7/7/2014: About those Global Growth Uplift Forecasts...

Last week, IMF updated its World Economic Outlook with a fresh upgrade to global growth forecast for 2015. Lot's of media miles have been travelled over this upgrade (here's one example). And, in fairness, the IMF might be right: there has been some firming up in global growth in recent months.

More significantly, the firming up is coming on foot of stronger performance of the advanced economies, where the cycle is now clearly indicating early stages recovery.

The same positive momentum has been confirmed in a number of expert surveys, e.g. BlackRock Investment Institute and McKinsey Global Institute and so on.

Still, just to be on the safer side, it is worth taking IMF forecasts in perspective. The Fund has been systematically wrong in its outlooks for Global and Advanced economies growth in recent years. Here is some evidence.

First: take the same period estimates (April-published estimates for the same year growth). These should be pretty easy to predict, as by the date of their release, the Fund has contemporaneous data flows on the economies (e.g. PMIs) and previous year dynamics pretty much sorted. Table below shows that, despite some data already being available, the Fund has rather varied experience with its estimates. And when it comes to the World Economy estimates, things have goo ten worse over the last three years, compared to the 5 years range.

Second, let's look at one year-ahead forecasts. Here, things are better in most recent three years, but they are not brilliant, especially when it comes to the Fund forecasts for the Euro Area. 3-5 year average over-estimate of growth is to the tune of 0.76-1.05% per annum. When it comes to World growth forecasts, these too turn out to be too optimistic, in the range of 0.56-0.60% annually.

Third: over two years forecasts, Fund's performance is worse: for the World economy forecasts tend to be on average more optimistic than the outrun by between 0.68% and 1.04% per annum. The same range for Euro Area is 1.19% to 1.53%.

Two charts illustrate the above. First: One-year ahead forecasts compared to outrun:

Next: 2008-2012 forecasts and 2013 (April) estimate for growth in 2013 compared to actual outrun:

Someone criticised my choice of the period covered, but the entire point of my argument here is not that the IMF is bad at forecasting (it is no worse than many other sources), but that forecasts at the times we live in are by their nature highly restrictive. That is, of course, not the notion one gets from reading business media reports of every IMF (or other major source) forecasts update.

So the net conclusion must be that there are indicators of global growth firming up… but I would't be rushing to buy on foot of IMF statements about 2015… At least not until there is a clear and established trend along which the forecasters can glide smoothly. When we need forecasts most, they are least useful… such is reality.

7/7/2014: Bitcoin: Swiss View vs EBA View

Three interesting links relating to Bitcoin:

1. Swiss authorities position on Bitcoin: http://leaprate.com/2014/06/23470/switzerlands-finma-grants-first-bitcoin-trader-license-to-sebx-deems-bitcoin-a-means-of-payment/
2. Swiss market view as contrasted by the EU view: http://leaprate.com/2014/07/23926/eu-opposes-switzerland-and-hits-bitcoin-instructs-banks-to-avoid-the-virtual-currency/
3. EBA position paper: http://www.eba.europa.eu/documents/10180/657547/EBA-Op-2014-08+Opinion+on+Virtual+Currencies.pdf (see page 22 for summary of identified risks)

4/7/2014: Fourth of July WLASze

This is WLASze: Weekend Links to Arts, Sciences and zero economics and in spirit of the 4th of July Day one hell of a 'Happy Birthday, America' webcards from deezen:
http://www.dezeen.com/2014/07/04/five-favourite-dezeen-american-architecture-projects-2014-4th-july/

My personal favourite: http://www.dezeen.com/2014/01/16/the-pierre-concrete-house-olson-kundig-architects/

And a bit of brilliant history of the Day when "treason was preferable to discomfort"... http://www.wired.com/2014/07/celebrate-the-4th-of-july-because-horse-flies/ Say, Thanks, America, to Tabanus Atratus, for the hotdogs and the fireworks and the football games in the parks... for the 4th of July:

Via http://www.wired.com/2014/07/celebrate-the-4th-of-july-because-horse-flies/

4/7/2014: Q1 2014: Domestic Demand dynamics

In the previous posts I covered the revisions to our GDP and GNP introduced by the CSO, top-level GDP and GNP growth dynamics, and sectoral decomposition of GDP.  These provided:

1. Some caveats to reading into the new data 
2. That the GDP has been trending flat between Q2-Q3 2008 and Q1 2014, while the uplift from the recession period trough in Q4 2009 being much more anaemic than in any period between 1997 and 2007. The good news: in Q1 2014, rates of growth in both GDP and GNP were above their respective averages for post-Q3 2010 period. Bad news: these are still below the Q1 2001-Q4 2007 averages.
3. Evidence that in Q1 2014, four out of five sectors of the economy posted increases in activity y/y. 

Now, let's consider Domestic Demand data. In the past I have argued (including based on econometric evidence) that Domestic Demand dynamics are most closely (of all aggregates) track our economy's actual dynamics, as these control for activities of the MNCs that are not domestically-anchored (in other words, they include effects of MNCs activities on Exchequer and households, but exclude their activities relating to sales abroad and expatriation of profits and tax optimisation).

Of the components of Domestic Demand:

• Personal Consumption Expenditure on Goods and Services stood at EUR19.915 billion in Q1 2014, which is up EUR42 million (yes, you do need a microscope to spot this - it is a rise of just 0.21% y/y. Good news is that this is the first quarter of increases in Consumption Expenditure after four consecutive quarters of decreases. Previously we had a EUR125 million drop in Personal Consumption Expenditure in Q4 2013 compared to Q4 2012.
• Net Current Government Expenditure stood at EUR6.614 billion in Q1 2014 which is EUR167 billion up on Q1 2013 (+2.59% y/y) and marks third consecutive y/y increase in the series.  Over the last 6 months, Personal Consumption fell by a cumulative EUR83 million and Government Net Current Expenditure rose EUR617 million. Austerity seems to be hitting households more than public sector?..
• Gross Domestic Fixed Capital Formation (basically an imperfect proxy for investment) registered at EUR6.864 billion in Q1 2014, up EUR191 million y/y. Which sounds pretty good (a 2.86% rise y/y in Q1 2014) unless one recalls that in Q4 2013 this dropped 11.35% y/y. Over the last 6 months Fixed Capital Formation is down EUR798 million y/y in a sign that hardly confirms the heroic claims of scores of foreign and irish investors flocking to buy assets here.
• Exports of Goods and Services, per QNA data, stood at EUR47.164 billion in Q1 1014, up strongly +7.41% y/y, the fastest rate of y/y growth since Q1 2011 and marking fourth consecutive quarter of growth. I will cover exports data in a separate post, as there is some strange problem with QNA data appearing here.
• Imports of Goods and Services were up too, rising to EUR37.635 billion a y/y increase of EUR2.086 billion.  
• Over the last 6 months, cumulatively, y/y Exports rose EUR4.970 billion and Imports rose EUR3.741 billion.
• Total domestic demand (sum of Personal Expenditure, Government Current Expenditure, Gross Fixed Capital Formation and Value of Physical Changes in Stocks in the economy) stood at EUR33.828 billion. This represents a y/y increase of just EUR335 million or 1.0%. This is the first quarter we recorded an increase since Q4 2013 saw a y/y drop in Total Domestic Demand of 3.83%. Over the last 6 months, cumulatively, Irish domestic economy was down EUR1.087 billion compared to the same 6 months period a year before.

The above are illustrated in the two charts below:

Lastly, let's take a look at nominal data, representing what we actually have in our pockets without adjusting for inflation. Over Q1 2014, nominal total demand rose by EUR499 million y/y, while over the last 6 months it is down EUR570 million y/y. So in effect all the growth in Q1 2014 did not cover even half the decline recorded in Q4 2013. One step forward after two steps back?..

Chart below summarises nominal changes over the last 6 months and 12 months.

4/7/2014: Q1 2014: GDP & GNP dynamics

In the previous posts I covered the revisions to our GDP and GNP introduced by the CSO and sectoral decomposition of GDP. The former sets out some caveats to reading into the new data and the latter shows that in Q1 2014, four out of five sectors of the economy posted increases in activity y/y. These are good numbers.

Now, let's consider GDP and GNP data at the aggregate levels.

First y/y comparatives based on Not Seasonally-Adjusted data:

• GDP in constant prices came in at EUR44.445 billion in Q1  2014, which marks an increase of 4.14% y/y and the reversal of Q4 2013 y/y decline of 1.15%. 6mo average rate of growth (y/y) in GDP is now at 1.49% and 12mo average is at 1.14%. Over the last 12 months through Q1 2014, GDP expanded by a cumulative 1.13% compared to 12 months through Q1 2013.
• Net Factor Income outflows from Ireland accelerated from EUR7.013 billion in Q1 2013 to EUR7.584 billion. Given the lack of global capes, this suggests that MNCs are booking more profit out of Ireland based on actual activity uplift here, rather than on transfers of previously booked profits. But that is a speculative conjecture. Still, rate of profits expatriation out of Ireland is lower in Q1 2014 than in Q1 2012, Q1 2011 and Q1 2010, which means that MNCs are still parking large amounts of retained profits here. When these are going to flow to overseas investment opportunities (e.g. if, say, Emerging Markets investment outlook improves in time, there will be bigger holes in irish national accounts).
• GNP in content prices stood at EUR36.861 billion in Q1 2014, up 3.35% y/y and broadly in line with the average growth rate over the last three quarters. This marks the third consecutive quarter of growth in GNP. Over the last 6 months, GNP expanded by 2.98% on average and cumulative growth over the last 12 months compared to same period a year before is 2.67%.

Two charts to illustrate:

The above clearly shows that the GDP has been trending flat between Q2-Q3 2008 and Q1 2014, while the uplift from the recession period trough in Q4 2009 has been much more anaemic than in any period between 1997 and 2007.

The good news is that in Q1 2014, rates of growth in both GDP and GNP were above their respective averages for post-Q3 2010 period. Bad news is that these are still below the Q1 2001-Q4 2007 averages.

GNP/GDP gap has worsened in Q1 2014 to 17.1% from 16.4% in Q1 2013. The same happened to the private sector GNP/GDP gap which increased from 18.3% in Q1 2013 to 19.1% in Q1 2014. This implies that official statistics, based on GDP figures more severely over-estimate actual economic activity in Ireland in Q1 this year, compared to Q1 last.

Chart to illustrate:

Switching to Seasonally-Adjusted data for q/q comparatives:

• GDP in constant prices terms grew by 2.67% q/q in Q1 2014, reversing a 0.08% decline in Q4 2013 and marking the first quarter of expansion. 6mo average growth rate q/q in GDP is now at 1.30% and 12mo at 1.26%. 
• GNP in constant prices terms grew by 0.48% q/q in Q1 2014, a major slowdown on 2.24% growth in Q4 2013. Q1 2014 marked the third quarter of expansion, albeit at vastly slower rate of growth compared to both Q3 2013 and Q4 2013. 6mo average growth rate q/q in GNP is now at 1.36% and 12mo at 1.34%. 

Chart to illustrate:

Finally, let's re-time recessions post-revisions.

Red bars mark cases of consecutive two (or more) quarters of negative q/q growth in GDP and GNP:

4/7/2014: Q1 2014: Sectoral Growth Decomposition

In the previous post I covered the revisions to our GDP and GNP introduced by the CSO. Setting the caveats set out in this discussion aside, what are the core underlying dynamics in the National Accounts?

Let's deal with sectoral distribution of output, expressed in constant factor cost terms:

• Agriculture, forestry & fishing sector output registered EUR1.042 billion in Q1 2014, which is up 11.2% on Q1 2013. Pricing effects contribute to the improvement which is now running at double digits y/y for three quarters consecutively. Compared to Q1 2011, output in this sector is up 15.3%, although activity remains below 2006-2007 average (some -6.5% lower).
• Industry output is at EUR11.462 billion, which is 2.1% ahead of Q1 2013. This marks first quarter of increases and the pace of expansion is not exactly fast. Compared to Q1 2011 output in the Industry is up only 2.9% and compared to @006-2007 average it is down 9%.
• Distribution, Transport, Software and Communication sector activity is at EUR9.775 billion in Q1 2014, up 8.0% y/y, marking the first quarter of increases after four consecutive quarters of y/y declines. The sector is down 2.5% on Q1 2011 and is -7.8% below 2006-2007 average.
• Public Administration and Defence sector activity is at EUR1.495 billion in Q1 2014, down 2.0% y/y for 21st consecutive quarter of y/y decreases. The sector is now down 7% on Q1 2011 and 16.6% below activity in 2006-2007.
• Other Services (including Rents) are up at EUR17.064 in Q1 2014, a rise of 3.9% y/y and marking 12th consecutive quarter of increases. Sector activity is now up 11% on Q1 2011 and is up 10.2% on 2006-2007 levels. All of this is down to MNCs operating in ICT services sector and much of the increase on 2006-2007 levels is accounted for by tax optimisation, not by real activity.
• Within Industry, Building & Construction sub-sector posted EUR0.719 worth of activity in Q1 2014, which is 7.6% ahead of Q1 2013, marking a slowdown in the rate of growth from Q2-Q4 2013. The sub-sector now posted expansion over the last 6 consecutive quarters. Still, Q1 2014 activity is 4.8% behind Q1 2011 and is down 57.1% on 2006-2007 average.
• Also within Industry, Transportable Goods Industries and Utilities sub-sector activity registered at EUR10.744 billion in Q1 2014 - an increase of 1.8% y/y and the first quarter of expansion. The sub-sector activity is now up 3.4% on Q1 2011 and is basically unchanged on 2006-2007 average.

So in the nutshell, only two sectors activity is currently running at above 2006-2007 average levels: Other Services (aka ICT Services MNCs) and Transportable Goods Industries & Utilities. All other sectors are running below 2006-2007 levels.

Charts below illustrate y/y growth rates in the sectors:

4/7/2014: Croke Park Country Booes...

After several requests, here is a quick estimate of Dublin economy's losses due to cancellation of Garth Brooks concert (disclosure: as a classical music fan, I have no idea what this guys sings about, genuinely, but MrsG says he is 'a really good country singer').

Estimates are:

For the laughs, of course, purely for the laughs - don't go out shorting Government bonds on this loss...

Update: in spirit with ESA 2010 framework, I do need to add illicit transactions and associated activities to the above, so here they are:

And the grand total is: EUR39.3 million. That excludes, obviously, reaffirming Summerhill and adjoining areas as the pivotal centres for certain 'buziness' activities - the reputational capital loss to the Dublin City Centre that is hard to estimate...

3/7/2014: Irish GDP Q1 2014: Riches of Drugs Trade & R&D 'Investments' Raining Upon Us

CSO published revised Quarterly National Accounts now in compliance with Eurostat latest requirements based on European System of National and Regional Accounts (ESA) framework. This resulted in an uplift in GDP and GNP figures due to two main sources:

• ESA 2010 framework changed the treatment of research and development (R&D) expenditure. Per CSO: "Under ESA95, R&D expenditure was treated as an ancillary cost to the main production of an enterprise, while under ESA2010, R&D expenditure is recognised as capital investment." This is rather stretching: a business 'invests in R&D' and the outcome is either unsuccessful or successful. In the case of unsuccessful outcome, R&D allocation gets written off, so it does not register in business activity as a negative entry offsetting wages and purchases paid for in the process of R&D expenditure being undertaken. In case of success, the resulting IP or product are entered in either as new capital or new value added. Again, these are not netted against R&D spending, as far as I understand. So R&D spending as investment implies double counting the expenditure as value added over time. Looks questionable to me.
• ESA also requires that an estimate for illegal activities should also be included in GDP calculations. This is not separated into a different line-item in QNA, so we have no idea where these additions were made. Also, significantly, it is unclear how imports of illegal goods and services are factored in - are these accounted for on gross imports side? Are these netted out of GDP calculations?

The adjustments resulting from these two changes are large. Overnight, 2013 GDP growth is now +0.2% as opposed to -0.3% before the above revisions kicked in. That's a swing of half of a percentage point!

More than that: In 2013, Irish GDP was supposed to have been EUR164 billion before the revisions. Hookers, illegal drugs, all other sorts of stuff that would land you in Mountjoy, plus R&D reclassifications pushed this to EUR174.8 billion - a full EUR10.8 billion richer we are not, but the Government now has a claim to make that we are and it is all thanks to the FG/LP 'leadership' and all this sort of publicity.

This is just meaningless. Country output comparatives and analysis across years and levels have been now rendered effectively bogus by the combination of
1) Massive tax transfers by the services sector MNCs
2) Massive profits shifting by the traditional MNCs
3) Estimates (or rather guesses) of the illicit trade activities; and
4) Politically correct treatment of R&D spending.

It is worth noting that in Ireland, R&D expenditure has been repeatedly questioned due to the suspicion that much of it (especially for indigenous companies) involves 'investments' in process and management R&D - i.e. activities that normally have nothing to do with invention or creation of anything new, but rather have more to do with marketing and sales.

With this in mind, one simply cannot ignore the National Accounts releases, so in the next few posts I will start analysis of the new, revised data.

Bear in mind, however, that today's 'gains' reported for Q1 2014 are artificial or superficial or plain bogus and have little connection to the reality on the ground. We are not made better off by counting cocaine sales and trips to 'Happy Endin' massage parlours and we are not being made richer by spending on R&D - we might get returns on that R&D, but these returns would count into the normal (pre-revision) GDP when they do take place.

2/7/2014: Irish PMIs Q2 2014: Services, Manufacturing, Construction & Composite Index

In two previous posts I covered Services PMI (here) and Manufacturing PMI (here) for Ireland for June 2014.  June data provides us also with Q2 average levels of activity as measured by PMIs, so let's cover this here.

Q2 2014 Manufacturing PMI averages came in at 55.5, marking the fourth consecutive quarter of readings above 50.0. Q1 2014 Manufacturing PMI averaged at 53.7. Q2 2014 average is now the highest of any quarter since Q1 2011.

All of this indicates that Industry contribution ex-Construction to the GDP should posting growth over H1 2014. And this is good news.

Services Q2 2014 PMI came in at 62.1 - rapid pace of growth - up on 59.9 in Q1 2014 and significantly up on 54.3 in Q2 2013. Again, these are strong indicators of growth in the sector in H1 2014 

And this growth accelerated in Q2 compared to Q1: in Q1 2014 y/y expansion in Services PMI was 10.4% and in Q2 2014 it rose to 14.4%, also in Q1 2014 Manufacturing PMI rose 7.2% y/y and in Q2 this rate of growth was 12.4%.

Finally, Construction PMI (we have these with one month lag, so Q2 figures are based on April-May averages, firmed up substantially, reading 61.9 in Q2 2014 compared to 57.6 in Q1 2014 and 42.4 in Q2 2013. Year on year rates of growth a massive: 28.8% in Q1 2014 and 45.8% in Q2 2014.

All in, the data for Q1 appears to be in line with growth registered in QNA realised today (more of this later) and Q2 is encouraging in so far as it shows acceleration in growth on Q1.

2/7/2014: Irish Services PMI: June 2014

Markit/Investec released PMI for Services for Ireland, so we can update now monthly series for both Manufacturing (see post here) and Services, as well as (in the follow up post to come next) the Composite Activity Index for the economy.

On Services PMI side:

• Main activity indicator firmed up to 62.6 from 61.7 in May, marking the highest level of PMI since February 2007. 
• 3mo MA is now at 62.1 against previous of 59.9. Year on year, 3mo MA is up 7.8 points
• Compared to the full sample average (54.1) current activity levels are running well above the levels consistent with 'normal' growth and these are statistically significantly above the expansion line. 

As chart below shows, we are now into expansion territory for both indices, which is a marked change on June 2013 and June 2012.

Next post will cover Q2 data for Services and Manufacturing PMIs and Composite Index.

2/7/2014: Russia Services & Composite PMI: June 2014

Russia Services PMI (Markit & HSBC) is out today for June 2014, posting a reading of 49.8 - virtually indistinguishable from zero growth. 3moMA is now at 47.6 against previous 3moMA at 49.6. In April-June 2013, 3mo MA was 51.1.

June marked the fourth consecutive month of Services PMI below 50.0 and the index has been posting slowdown in the economy since October 2012, with first negative growth signals coming through in Summer 2013.

With improved manufacturing reading (see earlier post here), the Composite PMI for the Russian economy strengthened to 50.1 in June from 47.1 in May. May 2014 marked the lowest reading in the index since May 2009, so not surprisingly, activity showed a slight bounce back. At current levels, however, the economy is not showing signs of recovery.

3mo MA as of June is at 48.3 and 3mo MA for the previous 3 months is at 49.2. Both contrast against the 3mo MA through June 2013 at 51.2/

Again, the slowdown in activity is marked from October 2012.

2/7/2014: Live Register by Nationality: June 2014 and Q2 2014

In the previous two posts (linked here) I covered top level data on Live Register for June 2014, and the Government "Score Card' comparatives between Q2 2014 and Q1 2011 when the current Coalition came to power. This post covers some details relating to foreign nationals on Live Register.

As of June 2014, there were

• 398,813 people officially on the Live Register (in other words, excluding those who received Live Register supports but were enrolled into State Training Programmes). This marked a decline of 8.39% y/y
• Of the above, 331,463 were Irish Nationals, representing 83.1% of total Live Register counts. Year on year, June 2014 numbers of Irish Nationals on LR is down 8.12% which is less than overall decline in the LR. A year ago, Irish Nationals represented 82.9% of total LR counts. So proportionally, Irish Nationals are now slightly more prevalent on LR than a year ago.
• In June 2014, there were 67,350 non-Irish Nationals on the LR, representing 16.9% of the total LR counts. This represents a decline of 9.73% y/y. A year ago in June 2013, non-Irish Nationals represented 17.1% of the LR.
• 15,034 UK nationals were on LR in Ireland in June 2014, representing a y/y decline of 10.0%, the second sharpest drop of all nationalities groups.
• There were 3,751 EU15 (ex-Ireland & UK) nationals on the LR in June 2014, virtually unchanged (up on 3,750) on June 2013.
• There were 36,772 Accession States (EU-12) nationals on the LR in June, representing a decline of 9.5% y/y. In June 2014, nationals of the Accession States accounted for 9.2% of the total LR counts, down from 9.3% in June 2013. In other words, proportionally, the numbers of Accession States nationals on LR have dropped more significantly than the decline in LR itself. This category posted the third steepest decline in LR numbers.
• Non-EU nationals listed on LR amounted to 11,793 as of June 2014, a decline of 12.8% on June 2013. Proportionally, they accounted for just under 3% of the LR total counts in June 2014, down slightly on just over 3.1% in June 2013. This category posted the overall steepest rate of decline in LR numbers y/y.

Charts to illustrate:

A table below summarises changes in quarterly averages terms for Q2 2014:

This largely confirms the same observations made about June 2014 figures.

2/7/2014: Live Register: Changes on Q1 2011 & Government 'Score Card'

In the previous post I covered Live Register (top numbers) for June. Here, as promised, a sort of 'Score Card' for the Government tenure period - looking at the LR performance over the period from Q1 2011 through Q2 2014. This is summarised in the table below:

Note one simple exercise, taking the rate of improvement in figures over either 3 years and a quarter (entire tenure of the Government) or over the last 12 months (quarterly averages basis), we can look at the number of years we are still away from getting the LR and its underlying components to some sort of a 'norm' (selected as the average of 2007-2008 period). Two things are evident from this exercise:

1. The task ahead is still awfully large and in no case are we out of the storm until around 2019-2020; and
2. The task is being made easier in recent months as things have been improving more rapidly

This confirms my earlier analysis that the current crisis does not appear to be as easily solvable as the one of the 1980s (you can see some of this here).

It would not be fair to criticise this Government for the problem of unemployment. And it would be wrong not to recognise the fact that the numbers are improving and the rate of improvement has accelerated in the last 18 months. Still, noting the caveats to the improvements that I cited in the earlier post on this subject, and considering the effect of State Training Programmes on LR (the cornerstone of Government labour market policies endorsed fully by the Troika) there is more of this road yet to travel than what has been marked over the last 3 years.

2/7/2014: Live Register: June 2014

Live Register figures for June 2014 are out today, so here are some updates.

Seasonally un-adjusted LR stood at 398,813 in June 2014, which is down 8.39% y/y down 36,544. In May 2014 the LR was down 7.81% y/y so June marks an improvement in the rate of Live Register declines.

Factoring in participants in State Training Programmes, total number of individuals in receipt of Live Register supports in June 2014 was 473,700 which is 5.68% lower (28,521) than in June 2013. The rate of decline in total Live Register Recipients numbers moderated in June, since in May 2014 it fell 6.98% y/y.

Chart to illustrate:

June marked the slowest rate of LR declines (when factoring in State Training Programmes participants) since February 2014. However, since December 2013, the annual rates of decline in LR+STP numbers have run above 5%, every month, against average 2.57% declines in January-November 2013.

On the other hand, official LR declines hit record in June, dropping 8.39% y/y, the steepest rate of annual decline since the crisis began.

All of the above are positives, but subject to two caveats:

1. We do not know how much of the LR reduction is down to emigration
2. We do not know how much of it is down to exits from the labour force.

Data for labour force itself comes with a quarterly lag, so all we have to go by currently is Q1 2014 figure, when the labour force rose to 2,146,300 compared to 2,137,500 in Q1 2013 - an increase y/y of 8,800. Rising net labour force could have come from younger workers coming into the LF for the first time (some of them are not finding jobs, some are) and it can mean that older workers who exited the LF are coming back. We do not know net drivers for the 8,800 increase, so we cannot speculate as to what effect on LR this has had.

What we do, however, know (with 1 quarter lag, again) is that LR recipients as share of labour force is still trending above 2008-present average and although it is coming down, the proportion remains stuck above 20%. 

2008-present average for LR+STP as % of labour force is 21.1%, current June 2014 reading is at 22.1% (assuming labour force for Q1 2014), and March 2014 reading was 22.0% - very close to June (March figure is based on Q1 2014 data, so it is more likely to be correct). In June 2013 this proportion was 23.1% and in March 2013 it was 23.9%, which means we have some improvement. However, we are still far from 1998-2007 average of 9.5%.

So the good news is: LR is down. Better news is: much of the decrease is not due to State Training Programmes. Bad news: there is still a lot of road left to travel before we get anywhere near normal levels of LR and the progress is not rapid.

Government 2011-present scorecard on LR - in the next post.

1/7/2014: Russia Manufacturing PMI: June 2014

Russia's Manufacturing PMI (released by Markit and HSBC, full release here) showed that contraction in Manufacturing moderated to 49.1 in June 2014, compared to 48.9 in May 2014 - a move that is statistically not significant. The index remains below 50.0, although in the range where deviation from 50.0 is also not statistically significant, signalling continued mild contraction/stagnation in Russian manufacturing.

This marks 8th consecutive month of sub-50 readings and over the last 12 months there was only one month with a reading above 50.0 (back in October 2013). While geopolitical crisis in Ukraine is weighing on Russian economy, the decline in performance set on around May-July 2013, well before the instability in Ukraine manifested itself.

3mo MA through June is now at 48.8, which is marginally slower rate of contraction than signalled by the 3mo MA through March (48.3) and is substantially worse than 3mo MA of 50.9 recorded in April-June 2013.

1/7/2014: Irish Manufacturing PMI: June 2014

June Manufacturing PMI for Ireland (released by Markit and Investec) posted a small gain, rising to 55.3 from 55.0 in May. 3mo MA is now at 55.5 and this is above the previous 3mo MA through March 2014 which stood at 53.7. 12mo MA is at 53.7 which implies that we have positive growth in manufacturing over the last 12 months. 3mo MA through June 2014 is above same period averages for 2010-2013.

Chart to summarise the series:

We are now on an upward trend from April 2013 and series are running above 50.0 marker thirteen months in a row:

And expansion remains statistically significant and well ahead of the 'recovery' period average:

All are good signals. Too bad Markit would not release more detailed sub-indices numbers, which prevents me from covering trends in Employment, Profit Margins and New Orders data.

One caveat: rate of improvement in June (m/m) was just 0.3 points, which is below 12mo average of 0.4 points and 3mo MA of m/m changes in the index are now -0.1 points, which is a slowdown on 3mo MA through March 2014 (+0.7 points) and on 3mo MA through June for 2013 and 2012.

30/6/2014: The Euro Plus Pact: Getting Causality Between Current Account and Competitiveness Backwards

Gabrisch, Hubert and Staehr, Karsten, new paper published by ECB and titled "The Euro Plus Pact: Cost Competitiveness and External Capital Flows in the EU Countries" (February 18, 2014, ECB Working Paper No. 1650. http://ssrn.com/abstract=2397789) looks at the effectiveness of the Euro Plus Pact which was approved by 23 EU countries in March 2011 and came into force shortly afterwards.

Emphasis in bold in the quotes is mine.

"The Pact stipulates a range of quantitative targets meant to strengthen cost competitiveness with the aim of preventing the accumulation of external financial imbalances."

According to the authors: "The rationale behind the Euro Plus Pact is evident in its original name, the Competitiveness Pact, and also in its current subtitle: “Stronger economic policy coordination for competitiveness and convergence” (European Council 2011, p. 13)."

In virtual obsession of European policymakers with internal competitiveness expressed in terms of cost of labour and production, "Deteriorating cost or price competitiveness in individual countries is seen as a source of economic and financial instability. This view is directly stated in the conclusions from the European Council meeting at which the Euro Plus Pact was adopted (European Council 2011, p. 5): "The Euro Plus Pact […] will further strengthen the economic pillar of EMU and achieve a new quality of policy coordination, with the objective of improving competitiveness and thereby leading to a higher degree of convergence […].""

The authors use Granger causality tests and vector autoregressive models "to assess the short-term linkages between changes in the relative unit labour cost and changes in the current account balance. The sample consists of annual data for 27 EU countries for the period 1995-2012." This allows them to explore the direction and size of the short term linkages between cost or price competitiveness and external capital flows in the EU countries.

"The analyses are particularly pertinent given the adoption of the Euro Plus Pact… The underlying rationale is that deteriorating cost competitiveness is an important factor behind the accumulation of current account deficits and financial vulnerabilities." Thus, the "participating countries must take measures to improve their cost or price competitiveness and thereby reduce the likelihood of financial imbalances accumulating."

First, authors use Granger causality tests to determine "whether lagged values of one variable help explain the other variable when autocorrelation and country fixed effects are taken into account." The result is: lagged changes in the current account balance help explain changes in unit labour costs, while there is no effect in the opposite direction. The results hold for all 27 EU countries, for the EU15 countries and for 10 EU countries.

Second, vector autoregressive models confirmed "qualitative results are in all cases very similar to those of the Granger causality tests. …"

In other words, "changes in capital flows appear to affect cost competitiveness in the short term, while changes in competitiveness appear to have no effect on capital flows in the short term." This is important, as many policy analysts (e.g. Bruegel) and European policymakers (from Commission to national governments) routinely express the view that external imbalances are the result of poor competitiveness, especially in the periphery and especially in the context of driving the momentum of the financial crisis and the great Recession.

Here is what the authors have to say on this: "Increasing capital flows from the core to the periphery of Europe may partly explain the deteriorating cost competitiveness in many countries in Southern and Central and Eastern Europe as well as the improving cost competitiveness in many countries in Northern Europe [prior to the Crisis]. The reversal of these capital flows after the outbreak of the global financial crisis may lead to ensuring changes in cost competitiveness."

But more crucially, there seems to be no reverse direction of causality: pursuit of greater competitiveness does not seem to be a correct prescription for achieving external balances. "...the measures in the Euro Plus Pact to restrain the growth of unit labour costs may not affect the current account balance in the short term."

Now, wait, that is ECB research paper that says 'restraining growth in unit labour costs' (aka: improving competitiveness) may not do much for external balances… Hmm… did anyone hear that Euro Plus Pact tree fall?

And moving beyond the past: is anyone monitoring flows of 'capital' to the 'periphery' in the form of extremely depressed Government debt yields that are prevailing today? Cause you know, that competitiveness might be falling next time we look…

29/6/2014: Tech & Science Migrants & Native Workers: US Evidence

Tech specialists and ICT specialists hired from abroad into countries like Ireland are seen, by the policymakers, as a necessary and sufficient evidence of growth in employment and domestic economic well-being. The reason for this is often found the argument that lack of local skills will result in higher labour costs and lower competitiveness of the sector and, thus, lead to outflow of ICT-linked FDI and reduced MNCs activity in the economy.

Part of this rationale is correct. Part is wrong. I recently posited, in my Sunday Times ex-column and in a WSJ op-ed, the thesis that in Ireland's case, tax optimisation by ICT MNCs is equivalent to a resource curse, whereby excessive amounts of financial resources flows into attracting and retaining skilled workers, resulting in underinvestment in other sectors of economy. Beyond this, the Government, grown accustomed to windfall revenues from the tax optimising MNCs has lower incentives to focus on developing indigenous and highly competitive specialisation.

Setting aside these more complex arguments, what is the effect of the skilled ICT and tech and R&D workers immigration on domestic economy?

Peri, Giovanni and Shih, Kevin Yang and Sparber, Chad, in their recent paper titled "Foreign Stem Workers and Native Wages and Employment in U.S. Cities" (May 2014, NBER Working Paper No. w20093) looked at the effects of the Scientists, Technology professionals, Engineers, and Mathematicians (STEM workers) immigration into the US. Per authors, STEM workers "are fundamental inputs in scientific innovation and technological adoption, the main drivers of productivity growth in the U.S."

In their paper, the authors attempt to "identify the effect of STEM worker growth on the wages and employment of college and non-college educated native workers in 219 U.S. cities from 1990 to 2010. In order to identify a supply-driven and heterogeneous increase in STEM workers across U.S. cities, we use the distribution of foreign-born STEM workers in 1980 and exploit the introduction and variation of the H-1B visa program granting entry to foreign-born college educated (mainly STEM) workers."

Key findings:

• "We find that H-1B-driven increases in STEM workers in a city were associated with significant increases in wages paid to college educated natives." In other words, shortages of specialist skills (signified by intensity of inflow of STEM migrants) do bid up wages for similarly-educated (in degree attainment and also in skills similarities) natives. This agrees with my argument that far from driving down labour costs for skilled workers not just in STEM-related sectors, but across all educated workforce, STEM-targeted immigration is associated with higher labour costs. Often, this is seen as being driven by complementarity between STEM skills and related services professionals (legals, accounting, sales, marketing, etc). But is that the case of signalling value of their degrees going up in the market, or is it the case of their skills value going up? One way or the other, more STEM immigrants seems to do nothing to improve labour costs competitiveness.
• "Wage increases for non-college educated natives are smaller but still significant." So wage inflation is not moderated by STEM migration, even if we control for skills. In other words, all sectors of city economy are facing rising costs in the presence of STEM immigration. This, of course, is not an argument of causality, but it is also not the evidence that would be consistent with an argument that STEM immigration induces gains in labour competitiveness.
• "We do not find significant effects on employment." In other words, jobs creation is not what happens when you open up targeted skills-driven migration. And, by converse, it is not impacted by restricting it. Which begs a question: every month Irish ministers present jobs announcements by STEM-intensive ICT services companies as evidence of employment creation. Every time they do so, they omit consideration of what higher cost of skilled and unskilled workers is doing to the rest of the economy. Should they be concerned with the latter at least as much as with the former? The study evidence suggests they should.
• "We also find that STEM workers increased housing rents for college graduates, which eroded part of their wage gains." Ah, can that be a reason why rents are inflating in Dublin, especially in the areas where STEM-equivalent skills are at the highest premium (IFSC and South Docklands corridor)? In summary, therefore, higher employment and immigration of STEM workers seems to be associated with higher costs of living for all workers. Is it correct to posit a question of spillovers or externalities that arise from greater share of new employment going to skilled ICT immigrants onto the long term residents of the country or city? If yes, then the logic suggests that there should be consideration of transfers from the immigrants under STEM programme to at least those natives and long term residents who do not gain in wages enough to compensate them for the rising cost of living.

Overall, authors conclude that "Together, these results imply a significant effect of foreign STEM on total factor productivity growth in the average US city between 1990 and 2010." Which is, of course, good. But it does not tell us if this TFP growth actually spreads across the entire economy or stays within STEM-intensive sectors. We do not know if TFP gains in STEM sectors are not offset by labour competitiveness losses in the rest of the host economy. And, crucially, it does not tell us if the above questions, posited in the bullet point comments, can be answered unambiguously in favour of more STEM-linked immigration.

29/6/2014: What a Difference a Year of ECB Activism Makes...

Mapping decline in CDS and implied probabilities of default for Euro area 'peripherals' over the last 12 months:

Largest declines: Greece, followed by Portugal, Spain, Italy and lastly Ireland. Timing of declines and divergent macrofundamentals of these countries suggest that drop in CDS has little to do with internal policies and performance of individual states - the 'periphery' is still being priced jointly. The decline in risk assessments of the 'peripherals' is primarily down to common policy, aka: the ECB.

On the other hand, if we are to distinguish within the 'peripherals', we can identify 3 sub-groups of countries:

• Weakest and stand-alone: Greece
• Mid-range weakness, also stand-alone: Portugal
• Stronger 'peripherals': Ireland, Spain and Italy

29/6/2014: Mid-Summer CDS Dreams: Ukraine v Russia

One of these countries has a brand new Association Agreement with the EU... and a fresh probability of sovereign default of 41%... another one (with probability of default at 11.9%) does not...

In two years from June 2012 through June 2014, Ukraine's probability of default declined 1.47% as the country received massive injections of funds from the IMF, US and EU. Russia's probability of default fell 3.89% over the same time. For comparatives: Ukraine's June probability of default is running at around 41%, Serbia's at 17.6%. Ukraine is currently the worst rated sovereign (by CDS-based probability of default) of any state with an Association Agreement with EU.

29/6/2014: London Property Markets: A Safe Haven After All

A fascinatingly interesting study looking into London property markets from the point of view of safe haven properties. Badarinza, Cristian and Ramadorai, Tarun, "Preferred Habitats and Safe-Haven Effects: Evidence from the London Housing Market" (April 17, 2014, http://ssrn.com/abstract=2353124) uses "a new cross-sectional approach, motivated by the insight that investors may have different "preferred habitats" within a broad asset class."

The study deploys this strategy "on large databases of historical housing transactions in London, finding that economic and political risk in Southern Europe, China, the Middle East, Russia, and South Asia helps explain price and volume dynamics in the London housing market over the past two decades. Safe-haven effects on the London housing market are long-lasting and significant, but temporary. The method also uncovers intriguing insights about cross-country variation in preferred habitats within London."

28/6/2014: Who are the Joneses?

Dahlin, Maria Björnsdotter and Kapteyn, Arie and Tassot, Caroline paper "Who are the Joneses?" (June 2014. CESR-Schaeffer Working Paper No. 2014-004. http://ssrn.com/abstract=2450266) attempts to answer a very important question in economics of individual perceptions and referencing of own well-being relative to well-being of others. The study tackles an issue that forms the core of a number of macroeconomic models, but also of relevance to the active debate about relative poverty and relative incomes.

"A burgeoning literature investigates the extent to which self-reported well-being (or happiness) or satisfaction with income is negatively related to the income of others" or the Joneses. "In many of the empirical studies, the assumption is that the incomes that matter are those of other individuals or households in the same geographical area." In other words - physical proximity is of the matter.

"In an experiment conducted in the American Life Panel, we elicit the strength of comparison with different groups, including neighbors, individuals of similar age and coworkers."

Fascinating findings emerged:

1. "Individuals are much more likely to compare their income to the incomes of their family and friends, their coworkers and people their age than to people living in the same street, town, in the US, or in the world." In other words, we reference our own well-being against well-being of those close to us socially and family-wise, not those who physically live near us, but are strangers to us. A relatively rich uncle may be inducing greater dissatisfaction onto us, than a filthy rich neighbour. In which case, were relative poverty be a concern, taxing family members on higher incomes is better than taxing everyone on higher incomes. Which, of course, would be an absurd policy.
2. "…we find both at the zip code and at the PUMA geographic level that own income or rank in the local income distribution matter for happiness and satisfaction with income, but incomes in the same geographic region do not influence own happiness when controlling for own income."  
3. "When asking respondents directly for how they rate the position of own and others’ income we find that higher estimates of neighbors’ income are negatively related with satisfaction with own income. Additionally, respondents who compare more intensively with their neighbors perceive the difference between their own income and that of their neighbors to be larger." So we do rate strangers' income relative to our own. Just not as much as we rate relatives' and friends' income relative to our own.
4. "Using age-based reference groups instead of geography-based reference groups, we find a consistent negative effect of the log median income and the perceived income in an individuals’ age group". In other words, the Joneses that we 'benchmark' ourselves against are more likely to be those from similar/shared cohort, in this case - cohort by age. The old do not begrudge, as much, the young, but they do begrudge other old.

"Overall, these results indicate that comparisons with neighbors may not be the most important channel through which perception of others’ income impacts one’s own well-being."

In other words, relative benchmarking matters, but it strength varies with familial and social ties, and matters less in terms of proximity. As I noted, half-jokingly, above: a richer uncle induces more negative referencing even if he lives in a distant community, than a richer neighbour who flaunts her/his wealth in our face. 

28/6/2014: Public Debt: It Really Is the Case of Beggar Thy Children…

In a new paper, researchers from Germany use "controlled laboratory experiment with and without overlapping generations to study the emergence of public debt."

The set up of the experiment is simple: "Public debt is chosen by popular vote, pays for public goods, and is repaid with general taxes."

The end result is asymmetric:

• "With a single generation, public debt is accumulated prudently, never leading to over-indebtedness." In other words, if your generation is the one responsible for repaying debt, spending is prudent and debt accumulation is ex ante bounded by expected income.
• However, "with multiple generations, public debt is accumulated rapidly as soon as the burden of debt and the risk of over-indebtedness can be shifted to future generations."

Crucially, "debt ceiling mechanisms do not mitigate the debt problem. With overlapping generations, political debt cycles emerge, oscillating with the age of the majority of voters." In other words, the idea that debt can be controlled by explicit limits is useless. So much is clear from the US debt ceiling system performance, as well as from the EU SGP experiences. And as much will be confirmed by the Fiscal Compact rules application in due time. Worse, absent levels constraints we are left with the Keynesian proviso that simply says: Be nice. Save when you can, send when you need. Oops... if the stick does not work, any hope the carrot will? I don't think so...

The paper was written by Fochmann, Martin and Sadrieh, Abdolkarim and Weimann, Joachim, and is titled "Understanding the Emergence of Public Debt" (May 24, 2014, CESifo Working Paper Series No. 4820. http://ssrn.com/abstract=2458325).

28/6/2014: Exports and Pollution Intensity: Swedish Evidence

A new paper published by CESIfo attempts to understand what mechanisms lead to the empirically-observed negative relationship between harmful CO2 emissions by firms and firm's exports.

Forslid, Rikard and Okubo, Toshihiro and Ulltveit-Moe, Karen Helene paper titled "Why are Firms that Export Cleaner? International Trade and CO2 Emissions" (May 24, 2014, CESifo Working Paper Series No. 4817. http://ssrn.com/abstract=2458293 "…develops a model of trade and CO2 emissions with heterogenous firms, where firms make abatement investments and thereby have an impact on their level of emissions."

Theoretical model "shows that investments in abatements are positively related to firm productivity and firm exports. Emission intensity is, however, negatively related to firms' productivity and exports. The basic reason for these results is that a larger production scale supports more investments in abatement and, in turn, lower emissions per output."

The authors then show that "the overall effect of trade is to reduce emissions. Trade weeds out some of the least productive and dirtiest firms thereby shifting production away from relatively dirty low productive local firms to more productive and cleaner exporters. The overall effect of trade is therefore to reduce emissions."

Lastly, the authors "test empirical implications of the model using unique Swedish firm-level data. The empirical results support our model."

28/6/2014: WLASze: Weekend Links on Arts, Sciences & zero economics

It has been some time since I did my WLASze (Weekend Links on Arts, Sciences and zero economics) last. The reason being somewhat strange state of mind as of late: less calm, less retrospection, more rushed work… the usual.

Here are couple interesting links that I cam across this week.

Via @PandaPolitics  : http://www.brainpickings.org/index.php/2013/11/29/accurat-modern-library/ a complicated, but deadly cool info graphic mapping "a visual taxonomy of lives and literary greatness" of 20th Century 75 big-name writers. It is complex, it is poorly organised (not searchable, non-alphabetic ordering, etc) and it is academist, rather than visual, but it is wonderfully rich and worth exploring.

Another link is courtesy of the RedOrbit.com:
http://www.redorbit.com/news/space/1113179065/distant-galaxy-trio-supermassive-black-holes-062614/ covering the story of a trio of Supermassive Black Holes discovered in a distant Galaxy.

And from the world of art: my favourite installation artists, duo of Ilya and Emilia Kabakov installation "The Strange City" at The Monumenta, Grand Palais, Paris. Review via http://www.aestheticamagazine.com/blog/review-of-the-strange-city-ilya-and-emilia-kabakov-at-the-monumenta-grand-palais-paris/

The site for the project is here: http://www.grandpalais.fr/en/event/monumenta-2014-ilya-emilia-kabakov

A shot from the recent WLASze past:  http://trueeconomics.blogspot.ie/2013/07/2772013-wlasze-part-2-weekend-links-on.html is a new installation Transarquitetonica by Henrique Oliveira an ambitious-beyond-ambition installation in Oliveira's traditional key

You can see a more comprehensive gallery here: http://wordlesstech.com/2014/06/03/transarquitetonica-henrique-oliveira/


Finally, Manifesta 10 Biennial is opening up today in St. Petersburg and is worth following for any reports: http://manifesta.org/biennials/manifesta10/

28/6/2014: Ukraine's Costly European Dream: BloombergView

In light of the celebrations in Ukraine and Brussels over the signing of the EU-Ukraine Association Agreement, here is an excellent op-ed from BloombergView on the topic: http://www.bloombergview.com/articles/2014-06-27/ukraine-s-costly-european-dream

28/6/2014: Irish Retail Sales: Q2 data to-date confirms fragile recovery

In the previous post I covered detailed analysis of Core Retail Sales data for May 2014: here. Now, a quick look at Q2 averages (for 2014 we have average over April and May) for the period from 2005 through latest.

Take a look at the chart plotting declines (as of April-May average) in retail sales activity compared to peak for Q2 data:

This data shows the following:

1. The only two sub-categories of goods and services where retail sales indices in Value terms are in shallower decline than in Volume terms (in other words inflation is positive and feeding through to consumers) are: Automotive Fuel and Bars - in other words two sectors where prices for inputs are largely controlled/set by the state.
2. No category has recovered pre-crisis levels of retail sales by both value and volume, while only one category (Food) recovered sales in volume, relative to pre-crisis activity.

This puts into perspective the extent to which the recovery we are experiencing so far is fragile. 

28/6/2014: Is S&P Behind the Curve on Portugal and Spain?

Euromoney Country Risk report is profiling S&P ratings on Portugal and Spain, with a comment from myself: here.

If you can't access the article, here is the article (click on each image to enlarge):

28/6/2014: Irish Retail Sales Activity: May 2014

There is a lot of hoopla about Irish retail sales stats released today by CSO. Irish and foreign media and even some analysts are quick to point to the headline numbers showing high rates of growth and some are going as far as describing Ireland's miraculous recovery. So what, really, is going on?

First of all, let's consider top level numbers: removing motor trades and fuel, Core Retail Sales:

• In Value Index terms, things have improved, which is a positive - so far in the crisis, value of sales trended well flatter than volume of sales primarily due to deflation in the sector. This was good for consumers, but bad for businesses as profit margins shrunk and with them, employment declined too. In May 2014, value of retail sales index rose to 94.6, up 1.39% y/y. Good news for retailers. Even better news: 3mo MA through April 2014 is up 1.7% y/y and 6mo MA is up 1.4% y/y. All in, we are seeing some fragile gains here.
• Also in Value index terms, this time around based on seasonally-adjusted data: month on month things are not so good: index is down 0.31% on April. So short-term, things are not better this time around. Not to panic, of course, as they are volatile and as trend remains up, albeit gently and unconvincingly so far (see first chart). We are bang-on on the trend now.

• In Volume index terms, the index is under performing recent trend, but is still pointing up on average. Although m/m index is down 0.48%, year-on-year volume of sales is up 3.33%.
• 3mo MA through May 2014 compared to 3mo MA through February 2014 is up 3.7%, stronger than Value index, implying potentially lower margins. Year on year 3mo MA is up 3.33% a notch slower than 3.36% 6mo MA on previous 6mo MA.

My Retail Sector Activity Index (RSAI) capturing simultaneously Value and Volume Indices, plus Consumer Confidence, reported by the ESRI has moderated from 111.0 in April 2014 to 110.6 in May 2014. Year on year, the RSAI is up strongly, from 101.4 back in May 2013, but on shorter-run horizon, the index is just about at the levels set in February-March 2014.

Top conclusions: All of the above are good readings, suggesting that while deflationary pressures remain a challenge, core retail sales have been improving. In previous months' posts, I noted that in my view, we are now on an upward trend in terms of Volume and at the start of a more cautious upward trend in Value terms. May data confirms this, as does the chart below showing current y/y growth compared to pre-crisis historical averages.

April 2014 reading for Volume touched just above the pre-crisis average growth rate (not the levels), this moderated back in May. Value index growth rates remain disappointingly below those recorded before the Great Recession.

In terms of levels, Value index (3mo average through May 2014) is currently 41% lower than historical peak levels and 13.8% below pre-crisis average. Volume index is 37.5% below its historical peak and 8.6% down on pre-crisis average.

27/6/2014: Eurocoin: Euro Area Growth in Q2 ahead of Q1

CEPR and Banca d'Italia released their latest Eurocoin forecast for the euro area economy today. Here are the details:

• In May 2014, Eurocoin posted its first decline in 11 months, falling from 0.39 in April to 0.31. Still April-May 2014 forecast for GDP growth based on Eurocoin stood at 0.35% q/q, faster than any quarter since Q1 2011. 
• The Eurocoin remained unchanged in June 2014, implying the overall average rate of growth of around 0.34%, a moderation on April-May forecast.
• Error-adjusted forecast range for growth is between 0.17% and 0.5%.

Per Banca d'Italia: "The deterioration in business confidence was counterbalanced by the positive contribution from the improved conditions in the financial markets and the pick-up in industrial activity."

Couple of charts to illustrate:

26/6/2014: Explaining the Gender Gap in Entrepreneurship

A new paper by Caliendo, Marco and Fossen, Frank M. and Kritikos, Alexander and Wetter, Miriam, titled "The Gender Gap in Entrepreneurship: Not Just a Matter of Personality" (May 23, 2014: CESifo Working Paper Series No. 4803 http://ssrn.com/abstract=2457841) tackles a very important and highly sensitive issue of gender gap in entrepreneurship.

The authors ask "Why do entrepreneurship rates differ so markedly by gender?"

The paper uses data from a large, representative German household panel, covering 2000-2009 period, to "investigate to what extent personality traits, human capital, and the employment history influence the start-up decision and can explain the gender gap in entrepreneurship."

"In contrast to previous research the main advantage of our data set is that it contains not only information on the socio-demographic background of the respondents, but also on a broad set of personality constructs that elicit the Big Five traits and several specific personality characteristics."

Note: Big Five Factor Model of personality (McCrae and Costa, 2008) "describes the personality by the factors openness to experience, conscientiousness, extraversion, agreeableness, and neuroticism (or, reversely, emotional stability)."

Per authors, "To the best of our knowledge information on the Big Five approach has not been used to assess the gender gap in entrepreneurship. We are the first to simultaneously analyse the effects of the Big Five factors, risk aversion, locus of control, and the ability to trust others ..., as well as of a variety of variables controlling for human capital, employment status, and other socio-demographic factors on the gender specific decision to enter self-employment."

The findings are very far-reaching and substantially in dispute with commonly held views:

1. "Applying a decomposition analysis, we observe that the higher risk aversion among women explains a large share of the entrepreneurial gender gap."
2. "We also find an education effect contributing to the gender difference." More specifically: "On average, working aged women in Germany are still less educated than men and are, therefore, less inclined to start a business."
3. "Thirdly, the current employment state has a strong effect into the opposite direction: If the share of women in wage employment were as high as the male share, holding everything else constant, their entry rate into self-employment would be much smaller."
4. "…we show that personality traits help explain the gender gap in nuanced ways. While specific characteristics, in particular risk attitudes, are able to explain a substantial amount of the gender gap, the overall influence of the Big Five personality constructs point to the opposite direction. This means that if women were endowed with the same scores in the Big Five as men, the gap would be even larger."

Overall: "the explained gap is therefore negative meaning that if women exhibited in all observable variables the same parameter values as men, the entry rate of women would be even smaller than actually observed."