economic terms.

More importantly, however, the IMF study shows that the structural slowdown in growth has started prior to the onset of the Global Financial Crisis and has been concentrated, in terms of drivers, in demographics of ageing, leading to decline in investment, and a fall off in the growth of the total factor productivity as advanced economies continued to exhaust growth along the technological frontier.

In simple terms, this confirms the thesis of the secular stagnation, especially as formulated by Robert J. Gordon (see http://trueeconomics.blogspot.ie/2012/08/2882012-challenging-constant-growth.html).

From my point of view, the study documents one key trend: the trend of increasingly lower contribution of the human capital to growth over the period of 2001-2007 in the presence of slower, but still, relatively sustained growth contribution from employment.

This shows that during the pre-crisis boom, much of economic growth was derived not from intensive margin (technological progress and linking of technology to greater labour productivity) but from extensive margin (increased supply of physical capital and asset bubbles).

In the future, this imbalance in growth will require significant policy corrections in order to restore human capital growth to 2001-2003 levels. Absent these highly disruptive policy reforms (covering taxation systems, provision and distribution of key public services, restructuring of enterprise management systems etc), the world will find itself at the tail end of technological growth frontier, with low rates of return to technology and innovation and, as the result, permanently lower growth in the advanced economies.

9/4/15: IMHO Proposals Concerning Home Repossessions

IMHO proposals to the Department of Finance on the Risk of Significant Home Repossessions is now available here: https://www.evernote.com/shard/s442/sh/e8e02a47-30c0-49c5-9846-d09f1ab9c18f/20f2d8894a0ab47c9fde09b245120436. 

9/4/15: Expresso on Putin-Tsipras Meeting

Portuguese Expresso coverage of yesterday's meeting between President Putin and Prime Minister Tsipras, with a comment of my own http://expresso.sapo.pt/grecia-inicia-primavera-com-a-russia=f918953.

8/4/15: Three Strikes of the New Financial Regulation: Part 3 – The Capital Markets Union

My new blogpost for @LearnSignal blog covering the Capital Markets Union regulations is now available on line: http://blog.learnsignal.com/?p=172

8/4/15: Ruble's Gains Are Convincing, But Risks Remain

Three charts:

Russian car sales

Source: @moved_average 

Down 42.5% y/y in March (estimated 43% decline).

Ruble v Dollar is going up and up:

Source: @Schuldensuehner 

Ruble v Euro is also up and up...

Source: @Schuldensuehner 


Linking all three? The myth of Ruble liquidity squeeze (e.g. here and here). Reality: sharp drop in imports, slight improvement in oil prices (and more importantly stabilisation of the trend to the upside) and improving conditions in the domestic banking sector are all driving ruble value up.

Another strong contributing factor is timing of external debt redemptions:

Source: https://www.tradingfloor.com/posts/pop-goes-the-rouble-4296859

These are now past their 2015 peaks.

All positive, but uncertainty remains and is still extremely high, so I would not be surprised if ruble starts posting some losses in and around the end of Q2.

8/4/15: Irish Quarterly PMIs: Services, Manufacturing & Construction

Given we now have data for PMIs for Ireland (via Markit and Investec) through March (see analysis of Manufacturing PMI here and Services PMI here), let's update quarterly PMI averages and compute my own 'composite' indicator based on 3 core sectors: Manufacturing, Construction and Services. Note: Construction sector PMIs are computed on the basis of january-February data as there are lags of 2 weeks in reporting these by Markit.

Manufacturing PMI for Q1 2015 stood at 56.5, down from 56.6 in Q4 2014. Thus, Q/Q the PMI is down 0.18%. In Q4 2014 Manufacturing PMI was up 0.77% Q/Q. So we have a slowdown in growth, but growth nonetheless.  The same holds for yearly comparatives. Q1 2015 was up 5.1% y/y, after posting 5.5% growth in Q4 2014 and 8.2% growth in Q3 2014. The series are trending above 50.0 for the 7th quarter in a row.

Services PMI fell from 61.9 in Q4 2014 to 61.6 in Q1 2015, down 0.5% Q/Q, having posted a decline of 0.3% q/q in Q4 2014. Yearly growth rates also slowed down: in Q3 2014 y/y growth in Services PMI was 5.8%, this fell to 3.7% in Q4 2014 and to 2.8% in Q1 2015. Still, we now have 17 consecutive quarters of growth in Services as recorded by PMIs in excess of 50.0.

Construction PMI (based on 2 months of data for 2015) is currently standing at 54.6, down from 63.8 in Q4 2014. This is a marked reversal in the q/q growth rates from 3.2% in Q4 2014 to -14.5% in Q1 2015, though we need to see March data to make any conclusions on this. Yearly growth rates are falling off the cliff too: in Q3 2014 Construction PMI rose 21.3% y/y, which declined to 8.5% growth in Q4 2014 and to estimated -5.3% contraction in Q1 2015. Again, as with Manufacturing, we do have continued 7 quarters of above 50 readings in the series, so the slowdown is in the rate of growth, not an outright contraction in activity.

As the chart above shows, Composite Index (computed by myself based on sectoral weights in the National Accounts) has posted a relatively sharp decline, driven primarily by the Construction PMI reading. As of today (absent March data for Construction PMI) the composite indicator is reading at 59.0, down from 60.7 in Q4 2014. This is the lowest reading in four quarters, so y/y the index is still up 1.4%, although the rate of growth in the index has fallen from 4.2% recorded in a year through Q4 2014 and 6.7% growth posted in Q3 2014. Nonetheless, the index continues to trend above 50 for the 17th quarter in a row.

7/4/15: IMF: Ninth Time is Gonna be Lucky in Ukraine

It is perhaps revealing that the IMF is being forced to defend its Ukraine package 2.0 only a month after it was unveiled. And even do so without providing any explicit risk assessments. Here is the latest on the Fund efforts on this front. Lipton's full speech is here: http://www.imf.org/external/np/speeches/2015/040715.htm

Of note two things:

1. This is an 9th lending programme by the Fund to Ukraine, with 8 previous ones being... err... not exactly successful.
2. The current programme is based on (see details here: http://www.imf.org/external/pubs/ft/scr/2015/cr1569.pdf) assumed 2015 real GDP contraction of 5.5%, growth of 2% in 2016, 3.5% in 2017 and 4% every year thereafter through 2020.  And below is the table of forecasts from the Central Bank of Ukraine (NBU) showing 2015 forecast for -7.5% growth and 2016 forecast for 3% growth. It also shows that NBU estimates y/y growth in Q4 2014 to have been -14.8% and Q1 2015 growth to be -15%. And that -7.5% growth in 2015 will require positive growth in Q4 2015 and a relatively modest contraction in Q3 2015.

All of which suggests that the Fund leading 'assumption' on growth might be a touch optimistic. And that makes its leading 'target' for debt/GDP ratio of 94% at year end 2015 to be a touch unrealistic. Just as the Funds' all previous leading assumptions and targets that the IMF set in all previous lending arrangements with Ukraine.

But, as the Good Director might say, this time it is different...

7/4/15: IMF WEO on Global Investment Slump: Part 2: It's Demand, Not Supply ..

IMF released Chapter 4 of the April 2015 World Economic Outlook update. The chapter covers the issue of lagging growth in private investment (http://www.imf.org/external/pubs/ft/weo/2015/01/pdf/c4.pdf).

IMF findings focus on 5 questions:

1. "Is there a global slump in private investment?"
2. "Is the sharp slump in advanced economy private investment due just to weakness in housing, or is it broader?"
3. "How much of the slump in business investment reflects weakness in economic activity?"
4. "Which businesses have cut back more on investment? What does this imply about which channels—beyond output—have been relevant in explaining weak investment?"
5. "Is there a disconnect between financial markets and firms’ investment decisions?"

I covered chapter’s main findings for questions 1-2 in the earlier post here: http://trueeconomics.blogspot.ie/2015/04/7415-imf-weo-on-global-investment-slump.html

Now, onto the remaining questions and the core conclusions:

Q3: "The overall weakness in economic activity since the crisis appears to be the primary restraint on business investment in the advanced economies. In surveys, businesses often cite low demand as the dominant factor. Historical precedent indicates that business investment has deviated little, if at all, from what could be expected given the weakness in economic activity in recent years. …Although the proximate cause of lower firm investment appears to be weak economic activity, this itself is due to many factors. And it is worth acknowledging that, as explained in Chapter 3 [of the WEO], a large share of the output loss compared with pre-crisis trends can now be seen as permanent."

Here's a handy chart showing as much:

Figure 4.6. Real Business Investment and Output Relative to Forecasts: Historical Recessions versus Global Financial Crisis (Percent deviation from forecasts in the year of recession, unless noted otherwise; years on x-axis, unless noted otherwise)

Q4: "Beyond weak economic activity, there is some evidence that financial constraints and policy uncertainty play an independent role in retarding investment in some economies, including euro area economies with high borrowing spreads during the 2010–11 sovereign debt crisis. …In particular, firms in sectors that rely more on external funds, such as pharmaceuticals, have seen a larger fall in investment than other firms since the crisis. This finding is consistent with the view that a weak financial system and weak firm balance sheets have constrained investment. Regarding the effect of uncertainty, firms whose stock prices typically respond more to measures of aggregate uncertainty have cut back more on investment in recent years, even after the role of weak sales is accounted for."

Here is an interesting set of charts documenting that financial and policy factors played more significant role in depressing investment in the euro area 'peripheral' states:

Figure 4.10. Selected Euro Area Economies: Accelerator Model—Role of Financial Constraints and Policy Uncertainty (Log index).

Note: in Ireland's case, financial constraints (quality of firms' balance sheets) is the only explanatory factor beyond demand side of the economy for investment collapse in 2013-present, as uncertainty (blue line) strongly diverged from the actual investment dynamics.


Q5: "Finally, regarding the apparent disconnect between buoyant stock market performance and relatively restrained investment growth in some economies, the chapter finds that this too is not unusual. In line with much existing research, it finds that the relationship between market valuations and business investment is positive but weak. Nevertheless, there is some evidence that stock market performance is a leading indicator of future investment, implying that if stock markets remain buoyant, business investment could pick up."

Conclusions

• So IMF finds no need for any systemic the supply-side adjustments on capital/credit side.
• It finds no imbalances in the capital markets and finds that demand is the main driver for collapse in investment. 

Where is the need for more 'integration' of the capital markets that the EU is pushing forward as the main tool for addressing low investment levels? Where is the need for more bank credit to support investment? Ah, right, nowhere to be seen…

Meanwhile, the IMF does note the role of debt overhang (legacy debts) in corporate sector as one of the drivers for the current investment slump. "Although this chapter does not further investigate the separate roles of weak firm balance sheets and impaired credit supply, a growing number of studies do so and suggest that both channels have been relevant." In particular, "For example, Kalemli-Ozcan, Laeven, and Moreno (forthcoming) investigate the separate roles of weak corporate balance sheets, corporate debt overhang, and weak bank balance sheets in hindering investment in Europe in recent years using a firm-level data set on small and medium-sized enterprises in which each firm is matched to its bank. They find that all three of these factors have inhibited investment in small firms but that corporate debt overhang (defined by the long-term debt-to-earnings ratio) has been the most
important."

Thus, once again, how likely is it that low cost and abundant credit supply unleashed onto SMEs - as our policymakers in Ireland and the EU are dreaming day after day - will be able to repair investment collapse? Err… not likely.

7/4/15: IMF WEO on Global Investment Slump: Part 1: It's Private Sector Issue..

IMF released Chapter 4 of the April 2015 World Economic Outlook update. The chapter covers the issue of lagging growth in private investment.

Titled "PRIVATE INVESTMENT: WHAT’S THE HOLDUP?", IMF paper starts with a simple, yet revealing summary:
"Private fixed investment in advanced economies contracted sharply during the global financial crisis, and there has been little recovery since. Investment has generally slowed more gradually in the rest of the world. Although housing investment fell especially sharply during the crisis, business investment accounts for the bulk of the slump, and the overriding factor holding it back has been the overall weakness of economic activity. In some countries, other contributing factors include financial constraints and policy uncertainty. These findings suggest that addressing the general weakness in economic activity is crucial for restoring growth in private investment."

So the key message is simple: investment contraction is not driven primarily by the failures of the financial system, but rather by the weak growth - a structural, systemic slowdown in growth. Full text available here: http://www.imf.org/external/pubs/ft/weo/2015/01/pdf/c4.pdf

Let's take a closer look at IMF findings that focus on 5 questions:

1. "Is there a global slump in private investment?"
2. "Is the sharp slump in advanced economy private investment due just to weakness in housing, or is it broader?"
3. "How much of the slump in business investment reflects weakness in economic activity?"
4. "Which businesses have cut back more on investment? What does this imply about which channels—beyond output—have been relevant in explaining weak investment?"
5. "Is there a disconnect between financial markets and firms’ investment decisions?"

The chapter’s main findings are as follows (in this post, I will cover questions 1-2 with remaining questions addressed in the follow up post):


Q1: "The sharp contraction in private investment during the crisis, and the subsequent weak recovery, have primarily been a phenomenon of the advanced economies." Across advanced economies, "private investment has declined by an average of 25 percent since the crisis compared with pre-crisis forecasts, and there has been little recovery. In contrast, private investment in emerging market and developing economies has gradually slowed in recent years, following a boom in the early to mid-2000s."

Figure 4.1. Real Private Investment (Log index, 1990 = 0)

Q2: "The investment slump in the advanced economies has been broad based. Though the contraction has been sharpest in the private residential (housing) sector, nonresidential (business) investment—which is a much larger share of total investment—accounts for the bulk (more than two-thirds) of the slump. There is little sign of recovery toward pre-crisis investment trends in either sector."

Figure 4.2. Real Private Investment, 2008–14 (Average percent deviation from pre-crisis forecasts)

Spot Ireland in this…

And per broad spread of contraction, see next:

Figure 4.3. Categories of Real Fixed Investment (Log index, 1990 = 0)

But here's an interesting chart breaking down investment contraction by public v private investment sources:

Figure 4.4. Decomposition of the Investment Slump, 2008–14 (Average percent deviation from spring 2007 forecasts)

This, sort of, flies in the face of those arguing that Government investment should be the driver for growth, as it shows that public investment contraction had at most a mild negative impact on some euro area states (Ireland is included in the above under "Selected euro area").


Next post will cover Questions 3-5 and provide top-level conclusions.

7/4/15: BRIC PMIs via Markit

, it is commonly said, is the highest form of ... 

And so Markit now releases a 'summary' of BRIC PMIs... not quite in a full release, but...

Useful... and you can read more in-depth analysis of BRIC Services PMIs here: http://trueeconomics.blogspot.ie/2015/04/6415-bric-services-pmis-overall.html and on Manufacturing PMIs here: http://trueeconomics.blogspot.ie/2015/04/2415-bric-manufacturing-pmi-march-marks.html

Ah, the perils of doing analysis in the age when the big boys follow... As always, thanks to Markit for publishing at least few remaining headline numbers of PMIs.

7/4/15: Irish Services PMI: March 2015

Irish Services PMI was published by Markit/Investec today.

March Services PMI stood at 60.9, down from 61.4 in February, marking the third consecutive month of m/m declines from the local high of 62.6 in December 2014. Current reading is the lowest in 12 consecutive months.

Still at 60.9, the index is signaling robust growth in the sector. More importantly, 3mo average is at 61.6 for Q1 2015, which is marginally weaker than 61.9 average for Q4 2014 and well above Q1 2013 reading of 54.2 and Q1 2014 reading of 59.9.

March marks the first time since January when both Manufacturing and Services PMIs declined. Last time this happened before January 2015 was in May 2014, so twin decline is a rather rare event. This said, both indices remained well above their post-crisis averages in March, although over the last 12 months, Manufacturing averaged 56.2 (which means March reading out-performed the average at 56.8) against Services 12 mo average of 61.9 (which means that March reading under-performed the average at 60.9).

Broadly-speaking, we are seeing reduction in the rate of growth in both Manufacturing and Services, albeit from very high levels.

More detailed quarterly analysis to follow, so stay tuned.

7/4/15: Another Quango for Ireland to Undo Ineffectiveness of a Host of Quangos

Only in Ireland... the Government that has:

• One office of the Financial Services Ombudsman,
• One office of the Financial Regulator,
• One office of Consumer Protection in the Central Bank,
• One office of the Consumer Protection Agency,
• One Insolvency Services

the same Government that has promised, upon election, to cut the number of quangos in Ireland is now seeking to establish a new quango to deal with the failure of all of the above quangos with the issue of banks veto in personal insolvency deals.

And it gets more absurd - the only reason the entire problem arises is... the Government decision to grant the banks full and asymmetric veto power in the insolvency deals.

You cannot make this up. Really...

Details: http://www.independent.ie/irish-news/politics/new-watchdog-to-put-pressure-on-banks-that-veto-debt-deals-31122855.html

And a reminder of the days gone (source: @rkavanagh09)

Oh, yeah, baby, Bold Reformists!