2/10/15: BRIC Manufacturing PMI: 7th month of Sectoral Recession in September

Manufacturing PMIs for BRIC countries for September generally remained on the downward trend established some 7 months ago.

• I have covered Russian Manufacturing PMI earlier here with index reading signalling slower rate of decline in the sector activity in September, rising to 49.1 from 47.9 in August. This is the highest reading in the series since February 2015, but marks 10th consecutive month of sub-50 readings.
• China Manufacturing PMI was covered in detail here showing a strong signal of continued deterioration in the economy.
• Meanwhile, Brazil posted a rise in Manufacturing PMI from horrific 45.8 in August to ugly 47.0 in September. This was the eighth consecutive month of sub-50 readings in Brazil Manufacturing sector, with extremely weak performance setting in back in Q 2014 and continuing basically without interruption since then. Per Markit, “although rates of contraction in new orders and production eased, the downturn remains sharp. Companies continued to shed jobs and reduce inventory levels.” Quarter performance was poor, but I will cover this in a separate post. Brazil is now the worst performing BRIC economy in Manufacturing sector activity for 8 months running.
• India continued to break the BRIC trend, posting another above 50 PMI reading for Manufacturing Sector. India Manufacturing PMI in September was running at 51.2, down from 52.3 in August and marking the slowest pace of growth in seven months, “mirroring a slower increase in new orders. Staffing levels were, consequently, reduced and purchasing activity rose at the weakest pace since December 2013. …New business from abroad expanded at the slowest pace in the current 24-month sequence of growth and one that was marginal overall.”

Table below summarises key readings:

Chart below illustrates key trends:

Overall, Manufacturing activity remains on a downward trajectory in 3 our of 4 BRIC economies, with negative trends accelerating in the case of China (second worst performer for the third month in a row), remaining steady in the case of Brazil (worst performer over last 8 months), slightly moderating in terms of contraction in Russia (third worst performer over the last three months). Meanwhile, growth in India is declining toward anaemic levels of activity. 

2/10/15: The plight of Irish self-employed and our backward economic policies

This is a copy of the Business Retail Union of Ireland public letter sent to the Minister for Social Protection regarding equal treatment of the self-employed in Ireland:

Source: @brui_ie

The key questions raised in this letter are other questions of great importance to this country for a number of reasons are:

1. Per latest CSO data there were 327,500 self-employed persons in Ireland in 2Q 2015, constituting 16.9 percent of total employment in the country. The number of self-employed persons is roughly comparable to the current counts of people on Live Register (332,000). Which means these are hardly ‘negligible’ or ‘small’ numbers. What is being done to make sure these people have access to basic, normal, civilised levels of representation in the economic and social system that is, allegedly, modern Ireland?
2. Self-employed people in Ireland face upfront tax penalty for their activities in terms of higher rates of taxation and higher cost of tax compliance. Why? Where is the balance between proportionality of taxation and representation?
3. Self-employed people in Ireland have no access to basic social protection benefits that PAYE workers can avail of. Why? Where is the balance between social services access based on need vs access based on privilege of arbitrary categories of employment?
4. Self-employed people in Ireland have no access to basic training and jobs activation schemes that PAYE workers can avail of. Why? Again, per (3) above, where is that balance?
5. Self-employed people in Ireland are discriminated against in access to state pensions. Same questions as in (4).
6. Self-employed people in Ireland have to deal with huge degree of income volatility with our tax system inducing more uncertainty in their after-tax income than PAYE workers. Why is that the financial markets operate on a basic principle of risk premium, whilst markets for human capital operate on the basis of risk penalty?
7. Self-employed people in Ireland have no basic supports in terms of annual holidays, sick leave, family leave, etc and are often placed at severe disadvantage compared to some PAYE and public sector workers in terms of jobs-related benefits. Which, of course, is understandable, but reinforces the point made in (6) above.

Many of the above differences cannot (and probably should not) be removed by state policies (e.g. (7)). Others can. None have been removed and no one - in our leadership establishment - appears to, frankly put, give a damn.

However, the reality of modern workforce is that:

• Self-employment is going to rise dramatically in the future as our economy moves further and further along the lines of developing skills, professional occupations employment and a ‘gig’-economy. In simple terms, global economy is becoming more and more self-employment intensive and Ireland can’t avoid the same fate, no matter how ignorant our policymakers remain;
• The recent decline (on pre-crisis trend) in self-employment is driven by the sheer mass of economic activity destruction in Ireland since the onset of the Global Financial Crisis, highlighting the extreme nature of jobs and income security volatility faced by the self-employed;
• Self-employment is set to expand in the future as we become more entrepreneurial and intrapreneurial.

If anything, current penalty to the self-employed should not only be erased, but reversed, due to higher risk nature of their work, they deserve a risk premium, not a risk penalty in the markets.

It is high time we gave a thought as to how on earth can we continue developing an entrepreneurial modern, human capital-based economy whilst penalising starting entrepreneurs and people taking risk deploying their skills through self-employment. Bragging about ‘entrepreneurial Ireland’ and ‘knowledge economy’ at international venues can’t get us anywhere, if we fail to first reform ourselves. The mentality of civil service ‘jobs-for-life’ entitlement culture that dominates our policy formation has to change. Good starting point - addressing the above issues for the self-employed.

1/10/15: Emerging Markets Debt v Equity

Debt, not equity, is the real China Fault Line, even if tremors are rocking its stock markets:

What we have in the above is a record of debt/equity in corporate valuations across the EMs and China. While debt pile relative to equity valuations has grown in the EMs ex-China (though it still sits below parity), in China, growth in debt has been exponential. Inly in 2007 did Chinese debt/equity ratio come close to parity (albeit from above 1) and ever since, debt growth outpaced expansion in equity valuations.

Bad enough. Except when one considers an even more dangerous side to this markets: debt growth likely led equity valuations. Which implies, if confirmed, that Chinese markets investors have simply ignored debt valuations in their balancesheet pricing of Chinese companies. In other words, straight out of Krugmanite book (for countries), 'debt doesn't matter'.

Good luck with that...

1/10/15: Of global equities and Gold

Bloomberg's @M_McDonough just posted a fresh chart for major global stocks indices rebased to the start of 2015:

The scary bit is that this is in own-currency terms and that the rot is well beyond the EMs and China.

I cover some of these issues in a guest contribution to GoldCore's quarterly review for 3Q - read in full here.

1/10/15: Russia Manufacturing PMIs: Some Easing in Contraction

Russia’s manufacturing PMI released by Markit showed slower rate of decline in the sector activity in September, rising to 49.1 from 47.9 in August. This is the highest reading in the series since February 2015, but marks 10th consecutive month of sub-50 readings.

Per Markit: both output and new orders posted “negligible growth” in September. More importantly:

• “…excess capacity remained prevalent, leading to further job cuts, while price pressures continued to intensify due to a lower value of the rouble against other major international currencies.”
• “Contributing to the rise in the PMI in September were improved trends in output and new orders, following a period of contraction. In particular, the intermediate goods sector performed well, recording rises in both output and new work. There were reports from the survey panel that domestic demand had firmed over the month and was a key support to production and order books.”
• Key driver to the upside, therefore, was imports substitution. 
• “International demand, in contrast, continued to deteriorate, as highlighted by a fall in new export orders for a twenty-fifth successive month. The rate of contraction was again solid, but nonetheless the slowest since June.”

Overall, Manufacturing PMI signal, in my view, is not yet consistent with expected stabilisation of the economy. Remember, I recently noted that previous hopes for economic recession bottoming out in 2Q 2015 have been squashed by the data, with new consensus outlook for stabilisation in 3Q. Based on the data to-date, this stabilisation did not take place. We are now looking at another quarter of below zero growth and most likely will see sub-zero GDP growth through 4Q 2015 as well.

Chart to illustrate manufacturing sector activity trends:

Note: I covered China Manufacturing, Services & Composite PMIs for September in an earlier note here http://trueeconomics.blogspot.ie/2015/10/11015-china-pmis-signalling-deeper.html. Overall, Russian Manufacturing PMI (and the exports component of the index especially) are broadly in line with Chinese data so far.

1/10/15: China PMIs: Signalling Deeper Problems Ahead

Latest Manufacturing and Services PMI data for China posted a strong signal of continued deterioration in the economy.

Manufacturing PMI came in at the lowest levels since March 2009, posting 47.2 in September, compared to 47.3 in August, and marking 7th consecutive month of sub-50 readings. Over the last 12 months, Manufacturing PMI reached above 50.0 in just two months, hit exactly 50.0 in one (marking zero growth in the sector) and was below 50 (marking contraction of activity) in the rest. Last time Manufacturing PMI was statistically above 50.0 was in July 2014 and last time it happened before then was in October-November 2013. In other words, there has not been statistically significant growth singled by Manufacturing PMIs for some two years now.

Per Markit release, things were even worse than the headline Manufacturing index suggested:

• “Total new work fell at the quickest rate in over three years, partly driven by a steeper fall in new export business. 
• “As a result, companies cut output at the sharpest rate in six-and-a-half years, while staff numbers fell at the quickest pace since the start of 2009. 
• “The health of the sector has now deteriorated in each of the past seven months. Furthermore, the latest deterioration was the most marked since March 2009.”

On Services side, Markit’s Services PMI for September came in at 50.5, the lowest reading since July 2014. Services PMI for China has never posted a sub-50 reading in the series history, so there is little we can tell about actual levels of activity in the sector based on this data. Still, 50.5 reading is so bad, it ranks as the second lowest reading in the history of the series.

Which brings us to the Composite PMI. China’s Composite PMI posted another sub-50 reading, falling from August 48.8 to September 48.0. This implies the fastest rate of contraction across the economy since January 2009.

Per Markit:

• “Employment trends continued to diverge across the manufacturing and services sectors in September. Manufacturers cut their workforce numbers at a solid pace that was similar to that seen in the prior month, while service providers continued to increase their payroll numbers. However, the rate of job creation was only slight, despite improving upon August’s fractional pace. Consequently, employment at the composite level declined for the fourth successive month.
• “Manufacturing companies signalled a further increase in outstanding workloads in September, which was often linked to reduced productive capacity. Meanwhile, softer growth in new work enabled service sector firms to work through their unfinished business in September and at the fastest rate in ten months. Overall, backlogs of work declined again at the composite level, albeit at a marginal rate.”

In simple terms, whatever growth was squeezed out of both sectors, that growth came from depleting outstanding orders, rather than signing new business.

Two charts to highlight these trends:

28/9/15: Blow Outs in the Markets: Beware of Debt Financing

 This is an unedited version of my article in the Village Magazine from June 2015.

Three recent events, distinct as they may appear, point to a singular shared risk faced by the Irish economy, a risk that is only being addressed in our policy papers and in the mainstream media.

Firstly, over the course of May, European financial markets have posted surprising rises in Government and corporate bond yields amidst falling liquidity, widening spreads and increased volatility.

Secondly, both the IMF and the Irish Government have recognised a simple fact: once interest rates revert back to their 'normal' path, things will get testing for the Irish economy.

And thirdly, the Irish Government has quietly admitted that the fabled arrears solutions to our household debt crisis are not working.

Deep below the lazy gaze of Irish analysts, these risks are connected to the very same source: the massive debt overhang that sits on the back of our struggling economy.

Stability? Not So Fast.

Take the first set of news. The problem of spiking yields and blowing up trading platforms in the European bond markets was so pronounced in May, that the ECB had to rush in with a bold promise to accelerate its quantitative easing purchases of Government paper to avoid an even bigger squeeze during the summer. All in, between January and the end of May, euro area government bond yields rose by some 6 basis points, cost of non-financial corporate borrowings rose by around 9 basis points, and banks' bond yields were up 1 basis point. All in the environment of declining interbank rates (3-month Euribor is down 10 basis points) and massive buying up of bonds by the ECB.

In one recent survey completed by the Euromoney before May bond markets meltdown almost 9 out of 10 institutional investors expressed deep concerns over evaporating market liquidity (higher costs of trading and longer duration of trades execution) in the sovereign bond markets. In another survey, completed in late 1Q 2015 by Bank of America-Merill Lynch, 61% of large fund managers said that European and U.S. stocks and bonds are currently overvalued - the largest proportion since the survey began back in 2003.

In the U.S., current consensus expectation is for the Federal Reserve to start hiking rates in 3Q 2015. In Europe, the same is expected around Q3 2016. And recently, both estimates have been moving closer and close to today, despite mixed macroeconomic data coming from the economies on the ground. If the process of policy rates normalisation coincides with continued liquidity problems in the bonds markets, we can witness both evaporation of demand for new government debt issues and a simultaneous increase in the cost of funding for banks, companies and the Governments alike.

Cost of Credit

Which brings us to the second point - the role of interest rates in this economy.

In recent Stability Programme Update (SPU) filled with the EU Commission, the Department of Finance provided a handy exercise, estimating the impact of 1% rise in the ECB key rate. The estimates - done by the ESRI - show that in 2017, a rise in ECB rate to 1 percentage point from current 0.05% will likely cost this economy 2.1% of our GDP in 2017, rising to 2.4% in 2018 and 2019. By 2020, the effect can amount to the losses of around 2.5% of GDP.

This increase would bring ECB rates to just over 1/3rd of the historical pre-crisis period average - hardly a major 'normalisation' of the rates. Which means that such a hike will be just a start in a rather protracted road that is likely to see rates rising closer to 3-3.5 percentage points.

But here is a kicker, the ESRI exercise does not account fully for the realities on the ground.

In addition to the ECB rate itself, several other factors matter when we consider the impact of the interest rates normalisation on the real economy. Take for example cost of funds in the interbank markets. Average 12 months Euribor - prime rate at which highest-rated euro area banks borrow from each other - averaged 3.29% for the period of 2003-2007. Today the rate sits at 0.18%. Which means rates normalisation will squeeze banks profits line. If euro area, on average, were to hike their loans in line with ECB increases, while maintaining current 12 months average lending margins, the rate charged on corporate year and over loans in excess of EUR1 million will jump from the current 2.17% to 3.37%.

It turns out that due to our dysfunctional banking system, Irish retail rates carry a heftier premium than the euro area average rates, as illustrated in Chart 1 below. Which, of course, simply amplifies the impact of any change in the ECB base rate on Ireland’s economy.

The reason for this is the pesky issue of Irish banks profitability - a matter that is distinct from the euro area average banking sector performance due to massive non-performing loans burden and legacy of losses carried by our banking institutions. Per latest IMF assessment published in late April, Irish banking system is the second worst performing in the euro area after the Greek when it comes to existent levels of non-performing loans. In today's terms, this means that the average lending margin charged by the banks in excess of ECB policy rate is 3.4% for house purchase loans, 5.63% for loans to Irish companies under EUR1 million with a fix of one year and over, and 4.0% for loans to same companies in excess of EUR1 million. Which means that a hike in the ECB rate to 1% will imply a rise in interest rates charged by the banks ranging from 0.84% for households loans, to 0.92% for smaller corporate loans and to 1.22% for corporate loans in excess of EUR1 million.

Chart 2 below highlights what we can expect in terms of rates movements in response to the ECB hiking its base rate from the current 0.05% to 1%.

No one - not the ESRI, nor the Central Bank, nor any other state body - knows what effect such increases can have on mortgages arrears, but is pretty safe to say that households and companies currently experiencing difficulties repaying their loans will see these problems magnified. Ditto for households and companies that are servicing their debts, but are on the margin of slipping into arrears.

While the ESRI-led analysis does enlighten us about the effects of higher rates on tax revenues and state deficits, it does little in providing any certainty as to what happens with consumer demand (linked to credit), property investment and development (both critically dependent on the cost of funding), as well as the impact of higher rates on enterprise formation and survivorship rates.

In addition, higher rates across the euro area are likely to imply higher value of the euro relative to our major trading partners' currencies. Which is not going to help our exporters. Multinational companies trading through Ireland are relatively immune to this effect, as most of their trade is priced internally and stronger euro can be offset by accounting and other means. But for SMEs exporting overseas, every percentage point increase in the value of the euro spells lower sales and lower profits.

Debt Overhang: It Matters

Across the euro area states, there are multiple pathways through which higher rates can drain growth momentum in the economy.

But in Ireland's case, these pathways are almost all invariably adversely impacted by the debt overhang carried by the households and the corporate sectors. Current total debt, registered in Irish financial institutions as being extended to Irish households and resident enterprises stands at just over EUR263.7 billion. And that is before we take into the account our Government debt, as illustrated in Chart 3.

A 1 percentage point increase in retail rates can see some EUR2.64 billion worth of corporate and household incomes going to finance existent loans - an amount that is well in excess of EUR2.28 billion increase in personal consumption recorded in 2014 compared to 2013, or 24% of the total increase in Ireland's GNP over the same period. Add to that added Government debt costs which will rise, over the years, to some EUR1.5 billion annually.

What is not considered in the analysis is that at the same time, rising cost of credit is likely to depress the value of the household's collateral, as property prices are linked to credit markets conditions. Which means that during the rising interest rates cycle, banks may be facing an added risk of lower recovery from home sales.

The effect of this would be negligible, if things were relatively normal in Irish mortgages markets. But they hardly are.

At the end of Q4 2014, total number of mortgages in arrears stood at 145,949 accounts, amounting to the total debt of EUR29.8 billion or 18% of total lending for house purchases. 94,929 accounts amounting to EUR14.94 billion of additional debt were restructured and are not in arrears. Roughly three quarters of the restructured mortgages involve 'solutions' that are likely resulting in higher debt over the life time of the restructured mortgage than before the restructuring was applied. We cannot tell with any degree of accuracy as to how sensitive these restructured mortgages are to interest rates changes, but arrears cases will be much harder to resolve in the period of rising rates than the cases so far worked out through the system.

When, Not If…

You'd guess that the ESRI and Department of Finance would do some homework on all of the above factors. But you would be wrong. There is no case-specific risks analysis relating to interest rates changes performed. Perhaps one of the reasons why majority of analysts have been dismissing the specific risks of interest rates increases is down to the lack of data and models for such detailed stress-testing.

Another reason is the false sense of security.

Take the U.S. case. The U.S. economy is now in an advanced stages of mature recovery, based on the most recent survey of economic forecasters by the BlackRock Investment Institute. But the underlying weaknesses in growth remain, prompting repeated revisions of analysts' expectations as to the timing of the Federal Reserve rates hikes. Still, the Fed is now clearly signaling upcoming rate hike.

The Fed is pursuing a much broader mandate than the ECB - a mandate that includes the target of full employment. The twin mandate is harder to meet than the ECB's singular objective of inflation targeting.

While the European inflation is low, it is not as low as one imagines. Stripping energy - helped by the low oil prices - inflation in the Euro area was estimated to be at 0.7% in April 2015. Combined, prices of gas, heating oil and fuels for transport shaved 0.66 percentage points off headline inflation figure. Although 0.7% is still a far cry from 'close to but below 2%' target, for every 10% increase in energy prices, HICP metric watched by the ECB will rise approximately 1.06 percentage points. So far, in April 2015, energy prices are down 5.8% y/y - the shallowest rate of decline in 5 months. Month on month prices rose 0.1 percentage points.

Sooner or later, interest rates will have to rise.  In the U.S., explicit Fed policy is that such increases will take place after the real economy recovers sufficiently to withstand such a shock. In the euro area, there is no such policy in place, in the aggregate, across the entire common currency area, and in the case of specific weak economies, such as Ireland, in particular.

24/9/15: Ireland's Remittances and Foreign Workforce

In a recent post, titled  "Ireland: a land of un-remarkable savers",  I covered EU Commission research on savings rates across different countries.

One interesting finding in the report relates to the issue net remittances or transfers from the country to foreign destinations net of inflows of funds from abroad into the country. These figures cover household remittances, so no direct effect of FDI and other investment flows in them.

Take a look at the following chart:

In absolute terms, Ireland leads the EU in terms of net remittances outflows abroad as percentage of the Gross National Income. Keep in mind - Cyprus was in an emergency funding situation from January 2012 on (when the country first received Russian emergency loans) and requested assistance from the EU in mid-2012, with actual bailout package agreed a year later. In other words, much of 2012 net outflows of household funds from Cyprus was probably down to relatively panicked situation in the country financial sector.

Ireland's net remittances outflows were running, in contrast, against more stabilised situation and inflows of funds from a number of emigrants who left during the crisis. Demographically, these can be divided into three categories:

• Returning migrants (who have little connection to Ireland and, thus, were more likely to take funds out of Ireland on their exit);
• Younger Irish workers (who would have left older family behind and whose earnings abroad would not have allowed for them to become net sender of funds into Ireland) and
• Middle-aged families, who often left properties behind with outstanding mortgages that required regular remittances into Ireland to fund.

The key for Ireland's position at the bottom of the European remittances table is, most likely, foreign workers in Ireland sending their surplus earnings/savings abroad for the lack of interest in investing in Irish assets (property and financial assets). If so, we have a problem: Ireland attracts large numbers of highly skilled younger workers who come here to work in MNCs-led sectors, such as ICT and ICT services, as well as Financial services. These workers, judging by remittances outflows, have little anchoring in the Irish economy.

As the result of remittances (counting only unrecorded remittances, and omitting the deeply negative official remittances), Irish savings rate falls from 14th in the EU to 17th in the EU:

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.