2/4/15: BRIC: Business Outlook 12 months ahead

Summary of BRIC economies Business Outlooks for 12 months ahead, via Markit:

India: "The Markit India Business Outlook survey points to sustained optimism among Indian companies. However, the net balance of +26 percent for overall output is the lowest in one year and below the both the BRIC and global averages. Weaker degrees of sentiment have been recorded across the manufacturing and service sectors, with the respective net balances registering +24 and +28 percent in February."

Russia (covered in more detail here: http://trueeconomics.blogspot.ie/2015/04/2415-russia-business-outlook-q1-2015.html): Overall private sector outlook forward has improved at the mid-point of Q1 2015 compared to the start of Q4 2014 as headline % of companies expecting an increase in next 12 months minus % expecting a decline has risen to +20% from Q4 2014 record low of +10%. The net balance for expected goods production over the next 12 months has risen to +35%, the highest since October 2013." We are seeing effects of imports substitution.

China: "…continued optimism at Chinese companies regarding future business activity". "February’s net balance of +30 percent is up from +26 percent in the autumn to the highest reading in a year. The latest reading is also above both the BRIC and global averages (+28 percent and +27 percent, respectively). …A net balance of +28 percent of goods producers anticipate an expansion of output over the coming year, up from +25 percent in October. Meanwhile, a net balance of +32 percent of service providers forecast business activity to increase in the next 12 months. This is the highest net balance seen in the service sector since mid-2012."

Brazil: "private sector companies remain optimistic towards output growth in the coming 12 months. However, the business activity net balance has slipped from +44 percent last October to +28 percent, its lowest reading since composite data were first available in October 2009. Sentiment has deteriorated at manufacturers and service providers."

As the chart below summarises, BRIC expectations are more subdued than those in the major advanced economies, with exception for Japan and the US.

Click on the chart to enlarge

Overall, this data shows consistent trend toward moderation in business expectations across the BRIC economies into Q1 2015, signalling growing downside risks to global growth. So far, ex-India (yet to be reported), Manufacturing data for March PMI surveys suggests this trend continuing through the end of Q1.

2/4/15: Russia Business Outlook: Q1 2015

While we are waiting for Markit to publish the latest Services PMIs for BRIC economies and the last remaining Manufacturing PMI of the group for India, here are some interesting stats on longer-term outlook in the Russian economy.

Via Markit Russia Business Outlook survey for Q1 2015, covering business expectations 12 months forward:

• Overall private sector outlook forward has improved at the mid-point of Q1 2015 compared to the start of Q4 2014 as headline % of companies expecting an increase in next 12 months minus % expecting a decline has risen to +20% from Q4 2014 record low of +10%. 
• Nonetheless, as Markit notes, "the latest figure is still the joint-second lowest since the series began in late-2009."
• "Moreover, among the countries surveyed globally, only Japan (+16%) and France (+19%) have weaker activity expectations than Russia."

Interesting point: per Markit, "The overall improvement in the business outlook has been driven by manufacturers. The net balance for expected goods production over the next 12 months has risen to +35%, the highest since October 2013." We are seeing effects of imports substitution.

Another point is that Services providers are much less optimistic: "...the services activity net balance has risen only slightly to +12%, the third lowest on record and the weakest figure among all

countries surveyed."

Core drivers for downside in expectations: "general weakness in the wider economy, a lack of working capital, high interest rates, inflation, currency fluctuations and a rising tax burden." Key risk, especially in the Services sector, is Capex: "... firms expect to cut capital expenditure over the next 12 months. The net balance for capex has trended lower since the start of 2013, and has fallen into negative territory in February for the first time, at -2%. This is also the lowest capex net balance of all countries surveyed. Service providers expect to cut capex (-3%) while the outlook at manufacturers is broadly neutral (+1%)."

Considering the above chart, the slowdown in the economic growth has become pronounced in Q4 2013, although structural weaknesses appear to set in around the ned of 2011. This is also consistent for the BRIC group overall as shown in the chart below:

Excluding Brazil (see my PMI analysis of the BRIC for more on this) all other BRIC economies have posted a sharp drop in expectations starting with Q1 2012. This trend remains persistent through Q1 2015, with Brazil joining the line up in full in Q1 2015.

Not a good sign for the global economic growth prospects...

1/4/15: H-W Sinn "Europe’s Easy-Money Endgame"

A very interesting op-ed by Professor Hans-Werner Sinn of German Ifo Institute for Project Syndicate: http://www.project-syndicate.org/commentary/euro-demise-quantitative-easing-by-hans-werner-sinn-2015-03

The problem outlined by Professor Sinn is non-trivial.

"...for countries like Greece, Portugal, or Spain, regaining competitiveness would require them to lower the prices of their own products relative to the rest of the eurozone by about 30%, compared to the beginning of the crisis. Italy probably needs to reduce its relative prices by 10-15%. But Portugal and Italy have so far failed to deliver any such “real depreciation,” while relative prices in Greece and Spain have fallen by only 8% and 6%, respectively".

As Professor Sinn notes, there are four possible solutions:

1. "Europe could become a transfer union, with the north giving more and more credit to the south and later waiving it." 
2. "The south can deflate." 
3. "The north can inflate." 
4. "Countries that are no longer competitive can exit Europe’s monetary union and depreciate their new currency."

So here's the problem, correctly identified by Professor Sinn: "Each path is associated with serious complications. The first creates a permanent dependence on transfers, which, by sustaining relative prices, prevents the economy from regaining competitiveness. The second path drives many debtors in crisis countries into bankruptcy. The third expropriates the creditor countries of the north. And the fourth may cause contagion effects via capital markets, possibly forcing policymakers to introduce capital controls".

Now, note: Ireland has opted for the second path. Any surprise we are driving people into bankruptcy in tens of thousands (once current legal queue is taken into account), along with multiple businesses?

But back to Prof Sinn's analysis. Remember the ECB QE? Ok, says Prof Sinn, suppose it delivers on target inflation of just under 2%. What does it mean for internal devaluations in the 'peripheral' Europe?

"If, say, southern Europe kept its inflation rate at 0% and France inflated at a rate of 1%, Germany would have to inflate by a good 4%, and the rest of the eurozone at 2% annually, to reach a eurozone average of slightly less than 2%. This pattern would have to continue for about ten years to bring the eurozone back into balance. At that point, Germany’s price level would be about 50% higher than it is today."

The problem, thus, is an unresolvable dilemma, since with that sort of arithmetic, we are in a tough bind:

• Either Germany runs mild inflation, while the 'periphery' runs outright deflation, allowing - over a painfully long period of time (decade or more) to devalue the imbalances, or
• Eurozone pursues Mr Draghi's objective of 'just under' 2% inflation across the entire Euro area at the expense of Germany (and the rest of the already shrunken 'core').

Do note, I have argued before that deflation in the 'periphery' is not a bad thing, as it allows for the interest rates to remain low (servicing cost of household and corporate debts is lower) and deleveraging of the households and companies to be less painful, while sustaining some domestic demand through increased purchasing power of incomes. So I agree with Professor Sinn's criticism of the ECB QE programme. 

The problem is that this means, as Professor Sinn rightly suggests, continued suppression of demand (the 'austerity' bit).

The choice faced by Europe are ugly. All of them. And there are no guarantees for any of them to actually work. And the cause of this problem is singular: creation of a political currency union. For anyone who says that Greece, Italy, Portugal, Cyprus, Ireland and Spain have caused their own problems, the replies are both simple and complex: 

• The simple one: absent the euro, their problems would have been by now solved by a combination of the old-fashioned defaults and devaluations. 
• The complex one: absent monetary transfers (lower interest rates and ample bank liquidity flowing cross-borders) with the EMU from the late 1990s through 2007, the imbalances generated in the 'peripheral' economies would never have been this large. Which means that the simple reply above would have been even more easy to apply.

1/4/15: St. Petersburg's Finec Students Visit Dublin

It was a real pleasure last week to speak to a group of students from St. Petersburg State University of Economics (Finec) during their visit to The College of Business, DIT as a part of the joint MSc programme.

Very informing Q&A and subsequent discussions. One very pressing topic, raised by students was the perception of Russia in Ireland and in Europe.

This was an open event for IRBA members too, so quite a few came over to the presentations and Q&A. 

1/4/15: Greek Crisis: Gaining Rhetorical Speed

So Greece is on- off- today in relation to the upcoming repayment of the IMF EUR450 million tranche due April 9. And no, it ain't April Fools Day joke.

Reuters reported as much here: http://mobile.reuters.com/article/idUSB4N0VR02320150401?irpc=932 and a more detailed report is here: http://www.spiegel.de/wirtschaft/soziales/griechenland-will-sich-nicht-an-iwf-zahlungsfrist-halten-a-1026697.html. Subsequently, the claim (made on the record) was denied: http://www.telegraph.co.uk/finance/economics/11509302/Greece-threatens-international-default-without-fresh-bail-out-cash.html

What happens if Greece does go into the arrears via-a-vis the IMF? Here is the IMF position paper on what happens in these cases: http://www.imf.org/external/np/tre/ofo/2001/eng/090501.pdf
And here are the Measures for Prevention/Deterrence of Overdue Financial Obligations to the Fund—Strengthened Timetable of Procedures as tabulated in the above report:

Which means that, in the nutshell, little beyond bureaucratic notifying and meetings takes place within the first 3 months of the breach. Nothing in terms of IMF penalties, that is. The markets, of course, will be a different matter altogether.

Meanwhile, Greece is rolling back on some past 'reforms':

And is planning on asking for more money soon:

This is some sort of a Chicken Game head-on road competition, while dumping petrol on the way... for speed...

1/4/15: Irish Manufacturing PMI: March 2015

Markit/Investec Manufacturing PMI for Ireland came out today showing continued and robust growth in the sector (or in the sub-sample of the sector covered by the survey).

Per Markit: "The Irish manufacturing sector registered a further strong improvement in operating conditions during March, helped by a series-record rise in employment. Job creation was linked to a further sharp increase in output requirements amid strong new order growth. The recent weakness of the euro against both the US dollar and sterling led to a first increase in input prices in three months."

Balmy conditions in the sector have meant that the PMI slipped somewhat from the scorching hot reading of 57.5 in February to a hot and humid 56.8 in March. Trend is flattening out, as expected, given the already surreal readings and the fact that the index has been over 50.0 for 22 consecutive months and within statistically significant difference from 50.0 for 19 months straight.

Aside from the above, anecdotal evidence - from one of the larger trade bodies - suggests that externally trading SMEs are now showing serious uptick in their exporting activity due to improved exchange rate environment.

Cited by Markit employment outlook strength is confirmed by today's Live Register data for February 2015 which shows:

1. Significant declines in Live Register y/y
2. Broad declines in Live Register across duration of registrations (long- and short-term supports); and
3. Broad declines in Live Register by occupation, with all occupations posting decreases in LR.

So on the net - good news.

1/4/15: Export@Google March 2015

My recent conversation about the state of the global markets, economy and everything for Export@Google event last month

This is now available on youtube: https://www.youtube.com/watch?v=wnoH_ndAQRI

1/4/15: Russian Manufacturing PMI: March 2015

Russian Manufacturing PMI (Markit & HSBC) for March came in with new disappointment: the indicator slipped to 48.1 from 49.7 in February. This marks the second lowest reading in the series since June 2009 (the lowest reading since June 2009 was recorded in January this year at 47.6).

from Markit release: "production and new business both recorded mild declines. Employment also fell, but at a weaker rate with consumer goods producers recording modest growth. There was some positive news on the inflation front, as input and output prices continued to rise, but to much slower degrees than seen at the start of the year".

Overall trend toward deepening contraction in the Manufacturing remains:

Ironically, February improvement in PMI to 49.7 (still below 50.0) means that 3mo average for Q1 2015 is now at 48.5 which is better than 3mo average for Q1 2014 (48.3), if only marginally. This is despite the fact that in March 2014, PMI was reading 48.3 against 48.1 in March 2015.

As reminder, Russian Manufacturing PMIs first slipped below 50 in July 2013 and remained below 50 in 15 months out of the last 21 months.

31/3/15: Six out of Seven Signs the US Economy is Weaker in Q1

That economic recovery in the U.S. - the engine for growth in far away places, like Ireland, the hope of the IMF, the beacon of the dream that debt stimulus is a fine way to repair structurally weakened (let alone devastated - as in the Euro area) economies is... err... coughing diesel:

Source: @M_McDonough

In basic terms, five out of six tracked Economic Surprise sub-indices are in the red now, with four of them in the red for some time. And the overall Bloomberg Economic Surprise index is in the red, and has been in the red for most of the Q1. And the overall index is falling in steep ticks... which is not good... not good at all.

31/3/15: Three Strikes of the New Financial Regulation: Part 2: Dubious Economics of FTT

My new post on the mess that is Europe's Financial Transactions Tax is available on LearnSignal blog: http://blog.learnsignal.com/?p=169

31/3/15: The Most Effective QE of all QEs

In the previous post I shared my view of the QE. Here is the best, most succinct summary of the effectiveness of the 'most effective' of all recent QEs: the US example via @Convertbond:

Nails it.

31/3/15: QE for the People

ECB's QE programme launched this month is targeting wrong policy and likely to fuel an already massive bubble in stocks and bonds. It is also unlikely to help generate real economic growth, as it simply transfers more wealth to the financial markets.

Look at the facts: 

• The Eurozone is suffering from structural stagnation that is driven by the lack of investment, anaemic domestic demand and policies, including taxation and enterprise regulation, that reduce entrepreneurship and make jobs creation and productivity growth (especially Total Factor Productivity) excessively costly.
• Overall household and corporate indebtedness in the Euro area remain high despite several years of deleveraging.
• Bank lending markets fragmentation contrasted by booming equity and bond markets shows that the problem is not in the lack of liquidity, but in over-leveraging present in the economy.

Experience in other countries that recently deployed QE shows that current measures by the ECB are unlikely to provide sufficient stimulus to drive growth to the new (and higher) ‘normal’: 

• Japan, the US, and the UK experiences with QE show that monetary policies are useful to the real economy only when they are combined with either expansionary fiscal policies or real investment increases or both.
• Even in such cases where QE has been successful, sustainability of QE-triggered growth has been weak in the presence of structural debt overhangs (Japan) and had to rely on structural drivers for growth present prior to the deployment of QE (the UK and the US).
• In the Euro area, the idea is to combine QE with austerity policies and in the presence of dysfunctional financial markets. Such a program could increase misallocation of resources via bidding up financial assets prices over and above their long term fundamentals-justified levels. 
• Bank of England created £375bn over the course of its QE programme. By the Bank of England’s own estimates, QE in the UK pushed up share and bond prices by around 20%. But because around 40% of stock market wealth is held by the wealthiest 5% of households, QE has made that wealthiest 5% better off by around £128,000 per household. 
• You might want to check this post on the potential effects of QE on the real economy: http://www.zerohedge.com/news/2015-03-28/finally-very-serious-people-get-it-qe-will-permanently-impair-living-standards-gener 

In short: the QE, as currently being carried out by the ECB, benefits the less-productive holders of financial assets, not the poor, nor the entrepreneurs, nor the real enterprise.

There is an alternative policy, a policy of “Quantitative Easing for the People”, an idea of distributing QE money directly to the citizens of the Euro area.

This is a more efficient approach for stimulating the real economy precisely because it puts liquidity directly at the point where it is needed most and can be used most efficiently, absent intermediaries, to address real structural problems present in the economy.

The plan is identical to the ECB current plan in terms of funds allocated: €60 billion will be created each month for 19 months. The amount each national central bank will create can also depend on its share of capital in the ECB, just as the current ECB QE programme envisages.

Each Eurozone citizen can receive ca €175 on average each month for 19 months. 

• The funds are taxable income, so there is a benefit to the Exchequers, allowing the governments to engage in expanded investment programmes or more efficiently close some of the budgetary gaps, while buying more time to implement structural reforms.
• The funds (net of tax) can be used by households to accelerate debt deleveraging and/or repair their pensions funds and/or fund consumption.
• As the result, “QE for the People” will stimulate domestic demand (consumption, investment and Government investment), while increasing the rate of debt deleveraging.
• In addition, “QE for the People” can help improve banks’ balancesheets by increasing loans recovery (as households repay loans). In contrast, ECB QE will not have such an effect as it will be taking off banks balancesheets zero risk-weighted Government bonds.  Thus, “QE for the People” can be seen as a more efficient mechanism for repairing financial system transmission mechanism than ECB own QE policy.
• The quantum of stimulus implied by the “QE for the People” proposal is significant. Take Ireland, for example. “QE for the People” means annual benefit of around EUR8 billion in direct stimulus (depending on how Ireland's share is estimated). In 2014, Irish Final Domestic Demand grew by EUR6.15 billion. So the direct effect of this measure for just one year would be equivalent to more than full year worth of real economic growth.

19 economists from across Europe and outside signed last week’s FT letter proposing this plan (with some variations) to stimulate the real economy in the euro area. The original letter is available here: http://www.basicincome.org/news/2015/03/europe-quantitative-easing-for-people/. 

This note posits my personal view of the alternative policy, somewhat at variance with the letter itself on the specific modality of Government involvement in the funding and Government receipt of the QE funds over and above normal tax capture (which I do not support). 

27/3/15: Russia Goes for Fiscal Cuts: Amended Budget 2015

Russian Duma passed (in first reading) amendments to the Budget 2015.

The new Budget is based on average oil price of USD50 pb, with expected GDP growth of -3% against inflation of 12.2% and USD/RUB exchange rate of RUB61.5. These are major revisions to the base assumptions.

Forecast government deficit for 2015 has now widened from RUB431 billion (0.6% of GDP) estimated back in October 2014 to RUB2,700 billion or 3.7% of GDP.

Budget forecast that the economy will contract 3% (to RUB73.5 trillion or USD1.27 trillion) in 2015 is a sharp deterioration on October 2014 estimates for GDP growth of 1.2%. Still, this is very optimistic. Earlier BOFIT forecast Russian economy to contract by more than 4% in 2015 on foot of assumed oil price of USD55 pb, and the Central Bank of Russia estimated 4% drop in GDP for 2015 on foot of USD50-55 pb assumption. See latest forecasts for the Russian economy here http://trueeconomics.blogspot.ie/2015/03/26315-bofit-latest-forecasts-for.html and for external trade here: http://trueeconomics.blogspot.ie/2015/03/26315-russian-imports-outlook-2015-2016.html

In December 2014, budgetary forecasts were for GDP decline of 0.8% and inflation averaging 7.5% with oil at USD80 pb.

The key pressure will fall onto the Russian oil revenues reserves fund (one of the sovereign wealth funds) which currently has liquid assets of USD98 billion, but under the Budget 2015 amendments will see this depleted by USD53 billion by year end.

As expected (see my note linked above), public sector wages were not cut in nominal terms, but surprisingly (analysts expected nominal rises in wages below inflation rate), public sector wages were completely frozen in the amended budget. As expected, pensions rose in nominal terms (5.5% y/y), but the increases fell below expected inflation rate, so real pensions will fall.

In a related report (http://beurs.com/2015/03/24/rusland-moet-besparen-maar-wil-niet/60374), Russia is to cut Interior Ministry (police) ranks by 110,000 with 78,700 cuts in 2015. This comes on top of cuts of 180,000 since 2011 - a part of large scale restricting of the police force that also included rebranding of Russian 'militzia' into 'police' and a score of measures aimed at reducing corruption. It is also worth noting that reductions are in line with May 12, 2014 Presidential decree that limits overall level of employment by the Interior Ministry to 1.1 million - at the time, this meant reductions of 180,000.

And reserves are still going to run low (http://www.themoscowtimes.com/article.php?id=517902)...

Despite the aggressive measures, in my opinion, Russia still needs some positive upside in the economy to meet the budgetary targets. My view is that even if oil prices reach an average of USD55-60 pb in 2015, the deficit is likely to be around 3.5-3.7%, so with Budget amendments penciling in USD50 pb price, things are very tight and prone to adverse risks. The good news - state sectors' wage inflation (running in 20% territory over recent years) will be scaled back via inflation and nominal freezes. Bad news is, this too is unlikely to be enough. 

27/3/15: That Russian Liberal Opposition: Facts Piling Up...

Recently, I wrote about the sorry state of the Russian liberal democratic opposition (http://trueeconomics.blogspot.ie/2015/03/21315-two-pesky-facts-and-russian.html) and Putin's strong showing in public ratings. Here is another data set, this time reflecting this week's data:

Q: Imagine that next Sunday there will be presidential election in Russia. Which politicians would you give your vote to? President Putin's share of the vote:

Source: http://fom.ru/Politika/

Here's the link to longer-dated series: http://bd.fom.ru/pdf/d12ind15.pdf and a snapshot from the same (I omit spoiled votes and those who are not planning to vote):

I have trouble spotting viable liberal opposition that can be supported by a democratic regime change. But may be I am just not seeing something... like it or not, but these are the numbers we have...

27/3/15: Euro Area Growth Indicator up in March, but...

Latest Eurocoin (Banca d'Italia and CEPR) leading growth indicator for euro area economy came in at a slight improvement in March to 0.26 from 0.23 in February, posting the highest reading since July 2014. The average quarterly growth forecast now implied by Eurocoin is at around 0.25-0.3% q/q with the risk to the upside.

This is the first monthly reading since July 2014 that puts Eurocoin into statistically significant growth territory and also the first monthly reading for positive growth momentum based on 6mo moving average.

However, as the chart below indicates, y/y we are still in weak growth territory and, to a large extent, this growth is supported by dis-inflationary momentum, rather than by nominal growth.

Accommodative monetary policer remains the key forward and the ECB remain stuck in the proverbial 'monetary policy corner':

In March, the main factors behind the Eurocoin increase were: an improvement in household and business confidence, plus gains in share prices. In other words, there is no organic driver for growth - both confidence indicators and share prices may have only indirect link to real economic activity.

27/315: Irish Retail Sales: February 2015

Core retail sales for February 2015 (excluding motors):

• Value of core retail sales in Ireland rose 0.22% y/y in February, having posted 0.67% growth in January - a significant slowdown in growth. 3mo average index for retails sales in value has rise 1.1% y/y in December 2014-February 2015 period compared to the same period a year ago. 6mo average through February 2015 is up 1.23% y/y. This is weak growth at best, given the levels of activity in the sector: 3mo average through February 2015 is down 33.93% on peak and down 3.64% on pre-crisis average.
• Volume of core retail sales fared, as usual, better, boosted by extremely low inflation in prices. Volume index rose 4.52% y/y in February 2015, after posting 4.61% growth in January 2015 (a slight slowdown in the pace of growth). 3mo average through February 2015 is up 4.8% y/y, and 6mo average is up 4.3% y/y. Still, compared to peak, volume of sales is still 25.3% below pre-crisis highs, although it is up 9.3% compared to the pre-crisis average.

As chart above clearly shows, the divergence between the Consumer Confidence Index and Value of retail sales activity remains in place, while Volume index is co-moving with the Confidence indicator. (more on this below).

Based on links between reported Consumer confidence and actual retail sales, Volume of retail sales is currently trending at relatively average levels (see chart below, green dot marking current reading), while Value indicator is trending well below the average reading consistent with reported Consumer confidence (see light orange dot marking the current reading).

Overall activity in the retail sector, however, is still improving. The chart below shows my own Retail Sector Activities Index (RSAI) that takes into the account trends in volume and value indices, plus the trend in consumer confidence. Currently, the main drivers for this improvement are: deflationary dynamics boosting volumes of sales and still elevated readings for Consumer Confidence.

However, rates of growth in both Volume and Value indicators are weaker than pre-crisis averages and are worryingly weak in Value terms (remember, retail sector profits and employment levels are predominantly the functions of value of sales, not volume of sales):

Finally, onto correlations: table below sums up correlations for each index, showing negative correlations between Consumer Confidence Index and Value and Volume of Retail Sales indices for the period from June 2008 through present (from the start of the crisis). It is worth noting that correlations have moved into positive territory from around 2012 on, although the latest readings suggest some temporary weakening of these.

Conclusions: setting aside Consumer Confidence readings, value and volume of retail sales indices are rising. However, as in previous months, increases in volume of sales are not matched by increases in value of sales, suggesting that overall sector activity improvements are driven primarily by deflationary price dynamics and only in the second order by improving demand. According to Consumer Confidence, we have been back in 2007 levels of activity since the start of Q2 2014. This is simply not supported by the annualised growth rates recorded in both Volumes of sales and Values of sales. Meanwhile, the levels of sales indices remain deeply below their pre-crisis peak readings and in value of sales terms, below pre-crisis average.

I will look at sub-sector decomposition of the retail sales indices performance once we have data for March, so we can strip out monthly volatility and look at quarterly comparatives.

27/3/15: Debt, Glorious Debt, Deluge of Debt... and Negative Yields

In the article on global debt woes forthcoming in one of the financial letters I contribute to in April, I will be looking more in depth at the problems brewing in the global asset markets. But for now, couple of interesting (additional) points.

According to Pictet, the share of global debt that is trading at negative yields has now risen to 8% of the total debt outstanding. For the Euro markets, 19% of all debt traded is now negative yielding, for debt denominated in Swedish SEK - 33% and for for Swiss CHF denominated debt - 44%.

If this is not enough to raise your hair, here is what investors think of the bonds markets:

Source: @lebullmarche

Per above, two core concerns are now taking over the worry-ranks for institutional investors: valuations bubble in bonds markets (up from 17% to 30% between January and March 2015) and Supply and quality of issuance of new debt (up from 6% in January to 26% in March).

27/3/15: Inching toward default: Ukraine CDS

Ukraine default scenarios (and debt restructuring) is now in the front line news, especially with IMF declaring then un-declaring its distaste for Russian position on EUR3 billion debt Ukraine owes Moscow that is due this year: http://www.reuters.com/article/2015/03/27/ukraine-crisis-imf-idUSL2N0WS1FO20150327. So much so, even Reuters are confused...

But here's the markets absent any confusion: Ukraine CDS are now trading with implied probability of default of 98.2%.

Source: @Schuldensuehner 

Which is, at this stage, only a question of whether or when the ISDA call the default.

Whether you like it or not, Ukraine needs to restructure its debts. Its economy cannot carry the interest burden and it cannot sustain any sort of recovery absent a significant debt writedown. Lending to the country to repay some of these debts is madness of highest order - so much so that even the IMF knows it. Even if Ukraine gets a massive writedown of debt, it will have years of extremely painful reforms ahead of it, and its economic development model will have to be re-written in its entirety. But at least the Ukrainian people will be able to think of this pain as not going to fund foreign legacy lenders. A small consolation, but a necessary one.

26/3/15: Russian imports outlook 2015-2016

Per BOFIT, Russian imports "will react strongly in 2015, partly dragged down by the economic contraction" and in part by weaker ruble and continued counter-sanctions. Import volumes adjust sharply during Russian recessions: in 2009 imports volumes fell 30% as GDP contracted by 8%. However, current Ruble is in a weaker position than in 2009: "the real exchange rate of the rouble has now depreciated much more than in 2009: it is a quarter weaker than the average rate for 2014. Russia’s income on exports, which dropped by a third in 2009, will deteriorate under the forecast oil price assumption[USD55 pb], by almost a quarter in 2015."

All of this means that Russian "imports will have to adjust to the smaller export income even more than usual [more than in 2009], since it would be difficult to fund a current account deficit in the present situation." It is worth noting that Russian economy does not run current account deficits to smooth out volatility in imports. "The current account last posted a deficit for a short period only, during the crisis of 1998."

Which means that BOFIT projects sharper decline in imports this time around: "import volumes are estimated to fall by a fifth in 2015. [On top of already sharp contraction in 2014]. The decline in imports will level off after 2015 as the economic contraction eases. In addition, the rouble’s real exchange rate will strengthen, since inflation is considerably faster in Russia than in its trading partners (the difference has grown to over 10%). In the absence of shocks which would lead to capital outflows, the rouble’s nominal exchange rate is expected to remain fairly stable, because net capital outflows stemming from e.g. repayment of foreign debt by non-financial corporations and banks will not necessarily exceed the surplus on the current account."

In other words, BOFIT does not expect an external funding crisis to be triggered by the debt redemptions.

"The current account will be bolstered by diminishing imports and a recovery in Russia’s export income resulting from rising oil prices. The recovery in export income will, in turn, create room for an increase in imports."

All of which is consistent with the Government policy: "the Russian Government has increased reactive manual steering in several areas ahead of the recession. Import controls have been intensified, e.g. by raising certain import duties and favouring domestic products in public procurement and also projects of state-owned enterprises. Capital outflows have been restricted by e.g. strengthening banking controls and issuing instructions to state-owned enterprises. Companies have been encouraged to apply targeted price controls, although this has not been widely used, as yet."

Exporters to Russia, especially from the EU, can expect some rough years ahead.

26/3/15: The Second Best Little Country for Electricity Costs Rip-off?..

It's the happiness of the Semi-State: the dysfunctional Irish electricity market.

Here's the latest from the IEA (see full publication here: http://www.iea.org/publications/freepublications/publication/KeyWorld2014.pdf) and an OECD chart summing up the plight of Irish consumers - industrial and household:

Yes, Ireland - the best small country to do business in is the second worst small country to be user of electricity in (after Denmark) and the fourth worst in absolute terms for households. We are also the fifth worst in terms of industry costs of the same, and the second worst small country in terms of industrial users costs.

But, remember, we are the Saudi Arabia of wind… 

26/3/15: BOFIT Latest Forecasts for Russian Economy 2015-2017

BOFIT published their new forecasts for the Russian economy. Here is the summary with my comments:

Pre-conditions: "Russian economic growth has slowed for three years in a row, due to e.g. waning growth in the available labour force, capital and productivity. In addition, a slight decline in export prices, the Ukraine crisis, sanctions, Russia’s counter-sanctions and other negative measures, with the accompanying increase in uncertainty, slowed Russian GDP growth to just over 0.5% in 2014. ...The impact [of oil price drop in H2 2014] began to show in the early months of 2015, with a slight contraction in GDP. Without transient factors, the economy would already have contracted in 2014."

What transient factors supported growth in 2014?

• "As in 2013, industrial production was partly supported by strong growth in defence spending."
• "The depreciation in the real exchange rate of the rouble since the early months of 2013 has [created room for some industrial imports substitution], and may also have slightly boosted exports of certain non-energy basic commodities."
• "The rouble’s strong depreciation led to consumer spending rushes, which kept private consumption growth at some 2%. However, wage growth slowed, as did pension growth. Inflation rocketed (to almost 17% in February) on the back of rouble depreciation and Russia’s counter-sanctions in the form of restrictions on food imports. Consequently, real household incomes contracted in annual terms for the first time since 1999. Aggregate income was underpinned by employment, which remained buoyant for the time being. Household borrowing decreased further."
• "Steered by the government, investment by most large state enterprises was relatively high. This was, however, insufficient to prevent total investment from falling by some 2%. The net capital outflows of the corporate sector increased, due partly to repayment of foreign debt and considerable constraints in access to foreign funding as a result of domestic uncertainties and external financial sanctions."

External position forward: "Export volumes declined by 2%. Exports of crude oil and gas dwindled markedly, while exports of petroleum products continued to grow at a robust pace. As the fall in ex-port prices steepened, export income in the last months of 2014 was already well over 10% lower (in euro terms) than a year earlier. Import volumes declined by 7% in 2014 and have now been in decline for 1½ years. The decline steepened considerably towards the end of the year."

BOFIT forecasts for 2015 assume oil price at USD55 pb and above and sanctions and counter-sanctions to remain in place "unchanged for a relatively long period".

"The impact of [oil price] change will be profound, since energy exports ac-count for almost a fifth of Russia’s GDP."

Do note: energy exports include not just crude petroleum and natural gas, but also refined products and electricity (including nuclear). This puts the Russian economy into perspective not usually considered in the Western media - the economy is much more diversified than many believe and claim. Further note, energy (total energy, not just oil and gas) accounts for just over 60% of total exports income.

Outlook summary: "...Russian GDP will contract by over 4% in 2015. The high degree of uncertainty will cause a shrinkage in private investment, while private consumption will be cut particularly by rapid inflation. Even though Russian imports have already edged down, they are estimated to fall further, by one fifth, in response to the sharp depreciation of the rouble during the last months of 2014. In 2016–2017, global economic growth and world trade will pick up, and it is assumed the oil price will rise to around USD 65 a barrel. The Russian economy is expected to continue slightly downward, before a slow recovery in 2017. The drop in investment is expected to flatten out towards the end of the forecast period. With real household income remaining low, it will also take time for private consumption to recover. Export volumes will grow at a very subdued pace. Imports will recover after 2016."

All in-line with my own outlook.

Private consumption "…will decrease substantially in 2015, and slightly further in 2016" driven primarily by inflation eroding household incomes and weak prospects for growth in private sector wages in nominal terms and public sector wages expansion below the rate of inflation. Notably, "the government is also seeking to cut the number of public sector employees." BOFIT expects pensions to "barely keep pace with inflation, at best".

Household credit will remain subdued, "even though the debt-servicing burdens stemming from payback of short-term loans will ease gradually. As during the crisis of 2009, savings may be rather substantial."

Public consumption "will decline amid pressures on the central government finances."

Investment "…will dwindle substantially this year and next. Private investment, in particular, will be depressed by a number of uncertainties relating to the ongoing tensions in East Ukraine, uncertain prospects for sanctions and the unpredictability of Russian economic and trade-related measures stemming from possible additional sanctions and recession countermeasures." So no surprises, then.

Fiscal side: "…the federal budget deficit is set to grow so large in 2015 (to about 3.5% of GDP) that the government Reserve Fund may be eroded by as much as a half. It is possible that support measures will be implemented using government bonds (as in the bank support operations in December 2014, which amounted to 1.4% of GDP). The support operations can also draw on debtors’ bonds (as in the funding of the state-owned oil giant Rosneft, which was just under 1% of GDP)."

The longer-term outlook is deteriorating: "The foundations of growth are being eroded by the contraction in private investment. Government spending is focused increasingly on defence and pensions, while public investment is subject to the largest cuts."

Chart below summarises forecasts:

Sources: Rosstat, BOFIT Forecast for Russia 2015–2017

26/3/15: The New Financial Regulation – Part 1: The Financial Transactions Tax

My latest post for LearnSignal blog opens a new series - covering the major financial services regulatory headaches in the works. This week: it is Financial Transactions Tax turn: http://blog.learnsignal.com/?p=166

26/3/15: Irish Planning Permissions 2014: The Crisis Drags On

CSO published Q4 2014 figures for Planning Permissions in Ireland, confirming the trend toward de-acceleration in the already weak data.

Here are the details.

On an annual basis:

• There were 15,724 planning permissions granted in Ireland in 2014 for all types of construction, up 13.11% y/y but still down 1.7% on 2011. Current level of planning permissions is below 2011 reading and is below any year between 1992 and 2011. Historical average from 1992 through 2014 is 33,333 which means current running rate is more than 2 times lower than the average. We are in the third worst year in the series history.
• Dwellings permissions rose from 3,316 in 2013 to 3,606 in 2014 (+8.7%). 2014 level of activity is below any year from 1992 through 2012. Dwellings permissions granted in 2014 were 24.4% below 2011 levels and represent the second worst year in history of the series. Historical average for 1992-2014 period is for 14,882 dwellings permissions to be granted, which means that in 2014, levels of dwellings-related planning activity was more than 4 times lower than historical average.
• Excluding dwellings, all other new construction-related permissions granted rose to 4,299 in 2014 from 3,431 in 2013 (+25.3% y/y), and up 45.0% on 2011, but still 77.8% below pre-crisis peak and 1.4 times below the historical average. 2014 was the third worst year in history for these sub-series and only marginally above the second worst year. 

Charts to illustrate:

Key point: given the absurdly low levels of activity in 2013, growth in 2014 is far from impressive. The bottlenecks created in 2010-2014, amounting to cumulative shortfall in planning permissions of 108,820 permissions relative to 1997-2001 average, and for dwellings this shortfall is 82,309 permissions. This shortfall is, put simply, catastrophic and is only increasing, given the current trends to-date.

Next: floor area relating to new permissions:

As shown in the chart above, 

• Floor area relating to planning permissions granted for all types of construction fell in 2014 to 3,184,000 sqm from 3,338,000 sqm in 2013 (down 4.6% y/y), representing a decline of 21.9% on 2011 levels. Relative to peak, total floor area approved is now down 86.7% and 2014 level of activity is 3.3 times lower than historical average (1992-2014).
• Planning permissions approved for dwellings had underlying floor area of 1,366,000 sqm, up 4.7% on 1,304,000 sqm approved in 2013.  2014 reading is 89.6% down on pre-crisis peak, and 4.5 times below the historical average activity.
• Floor area approved for non-dwellings permissions fell from 1,306,000 sqm in 2013 to 1,064,000 sqm (-18.5% y/y) and is down 88.6% on pre-crisis peak. Activity in this area is running 2.9 times lower than historical average.

Key points: 2014 was the worst year on record for the construction permissions activity measured by the total floor area of approvals, with overall square meterage of new permissions approved falling to an absolute historical low. 2014 was the third worst year on record for square meterage approvals for new dwellings construction and the absolute historical low for non-dwellings activity.

Summary of on-peak changes and historical shortfalls below:

Overall, 2014 data on planning permissions suggests little real improvement in the investment pipeline relating to construction sector. This evidence does not support the National Accounts tale of revival in domestic real estate investment and investment in general. According to the National Accounts, building & construction sector activity and Gross Fixed Capital Formation have both been running in excess of 2011 levels in both 2013 and 2014. Yet, there is no corresponding performance in planning permissions terms. This strongly suggests that current construction sector activity relates predominantly to past permissions pipeline, implying downside risk to the sector in the near future; and that our real estate investment 'boom' is driven predominantly by the re-sale markets (flipping of existent capacity, rather than creating new capital stock additions).

26/3/15: De-dollarisation of Russian accounts: media catching up, but risks remain

As I highlighted a week ago here: http://trueeconomics.blogspot.ie/2015/03/18315-russian-deposits-dollarisation.html, Russian households are starting de-dolarising their accounts in the wake of some regained confidence in the Ruble and the banking sector:

• See here on Ruble relative performance, recently: http://trueeconomics.blogspot.ie/2015/03/23315-em-currencies-on-rise.html
• See here on latest Russian banking sector stats: http://trueeconomics.blogspot.ie/2015/03/1732015-russian-banks-latest-stats.html

Now, the Moscow Times (h/t to +Russia Insider ) is covering same trend: http://www.themoscowtimes.com/business/article/ruble-panic-recedes-as-russians-start-selling-dollars/518053.html

However, not all is well, still and risks remain. Here is BOFIT analysis of the forward risks relating to oil prices and the banking sector (more on the latest forecasts later on the blog): "If the oil price remains, as assumed, at around USD 55 a barrel, and despite savings decisions, the federal budget deficit is set to grow so large in 2015 (to about 3.5% of GDP) that the government Reserve Fund may be eroded by as much as a half. It is possible that support measures will be implemented using government bonds (as in the bank support operations in December 2014, which amounted to 1.4% of GDP). The support operations can also draw on debtors’ bonds (as in the funding of the state-owned oil giant Rosneft, which was just under 1% of GDP). Where necessary, banks can use both instruments as collateral against even relatively long-term central bank funding. Recourse to the central bank has already become more substantial than ever before."

And more: in the face of oil price risks, "Bank panic situations where households and enterprises withdraw their funds from banks are possible, even though the authorities have intensified banking supervision. On the other hand, the Bank of Russia is ready to take immediate support measures."

All of which means that from the macroeconomic perspective, the current reprieve in dollarisation trends can be temporary. Over the next six months, I still expect continued decline in investment, with private sector capex depressed by a number of factors that are still at play: the Ukrainian crisis, the looming threat of deeper sanctions and oil price risks. State enterprises and larger state banks are likely to continue cutting back on large debt-funded investments and more resources will continue to outflow on redemption of maturing corporate and banking debt. 

So keep that seat belt fastened: the bumpy ride ain't over, yet.

25/3/15: IMF on Ireland: Risk Assessment and Growth Outlook 2015-2016

In the previous post covering IMF latest research on Ireland, I looked at the IMF point of view relating to the distortions to our National Accounts and growth figures induced by the tax-optimising MNCs.

Here, let's take a look at the key Article IV conclusions.

All of the IMF assessment, disappointingly, still references Q1-Q3 2014 figures, even though more current data is now available. Overall, the IMF is happy with the onset of the recovery in Ireland and is full of praise on the positives.

It's assessment of the property markets is that "property markets are bouncing back rapidly from their lows but valuations do not yet appear stretched." This is pretty much in line with the latest data: see http://trueeconomics.blogspot.ie/2015/03/25315-irish-residential-property-prices.html

The fund notes that in a boom year of 2014 for Irish commercial property transactions "the volume of turnover in Irish commercial real estate in
2014 was higher than in the mid 2000s, with 37.5 percent from offshore investors." This roughly shows a share of the sales by Nama. Chart below illustrates the trend (also highlighted in my normal Irish Economy deck):

However what the cadet above fails to recognise is that even local purchases also involve, predominantly, Nama sales and are often based on REITs and other investment vehicles purchases co-funded from abroad. My estimate is that less than a third of the total volume of transactions in 2014 was down to organic domestic investment activity and, possibly, as little as 1/10th of this was likely to feed into the pipeline of value-added activities (new build, refurbishment, upgrading) in 2015. The vast majority of the purchases transactions excluding MNCs and public sector are down to "hold-and-flip" strategies consistent with vulture funds.

Decomposing the investment picture, the IMF states that "Investment is reviving but remains low by historical standards, with residential construction recovery modest to date. Investment (excluding aircraft orders and intangibles) in the year to Q3 2014 was up almost 40 percent from two years earlier, led by a rise in machinery and equipment spending."

Unfortunately, we have no idea how much of this is down to MNCs investments and how much down to domestic economy growth. Furthermore, we have no idea how much of the domestic growth is in non-agricultural sectors (remember, milk quotas abolition is triggering significant investment boom in agri-food sector, which is fine and handy).

"But the ratio of investment to GDP, at 16 percent, is still well below its 22 percent pre-boom average, primarily reflecting low construction. While house completions rose by 33 percent y/y in 2014, they remain just under one-half of estimated household formation needs. Rising house prices are making new construction more profitable, yet high costs appear to be slowing the supply response together with developers’ depleted equity and their slow transition to
using external equity financing."

All of this is not new to the readers of my blog.

The key to IMF Article IV papers, however, is not the praise for the past, but the assessment of the risks for the future. And here they are in the context of Ireland - unwelcome by the Ministers, but noted by the Fund.

While GDP growth prospects remain positive for Ireland (chart below), "growth is projected to moderate to 3½ percent in 2015 and to gradually ease to a 2½ percent pace", as "export growth is projected to revert to about 4 percent from 2015". Now, here the IMF may be too conservative - remember our 'knowledge development box' unveiled under a heavy veil of obscurity in Budget 2015? We are likely to see continued strong MNCs-led growth in 2015 on foot of that, except this time around via services side of the economy. After all, as IMF notes: "Competitiveness is strong in the services export sector, albeit driven by industries with relatively low domestic value added." Read: the Silicon Dock.

Here are the projections by the IMF across various parts of the National Accounts:

So now onto the risks: "Risks to Ireland’s growth prospects are broadly balanced within a wide range, with key sources being:

• "Financial market volatility could be triggered by a range of factors, yet Ireland’s vulnerability appears to be contained. Financial conditions are currently exceptionally favorable for both the sovereign and banks. A reassessment of sovereign risk in Europe or geopolitical developments could result in renewed volatility and spread widening. But market developments currently suggest contagion to Ireland would be contained by [ECB policies interventions]. Yet continued easy international financial conditions could lead to vulnerabilities in the medium term. For example, if the international search for yield drove up Irish commercial property prices, risks of an eventual slump in prices and construction would increase, weakening economic activity and potentially impacting domestic banks." In other words, unwinding the excesses of QE policies, globally, is likely to contain risks for the open economy, like Ireland.
• "Euro area stagnation would impede exports. Export projections are below the average growth in the past five years of 4¾ percent, implying some upside especially given recent euro depreciation. Yet Ireland is vulnerable to stagnation of the euro area, which accounts for 40 percent of exports. Over time, international action on corporate taxation could reduce Ireland’s attractiveness for some export-oriented FDI, but the authorities see limited risks in practice given other competitive advantages and as the corporate tax rate is not affected."
• "Domestic demand could sustain its recent momentum, yet concerns remain around possible weak lending in the medium term. Consumption growth may exceed the pace projected in coming years given improving property and labor market conditions. However, domestic demand recovery could in time be hindered by a weak lending revival if Basel III capital requirements became binding owing to insufficient bank profits, or if slow NPL resolution were to limit the redeployment of capital to profitable new loans." Do note that in the table listing IMF forecasts above, credit to the private sector is unlikely to return to growth until 2016 and even then, credit growth contribution will remain sluggish into 2017.

And the full risk assessment matrix:

Oh, and then there is debt. Glorious debt.

I blogged on IMF's view of the household debt earlier here: http://trueeconomics.blogspot.ie/2015/03/25315-imf-on-irish-household-debt-crisis.html and next will blog on Government debt risks, so stay tuned.

25/3/15: IMF on Irish household debt crisis

IMF on Irish household debt crisis (from today's Article IV paper):

"Household balance sheets are healing gradually, yet loan distress remains high and over half of arrears cases are prolonged. Households have cut nominal debts by 20 percent from peak through repayments primarily funded by a 4 percentage point rise in their trend savings rate. Debt ratio falls have been large by international standards but debt levels remain relatively high at 177 percent of disposable income. Household net worth has risen 25 percent
from its trough."

One note of caution: IMF statement ignores sales of household debt out of the Central Bank-covered statistics to vulture funds. Furthermore, repossessions, insolvencies, bankruptcies, voluntary surrenders and some mortgages restructurings have also contributed to the reduction in household debt. Thus, not all of the debt reduction is down to organic debt repayment by households.

It is also worth noting that per chart above, Irish household debt is currently at the levels of 2005-2006 - hardly a robust reduction on crisis-peak.

More from the IMF: "A recent survey finds household debts concentrated among families with mortgages, having 2 to 3 children, with the reference person aged 35 to 44, and in the two top income quintiles. Yet, their debt servicing burden is still similar to other groups, reflecting the high share of long-term “tracker” mortgages, with an average interest rate of 1.05 percent at end 2014."

The problem is that the recent survey IMF cites covers data through 2013 only! (http://www.cso.ie/en/media/csoie/releasespublications/documents/socialconditions/2013/hfcs2013.pdf).

Overall issues, therefore, are:

1. Irish household debts remain extreme relative to disposable income;
2. Distribution of household debts is adversely impacting the most productive segment of Irish population and the segment of population in critical years for pensions savings; and
3. Deleveraging of the households is by no means completed and remains exposed to the risk of rising interest rates in the future.

All points I raised before and all points largely ignored by Irish policymakers.

25/3/15: As Bogus Is, Bogus Does... IMF on Irish MNCs-led Growth

The IMF has published its Article IV consultation paper for Ireland and I will be blogging more on this later today. For now the top-level issue that I have been covering for some time now and that has been at the crux of the problems with irish economic 'growth' data: the role of MNCs.

My most recent post on this matter is here: http://trueeconomics.blogspot.ie/2015/03/24315-theres-no-number-left-untouched.html

IMF's Selected Issues paper published today alongside Article IV paper covers some of this in detail.

In dealing with the issues of technical challenges in estimating potential output in Ireland, the IMF states that "Irish GDP data volatility and revisions make it difficult to assess the cyclical position of the economy in the short-run. Ireland’s quarterly GDP growth data are among the most volatile of all European Union countries, more than twice the variability typically seen."

The IMF provides a handy chart:

And due to long lags in reporting final figures, as well as volatility, our GDP figures, even those reported, not just projected, are rather uncertain in their nature:

However, as IMF notes: other structural issues with the economy, besides poor reporting timing and quality and inherent volatility, further 'complicate' analysis:

"Multinational enterprises (MNE) accounting for one-quarter of Irish GDP can vary their output substantially with little change in domestic resource utilization. As shown in a recent study, MNEs represent only 2.1 percent of the number in enterprises in Ireland but slightly over half of the value added in the business economy. MNE output swings, sometimes related to sectoral idiosyncratic shocks (e.g., the “patent" cliff” in 2013...), can occur with little apparent change in
domestic resource utilization."

In other words, there is little tangible connection between output of many MNEs and the real economy. And the latest iteration of tax optimisation schemes deployed by the MNCs is not helping the matters: "The sharp increase in offshore contract manufacturing observed in 2014 is another example of such a shock. Such shocks to the productivity of the MNE sector may be best treated as shifts in potential GDP, because the result is a change in GDP without any significant change in resource tensions or slack in the
economy."

But MNCs are important for Ireland's tax base, right? Because apparently they are not that important for determining real rates of growth. Alas, the IMF has the following to say on that: "Swings in the value added of MNEs contribute substantially to variations in Irish GDP. Yet such swings are not found to have a significant effect on [government] revenues."


How big of an effect do MNCs have on the real economic growth as opposed to registered growth? IMF obliges: "The gross value added excluding the sectors dominated by MNEs behaves quite differently from aggregate GDP in some years. For example, in 2013 it grows by 3 percent at a time when official GDP data
were flat." In other words, the real, non-MNCs-led economy shrunk by roughly the amount of growth in the MNCs to result in near-zero growth across the official GDP.

However, since 2013 (over the course of 2014) a new optimisation scheme emerged as the dominant driver of manufacturing MNCs-led growth: contract manufacturing. IMF Article IV itself contains a handy box-out on that scheme, so important it is in distorting our GDP and GNP figures. Per IMF: "In 2014, multinational enterprises (MNEs) operating in Ireland made greater use of offshore
manufacturing under contract."

A handy CSO graphic illustrates what the hell IMF is talking about:

As covered in the link to my earlier blog post above, "Goods produced through contracted manufacturing agreements are treated differently in the national accounts than in customs measures of trade. As these goods do not cross the Irish border, they are not included in customs data on exports. If, however, the goods remain under the ownership of the Irish company, they are recorded as exports in the national accounts. Payments for manufacturing services and patent and royalty payments are service imports in the national accounts, offsetting in part the positive GDP impact of contracted manufacturing."

And to confirm my conclusions, here is IMF on the impact of contract manufacturing (just ONE scheme of many MNCs employ in Ireland) on Irish growth figures: "Contracted manufacturing appears to have had a significant impact on GDP growth in 2014 although it is difficult to make a precise estimate. Customs data on goods exports rose by 2.8 percent y/y in volume terms in the first nine months of 2014. In contrast, national accounts data on exports rose 12 percent in the same period. The gap between these two export measures can be attributed in part to contracted production, but could also reflect other factors like warehousing (goods produced in Ireland but stored and sold overseas) and valuation effects." Note: I cover this in more detail in my post.

"Assuming conservatively that contract manufacturing accounted for about half of the difference between customs and national accounts data, the implied gross contribution to GDP growth in the first three quarters of 2014 from contract manufacturing is 2 percentage points. However, there is a need to take into account the likelihood that service imports were higher than otherwise, but it is not possible to identify the volume of additional service imports linked to contract manufacturing."

One scheme by MNCs accounts for more than 2/5ths of the entire Irish 'miracle of growth'. Just one scheme!

And now… to the punchline:

Update: Seamus Coffey commented on the 2013 figure for domestic (real) economy cited above with an interesting point of view, also relating to the broader issue of the Contract Manufacturing: http://twishort.com/DTShc and his blogpost on the subject is here: http://economic-incentives.blogspot.ie/2015/03/the-growth-effect-of-contract.html