Recently, I was asked to comment on the issue of emerging nationalism in the European and Eastern European (especially Russian and Ukrainian) context. Here is a paper that was produced for the discussion: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2499254
Tuesday, September 23, 2014
23/9/2014: Nationalist Revival and the end of the Age of Great Moderation
Recently, I was asked to comment on the issue of emerging nationalism in the European and Eastern European (especially Russian and Ukrainian) context. Here is a paper that was produced for the discussion: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2499254
23/9/2014: Irish factory Gate Prices: Deflation and Inflation in August
CSO's latest data on monthly factory gate prices shows that producer prices rose 0.3% in August 2014 m/m and fell 2.0% y/y, moderating a y/y drop of 2.4% recorded in July 2014.
Exports prices rose 0.4% and home sales prices were down 0.3% m/m. However, y/y exports prices are now down 2.1% and home sales prices are down 1.4%.
Noting the effects of European agricultural products trends associated with Russian counter-sanctions, dairy products prices were down 2.4% m/m and meat and meat products prices fell 0.4% m/m. Outside sanctions impact, Beverages prices rose 2.7% y/y, basic pharma products prices fell 4.5% y/y.
Capital goods prices rose 1.3% y/y and 0.3% m/m, while energy prices fell 13% y/y, petroleum fuel prices were down 2.3%.
Given moments in inputs prices and outputs prices, business margins appear to be pressured by: forex valuations (primarily driving exports prices changes to the downside) and by ongoing domestic deflation in the private sectors. Margins were supported by some decreases in the inputs costs (energy) and offset by the increases in prices of capital goods.
Chart below shows the overall downward trend in producer prices for manufacturing sectors that has been established now from roughly Q3 2012.
But never mind the above... all is rosy based on Irish PMIs readings...
Monday, September 22, 2014
22/9/2014: Where TLTROs dare to go?..
Last week I wrote about the disappointing nature of the first round of TLTROs by the ECB (http://trueeconomics.blogspot.ie/2014/09/1892014-quite-disappointing-tltro-round.html). Now, some more evidence that TLTROs are at best replacing / swapping liquidity in LTROs maturities without materially changing the nature of the banks assets holdings. Remember, the objective of TLTROs is to inject funds into corporate lending, not sustain or increase flows of funds into sovereign debt markets... which means sovereign yields should not be falling in connection to TLTROs.
So guess what's happening?
The chart above shows several things:
- Both Spanish and Italian yields are falling across all maturities in excess of 1 year.
- The margin from lending to the Spanish and Italian Governments (yield on bonds less cost of TLTRO funds) is lower across all maturities post TLTRO issue than before.
- Margin declines are not uniform across maturities, and generally steeper at longer maturities.
Are the banks taking up TLTROs pushing up prices of Government debt?.. That would mean more disconnection between the monetary policy objectives and outcomes, right?..
Sunday, September 21, 2014
21/9/2014: Irish Corporate Tax Policy: Some Leadership Needed
Earlier this week I gave a comment to TheCorner.eu on the issue of Irish corporate tax reforms and challenges:
21/9/2014: Ireland's Performance: Some Gains, Some Pains
Last week I gave a quick interview to Swiss Dukascopy TV. The link is here: https://www.youtube.com/watch?v=V9Qi9r-7PSE
Here are some of my notes for the programme.
Q: Ireland’s unemployment rate fell to five-year low of 11.5 per cent. Fitch restored its A grade to the Irish economy. Noonan believes the upgrade reflects significant progress made in repairing the economy.
Ireland has shown some significant improvements in unemployment and jobs creation areas and the economy is now growing, at least in official accounts terms, in part driven by changes to GDP and GNP accounting standards. These are well-documented and there is little point of dwelling on the figures.
However, less noticed is the fact that the latest figures for jobs market and population trends remain worrying.
Unemployment, officially, eased to 11.5% as you mentioned. But broader unemployment remains stubbornly high at 21.6% if you include underemployed, discouraged workers and all others who want a job, but cannot find one. If you add to this figure net emigration of working age adults and those who are not counted as unemployed because they are engaged in State Training Programmes, underlying ‘jobless’ rate reaches even higher. Another problem is that the declines in broader measures of unemployment from the peak are running at just about 1/2 the rate of official unemployment rate declines.
People are still dropping out of the labour force. Official Participation rate fell from 60.5% in Q2 2013 to 60% in Q2 2014. This below historical average of 60.8%. The Dependency ratio rose, albeit marginally, in H1 2014 compared to H1 2013. Over the last 3 years of the recovery, dependency ratio remained unchanged at the levels well above historical averages, some 7% above the average currently.
The problem is that the economy is generating jobs, but these jobs are either lower quality - when they cover domestic sectors of the economy and especially agriculture, or high quality jobs in the internationally-trading sectors, where employment is generally being created for younger, international workers. As the result, long-term unemployment amongst older workers is stubbornly high.
So Irish economy is an economy of two halves: one half is the economy that is saddled with high debt burdens, slow growth and in some cases, continued contraction. Another half is the economy with more robust growth. The problem is much of the latter half is imaginary economy of Services MNCs shifting profits through Ireland with little impact on the ground. The first half - the suffering one - is the real economy.
Q: Ireland has lost nearly a quarter of a million young people in five years due to emigration. This is one reason why some are skeptical about the recovery as they believe that there are still not enough jobs. Do you think we have seen enough evidence, which shows significant improvement in the labour market?
Latest emigration figures are somewhat positive for Ireland. We have recorded a decline in net emigration in 12 months through April 2014. This fell from 33,100 in 2013 to 21,400 in 2014. Much of this is down to two factors: some jobs creation in the economy is helpful, but also due to immigration increase from the countries outside the EU. This is good news. Bad news is that this is the 5th year of continued net emigration from the country, matching previous record back in the late 1980s and 1990s. In numbers terms, things are worse than then. In 5 years of 1987-1991, 133,700 Irish residents left the country, net of those arriving. In the 5 years through 2014, the number is 143,800.
So the crisis is easing, but it still is a crisis. And increasingly, people who leave today are people with decent jobs, seeking better career and pay prospects abroad, fleeing high cost of living and taxes. This means we are losing higher quality human capital.
Q: What other positive improvements in the economy are you expecting to see and do you see any downside risks remaining?
On the positive side, we are seeing continued gains in activity in core sectors of the economy. Especially encouraging are the signs of ongoing revival in manufacturing. Services, when we strip out the superficial figures from the MNCs, such as Google, Facebook, Twitter etc, are still lagging, but I would expect this to pick up too. Investment is rising - not dramatically, but with some upward support forward. Much of this down to booming local property markets in Dublin. This is ok for now, as we have a massive lag in terms of supply of housing and even commercial real estate that built up over the years of the crisis. There is a risk of a new bubble emerging in the resale property markets, but this bubble is still only a risk. Part of investment increase is also down to reclassification of R&D spending from being counted as a business expenditure prior to Q1 2014 to now counted as business investment. However, some indicators (PMIs and imports flows in capital goods and machinery categories) are pointing to a pick up in investment.
The downside risks are banks, retail interest rates cycle (potential for higher cost of servicing existent debt pile in the real economy - a risk that is still quite some time off), credit supply shortages (credit continues to decline in the economy and now we are seeing some downward pressures on deposits too). Beyond this, there is a risk of misallocated investment - investment flowing not to entrepreneurial activity, but to re-sale property markets - something that Ireland is always at a risk of.
I suspect that Irish economy will continue to grow at higher rates than the euro area for the next 12 months. But this growth will continue to come in at levels below where we need to be to actively deleverage our private sector and public sector debts.
Q: And what are the main trends we are witnessing in the Irish bond market right now?
There is basically no longer any connection between economic fundamentals - as opposed to monetary policy expectations - and the sovereign debt markets in the euro area. Take Credit Default Swaps markets, for example: Irish CDS are at around 53-54 mark, implying cumulative 5 year probability of default of around 4.62%. That is for a country with debt/GDP ratio of over 120% and relative to the real economic real capacity measured by GNP at around 135%. Take a look at Italy, with moderately higher public debt levels and more benign private sector debts: Italy is running at a probability of default of 8.29%.
The markets expectation is for the ECB to deploy a traditional QE on a large scale through its Assets Purchasing Programme - currently being developed.
Problem is: eurozone (and Ireland with it) is suffering from a breakdown in lending mechanism, lack of transmission of low policy rates to retail rates and credit supply. This is not going to be repaired by a traditional QE. It is, therefore, crucial that the ECB deploys a functional ABS purchases programme and scales up its TLTROs and better targets them.
Irish bond yields were, for 10 year paper, down to around 1.8 percent in August from 2.23 percent in July. Yields declines are in line with the rest of the euro area and its ‘periphery’. Has there been any significantly positive news flow to sustain these valuations? Not really. We are in a de facto sovereign bond markets bubble. It can be sustained for some months ahead, but sooner or later, monetary tightening will begin, currency valuations will change, and with this, the tide will start going out. Who will be caught without their proverbial swimming trunks on, to use Warren Buffet's analogy? All economies with significant overhang of private debt - first, second, economies with significant government debt overhang. Now do the maths: Ireland is one of the more indebted economies in the world when it comes to private debt. And we have non-benign sovereign debt levels. We simply must stay the course of continued reforms in order to prepare for the potential crunch down the road.
Overall, Ireland is clearly starting to build up growth and employment momentum, even when we control for the accounting standards changes on GDP and GNP side. But risks still remain, of course. The next few months will be crucial in defining the pre-conditions for growth over 2015-2016. A steady push for more structural reforms, especially completing the unfinished work in protected domestic sectors and developing and deploying real, sustainable and long-term productivity enhancing changes in the public sector will be vital.
Thursday, September 18, 2014
18/9/2014: Irish GDP & GNP Q2 2014: Headline Numbers
In the previous post (http://trueeconomics.blogspot.ie/2014/09/1892014-irish-gdp-q2-2014-sectoral.html) I covered sectoral decomposition of Irish GDP. Note, referenced activity in the above post and GDP are 'at factor cost', omitting taxes and subsidies.
Here, let's take a look at full valuations of real GDP and GNP, both seasonally-adjusted (allowing q/q comparatives) and seasonally un-adjusted (allowing y/y comparatives).
Starting with seasonally un-adjusted series.
Total real GDP (in constant prices) in Q2 2014 stood at EUR45.763 billion which is 7.72% above the levels recorded in Q2 2013 and marks second consecutive quarter of y/y growth (in Q1 2014 GDP expanded by 3.81%). Q2 2014 y/y growth rate in GDP is highest since Q1 2007 which is a huge print!
Profit taking by the MNCs accelerated to EUR8.016 billion in Q2 2014from EUR7.864 billion in Q2 2013 and GNP rose to EUR37.747 billion posting a y/y growth rate of 9.03% in Q2 2014, marking fourth consecutive quarter of GNP growth. The Q2 2014 y/y growth rate was the highest since Q2 2006. The level of GNP in Q2 2014 was the highest for any Q2 since Q2 2007. So we have another huge print here.
GNP/GDP gap at the end of Q2 2014 stood at 17.5%, which is worse than the gap of 16.9% in Q1 2014 but an improvement on 18.5% gap in Q2 2013. Excluding taxes and subsidies, private GNP/GDP gap reached 19.0% in Q2 2014 compared to 20.1% in Q2 2013. This means that while growth is improving domestic economic conditions, these improvements are not tracking in full overall economic activity.
In seasonally-adjusted terms, Irish economy's performance was more moderate, albeit still strong, than in y/y growth terms discussed above.
Q/Q, GDP grew by 1.54% in real terms in Q2 2014, marking a slowdown in growth from 2.79% q/q growth in Q1 2014. However, Q2 2014 marks second consecutive growth period and the first time we have posted a GDP outcome above EUR45 billion (EUR45.611 billion in fact) in any quarter since Q2 2008.
Q/Q GNP marked fourth quarter of expansion in a row with Q2 2014 uplift of 0.61% on Q1 2014, ahead of Q1 2014 growth of 0.38%. However, Q2 2014 growth was second slowest in last 4 quarters. In level terms, Q2 2014 seasonally-adjusted real GNP came in at EUR37.983 billion which is the best Q2 reading since Q2 2008. So despite growth moderation, levels performance is still relatively good.
Here are two charts plotting relative performance by quarter in terms of GDP and GNP compared to historical average growth rates for each decade.
18/9/2014: Irish GDP Q2 2014: Sectoral Decomposition
Quarterly National Accounts for Q2 2014 for Ireland have been published by the CSO and the numbers are so-far encouraging. I will be blogging on these through out the day, so stay tuned.
In this first post on QNA results for Q2 2014, let's take a look at the seasonally un-adjusted data (allowing for year-on-year comparatives) for real GDP by sector:
All sectors output rose 7.4% y/y in real terms in Q2 2014 marking second consecutive quarter of growth and significantly outperforming 3.3% growth y/y recorded in Q1 2014. Q2 all sectors output is now at EUR42.157 billion which is the highest reading for any quarter on record.
compared to Q1 2011 output now is 10.8% higher and we are running at the rate of output some 6.3% above the 2006-2007 quarterly average.
The above is undoubtedly good news.
Sectoral growth rates (y/y) breakdown as follows:
Summary of the above charts:
- Agriculture, Forestry & Fishing sector posted a massive rose in output of 13.9% y/y in Q2 2014 coming on foot of an already significant growth of 9.3% y/y in Q1 2014. This marks fourth consecutive quarter of growth in the sector, with sector activity now up 58.1% in real terms on Q1 2011 and 28.3% ahead of 2006-2007 quarterly average.
- Industry activity rose 6.47% y/y marking the first quarter of increases. Activity shrunk 5.09% in Q1 2014. The sector performance has pushed output 6.6% above Q1 2011 levels but is still running 5.74% below 2006-2007 quarterly average. Still, good news is that growth is back.
- Distribution, Transport, Software & Communication sector expanded by 11.3% y.y in Q2 2014 after posting growth of 10.6% y/y in Q1 2014. This marks second consecutive quarter of growth in the sector. Sector activity is now up 3.11% on Q1 2011 and is still down 2.51% on 2006-2007 levels.
- Public Administration and Defence sector grew 3.75% y/y in Q2 2014, marking second consecutive quarter of y/y growth in a row. In Q1 2014 the sector grew by 3.67% y/y. Despite all the austerity, sector activity is now up 1.62% on Q1 2011 but overall activity is down 8.9% on 2006-2007 quarterly average.
- Other Services sectors posted growth of 2.7% y/y in Q2 2014 and 3.9% growth in Q1 2014. Q2 2014 marked 13th consecutive quarter of positive y/y growth in the sector. Sector activity is up 9.6% on Q1 2011 and is 8.75% ahead of 2006-2007 quarterly average.
- Building & Construction sector posted growth of 8.99% y/y in Q2 2014 which comes after 7.63% growth in the sector in Q1 2014 and marks 7th consecutive quarter of growth. Good news, however, are moderated by the realisation that levels of activity in the sector are still running 53% below those of 2006-2007 although sector has managed to grow output by 4.4% on Q1 2011.
- Transportable Goods Industries and Utilities sector posted y/y growth of 6.3% in Q2 2014, compensating for the decline of 5.9% registered in Q1 2014. Sector activity is now 6.7% ahead of Q1 2011 and 3.13% ahead of 2006-2007 quarterly average.
Key conclusion: strong performance in growth y/y in key sectors of the economy in Q2 2014 showing no sector contracting against 2 sectors contracting y/y in Q1 2014. As expected, Q2 output came in with stronger readings than Q1 and indications are Q3 2014 is likely to be also ahead of Q1 expansion rates.
Stay tuned for more QNA data analysis here.
18/9/2014: Quite a disappointing TLTRO round 1
So ECB's first tranche of TLTROs allotted at EUR82.6 billion - which is disappointing to say the least. Announcement is here: http://www.ecb.europa.eu/press/pr/date/2014/html/pr140918_1.en.html
Prior to the allotment, the following were forecast:
My own view on the subject as follows (from a comment given yesterday for international publication).
Note that the take up today has been disappointing for all above expectations (my own included), suggesting that traditional LTROs roll-overs dominated decision on TLTRO demand. This means that going into AQR reviews by the ECB the banks are reluctant to expand their corporate lending balance sheets and the loading now is on much heavier take up of TLTROs in December. In the mean time, low take up in this tranche can put some added pressure on ECB to deploy its ABS purchasing programme.
TLTROs vs LTROs
The key difference between TLTROs and LTROs is in the targeted nature of TLTROs. Conventional LTROs (despite the fact that term 'conventional' can hardly apply to these rather exceptional instruments) are unrelated to the balancesheet exposures of the banks and are designed to simply inject medium-term and long-term liquidity into the banking system as a whole. Thus, in the environment of deleveraging and uncertainty with respect to future losses, LTRO-raised funds flow to government securities with lower / zero risk-weighting and high liquidity. The effect is to reduce yields on Government securities, without providing any meaningful uplift in lending to the real economy. De facto, LTROs helped alleviate the sovereign debt crisis on 2010-2011, but also resulted in increased credit markets fragmentation and did nothing to reduce credit supply pressures in the real economies of the euro area countries. TLTROs - via targeting levels of real credit exposures to non-financial corporations - are holding a promise to shift funds into credit markets for companies, with weighting formula favouring banks with greater exposures to such lending. If successful, TLTRO programmes can incentivise banks to lend on the basis of risk-return valuations, which can, in theory, also alleviate the problem of financial markets fragmentation by attracting euro area banks into lending in the so-called 'peripheral' economies.
At this stage, both demand and supply of credit in the majority of the euro area economies are well outside the fundamentals-determined levels. The financial markets are severely fragmented and the ongoing deleveraging of the banks and companies balancesheets still working through the credit markets. This means that any forecast for TLTROs uptake and effectiveness are subject to huge uncertainty. My view is that we are likely to see rather cautious take up of the TLTRO funds in the first round, with many lenders dipping into the funding stream without full commitment. We are looking at the take up of around EUR100-150 billion in Thursday TLTROs. One reason for this is that the first tranche of TLTROs is likely to go into replacing maturing 3-year LTRO funds rather than new expansion of the banks balancesheets. To-date, banks repaid some EUR649 billion of LTROs, with EUR370 billion outstanding. Close-to-redemption LTRO funds need replacement and TLTROs are offering such an opportunity, albeit at a cost (TLTROs are priced 10bp higher than LTROs but offer longer maturity). All-in, the banks are likely to go for roughly EUR300 billion of TLTROs (with total potential allotment of EUR400 billion available, the cost will be the main factor here), with under half of this coming in September and the balance in December. Another reason pushing TLTROs demand into December, rather than September, is the ongoing ECB review of the banks (AQR analysis).
TLTROs, ABS and QE
ABS measures are going to aim to address the size of the ECB balancesheet, while providing support for effective yield on loans to the real economy. In this, well-structured ABS purchasing programme can provide support for TLTROs by increasing incentives for the banks to lend funds to corporates. However, excessive focus in the ABS programme on quality of assets and risk pricing can posit a risk of increasing fragmentation in the markets, as such focus can drive a significant wedge in pricing between corporate yields in the core economies of the euro area and the 'periphery'.
I do not see the ECB deploying traditional QE programme at this point in time. The reason for this is simple: yields convergence in the Sovereign markets is ongoing, levels of yields are benign, and demand for sovereign assets remains strong. However, if TLTROs and ABS programmes prove to be successful, we may see banks exits from low-yielding sovereign debt (core euro area) and from high yield, but now significantly repriced peripheral debt (profit taking). Unlikely as this might be at this point in time, if such exits prove to be aggressive, the ECB will have to provide support for sovereign yields and a small-scale QE can be contemplated in this case.
In general, however, it is clear from Mr Draghi's recent speeches and statements that he sees two key problems plaguing the euro area economies: the problem of high structural and cyclical unemployment and the problem of low private investment. Both of these problems continue to persist even as the sovereign debt yields have fallen dramatically, suggesting that government spending stimulus and investment programmes are unlikely to repair what is structurally a longer-term set of weaknesses in the economy.
Prior to the allotment, the following were forecast:
- Credit Agricole: EUR100 billion (EUR200 billion into December tranche)
- Goldman Sachs: EUR200-260 billion in September and December TLTROs and EUR720-910 billion in overall programme
- Morgan Stanley: EUR250 billion in September & December TLTRO tranches and EUR100-400 billion for tranches 3-8
- Nomura EUR115 billion in September and EUR165 billion in December
- JPMorgan EUR150 billion in September
- Barclays EUR114 billion in September and EUR154 billion in December.
My own view on the subject as follows (from a comment given yesterday for international publication).
Note that the take up today has been disappointing for all above expectations (my own included), suggesting that traditional LTROs roll-overs dominated decision on TLTRO demand. This means that going into AQR reviews by the ECB the banks are reluctant to expand their corporate lending balance sheets and the loading now is on much heavier take up of TLTROs in December. In the mean time, low take up in this tranche can put some added pressure on ECB to deploy its ABS purchasing programme.
TLTROs vs LTROs
The key difference between TLTROs and LTROs is in the targeted nature of TLTROs. Conventional LTROs (despite the fact that term 'conventional' can hardly apply to these rather exceptional instruments) are unrelated to the balancesheet exposures of the banks and are designed to simply inject medium-term and long-term liquidity into the banking system as a whole. Thus, in the environment of deleveraging and uncertainty with respect to future losses, LTRO-raised funds flow to government securities with lower / zero risk-weighting and high liquidity. The effect is to reduce yields on Government securities, without providing any meaningful uplift in lending to the real economy. De facto, LTROs helped alleviate the sovereign debt crisis on 2010-2011, but also resulted in increased credit markets fragmentation and did nothing to reduce credit supply pressures in the real economies of the euro area countries. TLTROs - via targeting levels of real credit exposures to non-financial corporations - are holding a promise to shift funds into credit markets for companies, with weighting formula favouring banks with greater exposures to such lending. If successful, TLTRO programmes can incentivise banks to lend on the basis of risk-return valuations, which can, in theory, also alleviate the problem of financial markets fragmentation by attracting euro area banks into lending in the so-called 'peripheral' economies.
At this stage, both demand and supply of credit in the majority of the euro area economies are well outside the fundamentals-determined levels. The financial markets are severely fragmented and the ongoing deleveraging of the banks and companies balancesheets still working through the credit markets. This means that any forecast for TLTROs uptake and effectiveness are subject to huge uncertainty. My view is that we are likely to see rather cautious take up of the TLTRO funds in the first round, with many lenders dipping into the funding stream without full commitment. We are looking at the take up of around EUR100-150 billion in Thursday TLTROs. One reason for this is that the first tranche of TLTROs is likely to go into replacing maturing 3-year LTRO funds rather than new expansion of the banks balancesheets. To-date, banks repaid some EUR649 billion of LTROs, with EUR370 billion outstanding. Close-to-redemption LTRO funds need replacement and TLTROs are offering such an opportunity, albeit at a cost (TLTROs are priced 10bp higher than LTROs but offer longer maturity). All-in, the banks are likely to go for roughly EUR300 billion of TLTROs (with total potential allotment of EUR400 billion available, the cost will be the main factor here), with under half of this coming in September and the balance in December. Another reason pushing TLTROs demand into December, rather than September, is the ongoing ECB review of the banks (AQR analysis).
TLTROs, ABS and QE
ABS measures are going to aim to address the size of the ECB balancesheet, while providing support for effective yield on loans to the real economy. In this, well-structured ABS purchasing programme can provide support for TLTROs by increasing incentives for the banks to lend funds to corporates. However, excessive focus in the ABS programme on quality of assets and risk pricing can posit a risk of increasing fragmentation in the markets, as such focus can drive a significant wedge in pricing between corporate yields in the core economies of the euro area and the 'periphery'.
I do not see the ECB deploying traditional QE programme at this point in time. The reason for this is simple: yields convergence in the Sovereign markets is ongoing, levels of yields are benign, and demand for sovereign assets remains strong. However, if TLTROs and ABS programmes prove to be successful, we may see banks exits from low-yielding sovereign debt (core euro area) and from high yield, but now significantly repriced peripheral debt (profit taking). Unlikely as this might be at this point in time, if such exits prove to be aggressive, the ECB will have to provide support for sovereign yields and a small-scale QE can be contemplated in this case.
In general, however, it is clear from Mr Draghi's recent speeches and statements that he sees two key problems plaguing the euro area economies: the problem of high structural and cyclical unemployment and the problem of low private investment. Both of these problems continue to persist even as the sovereign debt yields have fallen dramatically, suggesting that government spending stimulus and investment programmes are unlikely to repair what is structurally a longer-term set of weaknesses in the economy.
Wednesday, September 17, 2014
17/9/2014: Belarus v Ukraine: Income per Capita
Someone just asked me a question as to what is the relative income in Belarus vs Ukraine. Here is the data on GDP per capita basis (PPP-adjusted to reflect exchange rates and price levels differences) for main CIS countries (click to enlarge):
Sorted. Enjoy.
On related note, here are some other comparatives including Belarus and Ukraine: http://trueeconomics.blogspot.ie/2014/09/992014-russias-risks-are-up-but-still.html see table at the bottom of the post.
17/9/2014: Letting Go Ireland's Tax Arbitrage Model Will be a Painful Process
OECD has put forward their proposals for new international tax rules that, in theory, could eliminate tax-optimisation structures that have allowed many multinational companies (such as Google, Apple, Pfizer, Amazon, Yahoo and numerous others) to cut billions of dollars off their tax bills. The proposals were prompted by the G20 request issued last year and the measures announced this week have already been agreed with the OECD’s Committee on Fiscal Affairs (44 countries).
The proposals form just a part of the overall international tax reforms package called “Action Plan on Base Erosion and Profit Shifting” that will be unveiled in 2015 and is commonly known as BEPS.
There are two pillars in the current announcement.
The first pillar addresses only some of the abuses of dual-taxation treaties that generally aim to prevent double taxation of companies trading across the borders. The OECD is proposing to make amendments to its model treaty package that would prevent cross-border transactions from availing of tax treaty reliefs whenever the principal reason for the transaction is to avoid tax liability. This is a principles-based change, recognising the spirit or the principle of the dual-taxation treaties. De facto, the aim is to prevent the situation where preventing dual taxation leads to the scenario of dual non-taxation.
As with all principles-based reforms, the devil will be in the fine print of the actual regulations and economist's mind is not the best guide for sorting through these. From the top, were the measures to succeed, profits shifting via the likes of Ireland to tax havens will be if not fully stopped, at least significantly impaired. The result will be putting at risk tens of billions of economic activity booked via Ireland. In some cases, practically, this will mean that activity will be re-domiciled to other jurisdictions, where it really does take place. In other, however, it will become subject to tax in the country that stands just ahead of the tax haven in the pecking order of revenues flows. Ireland might actually benefit here, since our tax regime is still more benign than that offered in other countries.
To support the first pillar, however, the OECD also wants to restrict the amount of profits that a company can report in its intra-company accounts when these are based offshore. In effect this will put a cap on how much of their activity companies can attribute to the intra-company transactions or to force companies to redistribute profits generated by intra-company divisions across the entire group.
This is likely to undermine our ability to gain from re-allocation of revenues mentioned above. For example, suppose a company has a division based in Ireland that holds the company IP. The division is highly profitable, despite being very small: revenues it earns from other parts of the company operating around the world are covering the alleged cost of IP. If these profits were capped and/or required to be redistributed around the world to other divisions of the same company, the incentive for the company to retain its IP in tax optimising location, such as Ireland, will be gone no matter what our tax rate is.
The second pillar relates to the rules on tax residency. In particular, the OECD said that the existent rules that allow companies to operate facilities in a country without registering tax residency there should be abolished. The result, if adopted, will be to force companies like Google, Apple and Amazon to pay taxes on activities carried out in larger European states in these states by removing the channel for profit shifting to Ireland and other countries. The OECD is explicit about this by insisting that companies with 'significant digital presence' in the market should be forced to declare tax residence in that country.
Ireland's official response to this threat is that majority of MNCs trading from here do have significant presence here in form of large offices and big employment numbers. This is a weak argument for two reasons. One: Irish operations are relatively small for the majority of MNCs, compared to their global workforce. Two: majority of Irish operations of MNCs are sales, sales-support, marketing and back office. In other words, these support larger markets workforce.
The first pillar of the proposal is likely to impact sectors such as phrama and tech, where significant profits are generated by IP, trademarks and patents and these are often held off-shore in what are de facto shell subsidiaries not registered for tax purposes in the countries where actual activities of the company are based.
The second pillar is even more damaging to smaller open economies such as Ireland, because it mirrors the old EU proposal for CCCTB basis of corporate taxation. This pillar will likely push activities that are registered in countries like Ireland back into the countries where actual transactions take place, favouring larger economies over smaller ones.
For example, take a US company running sales support centre in Ireland servicing Spain. This activity is supplied by Spanish-speaking, largely non-Irish staff that has been imported into Ireland not because they are more productive here or have better human capital or face lower costs of employing, but because their presence in Ireland allows the company to book sales in Spain into Ireland. In fact, absent tax arbitrage, it would probably be cheaper for the company to employ these workers in Spain.
Back in 2013, Reuters reported that 3/4 of the largest US MNCs in tech sector channeled their revenues from sales across the EU into Ireland and Switzerland, avoiding reporting these activities in the countries where actual customers resided.
If OECD proposals are implemented to reflect the spirit of the reforms, the tax arbitrage bit of the abnormal return on locating labour-intensive activities in Ireland will be gone. This, by itself, may or may not be enough to put those jobs on the airplanes back to Spain, Italy, Germany, France and elsewhere. But if other countries start making themselves more competitive in labour costs, tax and regulatory regimes, defending Ireland's competitive proposition will be harder and harder.
This process - of erosion of Irish competitive advantage - will be further accelerated by the OECD proposals on tax data sharing and clearance which envisages massive increase in the data reporting burdens on the multinational companies. The cost of compliance and audits this entails will be large and increasing in complexity of companies' structures, leading to more incentives for them to rationalise and streamline their operations worldwide. A tiny market, like Ireland, much more efficiently serviceable via the larger economy like the UK, is unlikely to win in this race.
OECD proposals can have a pronounced effect on economic growth, employment and financial health of a number of countries, including Ireland, Luxembourg, Switzerland, and the Netherlands because the proposals will force MNCs to change their global operations structures and move jobs out of tax optimisation states toward the states where real activity takes place.
From Ireland's point of view, closing off of the loopholes can have a dramatic effect on the ground if it is accompanied by other trends, such as renewed corporate tax rate competition that can challenge our attractive headline rate of 12.5%, erosion of Irish regulatory and supervisory regimes competitiveness, increase in cost inflation and other inefficiencies. Instead of competing on being a tax arbitrage conduit, Ireland will have to start competing on the basis of real economic fundamentals, such as skills, public policy, public goods and services, private markets efficiencies, etc.
Ironically, the threat of the elimination of tax arbitrage opportunities can result in Ireland becoming more competitive and more successful over time, assuming the Governments - current and subsequent - play it smart.
The proposals form just a part of the overall international tax reforms package called “Action Plan on Base Erosion and Profit Shifting” that will be unveiled in 2015 and is commonly known as BEPS.
There are two pillars in the current announcement.
The first pillar addresses only some of the abuses of dual-taxation treaties that generally aim to prevent double taxation of companies trading across the borders. The OECD is proposing to make amendments to its model treaty package that would prevent cross-border transactions from availing of tax treaty reliefs whenever the principal reason for the transaction is to avoid tax liability. This is a principles-based change, recognising the spirit or the principle of the dual-taxation treaties. De facto, the aim is to prevent the situation where preventing dual taxation leads to the scenario of dual non-taxation.
As with all principles-based reforms, the devil will be in the fine print of the actual regulations and economist's mind is not the best guide for sorting through these. From the top, were the measures to succeed, profits shifting via the likes of Ireland to tax havens will be if not fully stopped, at least significantly impaired. The result will be putting at risk tens of billions of economic activity booked via Ireland. In some cases, practically, this will mean that activity will be re-domiciled to other jurisdictions, where it really does take place. In other, however, it will become subject to tax in the country that stands just ahead of the tax haven in the pecking order of revenues flows. Ireland might actually benefit here, since our tax regime is still more benign than that offered in other countries.
To support the first pillar, however, the OECD also wants to restrict the amount of profits that a company can report in its intra-company accounts when these are based offshore. In effect this will put a cap on how much of their activity companies can attribute to the intra-company transactions or to force companies to redistribute profits generated by intra-company divisions across the entire group.
This is likely to undermine our ability to gain from re-allocation of revenues mentioned above. For example, suppose a company has a division based in Ireland that holds the company IP. The division is highly profitable, despite being very small: revenues it earns from other parts of the company operating around the world are covering the alleged cost of IP. If these profits were capped and/or required to be redistributed around the world to other divisions of the same company, the incentive for the company to retain its IP in tax optimising location, such as Ireland, will be gone no matter what our tax rate is.
The second pillar relates to the rules on tax residency. In particular, the OECD said that the existent rules that allow companies to operate facilities in a country without registering tax residency there should be abolished. The result, if adopted, will be to force companies like Google, Apple and Amazon to pay taxes on activities carried out in larger European states in these states by removing the channel for profit shifting to Ireland and other countries. The OECD is explicit about this by insisting that companies with 'significant digital presence' in the market should be forced to declare tax residence in that country.
Ireland's official response to this threat is that majority of MNCs trading from here do have significant presence here in form of large offices and big employment numbers. This is a weak argument for two reasons. One: Irish operations are relatively small for the majority of MNCs, compared to their global workforce. Two: majority of Irish operations of MNCs are sales, sales-support, marketing and back office. In other words, these support larger markets workforce.
The first pillar of the proposal is likely to impact sectors such as phrama and tech, where significant profits are generated by IP, trademarks and patents and these are often held off-shore in what are de facto shell subsidiaries not registered for tax purposes in the countries where actual activities of the company are based.
The second pillar is even more damaging to smaller open economies such as Ireland, because it mirrors the old EU proposal for CCCTB basis of corporate taxation. This pillar will likely push activities that are registered in countries like Ireland back into the countries where actual transactions take place, favouring larger economies over smaller ones.
For example, take a US company running sales support centre in Ireland servicing Spain. This activity is supplied by Spanish-speaking, largely non-Irish staff that has been imported into Ireland not because they are more productive here or have better human capital or face lower costs of employing, but because their presence in Ireland allows the company to book sales in Spain into Ireland. In fact, absent tax arbitrage, it would probably be cheaper for the company to employ these workers in Spain.
Back in 2013, Reuters reported that 3/4 of the largest US MNCs in tech sector channeled their revenues from sales across the EU into Ireland and Switzerland, avoiding reporting these activities in the countries where actual customers resided.
If OECD proposals are implemented to reflect the spirit of the reforms, the tax arbitrage bit of the abnormal return on locating labour-intensive activities in Ireland will be gone. This, by itself, may or may not be enough to put those jobs on the airplanes back to Spain, Italy, Germany, France and elsewhere. But if other countries start making themselves more competitive in labour costs, tax and regulatory regimes, defending Ireland's competitive proposition will be harder and harder.
This process - of erosion of Irish competitive advantage - will be further accelerated by the OECD proposals on tax data sharing and clearance which envisages massive increase in the data reporting burdens on the multinational companies. The cost of compliance and audits this entails will be large and increasing in complexity of companies' structures, leading to more incentives for them to rationalise and streamline their operations worldwide. A tiny market, like Ireland, much more efficiently serviceable via the larger economy like the UK, is unlikely to win in this race.
OECD proposals can have a pronounced effect on economic growth, employment and financial health of a number of countries, including Ireland, Luxembourg, Switzerland, and the Netherlands because the proposals will force MNCs to change their global operations structures and move jobs out of tax optimisation states toward the states where real activity takes place.
From Ireland's point of view, closing off of the loopholes can have a dramatic effect on the ground if it is accompanied by other trends, such as renewed corporate tax rate competition that can challenge our attractive headline rate of 12.5%, erosion of Irish regulatory and supervisory regimes competitiveness, increase in cost inflation and other inefficiencies. Instead of competing on being a tax arbitrage conduit, Ireland will have to start competing on the basis of real economic fundamentals, such as skills, public policy, public goods and services, private markets efficiencies, etc.
Ironically, the threat of the elimination of tax arbitrage opportunities can result in Ireland becoming more competitive and more successful over time, assuming the Governments - current and subsequent - play it smart.
Tuesday, September 16, 2014
16/9/2014: Mapping Uncertainty Across Industries
A very interesting post on HBR Blog (http://blogs.hbr.org/2014/09/the-industries-plagued-by-the-most-uncertainty/) mapping technological uncertainty against demand uncertainty across major industries.
Two charts:
16/9/2014: Allegedly, Irish Consumers Have Pulled Back Spending in August
It is with some puzzlement that I read the following tweet:
Being aware that there has not been any new data on retail sales or consumer demand issued today, I opened the link: http://www.independent.ie/business/irish/irish-households-pull-back-in-spending-last-month-new-figures-show-30590499.html
It turns out that the 'pulling back' of 'spending' is really a 'pulling back' of consumer confidence.
And indeed, as chart below shows, Consumer Confidence reported by the ESRI fell from a very high reading of 89.4 in July to 87.1 in August:
Now, we do not have August data for retail sales yet. And these may or may not have fallen. But Consumer Confidence decline has preciously little to say about the actual household spending or consumer demand or retail sales. Especially in the medium (3 months and over).
Take a look at data we do have:
- In January 2014, Consumer Confidence rose m/m strongly, but seasonally-adjusted retail sales barely rose in value terms and strongly shrunk in volume terms.
- In February 2014, Consumer Confidence rose again strongly, but seasonally-adjusted retail sales remained unchanged in volume terms and fell strongly in value terms.
- In March 2014, Consumer Confidence moderated significantly, and retail sales fell in volume and value terms.
- In April 2014, Confidence rose dramatically and both volume and value indices of retail sales rose as well.
- In May 2014, Confidence indicator tracked both retails sales indices to the downside.
- In June 2014, Confidence tracked volume and value of retail sales to the upside.
- In July 2014, Confidence rose dramatically, but retail sales shrunk in both volume and value terms.
So in last 7 months, Consumer Confidence changes tracked changes in actual consumer demand in 4 and did not track demand in 3. That is hardly a record to base any conclusions on. But historically things are even worse.
The chart above shows that Consumer Confidence historically shows a weak relationship with the Volume of Retail Sales and a very weak relationship with the Value of Retail Sales. Worse, these weak relationships fall to nil - or vanish completely - for quarterly readings:
So whatever KBC lads might say, ESRI Consumer Confidence does not indicate that households pulled back their spending in August. It might, however, suggest that consumer are not expressing same levels of enthusiasm about their current prospects and this might mean they could have pulled back spending.
Subscribe to:
Posts (Atom)
