25/3/15: Irish Residential Property Prices Fell Marginally in February

The residential property price index from CSO covering Irish property markets has posted second monthly contraction in February, falling from 80.3 in January to 80.0 last month. With that, y/y on growth rate in Irish residential property prices has slowed from 15.54% in January to 14.94% in February, the first sub-15% reading since September 2014. In effect, property prices in Ireland have now fallen back to the levels between September and October 2014. Cumulated gains in property prices over the last 24 months are now totalling 24.22% or an annualised gain of 11.46%, outpacing growth in the economy by roughly 5-fold.

Based on Nama valuations formula, residential property prices are now somewhere 18.5% below Nama business model expectations.

Prices of all residential properties excluding Dublin  remained static in February at 74.8, same as in January and up 8.25% y/y, marking a slowdown in the y/y growth from 9.20% recorded in January.


The decline in national prices was driven by Dublin prices, which fell for the second month in a row from 82.2 in January to 81.6 in February. This is the lowest index reading since September 2014 and marks a slowdown in y/y growth rates to 21.43% - the slowest rate of growth since April 2014. Still, cumulated expansion in Dublin residential property prices over the last 24 months is blistering 37.6% (annualised rate of 17.3%).

Within Dublin segment:

• Houses were the driver to the downside in overall property prices, with houses price index for Dublin standing at 86.0 in February 2015, down from 86.9 in January 2015 and back to the levels of September 2014. Y/y rate of growth in Dublin house prices fell from 21.7% in January to 21.1% in February, although over the last 24 months hose prices in Dublin are still up cumulatively 37.6% (+17.3% annualised). 
• Apartments prices in Dublin rose in index terms to 72.2 in February from 70.8 in January, erasing the declines that took place during Q3-Q4 2014. Cumulated gains in Dublin apartments prices over the last 24 months stand at 37.5% (+17.3% annualised) and y/y prices are up 24.5% - the fastest growth rate in 3 months.

Few charts to illustrate the above trends:

 Lastly, summary of price changes on pre-crisis peak and y/y:

Despite all the talk about the new bubble in house prices in Ireland, three themes remain true:

1. Property prices are still far below fundamentals-justified levels. In Dublin, undershooting of long-run (inflation-linked) prices is around 26-27%.
2. Property price increases are worryingly high, especially in the Dublin segment, warranting some ongoing concern; and
3. Moderation in property prices and downward correction over the last two months, driven by Dublin (but likely to translate into similar outside Dublin with a lag), predicted on this blog before, is a welcome change. However, I suspect we will see renewed increases in property prices later this year, albeit at rates more sustainable in the longer run.

24/3/15: There's no number left untouched: Irish GDP, GNP and economy

According to Bloomberg, US companies are stashing some USD2.1 trillion of overseas cash reserves away from the IRS: http://www.bloomberg.com/news/articles/2015-03-04/u-s-companies-are-stashing-2-1-trillion-overseas-to-avoid-taxes?hootPostID=ffda3e167ae0ebabc3da4188e9bd22de

Ireland is named once in the report in a rather obscure case. Despite the fact we have been named on numerous other occasions in much larger cases. But beyond this, let's give a quick wonder.

1) Last year, exports of goods in Ireland leaped EUR89,074 million based on trade accounts with Q1-Q3 accounts showing exports of EUR66,148 million compared to the same period of 2013 at EUR65,381 million - a rise of 1.01% or EUR767 million. Full year rise was EUR2,075 million. So far so good. Now, national accounts also report exports of goods. These show: exports of goods in Q1-Q3 2013 at EUR69,731 million and exports of goods in Q1-Q3 2014 at EUR78,835 million, making y/y increase of EUR9,104 million. Full year 2014 - EUR108.989 billion a rise of EUR15.98 billion y/y. The discrepancy, for only 3 quarters, is EUR8,337 million or a massive 6.1% of GDP over the same period. For the full year it is EUR19.92 billion or 11% of annual GDP. Much of this difference of EUR19.92 billion was down to 'contract manufacturing' - yet another novel way for the MNCs to stash cash for the bash… IMF estimated the share of contract manufacturing to be at around 2/3rds of the annual rise in Q1-Q3 figures. Which suggests that around EUR7.4 billion (once we take account of imports of goods) of Irish GDP rise in 2014 was down to... err... just one tax optimisation scheme. That is EUR7.4 billion of increase out of EUR8.275 billion total economic expansion in the MiracleGrow state of ours.

2) Last month, Services activity index for Ireland posted a massive spike: overall services activity rose 12.59% y/y, the dynamic similar to what happened in Q2-Q3 last year with goods exports (Q1 2014 y/y +8.2%, Q2 2014 y/y +12.9% and Q3 2014 y/y +17.9%). Even more telling is the composition of Services growth by sectors: wholesales & retail trade sector up 8.83% (a third lower than the overall growth rate), transportation and storage - ditto at 8.4%, admin & supportive services +2.91%. Accommodation and food services posted rapid rise of 14.03% and professional, scientific & technical activities rose 13.97%. Meanwhile, tax optimisation-driven information & communication services activity was up 21.15%. What could have happened to generate such an expansion? Anybody's guess. Mine is 3 words: "knowledge development box" - a non-transparent black-box solution for tax optimisation announced as a replacement for the notorious "double-Irish" scheme. So let's suppose that half of the services sectors growth is down to MNCs and will have an effect on our 'exports'. In Q3 2014 these expanded by 13.4% y/y and in Q2 by 10.8% - adding EUR5,560 million to exports. January data on services activity suggests, under the above assumption, roughly the same trend continuing so far, which by year end can lead to a further MNCs-induced distortion of some EUR11 billion to our accounts on foot of Services sectors exports.

Take (1) and (2) together, you have roughly EUR21-22 billion of annual activity in the export areas of services and goods sectors that is likely (in 2015) to be down to MNCs washing profits through Ireland through just two schemes.

Then there are our factor payments abroad - what MNCs ship out of Ireland, in basic terms. As our total exports of goods and services been rising, the MNCs are taking less and less profit out of Ireland. Chart below sums these up. While profitability of MNCs is rising - a worldwide trend - Ireland-based MNCs remittances of profits are falling as percentage of exports. 2008-2012 average for the ratio of net remittances to exports is 18%, which suggests that even absent any uplift in profit margins, some EUR27.5 billion worth of profits should have been repatriated in Q1-Q3 2014 instead of EUR22.16 billion that was repatriated - a difference of EUR5.36 billion over 3 quarters or annualised rate of over EUR7.1 billion. Factoring in seasonality, the annualised rate jumps to closer to EUR8 billion.

On an annualised basis, for full year 2014, exports of goods and services from Ireland rose y EUR23.28 billion year-on-year, while net exports rose EUR3.784 billion. Meanwhile, profits repatriations (net) rose only EUR719 million. Aptly, for each euro of exports in 2013, Ireland's national accounts registered 74.2 cents in net factor payments abroad. In 2014 this figure hit historical low of 69.1 cent.

My guess is, MNCs have washed via Ireland close to EUR30 billion worth of profits or equivalent of 17.1% of 2013 full year GDP and close to 16.5% of 2014 GDP. Guess what was the GDP-GNP gap in 2013? 18.5 percent. And in 2014? 15.4%. Pretty darn close to my estimates.

Let's check this figure against aggregate differences in 2008-2014 GDP and GNP. The cumulated gap between the two measures, in nominal terms, stands at EUR201.3 billion, closer to EUR204 billion once we factor in seasonality in Q4 numbers to the estimate based on Q1-Q3 data. The above estimate of EUR29.97 billion in 'retained' profits implies, over 7 years a cumulated figure of EUR209.8 billion, or a variance of EUR827-1,200 million. Not much of a margin of error. I'll leave it to paid boffins of irish economics to complete estimates beyond Q3 2014, but you get the picture.

And now back to points (1) and (2) above: how much of the Irish growth in manufacturing and services - growth captured by one of the two exports accounts and by the likes of PMI metrics and sectoral activities indices is real and how much of it is an accounting trick? And what about other schemes run by the MNCs? And, finally and crucially, do note that contract manufacturing and knowledge development box types of tax optimisation schemes contribute to both GDP and GNP growth, thus completing the demolition job on Irish National Accounts. There is not a number left in this economy that is worth reading.


Update: we also have this handy graphic from the BusinessInsider (http://uk.businessinsider.com/us-corporate-cash-stashed-overseas-2015-3?r=US) charting the evolution of U.S. MNCs stash of cash offshore:

Ah, those U.S. MNCs err... FDI... mattresses...

23/3/15: Deflation... Dumbflation... It's Real Purchasing Power That Matters

I have written in the recent past about the bogus debate surrounding the 'threat of deflation' in the euro area. You can see my view on this here in the context of Ireland: http://trueeconomics.blogspot.ie/2015/02/27215-deflation-and-retail-sales.html and here in the broader context: http://trueeconomics.blogspot.ie/2015/02/18215-inflation-expectations-and.html.

And now Bloomberg weighs in with the similar: http://www.bloomberg.com/professional/kc-post/ecbs-failure-reach-inflation-target-blessing/

To quote: "The strengthening recovery [in the euro area] should add some inflationary pressure — although readings are likely to remain in negative territory for some months, with lower energy prices still feeding through the production pipeline. This month, the ECB revised down its 2015 inflation forecast to zero. Assuming nominal earnings grow at the same pace seen over the last few quarters, the upward trend in real pay should persist in 2015.

Households are likely to react — even if with some lag — to the purchasing-power bonus. Household consumption, which makes up about 55 percent of GDP, has been somewhat muted lately, only contributing to growth by an average 0.1 percentage point over the last seven quarters. That’s less than half what it used to bring in during the pre-crisis years. The re-emergence of this large growth driver should help to strengthen the 2015 recovery. Negative inflation is a welcome shortcut, meaning the region doesn’t have to wait for a decline in unemployment to see a revival in domestic consumption."

Bingo!

23/3/15: German Exports-led Recovery and Two BRICs

Because exports-led recovery is the only thing, besides hopium, that sustains the euro area (although there are some rumblings on the horizon of awakening consumers and even corporate investment), here are two charts worth considering:

First up, German exports to China:

Source: @FGoria

Self-explanatory. Next: German exports to Russia:

 Source: @FGoria

Self-explanatory.

Why we need QE? Because even though it is too late to drink water once kidneys have failed, it is patently no more feasible to drink schnapps.

23/3/15: EM Currencies on the rise

Today's week-on-week changes in emerging markets currencies vis-a-vis the USD:

Source: @komileva

And for the Ruble, this with zero CBR interventions.

23/3/15: Credit, Domestic Demand and Investment: Euro Area in Three Charts

Three interesting charts outlining the big themes in Euro area economy:

First the 'limping leg' of the euro recovery: credit. Chart below shows decomposition and dynamics in corporate credit, with Q1 2015 reading so far pointing to a very robust demand for credit, and (even more importantly) credit driven by fixed investment. This should provide some support for Domestic Demand, albeit at the expense of re-leveraging the economy via bank channel (as opposed to leverage-neutral equity or non-bank credit, such as direct debt issuance):

Source: @FGoria

The importance of investment uplift is hard to underestimate in the case of the euro area, as the next chart clearly illustrates:

 Source: @FGoria

And this translates into depressed Domestic Demand (C+G+I bit of the national accounts):

Source: @FGoria

The gap between U.S. and the euro area is understandable. But the gap between Japan and the euro area is truly shocking, once one considers the state of the Japanese economy and the sheer magnitude of monetary stimulus that Japan had to deploy to push its Domestic Demand up from 2011.

In simple terms, the above charts show some revival in the euro area fortunes. In more complex terms, one has to wonder what this revival hinges on. In my opinion, we are seeing a bounce in credit creation that is not sustainable given the state of the global economy (with global trade flows remaining weak) and the conditions of households across the euro area (with domestic consumption and household investment still weak). 

22/3/15: Ukraine: disastrous growth figures

Ten quarters of shrinking GDP, out of 11 last. Ukraine:

Source: FT

When's the next 'rethink' by the IMF of the debt projections?..

21/3/15: Two Pesky Facts and Russian 'Liberal Democracy' Dream

Here's a problem, folks. Let's take two facts:

1. Vladimir Putin's approval ratings are currently in the upper 80s: http://www.bloombergview.com/articles/2015-03-16/a-year-after-crimea-putin-stands-strong  
2. Russia ranks as the third country in the world in terms of access to internet: http://www.pewglobal.org/2015/03/19/1-communications-technology-in-emerging-and-developing-nations/

Which gets you thinking.

If Russian public opinion is down to Kremlin propaganda and media control, then how come Russians, enjoying wide access to internet, are not rushing to their web browsers for the alternatives presented  in the Western free press (including in Russian), the independent Russian press (which does exist) and in the new media (which is very rich, diverse and widely available in Russian)?

In the USSR days, when there was no internet and there was no access to foreign publications, media etc and when the Soviet authorities actively suppressed access to foreign broadcasts, while closed borders were enforced for the few who dared to smuggle in foreign press, many Russians tuned to these voices. I grew up regularly listening to the BBC Russian Service and Voice of America and Radio Liberty. Many of my friends and their families did as well. Apparently, today, the survivors of the same channels - available freely - have very little impact on Russian public opinion. Why?

Russian culture is culture of extreme scepticism over authority. Scepticism that borders on cynicism. And Russian culture is a culture of kitchen politics (in modern world perfectly facilitated by social networks and alternative media). Russians have access to these sources at a rate of access that is extremely high and open. And yet their views remain non-liberal in the Western context of this term.

Is today's state of traditional media control reinforcing what is already a prevalent Russian public view: the set of beliefs that are largely consistent with those espoused by the Kremlin? Is it possible that Kremlin is not necessarily actively altering the public opinion, but rather tailoring its own positions to that opinion, while reinforcing existent biases? Can it be that such tailoring of policies is more democratic than the liberal alternative that has no popular support in Russia?

In this, who wags what? The proverbial dog of Moscow, the proverbial tail of the nation or the bone of free media access dangled on the web?

The uncomfortable nature of this problem is that in the West, we are told to believe in the potency of the Russian liberal opposition (which has access to internet and uses it extensively to promote ideas, sketches of policies and even more actively - acts of protest and own image) and that this liberal opposition is democratically anchored. We are told that, were the opposition leaders given a chance, they would win democratic mandate from the people to change and reform Russia. We are told that once Putin is gone, Russia will embrace change led by the liberal opposition. And yet, where is the evidence to support any of this?

I sympathise with the principles and values espoused by some of the opposition leaders (not all, since there is a huge range of views these leaders hold). But, any serious observer of Russian politics and economics will quickly discover that the liberal opposition is incapable of providing a properly designed reforms agenda. I cannot find credibly structured and costed alternative budgets, legislative proposals, regulatory white papers etc - all that we, in the West, tend to associate with functional opposition. The opposition cannot even provide its potential base with a coherent core message, beyond the incessant talk about the need for more democracy, the need for drastic (but unspecified) anti-corruption reforms, and the need for more liberalisation of everything.

While the Russian Government can also be very sketchy on policies impact assessments ex-ante their adoption, at least it provides some data that can be used to measure their effectiveness in the medium term. Russian liberal opposition? Not much, if any.

Western democratic opposition parties publish own policies, own alternative budgets, factually comment on Government policies and produce alternative ideas that are tested in the public domain. Russian liberal opposition is predominantly pre-occupied with promoting itself to its own support base. When personality clashes abate for short periods of time, what is left in the public view is the talk about big ticket changes (opening up to foreign investors, achieving peace and partnership with the West, combatting corruption etc - all good ideas), but no tangible, specific, cost-benefit weighted proposals. The opposition can freely use internet to promote such analysis and proposals. It does not. Instead, it uses the web for sloganeering. An average Russian interested in, say, the expected impact of liberalisation of the domestic monopolies (or near-monopolies) on, say, unemployment is left with vacuum of data, estimates and insight. One cannot expect any, even remotely rational person, to vote for the opposition leaders promoting such a policy, unless that person is fully insulated from any potential fallout from it. Hence, the core support base for the liberals in Russia is... yes, the urban upper middle class

In other words, we, in the West, are being told to trust the dream that has very little basis in reality and feasibility, and despite alleged claims of democratic nature has very little support within the electorate. It all reminds us of the policy that promoted regime change in Iraq as the means for creating a functional democracy there, to be led by the liberal Iraqi opposition. It didn't happen thus, not because we didn't try, but because we couldn't find liberal opposition capable of governing. We based our expectations of Baghdad on a naive dream and we missed the real Baghdad by a mile. Ditto for Cairo, ditto for Tripoli, ditto for Kabul... keep counting.

Yes, Russia is not Iraq - neither philosophically, nor ethically, nor socially, nor economically, nor politically, nor historically, nor culturally, nor geopolitically. In all of these terms it is more complex, statehood and institutionally more developed and stronger. Which means the pretty dreams of the post-regime change nirvana are even more out of touch in the case of Russia than they were in Iraq.

In the Soviet days, people of Russia could have been excused for not actively pursuing the alternative because they didn't know better - they had no access to alternative media, internet and to Western 'voices'. Yet, they desired such access and sought it whenever it was available. Today, Russians support the values represented by Putin, even though they are not actively denied access to alternatives. It is uncomfortable for the Western ideologues of regime change, but it is thus.

Here are some of the opinion polls on public approval ratings for various Russian parties and politicians:

Political parties first:

Yes, the hope of liberal opposition is clearly alive... in the minds of the West, but not in the minds of the Russian voters. About the only two - very remote - democratic choice alternatives per Russian voters are: Communists and LDPR (nationalists). The entire liberal alternative is about powerful enough (if they concentrated all their votes on Moscow alone) to win a couple of seats in the city government.

Politicians next:

And once again, there is no sight of liberal alternatives anywhere in the positive trust territory. And, incidentally, none were present even before the Crimea and during the 'softer' power periods of the Kremlin rule. The entire political spectrum besides Vladimir Putin, even if it were to include Putin's closest allies, does not reach 34% of the voters in terms of trust.

Which brings us back to the first two facts: Russian voters have access to alternatives (even if imperfect, but certainly much wider than their access to the same during the Soviet era); no they do not support any of these alternatives. Firstly, as Hertzen once said: "Who is to blame?" and lastly. as Lenin put it: "What is to be done?"

Just some food for thought...


Update: Here is a 2012 article from WaPo on the weak performance by Russian liberal opposition in the Presidential polls: http://www.washingtonpost.com/world/europe/russian-opposition-weak-at-polls/2012/10/14/60f7f9a8-1638-11e2-9855-71f2b202721b_story.html

21/3/15: Irish patents filings Q4 2014

Latest data on Irish patents, courtesy of NewMorningIP.com: chart below shows a decline in total patents filings in Q4 2014 compared to Q3 2014 with Q4 2014 patents counts at 699 down from Q3 2014 count of 786. Of these, Irish invention patents were down to 321 in Q4 2014 from 331 in Q3 2014, but up on 236 a year ago. In Q4 2014, Irish inventors accounted for 45.9% of total Irish patents filed, with Irish enterprises and individuals filing only 247 patents - the lowest for any quarter since Q1 2014, but ahead of the disastrously poor performance in Q4 2013 (188 Irish enterprises & individuals patents). Irish academia produced 74 patents in Q4 2014, the highest reading since Q3 2013, but still accounting for only 10.6% of total patents filed in Ireland.

Chart to illustrate:

21/315: Russia Forex Reserves: Down Another Week

Based on weekly data for the week of March 13, 2015, Russian Central Bank forex reserves fell to USD351.7 billion, down USD5 billion on previous week. The reserves are now down 28.7% (USD141.5 billion) y/y. Compared to the same week a month ago, the reserves are down 4.5% (USD16.6 billion).

The rate of weekly changes in reserves (USD5 billion) is slower than in the week of March 6th (USD6.3 billion) but well ahead the 3mo average weekly decline (USD4.61 billion) and 6mo average (USD3.57 billion).

Two charts to provide some historical comparatives in terms of period averages relative to both levels and rates of change.

It is worth noting that there have been virtually no Forex interventions (Ruble rate defence: http://www.cbr.ru/Eng/hd_base/Default.aspx?Prtid=valint_day and http://trueeconomics.blogspot.ie/2015/03/20315-central-bank-interventions-in.html) from CBR in February and March and there have been ongoing de-dollarisation of the household funds in February (http://trueeconomics.blogspot.ie/2015/03/18315-russian-deposits-dollarisation.html) that is likely continued in March (reducing forex deposits and cash holdings), which implies that declines in reserves are down to the following drivers:

1. changes in euro and other currencies, as well as gold and non-dollar denominated assets, valuations for assets held by the CBR - in other words the potential adverse effects of dollar exchange rates against other currencies, and changes in asset values due to changes in US bonds markets;
2. demand for Forex from corporates and banks (all of which would be in the form of loans from the CBR to these entities) all of which is associated with deleveraging the external debt; and
3. potential fiscal demand for forex.

20/3/15: Central Bank Interventions in Ruble Markets down to Zero in February

Don't hear much of "Panic at the Central Bank of Russia" reports as of late in the Western media - the ones that whipped into frenzy Russia 'analysts' back in November-December? Why, no surprise:

Per latest data, CBR interventions in forex markets defending the Ruble have shrunk in February 2015 to zero for USD and zero for EUR. Yep, zero.

Oh, and the table above shows, the panic of November-December 2014 Ruble crisis - real as it was - was not as bad as CBR supporting Ruble prior to the free float and during the peak of Crimean crisis.

So was the decision to let Ruble float wise? You decide. On the trend, it saved CBR some USD8.5 billion and EUR1.2 billion, even counting in December 2014 crisis.

20/3/15: Russia: Agri-food Sector and Falling Real Household Incomes

As BOFIT reported last week, 2014 marked the first year since 1999 crisis when Russian households experienced a decline in real household income. In 12 months through December 2014, real (inflation-adjusted) incomes declined by around 1% y/y, with the rate of decline accelerating to 5% y/y in November-December 2014, at the peak of the Ruble crisis. Even at the depths of 2008-2009 crisis, Russian real household incomes stayed in positive growth territory, as chart below illustrates:

One area of severe squeeze on actual (nominal) incomes has been in the public sector. As BOFIT noted: "As recently as 2013, public sector wages were rising nearly 20% a year. By the end of 2014, however, on-year nominal wage growth had fallen to zero, while inflation was running at 11.4%. Hence, real wages in the public sector fell substantially." Private sector wages shrunk by around 2% in dealt terms, y/y. Pensions rose by about 10% y/y in 2014, still below inflation increases.

As BOFIT reported: "The average 2014 wage (excluding grey-sector wages) was about €650 a month. In January this year, due to a massive drop in the value of the ruble, the average monthly wage was only about €450. The average pension last year was €220 a month, but in January, that amount had fallen to just €150."

Going forward, both public and private sectors are facing tough times in terms of wages growth. Meanwhile, composition of inflation - especially rapid inflation in food and other staples prices - is more significantly impacting retirees. As the result of inflation in food sector, Rosstat has revised its formula for the cost of consumer goods and services basket, increasing the relative weight of food by almost 1 percentage point to 37.3% of the total household spending. This means that going forward, higher inflation in food sector will have greater impact on CPI. And we can probably expect that higher inflation. 2014 was near-record crop year that is unlikely to repeat. Meanwhile, Russian agriculture is suffering from dire need of modernisation capes that is nowhere to be seen. There is some room for imports substitution via increased domestic production and via alternative supplies from outside the EU, US and other economies that imposed sanctions and suffered Russian counter-sanctions, but that substitution is severely limited by:

1. Bottlenecks in supply expansion in Russia; and
2. Lower exports revenues due to high oil prices.

Neither has much to do with sanctions: in the current oil price environment, lending to Russian corporates, even if it were available outside sanctions, would have been very subdued and expensive.

To lift production in the sector, the Government needs to simultaneously:

1. Increase capital investment supports to the producers;
2. Open and incentivise markets for agri-food production and supply sectors in Russia to foreign investment (lifting sanctions on imports of food will do absolutely nothing to food prices, as imports pricing will be linked to forex rates and cost of capital);
3. Set up long-term targeted incentives for Russian producers to increase output quality and volumes (preferably via tax system and streamlined land ownership, as well as improved access to markets). Less arbitrary enforcement of regulations would also help; and
4. In distribution and retailing, local authorities in a number of larger urban centres have tightened and consolidated control over retail markets, resulting in higher margins for retailers, lower margins for producers and cutting off producers' access to direct sales to consumers, especially for smaller producers. This should be reversed. 

Hedge Funds Returns: Part 4: To higher moments and beyond

My latest post for LearnSignal Blog on the topic of measuring hedge funds' returns: http://blog.learnsignal.com/?p=165

18/3/15: Russian Deposits Dollarisation and Capital Flight

I have written before about the nature of capital outflows from Russia. One aspect of capital outflows is how the aggregate reflects deposits shifts into forex, known as 'dollarisation' of deposits. When Russian residents withdraw foreign currency from the banks (either via drawing down existent currency deposits or by converting their Ruble deposits into forex), the transaction is registered as capital outflow from Russia, even if they park this currency in safety deposit boxes and in their coffee tins. In other words, capital outflow out of Russia is registered even if cash remains in Russia.

Based on the latest data from the Institute for Foreign Trade, The Gaidar Institute for Economic Policy and the Russian Presidential Academy of National Economy and Public Administration, as of February 1, 2015, share of forex deposits in Russian banks rose to 35.7% of total monetary base excluding cash, up on 19.4% a year ago. The degree of 'dollarisation' (conversion to forex) was higher in 2014 than during the 2009 crisis, when the share of forex deposits stood at 35.3% and is second highest after 1998 crisis peak.

In 2014, Russian residents directly withdrew USD28.6 billion in forex from the banks. A large figure, but significantly less than in 2008 when this figure stood at USD51.4 billion. Over 2014, Russian banking system lost, in total, USD40 billion of forex to cash conversions and deposits withdrawals - all of which was registered as capital outflow from Russia.

The research note can be accessed (in Russian) here: http://www.ranepa.ru/news/item/6869-monitoring-4.html.

Interestingly, it tells the story of banks running out of deposit boxes storage capacity around November-December 2014 as households rushed to convert to forex holdings (mistrusting the Ruble) and switched to holding this forex in cash (mistrusting the banks).

February data showed significant moderation in dollarisation. Forex deposits held by the Russian banks fell 10.7% to RUB5.1 trillion, while Ruble denominated deposits those 2.7% to RUB13.8 trillion, with changes driven predominantly by the strengthening of the Ruble (in February, Ruble gained 14% relative to the basket of USD and EUR).

Over the last 12 months, corporate forex deposits rose substantially, with 41.3% of all corporate sector deposits now held in forex - a sign that Russian companies are continuing to build forex reserves to counter existent and potential future sanctions. In effect, Russian companies are cutting back on exporting forex out of Russia in fear of losing control over these funds in the future. At the same time, household forex deposits fell by USD5 billion and Ruble-denominated deposits rose on improved Ruble exchange rate.

17/3/15: IMF Cries Wolf as Emerging Markets Currencies Plunge

Remember the Russian Ruble Melt of 2014? Now get ready for the Emerging Markets Currencies Shake-n-Bake of 2015:

H/T: @Schuldensuehner

It is a miracle that the Fed can do in the IMF-sponsored mercantilist world of Exports-led Recoveries...  And guess who is now crying wolf? Why, IMF, of course: http://www.imf.org/external/np/speeches/2015/031715.htm. Except they don't dare call it a wolf, just 'lessons to be learned'.

17/3/2015: Russian Banks Latest Stats: January-February 2015

Some interesting banking sector stats were reported this week by the deputy head of the Central Bank of Russia, Mikhail Suhov during the Russian Economic Forum in Geneva.  Here is a compendium of the latest banking stats reported by the CBR and in the Russian media.


Non-Financial Sector Credit

Russian retail banking lending to households fell 1.5% in February, down RUB165.4 billion with CBR expecting the trend to continue, stabilising at around 4-5% decline in household credit for the full year 2015. As of March 1, household credit outstanding stood at RUB11,060 billion.

According to Sukhov, household credit arrears rose 0.8 percentage points in the first two months of 2015 from 5.8% at the start of January to 6.6% by the end of February.

In January-February 2015, household credit declined by 2.1%, down RUB243.8 billion with RUB-denominated credit standing at RUB10,756 trillion against forex denominated credit of RUB304.4 billion.

Non-financial corporate sector credit fell 4.7% in dollar terms and 1.1% in Ruble terms. The figures do not reflect the latest CBR that lowered benchmark rate to 14% on March 13 from 15% previous. The CBR expects effects of the latest rate reduction to show in the aggregate data around May 2015.

Overall lending to the real sectors (excluding Government and financial sectors) fell 1.5% in February. Much of credit contraction is concentrated in a small number of banks, acceding to CBR deputy head.

Based on data from Finmarket, total real sector arrears stood at RUB730.4 billion, up RUB24.7 billion or 3.5% m/m. In January-February 2015, arrears rose RUB64.2 billion or +9.6%. As percentage of total banking assets, as of March 1st, real sector credit arrears were 6.6%, up 0.3 percentage points in February compared to January.

Sukhov also noted that current rate of increases in non-financial sector credit arrears is likely to continue, resulting in total arrears stabilising at around 7.5% for outstanding credit and 7% taking into the account new credit. CBR estimated 2015 total arrears increases of roughly RUB900 billion.


Bail-in Mechanism

Meanwhile, under the Financial Stability Board arrangement (FSB, set up in 2009 by the G20 group), the CBR is currently looking into establishing formal bail-in rules for the Russian banking sector and the system of bridging banks (licensed entities that act as bridging institutions temporarily holding banking assets in the case of bank shutdown). Bridge banks are supposed to take over assets of insolvent mankind institutions and hold these assets during the period of liquidation, allowing to extend the process of assets disposals to minimise the risk of fire sales. The bail-in mechanism proposed by the FSB includes automatic conversion of unsecured creditors (into equity and subordinated loans) to allow direct bail-in. However, the CBR has already stated that the automatic bail-in mechanism is not necessary for the Russian banking system at this point in time.


Forex Mortgages

Another interesting point raised by Sukhov in Geneva relates to the much-discussed in the recent past risk of forex-denominated mortgages held by the Russian banks. As a reminder, in December 2014, the CBR started a consultation with the banks on creating a mechanism for converting existent forex-denominated mortgages into RUB-denominated loans based on the exchange rate as of October 1, 2014. At the time, some analysts predicted that such a move would trigger significant write downs of banking sector assets. According to Sukhov, CBR currently sees no risk to the banking sector from forex mortgages conversions, with the number of banks exposed to such a risk being very small. The vast majority of such mortgages were issued prior to the Global Financial Crisis of 2008 with issuance of these loans slowing down very significantly after 2008.


Sector Consolidations

In 2014, CBR forced absorption of 7 Russian banks into bigger entities and the CBR is now expecting 2015 to be a much more active year for banking sector consolidation. Meanwhile, average T1 capital ratios for Russian banks remained above 12% in the first two months of 2015. As the result of organic changes in balance sheets, as opposed to sector players' consolidations via mergers and shutdowns, market share of 5 largest banks in Russia rose to around 52% in 2014 from roughly 49.5% in 2013. In 2015, the CBR expects market share concentration to increase to above 55%, potentially reaching 60% by the end of 2016.


Banks Profitability

This is consistent with the CBR view on the overall profitability across the banking sector. In February, banks' losses rose to RUB36 billion from RUB24 billion in January. However, Sukhov noted that the CBR does not expect banking sector losses to rise significantly over 2015, noting that some estimates of up to RUB1 trillion losses for 2015 across the Russian banking sector carry "very low probability" of materialising. Instead, Sukhov expects more polarisation across the banking sector, with greater concentration of losses. Sukhov's estimates for losses across the system of "one-two hundred billion rubles" is roughly half the estimate produced by CBR back in February (CBR forecast is for RUB300-400 billion in cumulative losses for 2015, against cumulative profit of RUB589 billion in 2014 and RUB990 billion profits recorded in 2013).

16/3/15: Ukraine's Government Debt Projections: Smiling IMF, Whinging Private Lenders

Few weeks ago I covered in some details the implications for Ukraine of the latest IMF-led lending package: http://trueeconomics.blogspot.ie/2015/02/18215-imf-package-for-ukraine-some.html. My projection was for the debt/GDP ratio reaching over 100% in the medium term (2016-2017) based on the timing of disbursal of the new loans package and the composition of the package at the time.

The latest IMF forecasts (http://www.imf.org/external/pubs/ft/scr/2015/cr1569.pdf) show debt/GDP ratio peaking at 94.6% of GDP in 2015. IMF latest estimate is based on the assumption that, having posted primary deficit of 1.15% of GDP in 2014, Ukraine will return a primary surplus of 1.1% of GDP in 2015. As IMF notes, average primary balance in 2004-2013 in Ukraine was -2.4% of GDP, so, as some would say... 'good luck' with that.

And the programme is also anchored to the private sector-held public debt restructuring. Here's MOU from the Ukrainian authorities on this: "To secure adequate public sector financing in the coming years, while also putting public debt firmly on a downward path, we intend to consult with the holders of public sector debt on a debt operation to improve medium-term debt sustainability. To facilitate this consultation, and in line with international best practice, we have hired financial and legal advisors (prior action). While the specific terms of the debt operation would be determined following our consultations with creditors, it would be guided by the following program objectives: (i) generate US$15 billion in public sector financing during the program period; (ii) bring the public and publicly guaranteed debt/GDP ratio under 71 percent of GDP by 2020; and (iii) keep the budget’s gross financing needs at an average of 10 percent of GDP (maximum of 12 percent of GDP annually) in 2019–2025. The restructuring is expected to be based on the program baseline macro framework applicable at the time the debt operation is launched. The debt operation is expected to be finalized by the time of the first review." Or in more simple terms, the IMF has already pre-committed to Ukraine cutting USD15.3 billion off its Government debt levels via private sector 'participation' in the programme. Something that is (a) questionable in terms of Ukraine's ability to deliver on, and (b) making a number of very powerful lenders quite unhappy (see http://www.themoscowtimes.com/article.php?id=517502).

And outside the baseline scenario, here is IMF's assessment of risks to Ukraine's debt profile: "Under a growth shock, entailing a cumulative growth decline of over 9 percentage points in 2016–17, the debt-to-GDP ratio reaches nearly 119 percent in 2017. A real exchange rate shock not dissimilar to the one in 2014 would also keep the debt ratio above 100 percent of GDP throughout the projection period. The combined macro-fiscal shock, an aggregation of the shocks to real growth, interest rate, primary balance and exchange rate, produces unsustainable dynamics, sending debt above 200 percent of GDP in 2017. The contingent liabilities shock highlights the risk of a further deterioration of the banking sector and associated higher fiscal costs. Its impact is mitigated by the buffer embedded under the baseline for larger-than-expected bank restructuring costs. By imposing a large associated shock to growth (14 percentage points below the baseline in 2016–17) and given the resulting deterioration in the primary balance together with an increase in interest rates, under the contingent liabilities shock debt peaks at 116 percent of GDP in 2017."

So in simple terms, I will largely stick with my original estimates that around 2016-2017, we are likely to see Ukraine's government debt around 100% of GDP marker.

16/3/2015: Some new 2015-2018 forecasts for the Russian Economy

Amidst much of the (occasionally informed) speculation as to the whereabouts of Russian President Putin (see for example this rather informative piece: http://uk.businessinsider.com/what-is-putin-doing-2015-3?r=US#ixzz3UWqOOHLc), President Putin has finally reappeared from wherever he might have been over the last how-many days... Of course, his reappearance promptly led to some 'highly informed' Western analysts seeing President Putin's double...

The matters of conspiracy aside (for their endless supply makes their value trend toward absolute zero pretty fast), the Economy Ministry has been busy preparing new forecasts for Russia for 2016, trailing behind the recent forecasts from the Central Bank.

Minister Ulyukaev today said that the economic outlook for Russia is based on the view that Western sanctions will remain in place "at least over the period of 2015-2016" and "most likely, in the following years". Beyond this, the Minister said that 2016-2018 will likely see 2.5%-3% average rate of growth in real GDP and that 2016 growth is likely to be in the same range. New forecasts, according to Mr. Ukyukaev - currently in preparation stages - see economic recovery starting in 2016. This, if confirmed in the official forecasts, would represent a dose of optimism not matched by many independent analysts, and well in excess of the cautious gloom of the Central Bank (see below).

Meanwhile, as The Moscow Times (not a paper known for expressing pro-Kremlin sentiments) noted: foreign investors are heading back into Russian markets http://www.themoscowtimes.com/article/517481.html. I wish them well - they are in for a rough ride, but should enjoy some upside, on average. Do note some of the risks and concerns voiced at the end of the article.

Of course, amidst all this positivity, the real signs are pointing to growing concerns about the state of the economy.

Central Bank published forecasts show "at risk scenario" forecast of -5.8% contraction in GDP in 2015. This assumes average oil prices in the range of USD40-45pb.

Under the base scenario, oil prices are expected to average USD50-55pb in 2015, rising to USD60-65pb in 2016 and USD70-75pb in 2017. These assumptions support GDP growth forecast of -3.4% to -4.0% in 2015, followed by a contraction of -1.0% to -1.6% in 2016, and growth of 5.5% to 6.3% in 2017. In effect, these forecasts imply 2015-2017 growth of between 0.4% and 0.9%, cumulative. Under the base scenario, growth of 4.6% in 2017 would be required to get Russian economy back to the end-2014 levels.

The CBR forecasts decline of USD50 billion in its forex reserves to around USD307 billion in 2015 and no change in reserves in 2016. The balancing out of reserves is based on current account surplus forecast of USD90 billion in 2016 up on USD64 billion in 2015. CBR projects current account surplus of USD119 billion in 2017.

My view is that the above figures err on optimistic side. I expect Russian economy to shrink by around 4-5% in 2015, post GDP growth of between -1.5% to +0.5% in 2016 and grow by around 3% in 2017. I also expect CBR forex reserves to drop by around USD80 billion in 2015 and closer to USD40-50 billion in 2016 to USD225-230 billion at the end of 2017.



Note: a fascinating and exhaustingly detailed account of the short history of Russian Government and business struggles for who will be building the bridge to Crimea: http://www.forbes.ru/print/node/282637 (in Russian).

13/3/15: Irish Bilateral Trade in Goods with BRIC: 2014

Full year 2014 data on Irish bilateral trade in goods with the BRIC countries is showing some interesting changes to historical patterns worth highlighting. Let's start with country-specific analysis:

Russia: 

Irish exports to Russia (goods only) reached EUR722 million in 2014, up 13.3% y/y from EUR637 million in 2013. Over the last five years, Irish exports to Russia almost doubled, rising 198%. Russia now accounts for 21.6% of Ireland's total exports to BRIC economies, up from 8.2% in 2009. Trade balance with Russia (goods only) has risen more modestly to EUR496 million, up just 1.43%, marking the second highest bilateral trade balance with Russia (the highest one was achieved in 2012 at EUR503 million). Still, Ireland's trade balance with Russia is the largest for all BRIC and Irish exports to Russia now exceeds the combined exports from Ireland to Brazil and India for the fourth year in a row. Over the last 5 years, cumulative trade in goods surplus in favour of Ireland in trade with Russia stands at EUR2.085 billion.

Brazil:

Irish exports to Brazil fell from EUR262 million in 2013 to EUR256 million in 2014 (a drop of 2.3% that effectively reverses the rise of 2.34% recorded in 2013). As the result, 2014 exports to Brazil exactly matched EUR256 million level of exports achieved in 2013. Over the last 5 years, Irish exports to Brazil have grown only 21.2% cumulatively - the second worst performance in BRIC. As the result of sharper contraction in imports, Irish trade balance with Brazil actually managed to improve in 2014. 2014 trade in goods surplus for Ireland's trade with Brazil was EUR97 million as opposed to a deficit of EUR12 million recorded in 2013 and a deficit of EUR260 million recorded in 2012. Over the last 5 years, cumulative trade in goods deficit against Ireland in trade with Brazil stands at EUR7.9 million.


India:

Irish exports to India fell from EUR304 million in 2013 to EUR248 million in 2014 (a drop of 18.4% that significantly reverses the rise of 29.4% recorded in 2013). As the result, 2014 exports to India almost matched EUR235 million level of exports achieved in 2013. Over the last 5 years, Irish exports to India have grown only 56.5% cumulatively - the second best performance in BRIC after Russia. As the result of a small rise in imports, Irish trade balance with India actually managed to deteriorate in 2014. 2014 trade in goods deficit for Ireland's trade with India was EUR154 million as opposed to a deficit of EUR83 million recorded in 2013 and a deficit of EUR130 million recorded in 2012. 2014 was the worst deficit year in our bilateral trade with India since the data on bilateral trade became available in 1998. Over the last 5 years, cumulative trade in goods deficit against Ireland in trade with India stands at EUR673.7 million.


China:

Irish exports to China rose from EUR1,941 million in 2013 to EUR2,111 million in 2014 (a rise of 8.8% that largely reverses the fall of 10.4% recorded in 2013). As the result, 2014 exports to China almost matched EUR2,167 million level of exports achieved in 2013. Over the last 5 years, Irish exports to China have shrunk by 9.4% cumulatively - the worst performance in BRIC. Adding insult to the injury, as the result of a small rise in imports, Irish trade balance with China actually managed to deteriorate in 2014. 2014 trade in goods deficit for Ireland's trade with China was EUR1,370 million as opposed to a deficit of EUR1,150 million recorded in 2013 and a deficit of EUR693 million recorded in 2012. 2014 was the worst deficit year in our bilateral trade with China since 2008. Over the last 5 years, cumulative trade in goods deficit against Ireland in trade with China stands at EUR3,849 million.


Combined bilateral trade with BRIC:

Irish exports to BRIC markets (goods only) rose to EUR3,337 million in 2014, rising 6.2% y/y from EUR3,114 million in 2013 and virtually reversing the losses sustained between 2013 and 2012 to almost match 2011 level of EUR3,324 million. Over the last 5 years, exports from Ireland into BRIC economies rose 13.4% cumulatively - hardly an impressive performance. Meanwhile, Irish imports from BRIC rose from EUR3,900 million in 2013 to EUR4,268 million in 2014. As the result, Irish trade deficit with BRIC economies rose from EUR756 million in 2013 to EUR931 million in 2014. Thus, 2014 marked the worst trade deficit with BRIC economies since 2008. 5 year cumulative trade deficit between Ireland and BRIC currently stands at EUR2,445.8 million

Quite surprisingly, Irish bilateral trade in goods with Russia - subject to EU sanctions, US sanctions-induced lower propensity for US multinationals to engage in Russia, and subject to severe disruption of financial flows, including trade credits and insurance - has managed to substantially outperform our trade with other BRIC economies and expand by 20.8% y/y in terms of combined trade flows and 13.4% in terms of exports to Russia. The reason for this the longer-term nature of our exporters engagement in the Russian markets and more partnership-based approach to trade. Irish exports to Russia are strongly dominated by indigenous, smaller exporters who tend to secure longer-term relationship-based engagement in the market. In addition, Irish exports to Russia are strongly developed in the areas of food production and agri-food technologies - two sectors that saw growth in investment in Russia.

13/3/15: Emerging Markets Corporate Debt Maturity Squeeze

H/T to @RobinWigg for the following chart summing up Emerging Markets exposure to the USD-denominated corporate debt redemptions calls over 2015-2025. The peak at 2017 and 2018 and relatively high levels for exemptions coming up in 2016, 2019-2020 signal sizeable pressure on the EM corporates that coincides with expected tightening in the US interest rates cycle - a twin shock that is likely to have adverse impact on EMs' capex in years to come. With rolling over 2017-on debt becoming a more expensive proposition, given the USD FX rates and interest rates outlook, the EMs-based corporate sector will come under severe pressure to use organic revenue generation to redeem maturing debt. Which means less investment, less hiring and less growth.

The impossible monetary policy trilemma that I have been warning about for some years now is starting to play out, with delay on my expectations, but just as expected - in the weaker and more vulnerable markets first.

13/3/15: South Stream Redux: Rejecting the Hungarian-Russian Nuclear Power Deal

A pretty nasty confirmation of the overall hostile approach by the EU toward national autonomy in dealing with the energy markets by the member states came in yesterday. As reported in the FT: http://www.ft.com/cms/s/0/9a6467e2-c8c1-11e4-8617-00144feab7de.html#ixzz3UCYrZfix, the EU has blocked Hungarian deal with Russian Rosatom to develop and supply new nuclear energy facilities at Paks. The EUR12 billion, 1,200 MW facility was to be designed, built and maintained by Rosatom under a contract that is pretty bog-standard around the world and included (also standard) long term exclusive agreement to supply fuel. Paks current output accounts for 40% of total Hungarian electricity generation and the country effectively has no options other than either burn Russian gas, Polish and/or Ukrainian coal or using nuclear. Notably, Polish and/or Ukrainian coal is perhaps the dirtiest generation alternative available to Hungary.

As reported in the FT: "Many EU officials also expressed concerns that Moscow was using energy policy to divide Europe and undermine the bloc’s consensus on sanctions imposed on Russia over its actions in eastern Ukraine."

Which simply means that the EU is now arbitrarily exceeding its own sanctions and is using trade as a conduit for political influence.

It is worth noting that long-term supply agreement for fuel is a necessary part of the agreement that is part-financed (EUR10 billion) by Russian credits. Recovery of these credits is built-into the fuel supply contract.

Another thing worth noting: the EU rejection is not based on the separate concern as to the nature of procurement contract involved. Russia is not liable for the procurement procedures deployed by the Hungarian authorities that might have been in breach of the EU procurement rules.

Net impact: the EU rejection of the contract not on the basis of procurement rules violation, but simply because the EU does not like long term contractual fuel supply arrangements with Russia represents a drastic departure from the EU rhetoric of supporting free trade. Just as in the case with Nord Stream and South Stream pipelines, the EU is currently cartelising energy procurement and development policy (see earlier note here: http://trueeconomics.blogspot.com/2015/02/5215-gazproms-nord-and-south-streams.html). In addition, the EU is now clearly erring on the side of becoming completely unreliable trading partner for Russia, as even the areas not impacted by sanctions are now openly being used as a tool for strengthen sanctions impact.

The twin effect of these exchanges should accelerate Russian pivot East and South away from Europe. This pivot is costly to Russia, but it is also costly to the EU, signalling in the longer run EU's dropping out of the Asia-Pacific, Central Asian and Russian trade and investment blocks. For you may or may not be a fan of Russia or Moscow's policies, but what you cannot escape in all of this is the simple fact: EU has now fully politicised its energy markets. And if so, then who is to say it won;t do so in other markets? The ones that might be important to, say, India or China or Asia Pacific or Latin America? Who is to say that the current trade flows are a permanent and protected feature of the world that EU inhabits? And who is to say that the risk of EU politicising another sector - aviation? transport? industrial machinery? - under the pretence of creating another 'Energy' Union is a risk that the non-EU world should ignore in dealing with Europe?

11/3/15: IMF Approves Bailout 3.0 for Ukraine

IMF statement on Ukraine:

Backgrounders: http://trueeconomics.blogspot.ie/2015/02/18215-imf-package-for-ukraine-some.html and here: https://www.imf.org/external/np/sec/pr/2015/pr1550.htm

Key points to the above: IMF came through just-in-time after seeing Ukraine going down to the last USD 4.5 billion in reserves and only barely enough time to pay the loans due to be repaid to... IMF. In a sense, IMF decision avoids the risk of IMF engineering the most pesky form of sovereign default known to the humanity: a default on IMF debt. Congratulations, IMF.

The hope-filled IMF statement is worth reading, but apparently, Ms. Lagarde sees Minsk 2 agreements as "largely holding for now". Which is consistent with some reports but most certainly is at odds with the UK, US and Nato views.

Another part worth noting is IMF's continued insistence that Ukraine's economic collapse is just a temporary 'balance of payments' problem. And in line with delirium, IMF is lauding the Ukrainian authorities for allowing "the exchange rate to adjust", as if Kiev had not thrown every last bit of meagre reserves and every possible bit of capital controls at defending the exchange rate in a futile attempt to prevent such 'adjustment'.

That said, let us hope that Ukrainian economy is indeed provided some much needed support through this package and that the reforms, penned into the agreement, do not lead another Maidan.

11/3/15: Building & Construction Activity in Ireland: 2014

Irish Building and Construction industry production indices are out for Q4 2014 and full year 2014, so here is a quick look.

Quarterly data:

• All building and construction activity rose 6% y/y in Q4 2014 by value and 4.5% y/y by volume.Compared to series low, value is up 55% and volume is up 51%. However, compared to historical peak, value is down 70.2% still and volume is down 71.8%. Thus, the annual rise is not impressive: single digit growth off the base that is so low, we are still 36.3% below Q4 2000 in value and 52.8% below Q4 2000 in volume. Worse, Q4 2014 marks the slowest annual growth in value and volume since Q1 2013.

• Building ex-civil engineering index is up 9.8% y/y in Q4 2014 in value terms and is up 8.6% in volume terms. The series still trend 76% below historical peak in value terms and down 78 in volume terms. Compared to Q4 2000, the series are down 51.3% in value terms and 64% below in volume terms.
• Residential building production is up massive 36.9% y/y in value terms and 35.2% in volume terms. Again, however, the base of activity is low: the series are still down 76.0% on peak in value terms and down 88.9% in volume terms. Compared to Q4 2000, residential building activity is down 70.6% in value terms and down 79.3% in volume terms.
• Non-residential building activity fell 3.9% y/y in Q4 2014 in value terms and is down 5.17% in volume terms. The series are 15.3% below Q4 2000 levels of activity in value terms and are down 30.4% in volume terms.
• Civil engineering activity - the only area of activity where we have been performing relatively better over recent years - posted a decline of 1.6% y/y in Q4 2014 in terms of value of activity and a drop of 2.88% y/y in terms of volume of activity. However, compared to Q4 2000, the series still run 64% ahead in terms of value and 20.6% up in terms of volume.

On annual basis, 2014 was a better year for value of activity compared to volume.

• Across all building and construction sub-sectors, activity in 2014 was up 9.36% y/y in terms of value of production and up 8.29 in terms of volume. Both value and volume y/y growth rates were weaker in 2014 compared to 2013. Relative to annual averages for 2000-20002 period, activity across all sectors of construction is down 47% in value terms and down 58.7% in volume terms.
• Residential building activity in 2014 rose 19.0% y/y in value terms (improving on 11.5% growth in 2013) and by 17.5% in volume terms (also improving on 10.8% growth in 2013). However, as with quarterly figures earlier, activity is growing of extremely low base. Compared to 2000-2002 annual averages, 2014 activity in this sub-sector is still down 78.3% in value terms and down 69.0% in volume terms.
• Non-residential construction activity is up 8.3% y/y in value terms in 2014 (much worse than 19.4% rise recorded in 2013) and in volume terms activity is up 7.2% (also worse than 18.5% rise in 2013). Full year 2014 activity is still well below 2000-2002 annual averages (down 21.4% in value terms and down 31.7% in volume terms).

To conclude: 

1. Some welcome improvements in the building and construction sector, driven primarily by residential construction activities, but coming off extremely low base of activity in 2013. 
2. Key issue is how much of 2014 activity uplift was driven by planning permissions secured prior to major regulatory changes that are holding back current permissions activity. 
3. Another key issue is the apparent significant slowdown in 2014 rates of growth in activity compared to 2013 rates of growth. 
4. Third issue: despite still low levels of activity in the sector, builders appear to be chasing higher margins on price / value side, instead of lower cost projects.Thus value of activities is rising faster than volume for the second year in a row. If this scenario is sustained into 2015, we are unlikely to see construction sector gains translating into alleviating price appreciation pressures in the rental and house purchasing markets.

11/3/15: The looming computerisation of European jobs

Two and a half years ago (http://trueeconomics.blogspot.ie/2012/08/2882012-challenging-constant-growth.html), I highlighted the research by Robert J. Gordon on the secular slowdown in economic growth awaiting the global economy, linked to the 'flattening out' of returns to technological innovation hypothesis.

Recent research from the Bruegel Institute (see: http://www.bruegel.org/nc/blog/detail/article/1394-the-computerisation-of-european-jobs/#.VQAET3EABEU.twitter) attempted to provide some estimation of the related topic: the topic of jobs displacement via technological innovation.

This represents a very important and interesting piece of work, quantifying risk exposures across the European economies to computerisation, robotisation and automation trends. The map Bruegel provides clearly shows the link between lower value-added sectors activity share of country GDP and the risk of jobs displacement due to technological innovation. However, even at the lower end of displacement scale, 47-49 percent of jobs are at risk, and this is a significant number. Worse, as authors correctly (in my view) suggest, the impact will be more pronounced for lower quality jobs, more reliant on labour and less related to human capital and complementarity between human capital and technology. In other words, already sizeable economic impact is likely to be magnified by an even larger social impact.

This topic is one of the key ones to focus on when thinking about the future economic, social and political developments. Just to give you a taster for the thinking ahead of us: in the majority of peripheral economies and indeed across the EU, jobs losses during the recent crises - the Global Financial Crisis, the Great Recession and the Sovereign Debt Crisis - were relatively concentrated in lower skills end of jobs spectrum, although this concentration was not as high as the bias expected for exult from technological displacement of jobs. Still, the relatively benign polarisation of the employment markets during the crises produced a prominent backlash in political sphere across the EU, with strengthening of the extreme political forces. Now, imagine the effect a much more socially concentrated disruption will cause to the traditional political systems.

Note: some links to related research

• http://trueeconomics.blogspot.ie/2014/06/2462014-us-productivity-slowdown-its.html
• http://trueeconomics.blogspot.ie/2013/11/14112013-human-capital-age-of-change.html
• http://trueeconomics.blogspot.ie/2014/05/1552014-innovation-employment-growth.html
• http://trueeconomics.blogspot.ie/2013/11/11112013-great-tech-future-for-ireland.html
• And a series of links specific to the Financial Services sector being disrupted by technological innovation: http://trueeconomics.blogspot.ie/2015/03/8315-fintech-entrepreneurs-reshaping.html

10/3/15: Euro Area Growth Indicator Improved in February

In February, Eurocoin - a leading growth indicator from CEPR and Banca d'Italia posted a pretty decent rise to 0.23 from 0.16 in January. The 2 months average is now consistent with growth of 0.3-0.4 percent q/q.

This is the strongest reading in the indicator since July 2014. This time around, gains in Eurocoin indicator were based on improved exports and industrial activity, which is a much better indicator of actual underlying economic performance than gains from stock markets valuations that drove Eurocoin over previous months.

Nonetheless, Eurocoin remains well below its historical average of 0.32. 3mo average through February 2015 is 0.17 against 3 mo average through February 2014 of 0.32, so, once again, growth conditions, albeit improving, remain weak.

The above is confirmed by the recent weakening in the outlook for France. Yesterday, French Government lowered its forecast for Q1 growth from 0.4% to 0.3%.

As ECB went into its much hyped QE, the monetary policy remains firmly 'anchored' in zero growth corner:

10/3/15: Hedge Funds Returns: Part 3: Dealing with Funds and Benchmarks Selection

My latest post on measuring returns in the hedge funds industry is now available on LearnSignal blog: http://blog.learnsignal.com/?p=163

8/3/15: Euro area crisis timing: a problem of definition

Here is an interesting article comparing Euro area debt crisis and Latin American debt crisis: https://www.stlouisfed.org/~/media/Publications/Regional%20Economist/2015/January/PDFs/sovereign_debt.pdf

One question that is persistently present in the literature is about timing the start of the Euro area crisis. The problem is manifold:
1) Different countries have gone into crises in different years;
2) Different aspects of the crises define different sub-crises across various macroeconomic parameters

Here is my stab at the comprehensive definition:

And a legend and some counts stats:

8/3/15: FinTech Entrepreneurs Reshaping Finance: Euromoney

An interesting article on FinTech developments as drivers for change in the financial services: http://www.euromoney.com/Article/3433436/Technology-The-fintech-entrepreneurs-reshaping-finance.html?LS=Twitter&single=true via Euromoney.com.

In recent months, I wrote about FinTech sector extensively for the LearnSignal blog here: http://trueeconomics.blogspot.ie/2014/11/25112014-fin-tech-unraveling-retail.html as well as digital disruption in retail banking sector: http://trueeconomics.blogspot.ie/2015/02/18215-digital-disruption-and.html plus fintech innovation on trading side: http://trueeconomics.blogspot.ie/2014/11/3112014-tech-innovation-in-finance.html

And here is a link to BBC coverage of the Irish FinTech scene: http://trueeconomics.blogspot.ie/2014/09/2692014-bbc-covering-irish-fintech.html

7/3/15:Euro Area GDP per capita: the legacy of the crisis

I have posted previously on the decline in GDP per capita during the current crises across the euro area states, the US and UK. Here is another look:

Let's take GDP per capita at the peak before the crisis.

For some countries this would be year 2007, for others 2008. Keep in mind, many comparatives in the media and by analysts treat the peak as 2008. This is simply not true. Only 89countries of the sample of 20 countries comprising EA18, plus US and UK have peaked their GDP per capita in real terms in 2008, the rest peaked in 2007. Hence, for the former countries, the GDP per capita decline started in 2009 and the for the latter in 2008. Now, take GDP per capita declines cumulated over the years when the GDP per capita was running, in real terms, below the peak. Again, the sample of the countries is not homogeneous here: for some countries, GDP per capita regained pre-crisis peak by 2011 (Germany, Malta and Slovak Republic), by 2013 (Austria and U.S.) and by 2014 (Latvia). For all the rest of the countries, the GDP per capita peak was not regained through 2014.

Now, let's plot the overall cumulated losses over the years of the crisis (over the years from the crisis start through either the year prior to regaining pre-crisis GDP per capita levels for the countries where this was attained, or through 2014 for the countries that did not yet recover pre-crisis levels.

Chart below plots these in euro terms (remember, this is loss through end of crisis or 2014 per capita) (note figures for UK and US are in their respective currencies, not Euro):

Thus, per above, in Greece, cumulative GDP per capita losses during the crisis (through 2014) amount to around EUR42,200, while in Malta cumulative losses from the start of the crisis through the end of the crisis in 2011 amounted to around EUR500 per capita.

Since the crisis was over, before 2014, across 6 countries (in other words the regained their pre-crisis peak GDP per capita levels in inflation-adjusted terms), it is worth to note that through 2014, in these countries, losses have been reduced.  In Austria, through 2014, cumulative losses on pre-crisis GDP per capita levels stood at EUR 2,107 per capita, in Germany there was a cumulative gain of EUR4,078 per capita, in Latvia a cumulative loss of EUR5,696 per capita, in Malta a cumulative gain of EUR1,029 per capita, in Slovak Republic a cumulative gain of EUR1,352 per capita and in the U.S. a cumulative loss of USD258 per capita

Taking the above figures covering either gains  or losses from the start of the crisis in each country through 2014 as a percentage of the pre-crisis peak GDP per capita, the losses/gain due to the crisis through 2014 amount to:

And that chart really tells it all.