6/8/15: Irish Services PMI: July Mirage of Growth

Today, Markit released Services PMI for Ireland. Note: I have covered details of the Manufacturing PMI release link here.

On Services side, headline index reading in July was 63.4, which is marginally ahead of 63.3 registered in June. July reading was the highest in 109 months, after June posting the highest reading in 108 months.

Per Markit, "Panellists mainly linked the latest increase in activity to improving economic conditions." As I have shown in the past, the index is only now starting to re-couple with actual services activity indicators, suggesting that much of the PMI reading is biased by the specific, concentrated MNCs-led activity. Still, the PMI has now reached dizzying heights.

On another positive side, Services PMI boom is coinciding with Manufacturing PMI boom (also most likely driven by MNCs tax optimisation strategies):

But, as the next post details, real actual, CSO-measured activity in the Services sector was nowhere near all-time highs in growth in 1H 2015. In simple terms, PMI is telling us porkies, or PMI survey participants are telling Markit porkies, or both...

What is even more disturbing is that Manufacturing PMI figures are also in the territory of imagineering, where fair princesses and unicorns run through the fields of golden pansies with butterflies at their... ah, whatever... just take a look at the above chart and read this: http://trueeconomics.blogspot.it/2015/08/5815-irish-industrial-production-up.html.

5/8/15: BRIC Composite PMIs: July 2015

I covered BRIC economies' Manufacturing PMIs for July here: http://trueeconomics.blogspot.ie/2015/08/4815-bric-manufacturing-pmis-july-2015.html.

Now, let's take a look at Services PMIs and Composite.

• Brazil Services PMI fell from an extremely poor 39.9 in June 2015 to an abysmal 39.1 in July, reaching a joint historical low (total history for the series spans 101 months). July reading was so poor, 3mo average through last month fell to 40.5 against 3mo average through April 2015 at 48.3 and 3mo average through July 2014 at 50.7.
• Per Markit: "The downturn remained widespread across the services categories covered by the survey, with all of the sub-sectors registering substantial falls in business activity. The steepest contraction was at Hotels & Restaurants, followed by Transport & Storage. The level of new business in the service economy decreased for the fifth straight month in July. The pace of reduction was slightly faster than in the prior month, but nonetheless still less severe than in May (when new business fell at the quickest pace since April 2009). 
• Brazil's woeful Services PMI was compounded by a drop in Manufacturing (see summary of both below), driving official Brazil Composite PMI deep into contraction territory at 40.8 against already extremely low 41.0 in June. Overall, Composite index has hit the lowest point since March 2009.
• Overall: there is absolutely no doubt that both Services and Manufacturing are currently in a recession, with below 50 readings in both sectors present since March 2015

• Russia Services PMI strengthened from 49.5 in June to 51/6 in July marking the return to growth in the sector. On a 3mo average basis, July 2015 reading was at 51.3, well ahead of 3mo average through April 2015 (46) and 3mo average reading through July 2014 (48.5). 
• However, Russian Manufacturing PMI (see separate coverage here: http://trueeconomics.blogspot.ie/2015/08/3815-russia-manufacturing-pmi-july-2015.html).
• The respective Russian Composite Output Index improved to 50.9 in July, up from 49.5 in the preceding month. Per Markit: "Supporting the rise in overall activity for the service sector was a fourth consecutive month of increasing volumes of incoming new business. Moreover, the rate of growth accelerated to the highest recorded for twenty months amid reports that a more positive economic climate was driving demand for services upwards."
• More details on both Russia Composite PMI and Services PMI here: http://trueeconomics.blogspot.ie/2015/08/5815-russian-services-composite-pmis.html.
• Overall: these are some tentative early-stage signs of economic stabilisation and possibly recovery. Too early to call a new trend, however, and any talk of real recovery will require sustained rise in Manufacturing PMI above 51-51.5 mark.

• China Services PMI posted yet another above 50 reading (the Index never once dipped below 50.0 mark) rising strongly from 51.8 in June to 53.8 in July. This is the strongest reading in the Index since August 2014 and brings 3mo average through July 2015 to 53.0, up on 52.4 3mo average through April 2014 and on 51.3 3mo average through July 2014.
• Sub-50 reading in Manufacturing PMI reflective of further worsening in manufacturing downturn in the economy (ongoing since November 2014 with a brief interruption in February 2015) meant that China Composite PMI posted "only fractionally above the neutral 50.0 mark at 50.2, down from 50.6 in June, and pointed to the weakest rate of expansion in 14 months."
• Overall: China remains on slower growth path with Manufacturing under significant pressure. This trend is linked to the fortunes of global trade flows (more so than Services) and to weakening investment outlook for Chinese firms.

• India Services PMI rose to 50.8 in July, marking a very shallow recovery in the sector and breaking two months streak of sub-50 readings. July reading was up on 47.7 in June and on a 3mo average basis, figures through July 2015 are at 49.4 - signalling weak contraction against 3mo average through April 2015 at 53.1 and 3mo average through July 2014 at 52.3.
• Strong Manufacturing performance in PMI terms and weak, but above 50 reading in Services provided upside support for the Composite PMI. Per Markit: "After having fallen in the previous month, output across the combined manufacturing and service sectors in India rose during July. The seasonally adjusted Nikkei India Composite PMI Output Index climbed to 52.0 from 49.2 in June to signal a modest increase in activity. Growth has now been recorded in 14 of the past 15 months. The return to expansion was helped by a first rise in services activity in three months and an acceleration in the rate of manufacturing production growth."
• Overall: India regained its strong performance dynamic in July across both sectors, with relatively weaker performance in Services. Indian economy currently leads the BRIC group in terms of growth momentum as signalled by PMIs.

Summary of changes across both Manufacturing and Services PMIs is provided below:

And chart for Services PMIs illustrates: 

Overall, BRIC activity as contributor to global growth has improved, remains weak. In June, the BRIC group of economies was contracting and exerting downward pressure on global growth. However, in July, they made a positive contribution, albeit extremely shallow.

In recent months, it has become customary for BRIC economies analysts to suggest that Russia is the weakest component to BRIC activity. However, while this assertion was true through 1Q 2015, it is no longer holding since then:

This, however, is of little consolation to an economy in a recession.

5/8/15: Irish Industrial Production Up Spazillion Percent on Quazillion Widgets

Why is it pointless to cover Irish economic data? Because of this!

Let's put this into perspective: in a modern economy with lean manufacturing and real-time supply chains, increasing volume of production in manufacturing by 30% in just 12 months is not feasible. But in Ireland, not only it is feasible, it is a reflection of moderation in the rate of growth on 1Q 2015:

Anyone who interprets these numbers as anything other than coming from the Theatre of Absurd is simply wasting their time and skills.

5/8/15: Irish monthly Unemployment Rate remains stuck at 9.7%

CSO data on estimated unemployment (that used to be released with Live Register) shows estimated unemployment steady at 9.7% in July, for the third month in a row.

• Officially, there were 208,900 unemployed 15-74 year olds in Ireland in July 2015, up 300 on June 2015. 3mo average through July is at 208,833 against 3mo average through April 2015 at 211,833, an improvement of 3,000 on 3mo average basis. Compared to July 2011, there were 107,500 fewer officially unemployed in Ireland. Compared to July 2014, number of unemployed in Ireland fell 32,400.
• However, factoring in those participating in State-established Activation Programmes, number of unemployed in Ireland stood at 289,788 (estimated using lagged data for Activation Programmes participation) in July, down 77,658 on July 2011 and down 16,128 on July 2014.
• There were 37,600 younger unemployed in Ireland in July 2015 (15-24 year olds), up 700 on June 2015 and down 8,200 on July 2014. The number of younger unemployed declined 28,500 compared to July 2011. 3mo average number of younger unemployed through July 2015 was 37,233 against 40,300 average for the 3 months through April 2015. 

• Estimated unemployment rate for 15-74 year olds stood at 9.7% in July, unchanged on May and June, down on 9.8% in March and April. Unemployment rate is down 5 percentage points on July 2011 and 1.5 percentage points on July 2014. Last 4 months marked the slowest sequence of declines in unemployment rate since March 2014.
• Estimated unemployment rate for younger workers was 20.2% in July 2015 compared to 19.9% in June 2015. The unemployment rate declined 8.4 percentage points compared to July 2011 and was down 3.4 percentage points on July 2014.

The key point is the slowdown in the unemployment rate reductions. Over 2012, average monthly rate of reduction in unemployment was 0.083%,  this rose to 0.153% average over 2013 and 0.167% over 2014. So far, over 7 months of 2015 the average monthly rate of unemployment rate decline was 0.071%.

5/8/15: Russian Services & Composite PMIs: July 2015

Having covered Russian Manufacturing PMI for July here: http://trueeconomics.blogspot.ie/2015/08/3815-russia-manufacturing-pmi-july-2015.html, let's take a look at the today's Markit release of Services and Composite PMIs.

Services PMI rose to 51.6 in July compared to 49.5 in June, with new business activity reaching fastest growth in 20 months. On a 3mo average basis, sector performance through July was at 51.3 - showing a marginal rate of recovery, and a major improvement on 3mo average through April 2015 (at 46.0), as well as on 3mo average through July 2014 (48.5).

As chart above shows, Russian Services PMI posted above 50 readings in three out of last four months. However, by historical standards, this expansion is extremely weak.

Per Markit: "The Russian service sector returned to modest growth during July, with activity rising on the back of the strongest gain in new business for over a year-and-a-half. Still, excess capacity remained a problem, with companies again comfortably able to make inroads into their work outstanding despite cutting jobs for a seventeenth month in succession."

The decline in Manufacturing (see link above) meant that the Composite PMI for Russia was weaker than the Services PMI. Nonetheless, Composite PMI reached 50.9 in July, up on 49.5 in June. 3mo average through July is at 50.7 against 3mo average through April at 47.4 and 3mo average through July 2014 at 49.5. Just as with Services PMI, Composite PMI has now posted above 50 readings in three out of four last months.

The above suggests strengthening in the stabilisation and early recovery momentum in the Russian economy, albeit we need a rebound in Manufacturing to above 50.0 reading for a couple of months to confirm robustness of this development. While it does appear the Russian economy is now past the worst period of contraction, calling any recovery will require at least couple of more months of improvements in PMIs.

4/8/15: IMF Downgrades Ukraine Growth Outlook

IMF just published its Article IV consultation paper on Ukraine. Here are some key points (I am staying out of extensive commenting on these, but emphasis is added in the quotes).

Before we start, it is important to highlight that IMF notes significant breadth and depth of reforms already undertaken by the Ukrainian authorities, albeit warns about potential slippage in future reforms. Given the overall environment (geopolitical and domestic) in which these reforms are taking place, Ukrainian Government deserves a positive assessment of their work in a number of important areas.

"The 2015 baseline growth projection has been marked down to -9 percent (relative to -5.5 percent at the EFF approval), driven by a delayed pick up in industrial production, construction, and retail trade, and expectations of a weaker agricultural season." Note: this is a massive contraction compared to Programme projections.

"Domestic demand will be somewhat more constrained than anticipated earlier by tighter credit conditions and larger-than-expected decline in real incomes amid higher inflation."

"Growth is expected to start recovering in the second half of the year, supported by growing consumer and investor confidence, gradual rehabilitation of the banking system, and restoration of broken supply chains in metals, mining, and energy production. Later on, manufacturing should also start benefitting from the restored competitiveness of Ukraine’s exports. However, the recovery is expected to take hold only gradually through 2016. Medium-term growth projections remain unchanged." Note: you can see projections for following years in the table at the end of this post.

"The 2015 inflation has been revised upwards to 46 percent at end-2015, compared to
27 percent at program approval, driven by the faster-than-expected pass-through effects of the large exchange rate overshooting in March."

Note: again, this is a massive revision on programme-assumed inflation. Take together with the GDP revision above, it is hard to see how the IMF can continue arguing sustainability case for the programme at this stage, without hoping for massive recovery.

"Inflation is projected to recede quickly in 2016 to around 12 percent as the one-off effects subside and economic stabilization takes hold. Monthly core inflation rates are already well below 1 percent and expected to remain in such territory, as the negative output gap, subdued demand, and the stabilization of the exchange rate will put downward pressure on inflation."

Here's an interesting bit: Inflation 'one off' drivers include IMF-required adjustment in energy prices:

"The rapid pass-through of the large exchange rate depreciation in February and increases in regulated energy prices pushed inflation to 61 percent y-o-y in April. As the hryvnia recovered and stabilized in April–June, prices of some imported goods declined while increases in prices of non-tradables remained moderate. As a result, inflation in June moderated to 0.4 percent m-o-m, or 57½ percent y-o-y. The high y-o-y number masks the sharp disinflation that has already occurred: the seasonally adjusted annualized inflation in May–June 2015 fell to 13 percent."

But energy prices are yet to be fully inflated to their targets, so more is to come: "Gas and heating prices increases. Gas prices for households were increased by 285 percent on average, effective April 1. Heating prices were also increased by 67 percent, effective May 8. Despite these increases, gas and heating prices remain among the lowest in the region. The program aims to reach 75 percent of cost recovery gas and heating prices based on international prices by April 2016 and 100 percent by April 2017."

Which, of course, means there will be much more pain for ordinary Ukrainians, comes winter.

"The overall balance of payments remains broadly unchanged. The current account deficit is expected to widen to 1.7 percent of GDP in 2015, compared to 1.4 percent of GDP at program approval. Both exports and imports are projected to decline considerably this year, driven by (i) falling export prices and larger-than-expected loss of export capacity stemming from the conflict; and (ii) the weaker economy and steeper fall of energy consumption."

"Risks to the outlook remain exceptionally high. Risks to economic growth are predominantly on the downside reflecting (i) uncertainty about the duration and depth of the conflict in Eastern Ukraine; (ii) prolongation of the discussions on the debt operation (which could disrupt capital flows); and (iii) slippages in policy implementation. In addition, confidence could fail to revive due to these factors, or due to a more protracted bank resolution process. Higher-than-expected inflation—due to inflation expectations becoming more entrenched—could reduce domestic demand further. On the upside, an early resolution of the conflict could boost confidence and growth faster than projected."

"…Regarding program implementation, policy reversals, including regarding the flexible exchange rate policy and fiscal/energy price adjustment could lead to continuing balance of payments problems and raise repayment risks."

"Against significant headwinds, the authorities showed again their determination to stay the course of the program. ...However, although domestic support for a new Ukraine is strong, pressures from populist forces and vested interests are growing. Moreover, the local elections in the fall pose a risk that the reform momentum could fade."

Bad news on debt levels are:

Note: Public debt levels assume meeting IMF target for restructuring current debt. There is another dreamy feature to both graphs - as with all IMF programmes, debt peaks out in year one. Given past histories, however, the forecasts don;t quite turn to reality.

Another set of bad news: Non-performing Loans (NPLs) as % of total assets was bad in 2013 and getting massively worse now:

And a summary of macro performance indicators and projections:

4/8/15: Of Corporate Stash and Irish Cash

There are two things to notice in this Bloomberg chart:

Source: http://www.bloombergview.com/quicktake/profit-shifting-avoid-tax

First the obvious one: Our Not-a-Tax-Haven Ireland is in the company of Bermuda, Lux and Switzerland, alongside the equally Not-a-Tax-Haven Netherlands (that Double-Dutch Sandwich is an all-transparent arrangement to attract companies to Dutch quality workforce, only second to the best-in-class workforce of Ireland). That is trivial stuff, though.

Second (less trivial) is the quantum of profits domiciled in the likes of Ireland. It has been large and rising. And thus, if begs a question: What happens to Irish 'economic growth' when these profits are repatriated either for investment purposes abroad (e.g. in Asia Pacific or elsewhere) or on foot of any future tax amnesty in the US or both?

Answers to that question should be mailed to every Irish Minister so keen on confusing MNCs profits and Irish economic miracles.

4/8/15: Global Manufacturing PMI Signals Faltering Growth in July

Global Manufacturing PMI was unchanged in July compared to June at 51.0, signalling weak growth and stalled growth momentum. Overall, activity is now at "its joint-weakest reading during the past two years".

Per Markit: "Underpinning the increase in output was further growth in new order inflows. However, the pace of improvement in new business slowed as new export orders declined for the second time in the past three months. New export business decreased in China, Germany, France, the UK, Taiwan, South Korea, Greece, Turkey, Indonesia, Vietnam, Russia and Brazil, and was little-changed in the US and Malaysia."

You can read more on this in my coverage of BRIC Manufacturing PMIs here: http://trueeconomics.blogspot.ie/2015/08/4815-bric-manufacturing-pmis-july-2015.html

4/8/15: Irish Manufacturing PMI: July 2015

Irish Manufacturing PMI released by Markit showed accelerated growth in the sector in July, with activity growth signal rising from 54.6 in June to 56.7 in July. This marks 26ht consecutive month of index readings above 50.0 (23rd consecutive month of readings statistically significantly above 50.0).

Overall, the trend remains for high growth in the sector, albeit the rate of increase in growth (second derivative) is moderating (turning negative) since around February 2015.

It is worth noting that the moderating trend in PMIs is confirmed by the most recent QNA datum showing Industry sector - excluding Building and Construction - in a q/q decline in 1Q 2015 of 0.31%, while the sector posted a 9.63% growth year-on-year.

Overall, another month of gains in Manufacturing is a good sign of underlying strength in the sector.

4/8/15: BRIC Manufacturing PMIs: July 2015

Markit released Manufacturing PMIs for July for all BRIC countries, so here is the snapshot of the data:

• Brazil Manufacturing PMI rose marginally to 47.2 in July from 46.5 in June, marking 6th consecutive month of manufacturing activity in contraction (below 50.0), with five of these months PMIs statistically significantly below 50.0. 3mo average though July is now at extremely low 46.1 against 3mo average through April 2015 at 47.3 and 3mo average through July 2014 at 48.9.
• Russia Manufacturing PMI fell from 48.7 in June to 48.3 in June - details are covered separately here: http://trueeconomics.blogspot.ie/2015/08/3815-russia-manufacturing-pmi-july-2015.html
• China Manufacturing PMI fell to 47.8 in July from 49.4 in June, signalling deterioration in sector performance and marking fifth consecutive month of contraction in the sector. This is the worst reading in the index since July 2013. 3mo average through July is now at 49.2 against 49.7 3mo average through April 2015 and 50.6 3mo average though July 2014.
• India Manufacturing PMI was the only PMI for the BRIC economies that stood above 50.0 in July, rising from 51.3 in June to 52.7 in July. This marks 21st consecutive month of above 50.0 readings. 3mo average through July 2015 is now at 51.7 (barely at statistical significance line) against 3mo average through April 2014 at 51.5 and 52.0 3mo average through July 2014.
• Three out of four BRICs economies have now been in Manufacturing activity decline territory every month since March 2015. 
• Based on 3mo averages, growth in May-July 2015 is down compared to same period in 2014 in all four BRIC economies.

Summary: BRIC manufacturing remains deep under water, with three of the four economies struggling with contracting manufacturing sector activity. Which is consistent with poor global trade performance (http://trueeconomics.blogspot.ie/2015/08/2815-global-trade-welcome-to-economic.html).

3/8/15: Europe as a Demographic Disaster

Here are the latest UN projections for population growth though 2100 (best viewed by clicking on the image to enlarge):

Source: http://esa.un.org/unpd/wpp/Publications/Files/Key_Findings_WPP_2015.pdf.

Of all major regions around the world: only three are likely to post negative population growth. These are:

• Europe - posting the most disastrous, by a mile, demographic prospect of all regions;
• Followed by Asia, where cumulated population decline will be less severe (through 2100) than in Europe; and
• Finally, by Latin America.

Here is a table calculated by me based on the UN projections showing 30 countries with largest declines in population over 2 periods: 2015-2030 and 2015-2050:

I group these countries by a historical sub-regions as follows:

• EU 
• Former USSR excluding currently in the EU

Several striking observations emerge:

• One hears quite frequently media comments about the disastrous situation with Russian demographics. Except: Russian Federation is not in 30 countries with worst population growth performance over 1950-2015 period, while its counterparts in the USSR - Ukraine, Georgia and Belarus are. Russia will be ranked 19th worst performing (demographically) country in 2015-2030 and 2015-2050 period. But compare this to Ukraine (to be ranked 4th in 2015-2030 period and 3rd in 2015-2050 period); Republic of Moldova (expected to rank 11th in 2015-2030 period and 4th in 2015-2050 period); Belarus (forecast to rank 12th in both periods); Georgia (ranked 20th in 2015-2030 period forecasts - better than Russia, but 15th in 2015-2050 forecast - worse than Russia). I have not heard much of 'disastrous policies' assessments in the media concerning their demographic collapse predictions.
• Another interesting aspect of the table is the exceptionally poor forecasted performance in demographics for the Eastern European states members of the EU.

You can see the above point 2 from the table below that selects EU member states:

Just for comparative reminder: Russian population (the benchmark case for media-covered demographic disaster) is forecast to shrink by 10.4% between 2015 and 2050. Which is bad, but better than 10 out of 29 EU member states (not benchmarks, according to the media, of a demographic disaster).

3/8/15: IMF on Russian Economy: Private Sector Debt

Continuing with IMF analysis of the Russian economy, recall that
- The first post here covered GDP growth projections (upgraded)
- External Debt and Fiscal positions (a mixed bag with broadly positive supports but weaker longer-term sustainability issues relating to deficits).

This time around, let's take a look at IMF analysis of Private Sector Debt.

As IMF notes, economic crisis is weighing pretty heavily on banks' Non-performing Loans:

In part, the above is down to hefty write downs taken by the banks on Ukrainian assets (Russian banks were some of the largest lenders to Ukraine in the past) both in corporate and household sectors.

However, thanks to deleveraging (primarily in the corporate sector, due to sanctions, and some in household sector, due to economic conditions), Loan to Deposits ratio is on the declining trajectory:

Note: Here is a chart on deleveraging of the corporate sector and for Russian banks:

In line with changes in demand for debt redemptions, FX rates, as well as due to some supports from the Federal Government, banks' exposure to Central Bank funding lines has moderated from the crisis peak, though it remains highly elevated:

Illustrating the severity of sanctions, corporate funding from external lenders and markets has been nil:

And Gross External Debt is falling (deleveraging) on foot of cut-off markets and increased borrowing costs:

So companies are heading into domestic markets to borrow (banks - first chart below, bonds - second chart below):

Net:

1) Corporate external debt is falling:

2) Household debt is already low:

3) But the problem is that deleveraging under sanctions is coinciding with economic contraction (primarily driven by lower oil prices), which means that Government reserve funds (while still sufficient) are not being replenished. IMF correctly sees this as a long term problem:

So top of the line conclusion here is that banking sector remains highly pressured by sanctions and falling profitability, as well as rising NPLs. Credit issuance is supported not by new capital formation (investment) but by corporates switching away from foreign debt toward domestic debt. Deleveraging, while long-term positive, is painful for the economy. While the system buffers remain sufficient for now, long term, Russia will require serious changes to fiscal rules to strengthen its reserves buffers over time.