4/6/15: Trend-spotting Out in 3 Key Charts

If you want to understand the German (and the Euro area) economy key trend, here are three charts:

Source for all: http://www.pewsocialtrends.org/2015/05/21/family-support-in-graying-societies/#

Combined, these imply one thing and one thing only: Domestic Demand (Investment + Consumption + Government Spending) can be sustained [in theory] over the next decades by just one thing: "Government Spending". In practice, the bad news is: such spending is neither hugely productive, nor feasible in current levels of indebtedness worldwide. Worse [from economic perspective] news: much of this spending will be swallowed by health & end-of-life services that will not be increasing the productive capacity of our societies.

In the mean time, logic of the above two charts implies:

1. Increased build up of external imbalances (current account surpluses in more extremely ageing countries);
2. Increased savings not suitable (due to risk profiles) for private investment (hence higher retail & long-term demand for highly rated bonds and equity, as opposed to higher growth bonds and equity); 
3. Reduced domestic consumption;
4. Heating up tax competition on the side of capturing revenues (as opposed to incentivising higher growth);
5. Growing reliance on 'hidden' taxes (e.g. currency devaluations and indirect taxation) to amplify (1) and (4);
6. Current 'peak productivity' generation (chart 3 above) is screwed on the double, and productivity growth curve going forward is downward-sloping, most likely even if we control for technological innovation.

All six points currently are at play. Draw your own conclusions.

4/6/15: Irish Growth Fudge: Village, May

My most recent article for the Village Magazine [May 2015] is now available on-line: http://www.villagemagazine.ie/index.php/2015/05/1-not-5-growth-in-2014/

Covering the problems with Irish growth accounting.

4/6/15: Irish Fiscal Spring: Village, April-May

My recent article for the Village Magazine [April-May edition] on Irish economy is now available on-line: http://www.villagemagazine.ie/index.php/2015/05/spring-unsprung/ 

3/6/15: BRIC Services & Composite PMIs: May 2015

Time to tally up BRICs PMIs for May.

Manufacturing numbers were covered here: http://trueeconomics.blogspot.ie/2015/06/2615-bric-manufacturing-pmi-continued.html

On services side:

• Brazil Services PMI tanked spectacularly, falling from already strongly contractionary 44.6 in April to a 74-months low of 42.5 in May. 3mo average through May is now at an abysmal 45.0 against 3mo average through February at 49.9 and 3mo average through May 2014 of 50.7. All in, this is the third consecutive month of sub-50 readings and adjusting for statistical significance, Services PMI index rose above 50.0 only three times over the last 16 months. 
• Russia Services PMI, meanwhile, surprised to the upside, rising from 50.7 in April (signalling weak growth) to 52.8 in May, signalling pretty robust recovery. 3mo average through May, however, is poor at 49.9, albeit an improvement against 3mo average through February at 43.7 and 3mo average through May 2014 of 46.9. All in, this is the second consecutive month of above-50 readings and first month of readings statically significantly above 50.0. May reading is the strongest since December 2013.
• China Services PMI continued to signal expansion in the sector at an accelerating rate, as the index increased from 52.9 in April to 53.5 in May. 3mo average through May is now at a relatively strong 52.9 against 3mo average through February at 52.4 and 3mo average through May 2014 of 51.3.
• India Services PMI tanked in May, falling from 52.4 in April to a 13-months low of 49.6 in May. 3mo average through May is now at 51.7 against 3mo average through February at 52.5 and 3mo average through May 2014 of 48.8. This development suggests substantial weakening in growth conditions in India which was the bright spot for growth within the BRICs group.

As the charts below shows, on a composite side, Russia has now reversed - for the second month running - previous trend and is now acting as a positive growth contributor to BRICs aggregates. The rest of BRICs, however, are acting as a drag on growth, especially when it comes to Brazil.

Table below summarises recent changes in the PMIs for both components across all BRICs:

3/6/15: Russian Services & Composite PMIs: May

Having covered Russian Manufacturing PMI earlier (here), now lets update data for Services PMI and Composite PMI.

In contrast to disappointing Manufacturing PMI, Services PMI for Russia came in at a surprising strong upside, rising to 52.8 in May 2015 from 50.7 in April. This marks the highest reading since December 2013 and the second consecutive month of above 50.0 readings in the series. 3mo average through May 2015 is now at 49.9 as opposed to 3mo average through February 2015 at 43.7 and 3mo average through May 2014 at 46.9.

Composite PMI, pushed up by Services sector reading posted another surprising rise to 51.6 in May, signalling rather solid growth momentum, compared to 50.8 in April 2015. 3mo average for the series is at 49.7 against 3mo average through February 2015 at 45.8 and 3mo average through May 2014 at 47.5.

As chart above illustrates, we now have strong growth in Services sectors driving up overall Composite indicator. This is quite surprising, given April real dynamics (see here).

Overall, PMIs indicate a volatile, trend-less movement toward overall economic stabilisation that require two things to confirm a positive trend: 1) improvement in Manufacturing reading over the next 2-3 months and 2) continued above-50 readings in Services over another 2-3 months. In simple terms, it is too early to call a positive trend in the economy, but Services dynamics are encouraging.

3/6/15: Irish Manufacturing PMI: May 2015

Irish Manufacturing PMI for May came in at a stronger 57.1 reading up on 55.8 in April. The indicator currently stands above 12 mo average (56.3) and 3mo average (56.6). 3mo average through May is marginally up on 3mo average through February 2015 (56.5).

Looking at shorter run shows that current levels of activity are consistent with flattening out of the trend at high levels at the trend level of 56.5-57.0:

Overall, good solid reading for Manufacturing, subject to all usual caveats relating to questionable MNCs activities and data bias in favour of MNCs.

2/6/15: Greece: Back to the [Groundhog Day] Future

Couple of weeks back I posted a detailed list of ECB ELA hikes since February 2015. So here's an updated table:

- Feb 5, 2015 = EUR59.5 bn
- Feb 12, 2015 = EUR65.0bn
- Feb 18, 2015 = EUR68.3 bn
- Mar 5, 2015 = EUR68.8bn
- Mar 12, 2015 = EUR69.4bn
- Mar 18, 2015 = EUR69.8bn
- Mar 25, 2015 = EUR71.0bn
- Apr 1, 2015 = EUR71.7bn
- Apr 9, 2015 = EUR73.2bn
- Apr 14, 2015 = EUR74bn
- Apr 22, 2015 = EUR75.5bn
- Apr 29, 2015 = EUR76.9bn
- May 6, 2015 = EUR78.9bn
- May 12, 2015 = EUR80.0bn
- May 21, 2015 = EUR80.2bn
- May 27, 2015 = EUR80.2bn
- Jun 2, 2015 = EUR80.7bn

Now, that implies 3 weeks cumulative ELA rises of EUR700mln and reserve cushion on ELA below EUR2.5bn by my estimate. And for all that, Greek Central Bank recoverable assets are currently at EUR41 billion. Ugh… Oh… the proverbial nose is tightening… but on who's neck?

The neck is somewhere in here - within the Greek Target 2 liabilities debate, liabilities that continue to rise, prompting a fine, but esoteric debate:

• Sinn on his perpetual obsession, Target 2 liabilities an default: http://www.project-syndicate.org/commentary/varoufakis-ecb-grexit-threat-by-hans-werner-sinn-2015-05
• Bershidky (really - Karl Whelan) on Sinns perpetual misunderstanding of Target 2: http://www.bloombergview.com/articles/2015-06-02/does-greece-have-a-diabolical-plan-b-

I side with Karl Whelan on this. What is material is Sinn's assertion that the Greek residents' "stock of money sent abroad and held in cash having already ballooned to 79% of GDP". And Greece is facing big bills on debt redemptions and wages and pensions in the next 3 months (see timeline here: http://trueeconomics.blogspot.ie/2015/04/24415-greek-debt-maturities-through-2016.html) or:

One thing is clear from all of this: Credit Swiss estimate of 75% chance of a deal being done this month on Greek 'programme', while the CDS markets are pricing in 75% probability of Greek default over the next 5 years:

And we have equally conflicting 'proposals' on how such  programme might be arranged: http://www.zerohedge.com/news/2015-06-02/greece-troika-submit-conflicting-eleventh-hour-deal-proposals which can be summarised as "the bottom line seems to be that, fed up Syriza's unwillingness to concede its election mandate, the troika will now write the agreement for Greece and Tsipras can either sign it or not. Apparently, the IMF has scaled back its demands for EU creditor writedowns (another loss for Athens) but remains skeptical of the entire undertaking."

If this is true, the entire 'new deal' being offered to Greece amounts to a new can being kicked down the same road.

Map of the road? [note: the below table excludes short-term debt]

h/t to @NChildersMEP 

So to sum up today on the Greek front:

1. ELA is running tight, just as deposit flights goes on;
2. Target 2 liabilities continue to mount;
3. Probability of default remains material at present;
4. Choices available to Greek authorities are Plan A: horrible and Plan B: terrible; and
5. Absent debt write down, even the best case scenario still leads to high risk of a political crisis in the short run and a default in the medium (3 years) term. 

It's Back to the Future, in a Groundhog Day-like sorts of the Future...

2/6/15: BRIC Manufacturing PMI: Continued Pain in May

Things got pretty ugly for Manufacturing sector across the BRIC economies in April, and the trend continues into May. The latest data from Markit shows that:

• Brazil Manufacturing PMI slipped marginally from strongly contractionary 46.0 in April to 45.9 in May. 3mo average through May is now at an abysmal 46.0 against 3mo average through February at 50.2, 3mo average through May 2014 was 49.6. All in, this is the fourth consecutive month of sub-50 readings and adjusting for statistical significance, PMI index rose above 50.0 only once over the last 16 months. This May reading is the lowest for any month since September 2011.
• Russia Manufacturing PMI fell from a contractionary 48.9 reading in April to a very poor 47.6 in May. 3mo average through May is now at 48.2 - not a disaster, but poor - against 3mo average through February at 48.7, 3mo average through May 2014 was 48.6. All in, this is the sixth consecutive month of sub-50 readings and adjusting for statistical significance, PMI index rose above 50.0 only once over the last 9 months. May 2015 reading ties for the lowest level of PMI for the Russian economy since June 2009.
• China Manufacturing PMI rose marginally from a contractionary 48.9 reading in April to a still sub-50 reading of 49.2 in May. 3mo average through May is now at 49.2 - a poor reading for the economy - against 3mo average through February at 50.0, 3mo average through May 2014 was 48.5. This May marks the third consecutive month of sub-50 readings and adjusting for statistical significance, PMI index rose above 50.0 last time in July 2014.
• India Manufacturing PMI continued to buck the BRIC trend, staying above 50.0 mark, albeit slipping from 53.0 reading in April to 52.6 in May. 3mo average through May is now at 52.0 against 3mo average through February at 52.9, 3mo average through May 2014 was 51.3. All in, this is the 19th consecutive month of above-50 readings.

Overall, three out of four BRIC economies posted sub-50 PMIs for Manufacturing in May, for the third consecutive month in a row, while the fourth BRIC economy (India) posted slowdown in the rate of positive growth in the sector.

1/6/15: Russian GDP fell 2.4% in January-April 2015

When Russian statistics agency published the latest data on economic growth for 1Q, the numbers came in at -1.9%, of 0.3% higher than the previous forecast by the Ministry for Economic Development (MED).

Based on the latest data from the MED, we have:

• GDP growth at -1.4% in January (y/y figures), -1.3% in February, -2.7% in March, and -4.2% in April. 
• April decline, therefore was faster than in 1Q 2014, resulting in GDP contraction of 2.4% y/y in the first four months of 2015.

This deflates all hopes for economic stabilisation thesis as both March and April posted accelerating rates of economic contraction, with figure for April simply impossible to ignore, even though, in part, it was driven by faster growth in April 2014.

Seasonally-adjusted data is a little more encouraging: January 2015 real GDP decline was 1% m/m, followed by 0.9% m/m drop in February, March at -0.9%, and April at -0.8%. So we do have some moderation in monthly contraction, although

• This is seasonally-adjusted preliminary data, subject to potentially hefty revisions and seasonality impacts; and
• Latest PMIs are not encouraging (see manufacturing for May here: http://trueeconomics.blogspot.ie/2015/06/1615-russian-manufacturing-pmi-may-2015.html posting worsening conditions in May, and April data for services and composite here: http://trueeconomics.blogspot.ie/2015/05/7515-russian-services-and-composite.html).

In March, industrial production generally stagnated, with April posting a contraction of 1.2% m/m. In mining, March turned up positive output growth, with April again falling into contraction at -0.4%. Production and distribution of electricity, gas and water contributed positively to GDP growth in April, up 0.9%. Manufacturing posted -1.8% contraction in April. Agriculture posted zero growth in April, having expanded in 1Q 2015.

Fixed investment fell 0.7% in April, compared to -0.2% in March, construction was flat in April, after posting declines in January-March.

Retail sales were down 0.9% in April for goods trade and 0.6% in household services. Real disposable household income grew in April by 0.2%, while real wages shrunk 2%.

Meanwhile, official unemployment remained at 5.6% in April, although this figure is heavily skewed to the downside by several factors:

1. Significant decline in the numbers of migrant workers (see http://trueeconomics.blogspot.ie/2015/05/31515-remittances-from-russia-sharply.html);
2. Large shifts in employment from official enterprises to grey and black economy;
3. Demographic trends of shrinking working age population (note: Russia did return to actual population growth in 2013 and 2014, but working age population has been declining since 2006).

Total exports of good stood at USD32.7 billion or 31.3% lower than in April 2014, having rise 0.9% m/m relative March.. Imports of goods amounted to USD16.2 billion, 41.8% lower than in April 2014 and down 7.2% on March 2015. So trade balance was down 16.6% y/y to USD16.5 billion.

The good news came from a slowdown in inflation in April. In January, monthly inflation was 3.2%, falling in February to 2.2% and 1.2% in March. April inflation was 0.5% on a monthly basis and in January-April consumer prices rose 7.9%.


Full details of the latest releases in Russian are here.

1/6/15: Russian Manufacturing PMI: May 2015

Russia Manufacturing PMI came in at disappointing 47.6 in May 2015, compared to 48.9 in April. This reverses slight improvement in April compared to March and puts PMI at the level matching the lowest reading since June 2009, achieved back in January 2015.

Weak conditions signal reversal of the slightly improving trends in the economy over 1Q 2015 (see following post on this).  We are now in 6th consecutive month of sub-50 PMI readings for the sector, and 24 months average PMI for Russian Manufacturing stands at 49.4.

31/5/15: IMF slashes Ukraine Economy Outlook

IMF statement on Ukraine with some pretty ugly forecast revisions.

[Note, emphasis in italics is mine]

"Press Release No. 15/243, May 31, 2015

IMF Statement on Discussions with Ukraine on First Review under the Extended Fund Facility Arrangement

An International Monetary Fund (IMF) mission visited Kyiv during May 12-29 to hold discussions on the first review under the Extended Fund Facility Arrangement (EFF) in support of the authorities’ economic reform program (see Press Release No. 15/107).

At the conclusion of the visit, Mr. Nikolay Gueorguiev, mission chief for Ukraine, made the following statement today in Kyiv:
 ...
“The authorities’ commitment to the reform program remains strong. All performance criteria for end-March were met and all structural benchmarks due in the Spring are on course to be met, albeit some with a delay. This good program implementation has been achieved notwithstanding an exceptionally difficult environment, in part related to the unresolved conflict in the East, which took a heavier than expected toll on the economy in the first quarter of 2015.

Accordingly, the mission has revised down growth projections for 2015 to -9 percent and projects end-year inflation at 46 percent. Inflation was mostly driven by one-off pass-through effects of the large exchange rate depreciation in February as well as the needed energy price increases.

“In recent months, signs that economic stability is gradually taking hold are steadily emerging. The foreign exchange market has remained broadly stable. Gross international reserves, although still very low, have increased to US$9.6 billion at end-April. Banks’ deposits in domestic currency have been recovering. The budget outturn in the first months of 2015 was stronger than expected, partly due to temporary factors.

“The authorities recognize that decisive implementation of economic reforms is indispensable for entrenching financial stability and restoring robust and sustainable growth. They are committed to advancing fiscal consolidation and energy sector reforms, including further energy tariff adjustments to eliminate the large losses of Naftogaz, reduce energy consumption, and foster energy independence. They are also moving ahead with the rehabilitation of the banking system, and the improvement of the business environment to enhance the productive potential of the economy.

“The authorities are also determined to complete the ongoing debt operation in line with program objectives. This will ensure that public debt is sustainable with high probability and the program remains fully financed, which are requirements for the completion of the review. More broadly, continued financial support for Ukraine’s reform efforts from official and private creditors is vital for the success of the program.”

Let's hope IMF optimism wins over the reality, but just two and a half months ago, the IMF projected gross international reserves for 2015 at USD18.3 billion, and now they are celebrating reserves at USD9.6bn. IMF programme sustainability analysis was forecasting real GDP decline of 5.5% in 2015 - not 9% decline the Fund now projects. See: http://www.imf.org/external/pubs/ft/scr/2015/cr1569.pdf for more details.

One has to wonder, just how 'flexible' the Fund became in recent years when it comes to 'hard' numbers underpinning it's 'programme sustainability' arithmetic.

31/5/15: Russian Fiscal Performance: Red Alert in Jan-Apr 2015

Russian Government finances are showing some serious signs of strain in April, lagging the 1Q 2015 outruns. In 1Q 2015, public revenues (the consolidated budget including federal, regional and local governments, state social funds) rose only 1% y/y in nominal ruble terms. Adjusting for inflation and ruble revaluations, this suggests real contraction of around 9-10 percent. Over the first four months of 2015, export duties returns and production taxes in oil & gas sector were down more than 20% y/y with 1Q 2015 decline of 15% y/y. Ex-oil & gas revenues, consolidated revenues were up 8% in ruble terms (nominal) in 1Q 2015.

Real trouble, however, is brewing on spending side. 1Q 2015 consolidated expenditures rose 20% y/y in nominal terms, with defence spending rising 50% y/y in 1Q 2015 and 45% in the first four months of 2015. Pensions and Social Security expenditure rose by around 30% y/y. Nominal spending on education and health remained largely unchanged.

The consolidated deficit for 1Q 2015 was 2.5% of GDP.

Source: Bofit

Now, some of the expenditure items were significantly front-loaded, especially for housing expenditure and defence. Which means that over the rest of 2015 we might see some moderation in these lines of spending and weaker adverse impact on deficits. Still, things are not exactly encouraging, neither in terms of structural nature of imbalances nor in terms of sustainability of such spending given the levels of official reserves.