13/2/2013: BlackRock panel economic outlook for H1 2013

Not surprisingly - and in line with the likes of CESIfo Index measuring global economic conditions (see link here) - BlackRock Institute report on global economic outlook also signaled that analysts' expectations are turning positive.

Here are two key charts for North American and Western Europe:

I like the cautious, but overall improving outlook for Ireland: still significant proportion of experts expecting continued recession, but crucially, Ireland is (at least in expectations) well-decoupled from the peripheral euro area countries.

Do note Spain's position as the worst expectations performer in the group - must I remind you, Mario Draghi recently praised Spain as the country that serves as an example of how to 'stabilise' crisis-hit banking sector... right...

13/2/2013: CESIfo Index shows improvements in Global Economy

CESIfo institute has issued its analysis of the global economy and... some good news: per CESIfo index tracking global growth, world economic climate indicator finally is up after two consecutive declines.


The increase in the index "was mainly driven by significantly more positive assessments of the 6-month [forward] economic outlook." At the same time, "assessments of the current economic situation improved only slightly. After 6 months of stagnation, the prospects for the world economy seem to be brightening."

• Asia led the global index rise, with region index "now higher than its long-term average once again. Both assessments of the current economic situation, and especially expectations, have brightened considerably." 
• In the case of North America "the rise in the economic climate indicator was mainly due to improved assessments of the current economic situation. Despite the improvement, the current economic situation is not completely satisfactory in this region." 
• Per CESIfo release: "The current economic situation is also unfavourable in Western Europe. Assessments of the 6-month [forward] economic outlook, on the other hand, were significantly more positive, which led to a moderate overall improvement in the economic climate." 

CESIfo Index panel "on average expect short-term interest rates to remain largely unchanged over the next six months. However, they believe that long-term interest rates are set to increase slightly. On worldwide average, economic experts expect moderate growth in the value of the US dollar over the next six months."

12/2/2013: Small step down, but doesn't hurt either...

Nice move in CDS markets for Ireland earlier today - not large, but good positive. Also, note relative distance in implied probabilities of default between Ireland and Portugal:

11/2/2013: What's David Hall's Case is Now About?

In light of the recent changes to the IBRC position and the Promo Notes, there can be some confusion around the case David Hall has taken against the Minister for finance. In particular, the confusion can arise due to the claims that we have made a "deal" on the promissory note and in light of the IBRC Bill 2013 provisions (Article 17). Let me try to (speculatively, I must add) shed some light.

The promissory notes were a product of the Credit Institutions (Financial Support) Act 2008 passed by the Dail Eireann on October 2, 2008. More specifically, the Minister for Finance, in allocating capital funds to the insolvent Irish banking institutions (see more of the background on this here: ), relied upon the provisions of the 2008 Act, Section 6. However, article 6.3 of the Act clearly stated that “Financial support shall not be provided under this section for any period beyond 29th September 2010, and any financial support provided under this section shall not continue beyond that date.” Furthermore, the Minister was given such powers (limited by the above date) to appropriate “all money to be paid out or non-cash assets to be given by the Minister… may be paid out of the Central Fund or the growing produce thereof” (Section 6(12)).

Furthermore, to the point of Defense in the case, Article 6(4) of the Act stipulates that “Financial support may be provided under this section in a form and manner determined by the Minister and on such commercial or other terms and conditions as the Minister thinks fit. Such provision of financial support may be effected by individual agreement, a scheme made by the Minister or otherwise.” This section is still covered by the 29th September 2010 cut-off date, but in so far as it covers (potentially) multiannual commitments created before that date but with a maturity beyond that date, it is unclear if this section covers the duration of the original Promissory Notes. Regardless of whether it does or not, the section is constrained explicitly by Section 6(5) which states: “Where the Minister proposes to make a scheme under subsection (4) – (a) he or she shall cause draft of the proposed scheme to be laid before each House of the Oireachtas, and (b) he or she shall not make the scheme unless and until a resolution approving of the draft has been passed by each such House.”

David Hall is claiming that in a democracy and under article 17 of the Irish Constitution the Dail and our elected representatives have the power to appropriate funds from the central fund (which, like all the rest of the Government funds, is made up of receipts and our taxes).

The point here is that David Hall is saying that it is not constitutional that one person, namely the Minister for Finance, or any future Minister for Finance, could spend monies (or future moneys) through issuance of bonds, various securities, even using another Promissory Note without any upper limit being set on such payouts and without any cabinet or Dail approval or vote.

According to David Hall’s case, this constitutes the core threat to the democracy enlisted within his claim. He believes that under the constitution that TD should have to vote on such expenditure and that they cannot give away their constitutional powers.

The fact that the current Promissory Note (and only in relation to IBRC notes) has been changed and eliminated does not alter the risk of future breaches of constitutionality (if David Hall is correct in his challenge) or abuses of the public purse.

11/2/2013: Irish Pharma Sector: December 2012

As promised in the previous post, ehre's some analysis of the breakdown for data for the Basic Pharmaceutical Products and Preparations Sector (BPP):

• Overall volume of production in the sector rose to 150.6 in December 2012, up strongly (+20.48%) m/m and even up y/y on year (+7.73%). However, compared to December 2010 the index is down 9% and relative to monthly peak it is down 16.47%. Back in December 2011 the index fell 15.53% y/y so there is some consolation there.
• 3mo average through December 2012 was down 5.79% on 3mo average through September 2012 and 11.53% down y/y.
• Overall, short-term rise in the index m/m is encouraging, but also consistent with pharma companies beefing up Q4 numbers.

Most worrying is the trend in Turnover - the series that tell us about profitability of the sector and returns in the sector. The series are sensitive to currency valuations, but overall they are closer in relationship to core pharma - the patent stuff.

• Turnover fell in December from 123.1 in November to 107.5 a drop of 12.67% m/m and down 39.47% y/y. Compared to December 2010 the index is now down 29.32% 
• The rate of fall is accelerating: in December 2011 the index rose 16.77% y/y as opposed to December 2012 fall of 39.47% y/y. 
• 3mo average through December 2012 was down 12.93% on 3mo average through September 2012 and 26.92% down on 3mo average through December 2011. Current 3mo period was down 21.55% on same period in 2010.

Chart below illustrates just how much out of line the turnover index is relative to historical readings and the contrast to volume of production index:

11/2/2013: Irish Industrial Production & Turnover: December 2012

Still catching up with data updates following a busy week lecturing.

Last week CSO issued data for december 2012 on Industrial Production and Turnover. Here's the detailed breakdown.

On Production volumes side:

• Index of production in Manufacturing Sectors rose to 112.0 in December 2012 up 11% on 100.9 in November 2012. Year on year index is up 2.85% - anaemic, but at least positive. 
• However, compared to December 2007 the index is still down although insignificantly at -1.72%. The issue here is that de facto this means that Irish Manufacturing Sectors are static over the last 5 years. 
• 3mo average through December is down 3.77% on 3mo average through September 2012 and is 7.15% down on 3mo average through December 2011. Thus, longer term dynamics, smoothing out some of the m/m volatility are not encouraging. 
• On shorter end of dynamics, however, things are slightly better: December reading is 112 and it is well-ahead of 6mo MA of 106.75 and 12mo MA of 108.99.
• Index of production in All Industries also improved in December to 108.8 up 1.58% y/y and 8.47% m/m.
• Compared to December 2007 the index is down significantly at -4.26%, which again shows that Industrial activity in Ireland has fallen relative to 5 years ago or at the very least - has not risen.
• 3mo average through December 2012 is 3.83% behind 3mo average through September 2012 and 7.01% below 3mo average through December 2011.
• As with manufacturing, shorter end of dynamics is more positive with December 2012 reading at 108.8 ahead of 6mo MA of 105.12 and 12mo MA of 107.19. 
• Modern sectors activity rose strongly at 9.3% m/m to 120.6 in December 2012, although y/y rise was much weaker at 1.86%. 
• The index is ahead of December 2007 by a marginal 1.82%.
• 3mo average through December 2012 is 7.68% below 3mo average through September 2012 and 9.61% below 3mo average through December 2011.
• Shorter dynamics are not too positive: the current reading of 120.6 is only marginally ahead of 119.82 6mo MA and is below 12mo MA of 124.05. 
• All dynamics in the Modern Sectors show steep falloff in Pharma activity.
• Lastly, Traditional Sectors activity returned to contraction in December, falling to 86.9 (-1.3% y/y and -1.25% m/m). The index is now 15.35% below where it was in December 2007. 3mo average through December 2012 is 1.73% down on previous 3mo period and is 1.37% down on same 3mo average in 2011. Worse than that, after posting a surprise uplift in November, the index is now running only slightly ahead of 6mo MA of 85.5 and 12mo MA of 85.13.
• So on the net, good news is that outside Traditional Sectors time series in volume activity are trending up in last two-three months. Bad news is - we are still off the levels of activity consistent with 2011 and are way off from regaining any sensible growth on 2007.

Chart to illustrate:

On Turnover Indices side:

• Manufacturing Sectors turnover fell from 101.1 in November 2012 to 97.0 in December 2012, down 3.10% m/m and down 10.76% y/y, both steep declines. Compared to the same period of 2007 the index is now down 9.5%. 3mo average through December 2012 is down 4.35% on 3mo average through September 2012 and is down 6.36% y/y.
• This index is pretty volatile m/m but overall, 6mo MA is at 98.93 and 12mo MA at 98.33 - both ahead of December monthly reading.

New Orders sub-index for all sectors is trending flat over the recent months (as per chart above) reaching 96.9 in December 2012, down from 100.1 in November 2012, so the index is down 3.2% m/m and it is down even more significant 10.9% y/y. Compared to December 2007 the index is down 11.6%. On 3mo dynamics the index is down 5.04% period on period and 6.7% y/y.

I will blog separately on dynamics in the phrama sector next.

11/2/2013: Bailout 3.0 and precedent research

Ireland Bail-out 3.0 (this time more benign than 1.0 - the original Troika lending arrangement, but less benign than 2.0 - the 2011 alteration to the terms of the Troika lending arrangement in the wake of Greek bailout 2.0... I know, one can wreck one's head on this forest of bailouts) has been heralded as a 'historic' achievement.

Here is the original (unedited) version of my paper from 2010 on

1. the necessity of such a deal, which makes me deem the deal to be net positive, and 
2. the volumes of relief that we need (well in excess of EUR4.3-6.9 billion NPV benefit my model estimates the deal will provide over 40 years duration) which makes me deem the deal to be insufficient in terms of relief provided.

Read, again... http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1985617

Note, the title of the book in which this featured as a chapter is What if Ireland Defaults.

10/2/2013: Irish Services Index: Still Searching for a Catalyst

Catching up with some data updates, the latest monthly data for Services sectors activity in Ireland was out recently (see link to CSO release here). The data overall points to weaknesses in Services in December 2012, as the summary table shows:

However, let's take a look at subtrends and subsectors:

• Wholesale Trade sub-index fell 4.01% m/m in December 2012 to 112.4 and was down 7.11% y/y. 3mo average through December 2012 is at 115.37 - well ahead of December 2012 monthly reading of 112.4, but down on 3mo average through September 2012 which stood at 116.23. 3mo average through December 2011 was 120.2 - significantly ahead of the average activity recorded in 3mo through December 2012. December 2012 reading was statistically within the historic average.
• Wholesale and Retail Trade, Repair of Vehicles etc sub-sector activity fell 2.65% m/m and was down 4.23% y/y in December 2012. 3mo average through December 2012 (108.57) was ahead of December monthly reading (106.4) and virtually unchanged on 3mo average reading through September 2012 (108.27). However the index reading and its 3mo average were both behind 3mo average through December 2011 (110.57). Similar deterioration in performance marked H2 2012 readings relative to H1 2012 and H2 2011.
• Transportation and Storage sub-sector activity remained relatively flat in December (110.1) compared to November (110.0) rising just 0.09% m/m, although the series are up 6.17% y/y. 3mo average through December 2012 (110.07) is below 3mo average through September 2012 (112.77), but well ahead of 3mo average through December 2011 (101.93). H2 2012 average stands ahead of H1 2012 average.

Per chart above, 

• Accommodation and Food Services sub-sector activity remained largely unchanged in December 2012 (105.5) compared to November 2012 (105.6) with 0.095% decline m/m contrasting 1.74% rise y/y. 3mo average through December 2012 (104.97) was only marginally ahead of 3mo average through September 2012 (104.83) and is ahead of 102.27 reading for 3mo average through December 2011. H1 2012 average was at 101.83 and this rose to 104.9 for H2 2012 average. December 2012 marks the fifth highest index reading since November 2009.
• Within the above sub-sector, Accommodation activity fell 0.18% m/m and rose 9.34% y/y - the largest rise in annual terms of all sub-sectors. Accommodation activity performance was particularly strong in H2 2012 (3mo average through December 2012 was 109.47 and 3mo average through September 2012 was 109.83) when activity index averaged at 109.65, compared to H1 2012 when it averaged 103.95.
• Administrative services fell 2.64% m/m but are still up 3.75% y/y, with 3mo average through December 2012 (102.17) virtually identical to 3mo average through September 2012 (102.20) and both ahead of 3mo average through December 2011 (92.0). H1 activity came in at slower pace than H2.

In heavily exporting sub-sectors of Services:

• ICT services activity rose 4.23% m/m in December 2012 (to 118.3) and was up 9.13% y/y. 3mo average through December 2012 stood at 114.83, ahead of 3mo average through September (110.17) and ahead of 3mo average through December 2011 (107.43). H2 2012 average activity stood at 112.5, up on 110.33 average for H1. The sub-index hit an all-time high in December 2012.
• In contrast with ICT Services, Professional, Scientific & Technical Activities have recorded an unpleasant contraction of 3.82% m/m in December 2012 to 88.2. The index is now 11.8% behind its average activity in 2010 and it has fallen a massive 16.40% y/y. 3mo average through December 2012 stood at 90.23, slightly up on abysmal 3mo average through September 2012 (86.8) but well below the 3 mo average through December 2011 (99.0). H2 average activity (88.52) was well below H1 2012 average activity (92.4) and well below H2 2011 activity (99.45).

Chart above provides outline for the overall Services Activity Index:

• The index has declined marginally (-0.66%) m/m to 106.0 in December 2012 and is now down 1.12% y/y. 3mo average through December 2012 was slightly healthier at 106.43 than the 3mo average reading through September 2012 (104.87), with 3mo average through December 2011 recording 105.0. However, overall H2 2012 average was practically unchanged at 105.65 against H1 2012 average of 105.43.
• The index is now reading below its momentum trend and is only marginally above (statistically) its historical average. As the chart above clearly shows, Irish Services Sector has been bouncing along a flat for some 13 months now, following a rise in twelve months before December 2011.
• Overall, thus, the data is not very encouraging. The sector seems to be searching for a catalyst to either the upside or the downside. Transport & Storage, ICT Services and Accommodation provide some hope (on the basis of y/y comparatives for 3mo average through December 2012, as well as December own y/y changes) for the future, whilst Wholesale services, as well as Professional, Scientific and Technical services creating a powerful downward drag.

10/3/2013: New Car Sales: Back to the Future of Exports-led Recovery

In line with the grand claims of revival of domestic demand around Christmas season 2012 and of green shoots sprouting everywhere where IBEC & IDA cast their eyes, the latest car sales stats are showing the glorious return of the autotrade to the late 1970s and late 1980s.

Per latest data, covering January 2013, as released by CSO (link here), gains in Irish trade competitiveness (aka contraction in domestic demand-driven imports) have bit hard into the motor sales sector.

Table below summarises short-term trends:

But possibly even more revealing are the stats for the month of January taken from 1965 onward:

Not a pretty sight. Current levels of All Vehicles new registrations are running at the levels of 1994, below 1989-1991 and below the levels of 1978-1981. Ditto for New Vehicles registrations and New Private Cars registrations. All three series are marginally above 2010 disaster year and the differences of all three from January 2010 are statistically insignificant.

Welcome back to the future where exports are rescuing us... possibly from ourselves. 

10/2/2013: EU Budget 'cut': neither reformist, nor significant enough

EU has agreed the next multi-annual framework for its budget. One of the best summaries I have read is here: http://www.bruegel.org/nc/blog/detail/article/1010-how-to-read-the-eu-budget-deal/#.URfavqFaZF8

The framework covers 2014-2020 period.

The reduction of the EU Budget from from 1.12% of GNI to 1% of GNI, in my opinion, is in line with the overall fiscal tightening across the EU and is a good thing (note, obviously my analysis will be different from that of Bruegel - linked above). The reason why I perceive this to be a strength of the Budget is that I generally do not perceive EU expenditure as being more economically efficient or necessary than that by the Member States. The further you detach spending from the sources of revenues (and the EU Budget is as far detached as feasible to imagine), the more weakly is the expenditure anchored to the needs of the economy.

Net reduction - as measured by the payments, is from EUR988bn to EUR908.5bn - is a relatively marginal 8.05%, not exactly an earth-shattering level of fiscal crunching. Furthermore, much of planned payments allocated in the past have gone unspent, implying that the effective 'cut' is most likely going to turn out much shallower than 8.05% headline figure.

Crucially, I disagree with the implicit Brugel position (based on their criticism of the Budget's 'pro-growth' momentum) that the EU expenditure should be considered in the light of economic growth enhancement or economic contraction. The EU Budget allocations can and do set dangerous precedents of creating permanent interest groups reliant on EU funding for jobs and demand generation. One of the best examples are EU research and development subsidies. Since the EU budget is drawn out of the national resources, any 'stimulus' the EU Budget can create is at the very best a reallocation of similar stimuli from national economies. Synergies at the pan-European or cross-European investment levels (e.g. building common integrated infrastructure etc) enhance the EU Budget growth-support capacity, but bureaucratic duplication, and interest groups politics reduce it in return. With much of EU Budget going to 'soft' programmes, where (1) substitution effects relative to nationally-administered programmes are unclear, and (2) transfers are subject to EU-level political and bureaucratic objectives and constraints, it is hard to imagine the EU expenditure to be more 'stimulative' than a national expenditure.

Furthermore, in the environment of continued debt consolidation and budgetary tightening policies at the national levels, it is hard to imagine that the EU spending priorities would see more efficient allocation of funds than tighter national priorities. In other words, one has to ask a simple question of whether funding another cross-border EU 'cohesion' project is the better use of increasingly scarce resources in the environment where both countries involved are cutting back hospitals and schools.

As Bruegel correctly points out, there are no reforms undertaken in the Budget. My concern here, however, is more on the expenditure side, while Bruegel concern is focused on revenue side. I simply do not see the EU Commission to currently have either democratic or fiscal capacity to begin collecting direct taxes of any variety. Proposed move of the Commission into indirect taxation (e.g. FTT etc) is likely to cement further the democratic deficit in the EU by providing EU Commission with all the trappings of sovereign power and requiring no direct accountability usually associated with direct taxation.

7/2/2013: Trading Debt for Cash Flow Relief?

Muy thoughts (quick one between lecturing) on the deal:

As I understand it,

1. We have converted quasi-governmental debt into pure Government bond.
2. Maturity profile is very good - long dated, no restriction on NTMA raising funds at 20 year + 
3. We are gaining some cash flow improvements up front (where they matter most), but 
4. We are not getting a major write down on the debt overall. 
5. Deficit impact is one-off 500mln, that will be absorbed into improvement over 2014 Budget and that's it as it becomes 'repeated measure' equivalent in 2015 and after. 
6. So material saving to the economy is really 500mln and that is at the peak (2014-2015), after that the savings will decline, until finally, around ca 2020-2025 (needs more precise calculations here) the savings will become negative as we will be paying more in interest than we would have been paying before.
7. Additional second order effect is that improved bond markets profile is likely to result in slightly lower borrowing costs over time, but this impact is off-set by the reduced Central Bank revenues remittable back to the Exchequer. 

The deal is not putting any final closure to the Anglo or INBS 'odious' debt, but simply constitutes an extension of the debt. 

It can result in the lower real value of the debt over the period of time, assuming Ireland can issue bonds at negative real interest rates (bond coupons below inflation rate), which is unlikely. 

Neither is the deal reducing the debt overall, which means the deal has no effect on the adverse impact of debt drag on growth. The Government never asked for a debt writedown (reduction in the overall debt levels).

The deal is a net positive, but materially not significant enough.

Basic summary - as expected last night on VinB.

6/2/2013: Irish Manufacturing PMI - January 2013

Last night I wrote briefly about the Services PMI for January for Ireland (see post here and an added post on the longer term link between PMI and Services Index here). Going over the database, however, made me realise that I have not posted on the latest Manufacturing PMI figures for January, so correcting this, here's the analysis.

Headline seasonally adjusted Manufacturing PMI posted a decline from 51.4 in December 2012 to 50.3 in January 2013, leaving the index notionally above 50.0 line for 11th month in a row. Alas, 50.3 is not statistically significantly different from 50.0 and in total out of the 11 months of consecutive notional readings above 50, in reality only 3 months posted readings that are significantly distinct from 50.0 zero-growth line.

Dynamics are flat at just around 51.5 (also not statistically distinct from 50.0), with 12mo MA at 51.5, 3mo MA at 51.4 and previous 3 mo MA at 51.6. This, however, compares relatively positively with 3mo MA through January 2012 (48.5) and 3mo MA through January 2010 (48.6) although the current 3mo MA reading is below 53.1 reading for 3mo MA through January 2011. 6mo MA is 51.5.

In brief - growth is sluggish and lacking a catalyst.

Charts:

Per above, Output index posted a slight rise in headline reading from 51.2 in December to 51.5 in January, marking 9th consecutive month of above 50 notional readings, with just 4 of these months posting readings statistically consistent with being above 50.0. 3mo MA was at 52.2 in 3mos through October 2012 and is at 52.2 in 3mo through January 2013. It is bang-on in line with 12mo MA of 52.1 and is identical to 52.2 6mo MA.

New Orders sub-index posted surprise contraction to 49.5 (not statistically distinct from zero-growth, so a very shallow contraction if any) in January from shallow growth of 50.9 in December. 12mo MA is at 52.0, with 3mo MA through January 2013 at 50.8 and 3mo MA through October 2012 at 52.3, marking a clear slowdown in growth over the last 6 months. That said, January 2013 was the first sub-50 reading in the series since January 2012.

New Export Orders posted slower rate of expansion at 50.9 in January 2013, down from 53.6 in December 2012. Again, as above, 50.9 is not statistically different from 50.0, although 53.6 was clearly statistically above 50.0. January 2013 reading was the weakest in 4 months and the second weakest in 11 months. 3mo MA through January 2013 is at 52.2, above 51.2 3mo MA through October 2012, 6mo MA at 51.7 and 12mo MA is at 52.5, so by all averages, January came in relatively weak.

Other series summed up in the charts below:

Output prices posted a clear decline in January 2013 (48.2) after posting a mild expansion (and a surprise one) in December 2012 (51.3). Overall, in last 24 months, only 9 months posted notional above 50.0 readings, when it comes to output prices. Meanwhile, input prices continued to inflate, with index reading of 57.1 in January 2012 being somewhat lower than 59.9 in December. In last 24 months, there was only one instance when input prices inflation was negative. All of which does not bode well for profit margins: in 3 mo through January 2013, average input prices inflation was consistent with 58.7 and in 3mo through October 2012 it stood at 59.4. At the same time, output prices were contracting by 49.7 in 3mo through January 2013 and were expanding at a slower pace than inputs costs were inflating (51.7 vs 59.4) in 3 months through October. In other words, profitability has been shrinking, on average over last 6 months and indeed over the last 12 months.

Now onto composite measures of current and future activity. These are computed based on my own formula, so not a part of NCB-released data. The Current Composite index is based on a  weighted average of Output and headline PMI index, relating current PMI to Output, as opposed to changes in stocks of goods and purchases orders. The Forward Composite Index is based on a weighted average of New Orders and New Export Orders, weighted relative to each series correlation to headline PMI. As such, both indices attempt to remove impact of temporary factors on underlying activity.

Current Composite Manufacturing PMI (CCM index) fell from 51.3 in December 2012 to 50.9 in January 2013, with overall notional levels above 50 recorded now in 9 consecutive months. However, statistically, the CCM Index was above 50.0 in only four out of the last 12 months. Forward Composite PMI (FCM index) also slipped in January from 52.2 in December 2012 to 50.2. Above 50.0 notional readings were now recorded in 11 consecutive months, although only four months posted readings statistically above 50.0.

On the net, the indices mark significant slowdown in current and forward activity, although current readings are consistent with progressing weak recovery (statistically indifferent from stagnation). Given overall global improvements in sentiment and trade, this can represent simply a lagging effect to global growth (upside potential) and / or drag on Irish activity from the Euro area and the UK economies weaker-than-global performance (downside potential).