24/9/15: The Ugly Faces of Trade Protectionism

Neat chart from Credit Suisse summarising the extent (and distribution) of new protectionist policies across several key economies:

Several points worth making:

• The obvious one: the U.S. leads in terms of protectionism. Which is ironic, given the U.S. championship of open trade agreements (TTIP and TPP being the most current ones) and the U.S. tendency to de-alienate the world into 'Free Trade' and 'Protectionist' groups of countries.
• BRIC come second and Europe comes third. Which is again highly ironic as BRIC rely heavily on trade-driven model for growth and Europe can't get over how (allegedly) free trade it is.
• Everywhere, save Russia and the U.S., state aid & bailouts is minor segment of trade protectionism policies.
• Export subsidies are meaningful in China and India.
• Trade defence and finance measures dominate in the U.S., India, Brazil and Europe, and are weaker in Japan and China, while virtually non-existent in Russia.

All-in - a pretty ugly picture of reality post-crisis.

23/9/15: China Flash PMI for Manufacturing: September

China flash Manufacturing PMI is at 47.0 for September - lowest level since March 2009 and 7th consecutive reading below 50. Over the last 12 months, the index has been below 50 in 9 months, at 50 for one month and has not been statistically above 50 since July 2014.

Index is now on a solid downward trend since January 2010 and looks set to be the second worst performing PMI in BRIC group (after Brazil) for the third month in a row.

22/9/15: Ireland: a land of un-remarkable savers

Remember the persistent whinging about 'high savings rates' in Ireland. And recall all the talk about how these savings are allegedly killing of domestic demand (because, of course, the 'recovery' has been supporting that demand, so if only the bad households stopped squirrelling away stashes of cash... then).

Ok, it always smelled like a rat, primarily because the alleged savings were not translating into household deposits. But, hey, the story rolled on for years...

So here is a neat EU Commission report on savings across the EU. And here is the top-line chart:

The chart above tells us two things about Irish savings:

1. Our savings rate was pretty darn low - fourteenth from the top in the EU - back in 2012.
2. Our savings rate was pretty darn low over 1995-2012 horizon - fourteenth from the top in the EU.

In fact, as the chart above illustrates, instead of jumping up in 2012 compared to 1995-2012 average, our rate stayed on average. Bang on it (we are on a red line).

Worse, adjusting for pensions, our savings rate is also remarkably poor - ranked 12th highest in the EU per following chart:

And our social services (pretty wide-ranging for some key demographics of dis-savers and very narrow for the demographic of savers) have little effect on our savings rate - net of social services, our saving rate ranks 15th (as opposed to 14th) from the top:

Of course, savings rates can be calculated differently across economies, so EU report distinguishes two sources of financial savings (savings used to purchase financial assets) and non-financial savings (savings used to purchase homes, gold etc). So may be, just may be the 'high rate of savings' was down to the latter (remember, Irish households were trying to repay their home mortgages as fast as possible)?

Nope, not that either. Per chart above, we rank 11th in the EU in terms of our financial savings rate and 19th in terms of non-financial savings.

So what on earth was that 'high savings' story about? A business lobby-invented scheme to get the state to 'nudge' savings out of the banks and into spending? A state-concocted dream to justify potential (and in some cases actual, e.g. pensions levy and property tax) introduction of taxes on assets? A glitch in data caused by mortgages close-offs due to sales to unregulated foreign entities and to writedowns on banks balancesheets? Precuationary savings that went to fund relocation of younger adults abroad? Or a compensation in the accounts by increased financial (cash) savings offsetting somewhat decline in the values of non-financial savings (house prices tanking)? Or all of the above?

One way or the other, Ireland is clearly not a nation of savers nor are we a nation of spenders. We are, remarkably unremarkably mid-of-the-road type...

22/9/15: Germany's IFO: "Refugees to Cost Ten Billion Euros"

Here is the full release from the Ifo Institute (emphasis in bold and comments in italics are mine):

"Ifo Institute Expects Refugees to Cost Ten Billion Euros

Munich, 22 September – If a total of 800,000 asylum-seekers do indeed come to Germany this year, as forecast by the German Federal Ministry of the Interior, it would cost the state around ten billion euros. This figure does not take into consideration family members joining the refugees or any educational measures; and is therefore a conservative estimate.  [here is a useful, albeit dated, link on family reunification framework in Germany showing significant potential impact. More current data is covered here. In addition, while educational expenditures can be significant, part of the costs will be carried through apprenticeships and training schemes that are covered by employers and that involve productive work, contributing to value added in the German economy.]

The qualification structure of immigrants from the crisis-afflicted states of Syria, Iraq, Nigeria and Afghanistan is probably poor. According to data from the World Bank, the illiteracy rate even among the 14-24 year old age group is 4 percent, 18 percent, 34 percent and 53 percent in these countries respectively. Even in the most developed of these countries (Syria) only 6 percent of the population has a university degree, which is not equivalent to a German diploma in many cases. Although refugees tend to be male and younger than the demographic average age, one thing is still clear: they are poorly prepared for the German labour market. In addition to language courses, Germany will also need to invest in training, which will generate extra costs. [We do not know exact quality of education and skills attained by the refugees, but applying average population parameters in this case can be fraught with some problems. For example, refugees coming through trafficking channels are required to pay up-front fees that are substantial in size, relative to average incomes. This means that there can be a strong selection bias in terms of refugees who reach Europe, compared to the average population in the country of origin - biases that tend to select more educated / better skilled and more financially enabled migrants. If so, their literacy rates and educational attainment status can be well above averages. In addition, undergoing a refugee journey implies very significant hardship, that is most likely known (at least partially) prior to the journey start. This can imply that refugees arriving into Europe may have stronger aptitude to succeed in integrating into new host society than those who remain behind. These biases are relatively well known in the literature on migrants flows in large scale migrations in the past.]
 
Many refugees will remain in Germany in the long-term and bring their relatives into the country. Migratory pressure from North Africa and the Middle East will remain high purely due to the demographical situation in these countries.  [This is correct, and the pressures are rising, not abating. The problem here is signalling: by openly accepting 800,000 refugees, German leaders have sent a very loud signal to the potential future refugees. Reality, however, is that such a signal will probably have only a marginal effect on refugees flows over time, since the main drivers (first order factors) pushing larger quantities of refugees into Europe - demographics, political and geopolitical instability, institutional deterioration, regional wars and conflicts, as well as issues such as climate change - remain acute.]

To avoid the refugee crisis becoming a long-term financial burden for German taxpayers, refugees have to get paid employment as fast as possible, so that they can meet their own living costs. There are fears, however, that many of them will not be able to find a job with a minimum wage of 8.50 euros in place because their productivity is just too low. It would be therefore be a good idea to lower the minimum wage across the board to prevent unemployment from rising.  [This is a matter for a separate analysis. While refugees initial productivity is likely to be lower, training and apprenticeship schemes should provide fast uplift in productivity for those who are well-enabled for such training. The key to limiting the cost of integrating refugees hinges crucially on several dimensions of German policy, namely: access to training, incentives to undertake training, quality of matching individuals to training opportunities, etc. Other considerations (for example pre-acceptance assessment of attitudes and aptitudes to integration) can help, but at this stage are not feasible except on a margin (for example prioritising processing of refugees who pass pre-acceptance assessments). Minimum wage coverage should not apply to apprenticeships and training schemes in general, in my view, and instead these activities should be covered by a separate minimum wage set below the normal employment-related minimum wage.]

Raising Hartz IV standard rates in the present situation is a very bad idea, as this would reduce incentives for refugees to look for work and generate an additional fiscal burden.
 
Model simulations by the Ifo Institute show that even in the case of a suspension of minimum wage legislation and Hartz IV rates remaining stable, the supposed immediate integration of immigrants into the German labour market does not stand to benefit the German economy. Although there are some labour market advantages, they are outweighed by higher unemployment rates and net transfers to immigrants.
 
Article: “Immigration: What Does the Domestic Population Stand to Gain?”  in: ifo Schnelldienst 18/ 2015; p. 3-12; a preview of the article is available at: http://www.cesifo-group.de/DocDL/sd-2015-18-battisti-etal-einwanderung.pdf "

Overall, a bold and interesting statement from Ifo (who are known for being bold), and a topic worth discussing.

22/9/15: Why Reform Irish Cider Excise System?

My paper for the Cider Ireland submission to Budget 2016 is available as text here.

20/9/15: Euromoney: "Cyprus almost as safe as Portugal"

"The Cyprus risk score has steadily improved this year in Euromoney’s crowdsourcing survey, rebounding in Q2, and is seemingly on course for further improvement in Q3 as economists and other risk experts make their latest quarterly assessments. Chalking up almost 53.1 points from a maximum 100 allotted, Cyprus has managed to climb one place in the rankings to 56th out of 186 countries surveyed, leapfrogging India and closing in on Portugal into a more comfortable tier-three position:"

Read more here.

Here are my notes on the topic (to accompany the quote in the article):

In my view, Cypriot economy recovery after 3 years of deep recession and banking sector devastation is still vulnerable to growth reversals and deeply unbalanced in terms of sources for growth. Firstly, the rate of growth is hardly consistent with the momentum required to deliver a meaningful recovery. Cypriot GDP rose 0.2% y/y in 1Q 2015 and 1.2% y/y in 2Q 2015. This comes on foot of 14 consecutive quarters of GDP decline. Quarterly growth rate in 2Q came below flash estimate and expectations.

Positive growth was broadly based, but key investment-focused sector of construction posted negative growth. Deflationary pressures remained in the Cypriot economy with HICP posting -1.9% in August y/y on top of -2.4% in July. Over January-August 2015, HICP stood at -1.6% y/y.

Despite some fragile optimism, the Cypriot Government has been slow to introduce meaningful structural reforms outside the financial sector. The economy remains one of the least competitive (institutionally-speaking) in the euro area, ranked 64th in the World Bank Doing Business 2015 report - a worsening of its position of 62nd in 2014 survey. This compares poorly to the already severely under-performing Greece ranked in 61st place.

Thus, in my view, any significant improvements in the country scores relate to the policy-level post-crisis normalisation, rather than to a measurable improvement in macroeconomic fundamentals.

19/9/15: IBM's Global Location Trends Report

Recently released "Global Location Trends: 2015 Annual Report" by IBM should be a pleasant read for Irish policymakers. The report "outlines the latest trends in corporate location selection — where companies are locating and expanding their businesses and creating jobs around the world."

And Ireland features positively and prominently, albeit with a caveat (below).

Take, for example, jobs creation by FDI-backed firms: per report, "Ireland and Singapore remain the strongest per-capita performers among the more mature (and, therefore, higher-cost) economies"

Notice that Ireland's rank has slipped slightly in 2014 compared to 2013.

Another category where we perform really strongly is average job value:

Per report: "For the fourth year in a row, Ireland is the top ranking country in the world on this measure. It continues to attract investment projects in industries characterized by high knowledge intensity and economic value added, such as life sciences and information and communication technology (ICT). The global top 10 ranking consists primarily of mature economies with a mix of investments similar to Ireland’s".

These are pretty impressive numbers, except for one major caveat: none of the report data was adjusted for corporate inversions. So when a U.S. company moves offshore to, say, Ireland (as many did and continue to do), via a tax-optimising inversion, the results appear to be an addition to Ireland's stock of FDI and Ireland's jobs creation, whilst in reality, both are superficial at best, and beggar-thy-neighbour at worst.

Perhaps surprisingly, despite being the main focal point of FDI inflows in the Republic, Dublin did not fare too well in the urban rankings, coming in at joint 12th position in 2014 ranking, down 5 places from the 7th rank in 2013.

Overall, the positive tone of the report is more than warranted in Ireland's case.

Nonetheless, the problem of aggressive tax optimisation and sharp practices by a number of MNCs invested in Ireland should be reflected and discussed in the global rankings.

This is especially important, given the report claims to reflect quality of FDI and jobs created. Ireland attracts massive inflows of tax optimising FDI in the areas of ICT services, pharma, biotech and medical devices, with aggressive on-shoring of Intellectual Property, and dire lack of actual research jobs being created. Instead of actual research, jobs in sales and back office activities, as well as residual (lower value) research are being registered as being registered as 'Professional' or 'Scientific' and the value added by these jobs creation is often, de facto, fully reflective of tax optimisation schemes.

The report authors might want to consult some facts listed here.

19/9/15: Irish Construction PMIs: August 2015

Irish Construction Sector PMIs for August showed moderate de-acceleration in sector growth.

Per Markit:

On a 3mo average basis:

• Overall Construction Sector PMI stood at 60.4 in 3mo through August 2015, up on 57.8 for the 3mo average through May 2015, but down on same period a year ago (61.3).
• Housing Activity sub-index posted deterioration m/m. However, on a 3mo basis the index through August 2015 (58.7) was up on the 3mo average through May 2015 (56.5), but down on 3mo average through August 2014 (63.5).
• Commercial Activity sub-index posted deterioration m/m. On a 3mo basis the index through August 2015 (61.3) was up on the 3mo average through May 2015 (59.4), but down on 3mo average through August 2014 (62.4).
• Civil Engineering activity sub-index posted deterioration m/m and a reading sub-50.0 for the second consecutive month. On a 3mo average basis, 3mo average through August 2015 was at 50.1, identical to the 3mo average through May 2015 and up on 47.6 average through August 2014.

Thus, all sub-indices have deteriorated on a m/m basis, and all, with exception of Civil Engineering, posted deterioration y/y on 3mo average basis.

As shown in the chart below, two key sub-indices of construction sector activity remain above 50 mark, but a sharp deterioration in overall growth momentum for the second month in a row. Both sub-series are signalling potential reversal in the positive momentum trend from September-November 2014 on.

In Civil Engineering, a brief recovery momentum signalled in Q4 2014 has now been erased:

18/9/15: "Russia is not the enemy": Boston Globe Op-ed

Superb op-ed in the Boston Globe dissecting the U.S. strategic errors in viewing Russia as an intrinsic enemy of the West:

"Emotion argues that Russia is a troublemaker because it refuses to play by our rules, and must be confronted and punished. Reason should reply that Russia is a legitimate power, cannot be expected to take orders from the West, and will not stand quietly while the United States promotes anti-Russia movements on its borders."

Read the full article here.

17/9/15: That 'Lost Decade' Meme... U.S. Median Incomes

The common memes in the media today are:

1. U.S. economic recovery from the crisis is complete and is well ahead of that of the euro area; and
2. The most recent economic crisis is a standalone event (a recession, rather than a continuation of a period of longer-term stagnation) and, thus, we can talk about the so-called 'lost decade' when it comes to the crisis-induced disruption.

Three really powerful articles on the topic of median incomes in the U.S. over the last 30 years that clearly dispute these points.

• First, Quartz.com piece, using US Census Bureau data, showing that inflation-adjusted median household income in 2014 stood at USD53,657 down 6.5% on 2007 levels and back to the levels compatible with 1989. Link to full article here.
• Second, Mike Shedlock's piece covering same data from more involved angles, with more scar figures: "Real median household income for all races is where it was in 1996. Real median household income for white non-Hispanics is where it was in 1997. Real median household income for blacks is where it first was in 1995. Real median household income for Hispanics is where it first was in 1998. Real median household income for Asians is where it first was in 1995." Full article here. The key point in both is that the so-called 'lost decade' looks more like 'lost two decades' and counting.
• Third, Yves Smith's piece on the same topic, taking adjustments to historical data into account, showing (chart below) that "Median household income for non-elderly households in 2014 ($60,462) was 9.2 percent, or $6,113, below its level in 2007. The disappointing trends of the Great Recession and its aftermath come on the heels of the weak labor market from 2000–2007, during which the median income of non-elderly households fell significantly from $68,941 to $66,575, the first time in the post-war period that incomes failed to grow over a business cycle. Altogether, from 2000–2014, the median income for non-elderly households fell from $68,941 to $60,462, a decline of $8,479, or 12.3 percent…" Full article here.

Do remember, we are talking here about the engine of global recovery, the home of hope for the real workers, the jobs creation machine, the U.S. economy that is, allegedly, in a ruder health than the rest of the advanced economies world... just don't forget to add that crucial 's' at the end of its 'lost decade' descriptor...

17/9/15: Greek Crisis: Structural & Institutional Drivers

A lot has been written about Greek economy, with basically two divergent views (ignoring comical extreme perspectives usually harboured by the media) of the core problem:

• The first perspective is that Greek economy has been driven by wrong-footed European policies (austerity, failed restructuring of Private Sector-held debt), as well as by deceptive practices of some private sector players (that somehow facilitated Greek Governments' false declarations of deficits, questionable restructuring of pre-Euro era debts etc).
• The second perspective is that Greece suffers from chronic, long term institutional failures that have left economy deeply non-competitive.

In my view, both narratives coexist in reality, even though the first one became the dominant preferred narrative of the 'Left' while the second one became the dominant one on the 'Right' of political spectrum within Greece and outside.

Ideology aside, here is an interesting and wide-ranging view from the second perspective, courtesy of Edmund S. Phelps. Worth a read... 

As a note to this, one part of the first perspective that is glaringly false is the perception of Greece as being a victim state of the 'international bankers'' manipulation of the national debt accounting (the so-called Goldman Sachs Swap deal). Greek Government, at the time, wilfully and freely contracted Goldman Sachs to execute the deal. Informational disclosures available to the Greek Government at the time were sufficient for the Government to know exactly what it was doing and why. Eurostat was notified of the deal and did not object. There appears to have been no deception nor any coercion involved, except for the deception by the Greek Government at the time, knowing neglect of the issue by the Eurostat and soft coercion of the EU in dealing with Greek Accession to the Euro.  

Far from being a victim, Greek authorities have actively, willingly and knowingly participated, over decades, in shaping numerous institutional failures that strongly contributed to the economic destruction of the country. These authorities acted on the basis of electoral mandates. Their failures are briefly listed in Endmund S. Phelps' article linked above.

This does not, of course, diminish the pain from the crisis and does not eliminate the need for cooperative assistance and support to be extended to Greece, including direct debt relief. But it does call for a better balancing of analysis of the Greek economic situation overall. And it does call for the Greek people to engage in some serious soul-searching as to the nature and quality of the political leadership they elect. Especially, given the fact that they are about to go to the polls on September 20th.

17/9/15: Predict Conference: Data Analytics in the Age of Higher Complexity

This week I spoke at the Predict Conference on the future of data analytics and predictive models. Here are my slides from the presentation:

Key takeaways:

• Analytics are being shaped by dramatic changes in demand (consumer side of data supply), changing environment of macroeconomic and microeconomic uncertainty (risks complexity and dynamics); and technological innovation (on supply side - via enablement that new technology delivers to the field of analytics, especially in qualitative and small data areas, on demand side - via increased speed and uncertainty that new technologies generate)
• On the demand side: consumer behaviour is complex and understanding even the 'simpler truths' requires more than simple data insight; consumer demand is now being shaped by the growing gap between consumer typologies and the behavioural environment;
• On micro uncertainty side, consumers and other economic agents are operating in and environment of exponentially increasing volatility, including income uncertainty, timing variability (lumpiness) of income streams and decisions, highly uncertain environment concerning life cycle incomes and wealth, etc. This implies growing importance of non-Gaussian distributions in statistical analysis of consumer behaviour, and, simultaneously, increasing need for qualitative and small data analytics.
• On macro uncertainty side, interactions between domestic financial, fiscal, economic and monetary systems are growing more complex and systems interdependencies imply growing fragility. Beyond this, international systems are now tightly connected to domestic systems and generation and propagation of systemic shocks is no longer contained within national / regional or even super-regional borders. Macro uncertainty is now directly influencing micro uncertainty and is shaping consumer behaviour in the long run.
• Technology, that is traditionally viewed as the enabler of robust systems responses to risks and uncertainty is now acting to generate greater uncertainty and increase shocks propagation through economic systems (speed and complexity).
• Majority of mechanisms for crisis resolution deployed in recent years have contributed to increasing systems fragility by enhancing over-confidence bias through excessive reliance on systems consolidation, centralisation and technocratic responses that decrease systems distribution necessary to address the 'unknown unknowns' nature of systemic uncertainty. excessive reliance, within business analytics (and policy formation) on Big Data is reducing our visibility of smaller risks and creates a false perception of safety in centralised regulatory and supervisory regimes.
• Instead, fragility-reducing solutions require greater reliance on highly distributed and dispersed systems of regulation, linked to strong supervision, to simultaneously allow greater rate of risk / response discovery and control the downside of such discovery processes. Big Data has to be complemented by more robust and extensive deployment of the 'craft' of small data analytics and interpretation. Small events and low amplitude signals cannot be ignored in the world of highly interconnected systems.
• Overall, predictive data analytics will have to evolve toward enabling a shift in our behavioural systems from simple nudging toward behavioural enablement (via automation of routine decisions: e.g. compliance with medical procedures) and behavioural activation (actively responsive behavioural systems that help modify human responses).