12/10/2012: Irish Savings Myths

Last night at the Dublin Chamber dinner, Taoiseach Enda Kenny made a rather common, but egregious in its nature statement that Ireland has the highest savings rate in the OECD at 12% GDP. Speaking before him, the President of the Dublin Chamber, Patrick Coveney, made a similar statement, but referenced 14% savings rate. Both speakers were identifying a high savings rate as being an impediment to consumer spending and recovery.

In addition to the above, the Chambers President made another startling juxtaposition. In his speech he said that:

1. Savings are too high and we need to 'do something' to reduce these;
2. Investment is too low
3. In the future, investment (via bank lending) will remain low.

Let me deal first with the last set of claims. In the Irish economy, savings are used to pay down debts (thus supporting deleveraging of the households and companies, and preventing collapse of our banks) and invest in economic activity. Reducing the debt-repayment component of savings would require a default/restructuring of private debts. The remainder of our savings goes to finance investment (direct equity & direct lending to businesses) and deposits in the banks (which in turn normally finance lending). So which part of our savings would Patrick Coveney like to cut? The banks bit (precipitating collapse of the banks) or the investment bit (precipitating further decline in investment)?

I am not even going to ask Mr Coveney as to what he might suggest that the Government should do to cut our savings rate. Impose huge wealth taxes, or go straight to a large-scale expropriations of 'excessive' savings? Both will do wonders to Ireland's reputation abroad, let alone to the dynamics of future investment at home.

Instead, lets move on to the myths both speakers were keen on repeating - the myths of our allegedly massively high savings rates. All of the data below is taken from the IMF WEO database.

Let us rank Ireland's gross savings rate compared to all other advanced economies (higher rank means lower savings rate):

Contrary to what our Taoiseach and Mr Coveney were saying, Ireland's savings rate in 2010-2014 is estimated by the IMF to be... the 5th lowest in the sample of 33 advanced economies around the world. May be it is the highest in the Euro zone? Oh, no - it is actually the fourth lowest in the Euro zone.

So what about this year then? Oh, that would be exactly the same as for the 2010-2014 average:

But wait, you might say, surely we are saving as an economy more today than in the past? Oops...

As above shows, during the 1980-2011 period, average savings rate in Ireland stood at 18.63% of GDP. In 2012 it will be 10.82% of GDP. In 2011 it was 10.59%, in 2010 11.53% and so on. Not even close to the historical average! And not close to our peers all of whom have much higher rates of savings: Israel at 18.94%, Finland at 19.84%, Belgium at 21.38%, Austria at 25.23%, Netherlands and Hong Kong at 26.29%, Luxembourg at 26.57%, and so on.

And yes, Mr Coveney, savings and investment are linked in Ireland:

And the gap between savings and investment in Ireland - explained in part by the banks claims on our savings via loans repayments:

... well that gap is currently at the advanced economies average and it was below that average during the crisis so far. 

In other words, there is no 'excess' savings in Ireland. As this economy continues to struggle with the banks debts (ah, the Chambers dinner was sponsored by one of the Pillar Banks) our savings-investment gap is forecast to rise above the advanced economies average in 2013-2017. That is the illustration of the Taoiseach's famous dictum that he won't have 'defaulter' written on his forehead. So clean forehead for our Taoiseach means no investment for businesses. Simples...

10/10/2012: Irish Real Economic Debt - Busting Records

Last night I came across the latest data from the IMF on the overall levels of indebtedness and leverage across a number of countries. Here's the original data:

Much can be taken out of the above. For the purpose of discussion below, I define real economic debt as a sum of household, non-financial corporate and government debts, excluding financial firms' debts. This real economic debt is liability of the Irish economy: households, private enterprises and public sector providers of goods and services.

First up, total debt levels:

Ireland's total real economic debt runs at a staggering 524% of our GDP and 650% of our GNP. In fact, I use 24% GDP/GNP gap as a basis for adjustment which is significantly less than the current gap, but is consistent with 2011-2012 (to-date) average. Put into perspective:

• Our economy's overall indebtedness is 1.73 time higher than the euro area levels in GDP terms and if GNP is used as a basis it is 2.14 times higher
• Our real economic debt is 14.4% ahead of that of Japan (second most indebted country on the list) if GDP is used and is 41.9% ahead of Japanese debt if GNP is used.

Our real economic debt can be decomposed into the following three components contributions:

In other words, the above chart clearly shows that Ireland's core debt overhang arises not from the Government finances, but from accumulation of liabilities on the side of the companies. More than that:

• Ireland's Government debt levels are 25.5% ahead of the euro area
• Ireland's Household debt levels are 64.8% above the euro area
• Ireland's corporate debt levels are at 209% of the euro area levels.

Thus, with the Government policy firmly focused on taxing households to save own balancesheet, we have a perverse situation that the economy is dealing with debt overhang in Government debt that is more benign than the debt overhangs in the sectors the Government is obliterating. Households faced with increased taxation to pay for Government debts and deficits implies lower spending on goods and services and lower ability to repay household debt. Thus higher taxes on households (direct and indirect, including aggressive extraction of income via semi-states' charges) imply growing burden of the debt overhang in the private sectors (firms and households).

Adding financial debts to the overall real economic debt in the economy forces Ireland into a truly unprecedented position vis-a-vis other countries in the sample. (Note - adjustment for IFSC is mine).

Using the bounds for debt of 90% (consistent with upper range for Checchetti, Mohanty and Zampolli (2011) and Reinhart, Reinhart & Rogoff (2012)), the levels of cumulated real economy debts that are consistent with reducing future long-term potential growth in the economy are taken to be 270% of GDP. Hence:

and

In the above, the larger the size of the bubble, the greater is the drag on future economic growth from debt. The further to the right on the chart the bubble is located, the greater is the problem associated with Government debt (as opposed to other forms of debt). What the above shows is that Ireland's debt crisis is truly unique in size, but it also shows that the most acute crisis is not in the Government debt, but in private sectors debt.

Now, at 4.5% per annum cost of funding overall debt, irish economy interest rate bill on the above levels of real economic indebtedness runs at ca 29.2% of our GNP. Do the comparative here - interest rate bill equivalent to the total annual output of the Irish Industry (that's right - all of our Industrial output in 2011 amounted to less than 29.3% of our GNP. This is deemed to be 'long-term sustainable'... right...


Note: In my presentation at a private dinner event yesterday I referenced by earlier estimate of the total economic debt in Ireland at 420% of GDP. My 2011 estimate was ca 400% GDP. These figures have been published by me in the Sunday Times and also correspond closely to the 2010 figures cited by Minister Noonan in the Dail and made public here on this blog. They also were confirmed by Peter Mathews TD. My estimates were based on publicly available data which is less complete than data available to the IMF.

7/10/2012: VTB and Sberbank relative position vis peers

Another interesting point from the Goldman note on euro area banks, relating to Russian banks - see chart below (you'll need to click to enlarge it):

Note that per my latest recent assessment of Russian equity markets, both VTB and Sberbank are relatively undervalued.

Original note is linked here.

7/10/2012: Goldman on Euro Area banks

Some very interesting stats on the Euro Area (comparatives) banking sector from the recent (October 4) research note from the Goldman Sachs (link here). Here are some bits:

In a recent (October 4) presentation to retail investors in Cork I was speaking about the mismatch in non-financial corporations funding sources between the US and Euro Area. My conclusion was that in the medium term (2013-2015) Euro Area corporates will be forced to increase issuance of corporate bonds since their preferred source of funding - banks lending - is going to stay subdued on supply side, while the equity issuance cannot absorb simultaneous deleveraging of the banking sector, and demand for increased equity from the corporate sector, especially as Governments across the EU are going into 'tax-em-to-hell' mode when it comes to potential investors.


Here are two charts from GS note on the same:

And where are banks largest, dominant players in the economy? Why, in usual suspects...

Now, what's the problem with the above chart? Oh, let's see: Swiss and UK bankers are bankers to the world, with more exposures to assets outside their countries than inside. Irish banks listed include some IFSC banks, but... adjusting for that and adjusting for GNP/GDP gap, Irish figure is as follows:

• Covered banks: 295% of GNP as of Q2 2012 (using 2011 GNP)
• Total Assets of Domestic Group of banks as of August 2012 are 447% of 2011 GNP. Of these, 318% are purely assets relating to Irish residents.

Thus, if we are to control for the international exposures of the banks, the same relative position for Ireland is most likely to be maintained as in the chart, albeit the numbers will be smaller across all banking systems. And now think of adjusting these for the quality of assets held... and weep.


And here's a note for Michael Noonan and his friends at Irish banks: this time it is NOT going to be much different:

Do note the above is in nominal Yen, which is kinda telling - Japanese banks have not grown since 1990, inflation-adjusted, through probably 2009-2010. And that with Japanese printing cash and piling up public debt like there is no tomorrow between 1990 and today. What hope is there for the return of lending and profitability in Irish banking ca 2014 that the Central Bank and the Government and the banks have been betting on throughout their disastrous disaster management practices 2008-present?


Lastly, here are two tables neatly summarizing the epic fiasco of European (and Irish - see second table) banking:

Do note prominent positioning of Ireland's zombies, right there, with Tier Last Marfin, B of Cyprus, and Dexia...


Now for a quote... but wait a second first a preliminary set up: Irish Government claims that new regulatory regime will be a departure from the past for Irish banking. The same Government claims that too much competition in Irish banking was contributing to regulatory failures. So a duopoly of BofI + AIB zombies should foster more effective regulatory regime, right? Oh... Goldman on that (italics mine):

"At the other end of the spectrum, countries with central banks as their supervisor have generally done better, the two exceptions being the Netherlands and Ireland (where supervisors fared badly owing to the huge size of the banks that these countries had relative to their GDP – the sheer size of these made it much too difficult to supervise these, ‘too big to save’ banks in these cases)." So, tell me - if having TBTF banks = "much too difficult to supervise" banking system, how will having Duopoly banking system help supervisory effectiveness? Answer: it will hinder such effectiveness. Instead of being captive to a bunch of banks, Irish regulatory regime will be captive to two banks - incidentally, the very same ones that led capture of regulators back in 1990s-2000s.

Let's stop the reading here...


Update: In a fair criticism of the GS report, it ignores Solvency II implications, although does cover Basel III and Dodd-Frank. Solvency II omission was pointed out by the @creditplumber / David McKibbin. 

6/10/2012: Irish Industrial Production - August 2012

Per CSO:

• Production for Manufacturing Industries for August 2012 was 0.7% lower than in July 2012. On an annual basis production for August 2012 increased by 0.2% when compared with August 2011.
• The seasonally adjusted volume of industrial production for Manufacturing Industries for the three month period June 2012 to August 2012 was 1.8% higher than in the preceding three month period.
• The “Modern” Sector, comprising a number of high-technology and chemical sectors, showed a monthly increase in production for August 2012 of 5.1% and there was a decrease of 0.9% in the “Traditional” Sector.
• The seasonally adjusted industrial turnover index for Manufacturing Industries decreased by 0.1% in August 2012 when compared with July 2012. On an annual basis turnover increased by 0.2% when compared with August 2011.

Here are some more detailed stats and dynamics:

• Volume of total Manufacturing output was down 3.43% in August compared to same month in 2007 (pre-crisis). 3mo average through August 2012 was up 1.78% on 3mo average through May 2012 and 3.75% ahead of the 3mo average through August 2011.
• August reading for Manufacturing marks the first m/m decline since February 2012.
• Volume of production in All Industries in August 2012 was down 4.68% on same period in 2007. 3mo average through August is 1.75% ahead of 3mo average through May and is 2.72% ahead of 3mo average through August 2011.
• Both Manufacturing and All Industries indicate improved 3mo averages as consistent with modest improvement in output dynamics.
• Volume of activity in Modern Sectors posted the highest reading since October 2011 and the second highest reading since the beginning of comparable series (January 2006). 3mo average through August 2012 is now 1.26% ahead of the 3mo average reading through May 2012 and is 6.59% ahead of the 3mo average through August 2011. Very strong performance in the sector.
• In Traditional Sectors, however, volume of activity fell 14.17% y/y and is now down 20.05% on August 2007 level of activity. 3mo average through August 2012 is down 1.78% on 3mo average through May and is down 4.34% on 3mo average through August 2011.

Chart to illustrate:

• As the result of the above trends, the gap between indices measuring the Volume of production in Modern and Traditional sectors has now widened to 51.5 - the highest reading since the all time record of 56.6 in October 2011.

It is worth noting that Traditional manufacturing sectors are usually associated with higher labour intensity than Modern sectors, implying the disconnection between improvements in overall Manufacturing index (volume) activity and the likelihood of jobs creation acceleration.

Turnover indices:

• Manufacturing sector turnover dipped marginally in August (-0.1% m/m) but is ahead, also marginally, on the annual basis (+0.19%). The index is down 6.9% on August 2007. 3mo average through August 2012 is 5.28% ahead of the 3mo average through May 2012 and is 3.29% ahead of the 3mo average through August 2011.

Lastly, New Orders index:

• New Orders index hit the highest reading in 2012 in August, up 3.4% y/y and 1.16% m/m, although the activity is still down 6.8% on August 2007. 3mo average through August 2012 is 5.5% ahead of 3mo average through May 2012 and 3.9% ahead of the 3mo average through August 2011.

The overall activity in the industrial production is clearly stabilizing at the recovery levels, but as noted above this is solely driven by the activity in Modern sectors.

6/10/2012: Correlation v Causation

An excellent, albeit very reader-friendly (yes, that's a draw back as it trades depth) discussion about the relationship between correlation and causality (link). H/T to Markus Sagebiel ( @msgbi )

6/10/2012: US Payroll Data for September 2012

So far, 2012 has been a volatile year for jobs creation in the US and the latest figures released yesterday confirm this volatility, albeit this time to the pleasant side. Expansion of NF payroll by 114,000 in September came in slightly below expectations, but alongside trend. More significant reading was accorded to the upward revisions for previous level of employment. NF payrolls for July went up from 141,000 to 181,000 and for August from 96,000 to 142,000 - a cumulated increase of 86,000 on previous estimates. However, private sector payrolls rose disappointing 104,000 some 30% below the consensus and up only slightly on 97,000 increase in August. Meanwhile hourly earnings were up 0.3% outstripping both expectations and August flat performance (+0.0%). Average weekly hours worked went up by statistically insignificant 0.1 hours to 34.5 hours.

On the optimism deflating side of things, we have Q1 average increases in NFP of 226,000, followed by Q2 increases in NFP of 67,000. Now we have Q3 at 145,700 average which is 146,200 monthly average. In other words, despite massive revisions, Q3 is not spectacular when it comes to jobs creation.

Headline unemployment figure showed most dramatic change in yesterday's report declining from 8.1% in August to 7.8% in September and bringing US unemployment to the lowest rate since January 2009. This accelerates decline of 0.2% in unemployment rate recorded in August. Good news - labour market participation rate rose from 63.5% in August to 63.6% in September. Which means more people were finding jobs. Alas, back in 2010-2011 the participation rate stood at 64.4% on average, ahead of the current level. And the number of those in employment rose by 873,000 against the drop of those unemployed by 456,000. But, again, that silver lining contains a sizable cloud over it: employment to population ratio rose to just around 58.5%, which is only slightly ahead of 58.4 in 2010-2011 and well behind 62.7% in 2003-2007 and 60.8% in 2008-2009.

However, the decline in unemployment is really an over-exaggeration of the actual labour market performance for a number of reasons:

• A number of commentators correctly pointed that household survey - the basis for calculating unemployment rate - has been returning very volatile readings.
• Ending of the emergency unemployment benefits during the summer also most likely contributed to pushing people into employment (something that would be consistent with increases in employment being predominantly in lower wages and part-time jobs - see below). It is worth remembering that emergency extensions to benefits were cut fully back in May. As the result, unemployment benefits extensions dropped by some 865,000 since May.
• Part-time involuntary employment accounts for 3/4 of the total gains in employment over June-September 2012 with numbers of part-time workers who would like to have a full-time job, but can't find one rising 582,000. Overall, U6 unemployment rate (those unemployed and underemployed) remained at 14.7% in September, showing that virtually all gains in the labour market in the US are low quality. And further confirming this, the percentage of long-term unemployed (in excess of 6 months) in total unemployment rose to 40.1% in September from 40.0% a month before.

See the chart (via Citi Research):

So to the Obama Camp optimists out there - the trend in jobs improvements is exceptionally weak, and at a risk of being derailed completely once electioneering-induced pause in fiscal adjustments is over comes January 2013. And to Mitt Romney Camp contrarians out there - the trend in jobs improvements is still present, if only in a sense of absent deterioration. 

Glass half-full and half-empty...


Update:  and here is an excellent post from the Sober Look blog on the sub-trends in US consumer credit 'growth'...

6/10/2012: Euro area bonds supply calendar for October 2012

Morgan Stanley October bonds supply calendar for euro zone sovereign bonds:

 

And summary of volumes for redemptions, coupons and new issuance:

Ireland's volumes above refer to coupon payments only.

6/10/2012: Art, Mathematics and Science

And to finish off the night of charts galore, here's something charts-graphs related of a softer variety: on art and maths . Enjoy!

5/10/2012: Remember when US was 'decoupling'?

Really cool stuff: Euro area and US default probabilities divergence (via Citi Research):

And on related note of Euro area divergence, US is posting some nice figures today on NFPs, implying this.

Now, remember the days when European 'leaders' were bragging about the US decoupling from the rest of the world?.. Well, it looks like the US, along with the rest of the world, is decoupling from Europe.

5/10/2012: Did Economic Fundamentals trump QE

Two effects of QEs and LTROs - the drivers of temporary inflation - were to boost returns on commodities and reallocate funds into Emerging Markets early on, followed by the fundamentals taking over once again, bidding down commodities and re-diverting EM inflows to developed markets...

Put differently, you can't fight fundamentals with money when the real transmission mechanism is broken. So far, we had this theme powerfully reverting returns back to the 2010 norm. It remains to be seen if the recent firming up of the US growth is going to be sustained.

5/10/2012: China's "This Time..." Moment?

T'is the night for charts folks... another pretty one:

This time it's different pic comes via Citi Research and illustrates Chinese property price indices...

5/10/2012: How you spell easy money?

Nice chart from Citi Research:

Easy Money - US Treasuries & German Bund 10year yields:

Pretty much times equities too...

5/10/2012: Couple interesting points on gold

Some very interesting research on gold from BNP Paribas (link) and some snippets from it:

Take a look at this chart:

Gold showing lower downside volatility compared to all comparatives and gold showing the upside premium too. Why wouldn't it if inflationary expectations are 'anchored' up?

"We expect central bank accommodative actions, and their impact on inflation expectations and currencies, to be supportive of gold for most of 2013. The US 5yr/5yr breakeven rate, an indicator of inflation expectations, rose on the announcement of QE3 to above 3% from 2.6%. It has since  retreated to 2.9% (Chart 3).

Part of the rationale behind further monetary easing by the Fed is precisely to support inflation expectations and avoid a deflationary environment. Another key objective of QE is to boost risky assets by increasing liquidity and reducing Treasury yields."

"The upcoming round of quantitative easing should also put downward pressure on the US dollar. The currency may lose ground against currencies such as the Yen or the Sterling until mid-2013. Euro appreciation will likely be capped by ongoing uncertainty linked to the sovereign debt crisis. While depreciation in the US dollar tends to be positive for gold, it is difficult to read much into this. The correlation between gold and the EURUSD is variable
and unstable. It currently stands around 65% on a 30-day basis (Chart 4)."

And in case you've been thinking that all the talk about gold as the 'barbaric relic' and the power of the central banks worldwide to right the crisis and protect us from catastrophic risks is true, ask yourself then why this:

In other words, why are Central Banks and Treasuries suddenly buying gold when they keep telling us all that everything is fine in the world of fiat money? Answer is - in part, being prudent, they are insuring against catastrophic risks. Which is a good practice. The bad practice, of course, is to simultaneously lie to their people that 'barbaric relic' is irrelevant in the age of fiat they so well control.

5/10/2012: Eurasian Economic Commission

A very interesting and, in my view, on-the-money discussion of the Eurasian Economic Commission - the build-up on customs union between Russia, Belarus and Kazakhstan from the Carnegie Endowment for International Peace: here.

Disclaimer: I would be a long-time supporter of the idea of the customs union within the CIS and the expansion of this union to include other neighboring states, with the Eurasian Economic Commission gaining capacity to negotiate functional trade and capital and people mobility agreements with the EU.

5/10/2012: Endaffo - a Magic Celtic Dragon

So this... link ... is the latest twist of spin PR tumble & dry news cycle with the Time Magazine ca 2012. And it has triggered somewhat of a surfing waves weather in the websphere. On the one hand, the FGers and Green Jerseyists are cheering the coup that has led to the declaration on the magazine cover of the return of the Celtic something. Obviously in green. On the other hand it is triggering memories of the not-so-distant past: link and link.

Oh, putting aside the fact that Time Magazine clearly doesn't bother reading actual data (otherwise what comeback?), all I can say about the 'good news' is that while Enda 2012 now does Biffo 2010, Time Magazine 2012 does Newsweek 2010.

And here's a priceless, poignantly telling lunacy of the Times 'interview' (italics are mine):

"And why do you think a gulf exists between the Irish and international perceptions of Kenny?
Politicians are often more popular abroad than they are in their own countries. That’s partly because familiarity breeds contempt. You could say it’s because the Irish know him better. But it’s also because the Irish focus on the smaller picture, and sometimes you really can see things better from a distance. It’s exactly the same if you think about what goes on in Washington or Westminster."
http://world.time.com/2012/10/05/behind-the-story-times-catherine-mayer-discusses-irish-prime-minister-enda-kenny/#ixzz28Q4VfaCJ 

Yes, Irish voters, residents, taxpayers, people - you are small-minded. Better listen to the Big Picture folks in the Times magazine who can't even check IMF WEO database to see, just what a marvelous Celtic Comeback Enda Kenny has triggered in the country his Government runs. Oh, sorry... but that would be 'focusing on the smaller picture', right?

So with Washington & Westminster in mind, I give you a new Tiger of Global Politics: Endaffo combining "endearing and ...slightly childlike quality to his enthusiasm" features of Times-cover Enda and "razor-sharp intelligence" of Newsweek-ranked "The Fiscal Taskmaster" Biffo.

Update: In the latest of the series of powerful endorsements from international media, our Taoiseach was credited - via selective quotations from the Time article - by the Irish Times (here) as follows: ""He didn’t do anything that one would think of as particularly foolish..." 
Ms Mayer said..."

It never occurs, in the duration of her interviews, for Ms Mayer to ask the obvious: 'Given the gravity of the crisis that Ireland is going through, is talking to a man who sets for his Government lowest possible targets and then fails to achieve them worth the paper and ink?'

"Ms Mayer said it was her belief politicians in Ireland are less insulated from reality than in other countries."

Distance from reality, of course, is a matter of perspective. Given the degree of detachment from that concept that Ms Mayer seems to exhibit, she might be onto something there.

4/10/2012: Kicking, Picking... Dependency

Quite an interesting chart plotting the substitution of the Eurosystem Open Market Operations dependency for two groups of banks. Massive inversion of relative dependency there:

Source: Citi Research. 

4/10/2012: Investor's Daily: We've been telling you porkies

In the previous post I tried to make some sense out of the headline numbers from the Exchequer returns through Q3 2012. This time around, let's take a look at the overall Exchequer balance.

Headline number being bandied around is that overall exchequer deficit stood at €11,134 mln in January-September 2012, down €9,526 mln on same period in 2011 (an impressive drop of 46.1%). Alas, that is a pure hog wash. Here's why.

In 2011, Irish state assumed banks recapitalizations and insurance shortfalls funding spending of €10,653 mln, this time around, the Government allocated only €1,775 mln to same.

Adjusting for banks recaps, therefore, Exchequer deficit stood at €10,007 mln in January-September 2011 and it was €9,359 mln in the same period this year, implying deficit reduction of €647.5 mln y/y - a drop of 6.47%.

But wait, in both 2011 and 2012 the state collected extraordinary receipts from banks recapitalization and guarantee schemes - the receipts which, as the EU Commission warned us earlier this year are likely to vanish over time. These amounted to €1.64bn in 2011 and €2.06bn in 2012 (January-September figures).

Subtracting these from the balance we have: exchequer deficit ex-banks recaps and receipts in 2011 was €11,650mln and in 2012 it was €11,417mln. In other words, the State like-for-like sustainable deficit reductions in the 9 months through September 2012 compared to the same period in 2011 were… err… massive €233.7 million (2%).

Let's do a comparative here: Budget 2012 took out of the economy €3.8 billion (with €2.2 billion in expenditure measures and €1.6 billion in taxation measures). On the net, the end result so far has been €233.7 million reduction of like-for-like deficit on 2011. How on earth can the Troika believe this to be a 'best-in-class' performance?

Or alternatively, there's €9.36 billion worth of deficit left out there to cut before we have a balanced budget. At the current rate of net savings, folks, that'd take 40 years if we were to rely on actually permanent revenues sources or 14 years if we keep faking the banking system revenues as not being a backdoor tax. Either way… that idea of 'under 3% of GDP' deficit by 2015 is… oh… how do they say it in Paris? Jonque?

And just so I don't have to produce a separate post on this, the Net Cumulated Voted Spending breakdown is also worth a line or two. You see, the heroic efforts of the Irish Government to support our economy have so far produced a reduction of €474 million on capital investment budget side y/y. But, alas, similarly heroic efforts at avoiding real cuts to the current spending side also bore their fruit, with current voted expenditure up year on year by €369 million in 9 months through September 2012.

So the bottom line is - savage austerity, tears dropping from the cheeks of our Socialist err… Labour TDs and Ministers… has yielded Total Net Voted Spending reduction cumulated over January-September 2011 of a whooping €105 million… And that is year on year. extrapolating this to the rest of the year implies that in 2012 we can expect roughly to cut our Net Voted Expenditure by a terrifyingly insignificant pittance amount of €140 million.

Yep… Jonque!

4/10/2012: Spanish Banks Stress Tests

My article for The Globe & Mail on Spanish banks stress tests (link).

3/10/2012: AIB hikes mortgages rates. Government plays banjo.

The logic of Irish Government's policy on the banking crisis:

Fallacy 1:
Government Position: Irish Government claims that it is protecting and shoring up Irish banks so they can start lending into the economy.
Irish Banks Position: jack up variable mortgages rates, thus taking money out of the economy.

Fallacy 2:
Government Position: Irish 'savings rate is irrationally high' so we must reduce the rate of savings to incentivise demand.
Irish Banks Response: jack up variable mortgages rates, thus reducing domestic demand.

Fallacy 3:
Government Position: Mortgages crisis must be dealt with while protecting family homes, where feasible.
Irish Banks Response: jack up variable mortgages rates, thus making homeownership less sustainable for many financially stressed homeowners.

Fallacy 4:
Government Position: Strategic defaults must be avoided.
Irish Banks Response: jack up variable mortgages rates, thus incentivising more strategic defaults.

Fallacy 5:
Government Position: Property markets must be returned to healthy functional state (aka: price increases are good, price drops are bad).
Irish Banks Response: jack up variable mortgages rates, thus pushing more properties into distress sales and removing more borrowers out of the pool of potential home buyers.

Which part of this 'market' is rational?

2/10/2012: Irish Exchequer Receipts Q3 2012

Headline figure on Tax Receipts is €26,118mln collected in Q3 2012 against profile of €25,733mln a surplus over the profile of 1.5%. However, in January-August  2012 the same surplus was 1.7% and January-June 2012 it was running at 3.1% surplus on target. In other words, target is being met, but performance is deteriorating and the Department is correct to sound cautiously here, constantly reiterating the importance of Q4 in terms of receipts delivery. The cushion as it stands at the end of September was €385 million on profile.

Year on year headline figure shows improvement in 9 months through September (up 8.4% on unadjusted basis, and up 6.2% on adjusted basis) compared to 8 months through August (7.7% on unadjusted basis and 5.2% on adjusted basis). This is the good news for the Exchequer.

On adjusted basis, tax revenues are up €1,491 mln in Q3 2012, having been up €1,063 mln in 8 months through August. This suggests that September monthly performance was pretty robust even once we adjust for the various reclassifications of tax revenues.

Now, let's try to see what is going on behind the headlines.

Adjustments - covering reclassifications of USC and delayed accounting for corporate tax receipts (carryover from 2011) - were running at €511 million in 8 months through August 2012. In Q1-Q3 2012 these were booked at €529 million - a suspiciously low differential for the whole month. I noted the same suspicion back in August. 

In addition, the Department seemingly does not account for reclassification of the Corporate Tax receipts from 2011 to 2012 in full. Instead, the Department does subtract the revenues booked in 2012 due to carry over from 2011 from 2012 figures, but it does not add these carry over amounts back into 2011 comparative Corporation Tax figure.

On non-tax revenues side, banking-related receipts are running at €2.057bn in 9 months through September 2012 against €1.643bn in the same period 2011.Semi-states dividends (another indirect tax on the economy) are at €88mln against €31mln in 2011. Pensions levies are at €11mln against €8.6mln in 2011. Adjusting for banks receipts alone (see my August note as to why such adjustments are warranted), total current receipts (tax and non-tax) are at €26,471mln in January-September 2012 against €24,455 in the same period 2011 (+8.25% y/y). 

Now, adding to these adjustments on tax revenues (explained above), total adjusted current receipts are up 6.1% y/y, not the 9.3% headlined in the exchequer figures.

Excluding the Sinking Fund transfers (deficit neutral), Capital Receipts are down at €813 mln in 9 months through September 2012 compared to €1,038mln in the same period 2011.

Let's combine all receipts ex-Sinking Fund receipts:

• Official numbers are: Total tax and Non-Tax Current and Capital Receipts amounted to €29.342bn in January-September 2012, up 8.13% on the same period 2011 (€27.136bn).
• Adjusting for Banks-related receipts and adjusting for tax revenues reclassifications, total receipts amounted to €26.755bn in 2012 and €25.655bn in 2011 (January-September periods), a rise of 4.29% y/y or €1.1bn.
• The above is still an impressive performance, given stagnant economy, but it is a far cry from what is needed to close the funding gap for the Exchequer.
• Critically, while tax performance cushion on target is getting thinner, it is still positive and is likely to stay non-negative through Q4 2012. In other words, it appears that we will deliver on targets on tax revenue side. This represents the reversal to some threats emerging in July-August.

1/10/2012: ECB in two charts

ECB in 2 charts:

30/9/2012: Ireland's Demographic Dividend Turns Negative?

Ireland has one of the highest and healthiest birth rates in the advanced economies club, a fact that remains valid even today, amidst the economic downturn. In the past, this has prompted some economists and commentators to label this trend 'the demographic dividend'. I always pointed to the fact that if this indeed is a 'dividend', then retaining it within the Irish economy (society) is as important as generating it in the first place. Alas, over the recent years, our demographic dividend has been largely squandered away by the combination of a cyclical downturn (temporary loss of jobs) and more importantly by the structural recession (longer term loss of jobs). I highlighted the top line trends in our migration in the previous posts (here and here).

Here, let's take a quick look at the 'demographic dividend'.

With many caveats, let us define two groups of population: those in active working age group (20-64 years old) and those outside this group (0-19 years old and over 65 years old). The reason for these definitions is that younger people  under 20 years of age are significantly engaged in education systems and although some of the students do work, they are not engaged in career-enhancing work and/or work part time. Similarly, some of the people in age category over 65 are still very much gainfully employed, but vast majority of people in this age category either work part time, or do not work at all. Again, all of this relates to formal employment, so we omit household work, which is important in the economy as well, but is hard to quantify.

With caveats, then:

• Between 2006 and 2009 working age group population in Ireland grew by 189,100 and in the period of 2010-2012 it shrunk by 27,000. Quite a reversal in the 'demographic dividend' if you ask me.
• The same group share of total population grew by 0.1 percentage point in 2006-2009 period and contracted by 1.0 percent in 2010-2012 period.
• Meanwhile, the opposite side of the 'dividend' performed in exactly the opposite direction: non-working age population grew in 2006-2009 period by 114,500 and then again expanded by 57,700 in the period of 2010-2012. 
• The share of total population that is captured by the non-working age population shrunk by 0.1% in 2006-2009 period and grew by 1.0% in 2010-2012.
• Let's sum this up: in 2006-2012 period, working age population expanded by 150,800, while non-working age population grew 201,600. If this is a dividend, so far it is coming up negative. Proportion of working age population as a share of total population shrunk 1.5% and proportion of non-working age population expanded by 1.5%.

Charts to illustrate:

The above, of course, leaves out the account of unemployment. But even abstracting away from this, Ireland is now at risk of suffering from rising twin dependency: fewer working-age people funding more non-working-age people. All because of emigration. Dividend...

30/9/2012: Retail Sales data for Ireland August 2012

Retail sales figures for August are out this week with some positive, if only fragile, news.

• Core retail sales Value Index rose to 96.0 from 95.3 in July, up 0.73% m/m. Value index is still down 0.31% on 3mo ago, but the index is up 1.48% y/y.
• 6mo MA is at 95.42, so August reading is slightly ahead of the longer-term average. Previous 6mo MA through February 2012 was at 95.3.
• August reading is still below the 2010-2011 average (96.63).
• August marked second consecutive rise in Value index, although the overall index still did not fully recover from June sharp drop.
• Core retail sales Volume index remained relatively unchanged in August at 99.2 after posting 99.1 reading in July. The index is up on 98.0 in July, but is still below May reading of 99.5.
• Volume index in August was at -0.30% below the reading 3 mo ago and is up 0.3% y/y. The gap between volume and value indices changes over the last 12 months suggests acceleration in inflation.

Charts below show overall trends, including the trends in consumer confidence:

As usual, my own Retail  Sector Activity Index (RSAI) based on the above series:

RSAI rose to 110.1 in August from 108.9 in July due to a combination of increases in the Value and Volume Indices and Consumer Confidence. RSAI is now 1.15% up m/m and 6% up y/y with core y/y driver being consumer confidence (+25.4% y/y in August). The problem is that on general, the Consumer Confidence indicator is largely irrelevant as a metric to the sector performance. For example, all indices set at 100=2005 level of activity. By this metric, Volume of activity is still down 0.82%, while the Value index is down 4.0% on 2005 levels of activity. Consumer Confidence is 38.3% up. 

So the positives are, at least through August, as follows:

1. Value Index of retail sector activity is up 2 months in a row, but at a weak rate of increases so far;
2. Volume index is basically flat (at least not declining)
3. Confidence is up, but I would advise serious caution in interpreting this.
4. RSAI is up and may be signaling some future firming up in sales, assuming confidence indicator is not going completely out of connection with the real economy. 

29/9/2012: Detailed analysis of Irish migration by nationality

On foot of some comments to my earlier post on Ireland's migration flows, here are three charts to show in more details nationality breakdown of the core flows: Data refers to April-April data, so 2012 references period of April 2011 - April 2012.

Annual immigration:

• Total immigration peaked at 151,100 in 2007 and declined to the low point of 41,800 in 2010. Since then, it bounced somewhat back to 53,300 in 2011 and to 52,700 in 2012.

Annual emigration:

• Annual emigration hit bottom in 2006 at 36,000 and rose steadily to 49,200 in 2008. Thereafter, total emigration rose to 72,000 in 2009, dropped slightly to 69,200 in 2010 and shot up in 2011 (80,600) and 2012 (87,100).

Cumulated flows for 2006-2012:

• Cumulated net inflows for the period of 2006-2012 stood at 153,500 in April 2012.
• Irish nationals represent the only category of residents that registered net cumulated outflow (-23,400) in the period of 2006-2012.
• In 2006-2008, there were cumulated net inflows of 32,100 for Irish nationals and in 2009-2012 this was reversed to a cumulated net outflow of 55,500
• In 2006-2008, there were cumulated net inflows of 11,400 of UK nationals into Ireland, which was reversed to a cumulated net outflow of 2,300 in the 2009-2012 period
• In 2006-2008, there were cumulated net inflows of 14,100 for 'Rest of EU15' nationals and in 2009-2012 this was reversed to a cumulated net outflow of 5,800
• In 2006-2008, there were cumulated net inflows of 152,900 for EU12 nationals and in 2009-2012 this was reversed to a cumulated net outflow of 27,300
• In 2006-2008, there were cumulated net inflows of 30,600 for nationals from the rest of the world and in 2009-2012 there was a shallower net cumulated inflow of 3,600.

29/9/2012: Eurocoin for September 2012

In the previous post I promised the update for the leading economic indicator, eurocoin, results for September.

In September, eurocoin remained at broadly-speaking the same level as in August, singaling contraction of -0.32 (August reading was -0.33). The indicator was on the positive side in equity markets and sovereign debt components, but came in with deterioration on firms and households surveys side.

This marks twelve consecutive months of sib-zero readings.

3mo MA for the indicator is now at -0.297, 6mo MA is at -0.195 and y/y the swing in the eurocoin is -0.35 points. Current reading is slightly worse than -0.31 average reading for 2008-2009.

Growth forecast based on eurocoin suggests -0.4-0.5% economic contraction in Q3 2012.

Monetary policy is now consistent with accommodative stance:

However, monetary policy remains outside the inflation targeting range:

Economic deterioration continues in y/y terms, while moderating inflation is also on track, suggesting that some further easing in the policy is still feasible in months ahead. My expectation would be for an ECB rate cut in October-November of 25bps.

28/9/2012: Two points of note from today's economics news

Two points of note today (and no, none relating to the non-scientific fiction of the Spanish banks stress tests):

Point one: IMF assessment of Iceland's economy (in a second post-programme note):

"Growth has recovered and the outlook is good. Following a deep and protracted recession, the economy grew by 2.6 percent in 2011—a performance that looks set to be broadly repeated in 2012 and sustained over the medium term. The output gap is closing, unemployment has decreased, and inflation, though still high, is expected to converge toward the Central Bank’s target of 2½ percent in the medium term if monetary tightening resumes. Public and external debt ratios are on a downward path and financial sector conditions are improving."

Now, I did stress in italics few bits there…

IMF continues by pointing out that Iceland - to guard against downside risks - should aim to continue current fiscal path and 

"For the 2013 budget, additional measures amounting to about 0.2 percent of GDP would put the overall balance firmly on track for a balanced position in 2014"

Now, the best-in-class Ireland, of course, is aiming to deliver a budgetary deficit of 5% in 2014 - not a balanced budget and to achieve the same target that IMF suggests would take Iceland a precautionary cut of 0.2% of GDP for Ireland would imply dropping deficit by at least 7.7% in 2013. Hmmm… right… the 'bad boy' Iceland = 0.2%, the 'good boy' Ireland = 7.7%…

But wait, the real point two to consider is not about Ireland-Iceland 1-letter difference comparatives, but about Iceland v Euro area ones. Today, Eurocoin - the CEPR and Bank of Italy joint-run leading economic indicator for the Euro area economy came out for September, showing that Euro area economic growth has stabilized at around -0.3-0.5% GDP. Now, run this by me again? Iceland stabilized at around +2.6% growth, Euro area stabilized at around -0.3%… Oh, dear.

See Eurocoin details in the next post...

28/9/2012: Thou Shalt Not Read Into the ECB PRs Too Much

You'll read a load about the Spanish Banks 'stress' tests (which they largely passed with just minor blemishes) in days ahead, but one thing worth remembering is that all the congratulatory patting on the back the Spanish authorities about to receive means diddly-nothing.

Here's what the ECB had to say about the most farcical of all 'stress' tests ever conducted anywhere this side of the Zimbabwean border - the stress tests of July 2010 which even the Irish banks passed with flying colors:

"The stress-testing exercise is comprehensive and rigorous. It confirms the resilience of EU and euro area banking systems to major economic and financial shocks. The exercise, therefore, represents an important step forward in supporting the stability of the EU and euro area banking sectors."

The farcical bit was of course that the 'comprehensive and rigorous' tests of 2010 found all euro area banks needing just €3.5bn of capital...

And here's what the ECB had to say about July 2011 stress tests that failed to find much at fault with the Spanish banking system (italics are mine):

"The European Central Bank (ECB) welcomes the publication today of the results of the EU-wide stress-testing exercise, which was prepared and conducted by the European Banking Authority (EBA) and the national supervisory authorities. The EU-wide stress test in the banking sector has proved to be an important tool to enhance transparency in the EU banking system. It provides for the disclosure of all the information that is relevant for the market to assess the resilience of the institutions in the context of an adverse scenario."

So let's not exercise too much about today's ECB 'welcoming' of the Spanish stress tests (link here)...