9/10/15: Subsidies and Irish Agriculture: 2014 Data

Per latest data from CSO, Net Subsidies accounted for 59.6% of agricultural income in Ireland in 2014, ranging from 105.3% in the Midlands to 40.6% in South-West.

High as a kite on subsidies, Irish agriculture nonetheless managed to improve, thanks in part to lower euro valuations, its value added relative to subsidies. In 2012 net subsidies counted for 72.1% of total operating surplus (or income) in the sector, falling to 63.4% in 2013.

Key computational definition here are for GVA (Gross Value Added) and Operating Surplus (Income):

GVA at basic prices = Agricultural Output at basic prices – Intermediate consumption
Operating Surplus =    GVA at basic prices – Compensation of employees
                              –  Fixed capital consumption
                              + Other subsidies less taxes on production

Net value added in Irish agriculture in 2014 was EUR1.463 billion, up on EUR1.316 billion in 2013.

For the politicians claiming immense importance of the sector to Ireland, a quick reality check: Gross Value Added (which includes all labour inputs and capital spending in the sector, as well as subsidies net of taxes) stood at EUR2.192 billion in 2014.

And of that, subsidies accounted for 69.4 percent of total Gross Value Added - more than 2/3rds of Irish Agricultural Value Added came via a cheque from Europe, not from customers buying the goods.

In fact, claims about Irish Agricultural Sector contribution to the economy are often wildly off the mark. Per CSO data, the highest metric of this sector activity - Agricultural Output at Basic Prices is EUR7.328 billion for the entire 2014 and of these 20% (one fifth) were net subsidies.

9/10/15: Is Economics Research Replicable?… err… ”Usually Not”

An interesting, albeit limited by the size of the sample, paper on replicability of research findings in Economics (link here).

The authors took 67 papers published in 13 “well-regarded economics journals” and attempted to replicate the papers’ reported findings. The researchers asked authors of the papers and journals for original data and codes used in preparing the paper (in some top Economics journals, it is a normal practice to require co-disclosure of data and empirical models estimation codes alongside publication of the paper).

“Aside from 6 papers that use confidential data, we obtain data and code replication files for 29 of 35 papers (83%) that are required to provide such files as a condition of publication, compared to 11 of 26 papers (42%) that are not required to provide data and code replication files.”

Here is the top line conclusion from the study: “We successfully replicate the key qualitative result of 22 of 67 papers (33%) without contacting the authors. Excluding the 6 papers that use confidential data and the 2 papers that use software we do not possess, we replicate 29 of 59 papers (49%) with assistance from the authors.”

In other words, even the authors of the original papers themselves were not able to put the results to re-test.

“Because we are able to replicate less than half of the papers in our sample even with help from the authors, we assert that economics research is usually not replicable.”

This is hardly new, as noted by the study authors. “Despite our finding that economics research is usually not replicable, our replication success rates are still notably higher than those reported by existing studies of replication in economics. McCullough, McGeary, and Harrison (2006) find a replication success rate for articles published in the JMCB of 14 of 186 papers (8%), conditioned on the replicators’ access to appropriate software, the original article’s use of non-proprietary data, and without assistance from the original article’s authors. Adding a requirement that the JMCB archive contain data and code replication files the paper increases their success rate to 14 of 62 papers (23%). Our comparable success rates are 22 of 59 papers (37%), conditioned on our having appropriate software and non-proprietary data, and 22 of 38 papers (58%) when we impose the additional requirement of having data and code files. Dewald, Thursby, and Anderson (1986) successfully replicate 7 of 54 papers (13%) from the JMCB, conditioned on the replicators having data and code files, the original article’s use of non-confidential data, help from the original article’s authors, and appropriate software. Our comparable figure is 29 of 38 papers (76%).”

A handy summary of results:

So in basic terms, economists are not only pretty darn useless in achieving forecasting accuracy (which we know and don’t really care about for the reasons too hefty to explain here), but we are pretty darn useless at achieving replicable results of our own empirical studies using the same data. Hmmm…

9/10/15: Quantitative Scaring & Secular Stagnation

One very important point being raised in this article from the Economist: "Controlling for the range of things that influence interest rates, from growth to demography, economists have attempted to gauge the impact of reserve accumulation. Francis and Veronica Warnock of the University of Virginia concluded that foreign-bond purchases lowered yields on ten-year Treasuries by around 0.8 percentage points in 2005. A recent working paper by researchers at the European Central Bank found a similar effect: increased foreign holdings of euro-area bonds reduced long-term interest rates by about 1.5 percentage points during the mid-2000s."

Which brings us to the idea of the 'savings glut' over the 2000s. I covered this in this article concerning the twin threats of supply and demand side-driven secular stagnation.

The Economist give us one side of that equation: Sovereign Reserves

All of which has two implications:

1. The commodities bubble bursting will have a second order effect on longer-term expected cost of Government borrowing in the advanced economies by removing the surplus of savings accumulated in the official accounts in the Emerging Markets. Which makes unwinding monetary policy excesses (from the balancesheets of the Central Banks in the advanced economies) so much harder. The knock on effect of this will be lower solvency of the Western pensions funds in the longer run; and
2. Depletion of savings on the sovereign side will require increased savings on the private sector side. Which will have compounding effect on demand.

Both points reinforce the adverse impact on global growth prospects.

7/10/15: IMF's Latest Fiscal Data and That "Iceland v Ireland" Question

You know, there’s always fun to be had with the IMF’s Fiscal Monitor updates. If only because they throw some light onto yet to be published WEO updates. But this time around, I was given a mission. Someone few weeks ago on twitter suggested that I should revisit some comparatives between Iceland and Ireland. And so here we are, fresh Fiscal Monitor at hand, let’s crunch the numbers.

Take General Government Overall Balance as % of GDP. In 2014, Ireland (best pupil in the Euro class) had a deficit of 4%. This year, IMF forecasts a deficit of 2% (significantly outperforming our Troika allowance). Which is great news. Iceland (the ‘bad pupil in class’ judging by its desire to burn bondholders in the past) had deficit of 0.2% of GDP in 2014 and is forecast to post a surplus of 1.3% in 2015. Add two numbers together and you get 2 years cumulative deficit of ca 6% for Ireland and cumulative surplus of ca 1.1% for Iceland. Iceland will be posting its first full budgetary surplus in  2015 according to the IMF latest figures, Ireland will get there in… well, not any time before 2021 as IMF projects our best performance to be 0% deficit in 2018-2020. Who’s that pupil at the back row?..

Now, take General Government Primary Balance (so stripping out the pesky payments of interest on debt). Ireland had a deficit of 0.6% of GDP in 2014, moving onto a forecast surplus of 0.8%. So net over two years, roughly 0.2% primary surplus. Take Iceland now: 2014  primary surplus of 3.5% and 2015 projected primary surplus of 4%. Net over two years, roughly 7.5% surplus. Which is, sort of, kind of 37.5 times better than Ireland?.. But wait, Iceland reached its first primary surplus in 2013. Ireland will reach its first primary surplus in 2015. Best, you know, in the class… may be not quite in the school, but…

Onto Cyclically-adjusted Balance (government balance accounting for business cycles). Ireland to start with again: -2.5% of potential GDP deficit in 2014 and -1.4% of potential GDP deficit in 2015. Not bad. Poor Iceland: cyclically adjusted deficit of 0.1% in 2014 and projected surplus of 1% in 2015. Cumulative two years for Ireland: deficit of ca 3.9% of GDP, for Iceland: surplus of 0.9% of potential GDP.

Soldier on. Next up, Cyclically-adjusted Primary Balance. Ireland: 0.9% surplus in 2014 and 1.3% surplus in 2015. Iceland: 3.8% surplus in 2014 with projected surplus of 4.1% in 2015. Two years cumulative: Ireland’s surplus of ca 2.2% of potential GDP, Iceland’s surplus of 7.9% of potential GDP.

Both countries took on hefty debt beating in the crisis. Back in 2006, Gross Government Debt in Ireland was 23.6% of GDP and in Iceland it was 29.3% of GDP. Iceland was underperforming Ireland. In 2014 gross government debt in Ireland was 107.6% of GDP and in Iceland it was 82.5% of GDP. In 2015, as IMF projects, the figures will be 75.3% of GDP for Iceland and 100.6% for Ireland. Oh dear… but perhaps things are going to catch up for us in the medium term future? Ok, IMF projects Gross Government Debt out to 2020. This is, of course, no guarantee, but the best we can go by. In that somewhat not too distant future, Iceland’s Gross Government Debt is projected to be around 54.9% of GDP. Ireland’s - at 82.9% of GDP. Here’s a bit of farce: at the peak of debt crisis for both Ireland and Iceland - in 2012, our debt to GDP ratio was 27.5 percentage points higher than that of Iceland. Per IMF projections out to 2020, the difference will be… 28 percentage points.

Of course, nowadays it is fashionable to remind ourselves that despite having lots of debts we have some assets (AIB shares and stuff). IMF partially accounts for these by estimating Net Government Debt. So let’s take a look at that metric. Per IMF data, peak of net debt levels in Iceland and Ireland took place around 2012 (for Iceland) and 2013 (for Ireland). Back then Icelandic Net Government Debt was 25 percentage points lower than our Net Government Debt. This year, IMF projects, it will be 31.6 percentage points lower (50.8% of GDP for Iceland and 82.4% of GDP for Ireland). But may be we are on track to watch up with Iceland by 2020? Not really, per IMF forecasts, our Net Government Debt will be 29.6 percentage points higher then than Icelandic Net Debt.

So I’ll sum up for you the IMF latest data in 2 charts. Self-explanatory. In both charts, positive values showing Iceland outperforming Ireland in fiscal metrics. Enjoy:

While Ireland did deliver impressive adjustments on fiscal side post-crisis peak, it is simply incorrect to identify our adjustments as being consistent with achieving performance better than that found in Iceland over the same period.

7/10/15: Bubbles Troubles and IMF Spectacles

As was noted in the previous post (link here), IMF is quite rightly concerned with the extent of the global financial bubbles that have emerged in the wake of the years-long QE waves.

This chart shows the extent of over-valuation in sovereign debt markets:

But the following charts show the potential impact of partial unwinding of the bubbles. First up: bonds:

Then, equity:

Per IMF: “The scenario generates moderate to large output losses worldwide” as chart below shows changes in the output in 2017 under stress scenario compared to benign scenario:

And here’s what happens to projected Government debt by 2018:

         Toasty!

7/10/15: On the Illusion of Financial Stability

IMF’s Global Financial Stability Report for October 2015 is out, titled, predictably “Vulnerabilities, Legacies, and Policy Challenges: Risks Rotating to Emerging Markets”.

It is a hefty read, but some key points are the following.

“Th e Federal Reserve is poised to raise interest rates as the preconditions for liftoff are nearly in place. This increase should help slow the further buildup of excesses in financial risk taking.” As if this is something new… albeit any conjecture that the Fed move will somehow take out some of the risks built up over years of aggressive priming of the liquidity pump is a bit, err… absurd. The IMF is saying risk taking will slow down, not abate.

“Partly due to con fidence in the European Central Bank’s (ECB’s) policies, credit conditions are improving and credit demand is picking up. Corporate sectors are showing tentative signs of improvement that could spawn increased investment and economic risk taking, including in the United States and Japan, albeit from low levels.” So, as before, don’t expect a de-risking, expect slower upticks in risks. The bubbles won’t be popping, or even deflating… they will be inflating at a more gradual pace.

All of which should give us that warm sense of comfort.

Meanwhile, “risks continue to rotate toward emerging markets, amid greater market liquidity risks.” In other words, now’s the turn of EMs to start pumping in cash, as the Fed steps aside.

In summary, therefore, that which went on for years will continue going on. The shovel will change, the proverbial brown stuff will remain the same.

Still, at the very least, the IMF is more realistic than the La-La gang of european politicians and investors. Here are some warning signs:

1. “Legacy issues from the crisis in advanced economies. High public and private debt in advanced economies and remaining gaps in the euro area architecture need to be addressed to consolidate financial stability, and avoid political tensions and headwinds to confidence and growth. In the euro area, addressing remaining sovereign and banking vulnerabilities is still a challenge.” You wouldn’t know that much, but the idea of rising rates and rising cost of funding has that cold steely feel to it when you think of your outstanding mortgage…
2. “Weak systemic market liquidity… poses a challenge in adjusting to new equilibria in markets and the wider economy. Extraordinarily accommodative policies have contributed to a compression of risk premiums across a range of markets including sovereign bonds and corporate credit, as well as a compression of liquidity and equity risk premiums. While recent market developments have unwound some of this compression, risk premiums could still rise further.” Wait a second here. We had years of unprecedented money printing by the Central Banks around the world. And we have managed to inflate a massive bubble in bonds markets on foot of that. But liquidity is still ‘challenged’? Oh dear… but what about all this ‘credibility’ that the likes of ECB have raised over the recent programmes? Does it not count for anything when it comes to systemic liquidity?..
3. The system is far from shocks-proof, again contrary to what we heard during this Summer from European dodos populating the Eurogroup. “Without the implementation of policies to ensure successful normalization, potential adverse shocks or policy missteps could trigger an abrupt rise in market risk premiums and a rapid erosion of policy con fidence. Shocks may originate in advanced or emerging markets and, combined with unaddressed system vulnerabilities, could lead to a global asset market disruption and a sudden drying up of market liquidity in many asset classes. Under these conditions, a signifi cant—even if temporary— mispricing of assets may ensue, with negative repercussions on fi nancial stability.”

In summary, then, lots done, nothing achieved: we wasted trillions in monetary policy firepower and the system is still prone to exogenous and endogenous shocks.

“In… an adverse scenario, substantially tighter fi nancial conditions could stall the cyclical recovery and weaken confi dence in medium-term growth prospects. Low nominal growth would put pressure on debt-laden sovereign and private balance sheets, raising credit risks.

• Emerging markets would face higher global risk premiums and substantial capital out flows, putting particular pressure on economies with domestic imbalances. 
• Corporate default rates would rise, particularly in China, raising fi nancial system strains, with implications for growth.
• Th ese events would lead to a reappearance of risks on sovereign balance sheets, especially in Europe’s vulnerable economies, and the emergence of an adverse feedback loop between corporate and sovereign risks in emerging markets. 
• As a result, aggregate global output could be as much as 2.4 percent lower by 2017, relative to the baseline. This implies lower but still positive global growth.”

Note, the IMF doesn’t even mention in this adverse scenario what happens to households up to their necks in debt, e.g. those in Ireland, the Netherlands, Spain, and so on.

So let’s take a look at a handy IMF map plotting their own assessments of the financial systems stability in October 2015 report compared to April 2015 report. Do note that April 2015 report covers the period right before the ECB deployed its famed, fabled and all-so-credible (per IMF) QE.

Just take a look at the lot. Market & liquidity risks are up (not down), Risk Appetite is down. Macroeconomic risks improved, but everything else remains the same. That is a picture of no real achievement of any significant variety, regardless of what the IMF tells us. Worse, IMF analysis shows that risk appetite deteriorated across all 3 sub-metrics and as chart below shows, market & liquidity conditions have deteriorated across all 4 sub-metrics.

Meanwhile (Chart below), save for household risks, all other credit-related risks worsened too.

Meanwhile, markets are sustained by debt. That’s right: stock prices remain driven by debt-funded net equity buybacks and domestic acquisitions:

Meanwhile, Government bonds are in a massive bubble territory, especially for the little champions of the Euro:

You can see the extent of IMF’s thinking on the topic of just how bad the financial assets bubbles have grown in the following post.

The basic core of the IMF analysis is that although everything was made better, nothing is really much better. In the world of financial stability fetishists, that is like saying we have a steady state of no steady state. In the world of those of us living in the real economy, that is like saying all that cash pumped into the markets over the last seven years and across the globe has been largely wasted. 

7/10/15: Of Island of Scholars...

A very interesting set of interactive charts showing the impact of the crisis on third level funding and student numbers across various European states: http://eua.be/activities-services/projects/eua-online-tools/public-funding-observatory-tool.aspx.

One shocking conclusion: whilst Ireland experienced a robust increase in the number of students during the crisis, Irish public funding for universities fell at a second highest rate in the EU (after Greece). You can see where these comparatives put us in contrast to, say, Iceland.

7/10/15: Irish economic Activity & PMIs: 3Q 2015

Irish quarterly PMIs for 3Q 2015 posted a marginal improvement in growth conditions compared to 2Q 2015, further strengthening on the already fast pace of economic activity expansion. This overall momentum was driven solely by gains in growth momentum in Services sectors.

Manufacturing PMI averaged 55.2 in 3Q 2015, down marginally on 55.8 in 2Q 2015 and marking the slowest pace of activity expansion since 1Q 2014. 3Q marks second consecutive growth of weakening PMIs. Still, current running rate signals strong growth in the sector.

Services PMI posted a reading of 62.8 in 3Q 2015, up on already high reading of 61.8 in 2Q 2015. This is the highest reading since 2Q 2006 and marks second consecutive quarter of increases in the index. Overall activity signal from the 3Q PMI averages is for an outright boom in the sector.

Construction PMIs (with data only for July-August) fell in 3Q 2015 to 59.1 from 2Q 2015 reading of 62.1. Nonetheless, growth, as singled by PMI, remained robust in 3Q 2015.

Overall, PMIs continue to signal robust rates of economic activity growth in the Irish economy over the course of 3Q 2015. 

Usual caveats, however, apply to interpreting the links between PMIs and actual production and value added in the sectors. Historically Irish Manufacturing and Services PMIs exhibit statistically insignificant correlation with real activity in both sectors, as well as GDP and GNP growth. At the very best, Services PMI data is capable of explaining at most around 11 percent of total variation in GDP, while at the worst, Manufacturing PMI explains at most 5.6 percent of total variation in GNP.

7/10/15: Two Reports, One Ireland, Hundreds of Billions in MNCs' Profits

Two interesting headlines in recent days brought back the memories of recent hot-flash splashes of news regarding Ireland's position as a corporate tax haven. These are:

1. Irish response to the completion of the OECD review of the options for addressing the imbalances in the global corporate taxation systems: http://www.independent.ie/business/world/new-oecd-global-tax-proposals-target-corporation-tax-avoidance-31583371.html, and
2. A less publicised in Ireland study from the U.S. estimating to volumes of corporate tax optimisation/avoidance with honourable place reserved for Ireland in it: http://www.reuters.com/article/2015/10/06/us-usa-tax-offshore-idUSKCN0S008U20151006

Have fun tying them together... but here are some choice quotes from the Citizens for tax Justice study referenced in the Reuters article:

"The Congressional Research Service found that in 2008, American multinational companies collectively reported 43 percent of their foreign earnings in five small tax haven countries: Bermuda, Ireland, Luxembourg, the Netherlands, and Switzerland. Yet these countries accounted for only 4 percent of the companies’ foreign workforces and just 7 percent of their foreign investments."

"For example, a 2013 Senate investigation of Apple found that the tech giant primarily uses two Irish subsidiaries — which own the rights to some of Apple’s intellectual property — to hold $102 billion in offshore cash. Manipulating tax loopholes in the U.S. and other countries, Apple has structured these subsidiaries so that they are not tax residents of either the U.S. or Ireland, ensuring that they pay no taxes to any government on the lion’s share of the money. One of the subsidiaries has no employees."

"Google uses accounting techniques nicknamed the “double Irish” and the “Dutch sandwich,” according to a Bloomberg investigation. Using two Irish subsidiaries, one of which is headquartered in Bermuda, Google shifts profits through Ireland and the Netherlands to Bermuda, shrinking its tax bill by approximately $2 billion a year"

A handy graph:

And another one:

Do note that per above table, Ireland is a conduit for the U.S. corporates' tax activities that amount to 42% of our GDP, while Switzerland (the country we so keenly like to tell the world is a 'real' tax haven) facilitates activities amounting to 'only' 9% of its GDP. 

You can read the entire report and see associated data here: http://ctj.org/pdf/offshoreshell2015.pdf

And while you are at it, here is a little Bloomberg piece from back 2014 on another whirlwind of activities: corporate inversions. http://www.bloomberg.com/news/articles/2014-05-04/u-s-firms-with-irish-addresses-criticized-for-the-moves What is notable in this article is that we are now having inversions of inverted companies, whereby new re-domiciling firms buy into previously re-domiciled companies to land themselves a PO Box presence in Ireland.

So back to that OECD reform proposal, therefore, that involves addressing the issue of the Base Erosion and Profit Shifting (BEPS) and is apparently of no threat to us in Ireland... You can try reading all the legalese here http://www.oecd.org/tax/beps-2015-final-reports.htm, or just give it a thought - tax optimisation by U.S. (only U.S.) MNCs via Ireland amounts to up to 42% of our GDP and likely less than 1-2% of the companies workforce is present here. How much of that 42% booked via Ireland is 'base erosion & profit shifting'? Ah, yes... let's not ask questions we don't want answered. Let's just have a breakfast at Tiffany's while repeating that "Ireland has a low rate transparent system and IDA insist on substance for any companies that it supports and I think those are the three pillars that supports our offering and I think Beps is about moving all international systems to a more transparent, clear system."

Don't laugh...

6/10/15: BRIC Quarterly Economic Activity & PMIs: 3Q 2015

Now, as promised, the summary of 3Q 2015 BRIC PMIs and the insights these give us into global growth trends. Note: series history refers here to data from 1Q 2006, since some countries in the group only started collecting PMI data from that period.

Brazil:

• Brazil’s Manufacturing PMI averaged poorly 46.7 in 3Q 2015, which is… drum roll… an improvement on disastrous 46.1 recorded in 2Q 2015. All in, Brazil manufacturing sector contraction is now 6 consecutive quarters-long. Over the last two consecutive quarters, Brazil posted the worst Manufacturing sector performance of all BRIC economies. 
• Meanwhile, Brazil Services PMI tanked to 41.9 on 3Q 2015 average basis from already abysmal 42.3 reading in 2Q 2015. This means that Brazil Services sectors are in a deep contraction over the last 6 months and the rate of contraction accelerated in 3Q 2015. This is the worst quarterly reading in all BRIC economies for Services sector for the second consecutive quarter running and the fourth consecutive quarter of recession in Brazil’s Services. 
• While Manufacturing PMI in 3Q 2015 was the fifth lowest in history of the series, Services PMI hit its lowest level in history. In brief, Brazil is in deep trouble and is currently the worst performer across both manufacturing and services sectors of all BRIC economies. Brazil recorded now four consecutive quarters of sub-40 readings in both indices - the only economy in the BRIC group to have done so (in Russia case, such coincident sub-50 readings have occurred for the duration of only two quarters) in post-Crisis period.

Russia:

• Russian Manufacturing PMI averaged 48.4 in 3Q 2015 unchanged on 48.4 reading in 2Q 2015. This is the lowest (tied with 2Q) reading since 1Q 2014 and marks the third consecutive quarter of sub-50 readings in the sector. The level of contraction singled by 48.4 reading is, however, not particularly remarkable, marking the 6th sharpest rate of activity decline in series history.
• Russian Services PMI posted a reading of 50.7 in 3Q 2015, consistent with weak growth, following 51.0 reading in 2Q 2015 and marking two consecutive quarters of above 50 readings. Growth is still weak in the sector, with 3Q 2015 reading being 9th lowest in series history.
• Overall, Russian economy is still in a recessionary scenario, judging by PMIs although some improvement is visible in the Services side of the economy. In my view, it is too early to call the bottom of the recession, yet, but there are some potentially encouraging signs emerging.
• Russia remained the second weakest economy in the BRIC group, only marginally (by about 0.1 points) underperforming China when comparative is taken across both sectors of the economy.

China:

• Chinese Manufacturing PMI fell off the cliff in 3Q 2015, declining to 47.4 compared to 49.2 in 2Q 2015. This marks second consecutive quarter of sub-50 readings for the index. 3Q 2015 index was 3rd lowest in the history of the series, highlighting just how sharp the deterioration was. Over the last 4 quarters, Chinese manufacturing failed to post a reading above 50.0 in all quarters, meanwhile, over the last 16 quarters, Chinese Manufacturing posted a statistically significant growth reading in only one quarter.
• China Services PMI fell from 52.7 in 2Q 2015 to 51.9 in 3Q 2015. This is the 5th lowest reading in the history of the series and, although nominally above 50.0, statistically is not consistent with a signal of even moderate growth. 
• In simple terms, China is getting dangerously close to statistically zero growth across the economy, which, in my view - given the low quality of Chinese official data - can be anywhere around 3-4 percent official GDP expansion for 2015. Potentially - lower. 

India:

• Indian Manufacturing PMI continued to lead the BRIC economies indices, rising to 52.1 in 3Q 2015 from 51.7 in 2Q 2015. Still, the case of growth is 9th slowest in data series history.
• Indian Services PMI posted a strong rebound from 49.9 reading in 2Q 2015 to 51.3 in 3Q 2015. Even with this rebound, latest indicator is signalling 10th slowest rate of growth in the Services side of the economy.
• Overall, India returned to the scenario of broadly based (across both Services and Manufacturing) growth in 3Q 2015. However, considering past performance, growth across both sectors in India was anaemic in 3Q and it has been weak since the start of 2013.

Charts below illustrate key trends:

Overall, BRIC group activity has been pretty disastrous in recent quarters, as shown in the Chart below

As the above illustrates, combined BRIC Manufacturing index is currently running at 48.5 down from 49.4 in 2Q 2015 and marking second consecutive quarter of sub-50 readings. This the third worst performance level for the indicator. Across Services sectors within the BRIC economies, activity also fell in 3Q 2015 (to 50.7) from already weak 50.9 in 2Q 2015. 3Q 2015 Services reading is 5th worst in history.

Table below summarises recent changes in quarterly PMIs:

Key conclusions: 

• BRIC economies are in a sharp, structural slowdown across both manufacturing and services, with Brazil and Russia lingering in sustained recessions, China effectively falling off the growth cliff and India slowing down, but still generating positive growth. The rot is global - it is driving global trade and currencies imbalances and is also driven by global trade, demand and currencies imbalances. With the world’s largest EMs in deep trouble, one has to wonder how low can global GDP growth revisions go in months ahead.
• The structural or longer-term nature of this rot is best highlighted in the last chart above, showing clearly the dramatic trend decline in Manufacturing activity starting with 2Q 2011, followed with the onset of decline in Services side of the economy in 2Q 2013.

Note: Monthly PMIs for September were covered in previous posts:
- For Services and Composite PMIs: here.
- For Manufacturing PMIs: here.

6/10/15: BRIC Services & Composite PMI: September 2015

BRIC Services PMIs and Composite PMIs are in for September. I covered Manufacturing PMIs for BRTIC economies earlier here.

Unlike Manufacturing sector, BRIC Services sector did much better, posting overall a shallow, but positive growth.

• Russia Services PMI was covered in detail in this post. Overall, in the end Russia Services PMI reading for September ended up being tied for the highest position in the entire group alongside India’s
• India’s Service PMI came in at 51.3, down from 51.8 in August and marking third consecutive month of above 50 readings. The rate of growth singled by the Indian PMI is, however, relatively weak. 
• China Services PMI came in at 50.5, the second weakest reading for a BRIC economy and down on 51.5 in August. Statistically-speaking, just as with Russian and Indian Services indicator, Chinese Services PMI was not distinguishable from zero growth 50.0 marker. For the economy that never posted below 50 reading in its Services PMIs, however, current reading for China is probably consistent with a sector growth plummeting sharply. This is the lowest rate of activity since July 2014. September reading was also second lowest on record.
• Brazil Services PMI was the only reading below 50 in the BRIC group and at 41.7 it is a very poor reading and is below August 44.8. Brazil has now posted the weakest of Services PMIs reading for all BRIC economies every month since March 2015.

As Chart above clearly indicates, Brazil weakness is sharp and sustained over some time now. In contrast, Russia has managed some stabilisation in the Services sector with very strong upward correction starting from February 2015 low. Overall, you can also see the extremely compressed and subdued growth activity in the Sector across the BRIC economies starting with 3Q 2013 on. 

Summary table below highlights recent changes in Manufacturing and Services PMIs for the BRIC economies:

Now, let’s consider Composite PMIs.

• Again, Russia Composite PMI was covered in the separate earlier post here. In comparative terms, Russian Composite PMI was the second highest in the BRIC group after India.
• India Composite PMI came in at 51.5 in September compared to 52.6 in August, marking a deterioration in the rate of growth in the economy. 51.5 reading is border-line significant in statistical terms, suggesting possibly sharper downturn in the economic activity than simple decline of 1.1 points suggests. Still, India posted the best performing Composite PMI of all BRIC.
• China Composite PMI came in at disappointing 48.0 in September, down from an already weak 48.8 in August. Last two months readings suggest negative growth in the Chinese economy, although it is hard to call what exactly is happening in the actual economy. Nonetheless, China was a negative drag on the BRIC growth for the second month in a row.
• Brazil Composite PMI literally is tanking. It hit 42.7 reading in September, down from 44.8 in August. This marks a seventh consecutive month of composite PMI for the country signalling an outright contraction in output. 

Charts above plot BRIC Composite PMIs. Several things worth noting here are:

1. There is continued divergence in Russian PMIs (to the upside) and BRIC ex-Russia PMIs (to the downside) driven by sharp deterioration in Brazil economic environment over the last 7 months. Local peaking of BRIC ex-Russia PMIs in February 2015 is now fully exhausted and in September, BRIC ex-Russia index took a sharp nosedive. Trendiness reflect this divergence and show that it is currently well-established. In other words, although Russian economy is performing poorly, ex-Russia BRIC economies are performing even worse, even if we include into this sub-grouping a relatively well performing India.
2. Overall, BRIC Composite PMI is on a sustained downward trend since June 2014 and in July-September 2015 this downward trend accelerated sharply. BRIC Composite PMI now signals recessionary conditions across the whole group of four largest Middle-Income and Emerging Markets economies. On a longer time line, weak performance in the BRIC economies has been now a feature of the global growth environment since the end of 1Q 2013.

I will be covering quarterly PMI signals in the subsequent post, so stay tuned.

5/10/15: Manning Financial Q4 2015: Economic Update

My Economic Update for Manning Financial for 4Q 2015: