Economics 25/06/2009: Unemployment and IMF

While many of you are wondering where is my comment on last night's IMF report, I must ask you for your infinite patience - it is forthcoming in this week's Sunday Times and I will be posting more on the issue over time.


In the meantime, the US Bureau of Economic Analysis (BEA) reports today that the real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- decreased at an annual rate of 5.5% in the first quarter of 2009, (that is, from the fourth quarter to the first quarter), according to final estimates released by the Bureau of Economic Analysis. In the fourth quarter, real GDP decreased 6.3%.

I can see our strategy to wait for Americans to turn around working... thanks to the Irish Government tough choices on policy side, US GDP contractions are flattening out. Happy times are just around the corner.

Of course, one cannot suggest that the Irish Government is not doing more than just help the Americans in their troubles. Indeed, hat tip to BL, Politics.ie have the following itinerary for our Dear Leader of Offaly, Knight of the Bogs and Lord of the Bord Na Mona Mansions:
23.06.09:

• Brian Cowen attends the official re-opening of Shinrone National School, Birr, Co. Offaly
• Brian Cowen raises the First Green Flag at Coolderry Central School, Birr, Co. Offaly; and
• Brian Cowen attends the Official Opening of Isotron Ireland’s new Electron Beam Sterilisation Facility, at Tullamore, Co. Offaly

Of course, Mary Coughlan, the Grand Dame of Diplomatic Etiquette and the Lady of Jobs Announcements Junkets was equally busy jet-setting across the nation to announce jobs:

• 45 at Boston Scientific plant in Galway (after cutting 240 jobs in Galway last August and as another motor trade company sheds 70 jobs in Galway the same day as Mrs Coughlan arrived there);
• alongside Gaeltacht Minister Eamon "Gimme More Subsidies" O'Cuiv visiting west Donegal today to assess the damage caused by flash floods (I didn't know the DETE is also responsible for emergency services in this country); but
• Flooding aside, she did have a chance to pull an unveiling string at the launch in Finnabair Business Park in Dundalk...
  

All in the day's work for Tanaiste, directly responsible for dealing with our soaring unemployment rate (on the exact day when CSO unveiled the latest unemployment data from QNHS).
Of course, neither Biffalo-Gruffalo, nor Scary-Mary are much of the IMF/Economic Policy men (women), so why not let poor rookie, Brian Lenihan deal with the opposition fire on the issue of yesterday's damming report? Afterall, as the US data shows, things are already getting better (by getting worse at a slightly slower pace than before)... "The heart attack patient has no pulse, Doctor," shouts the nurse. "Excellent, things have bottomed out then," retorts Dr Biffalo, "Pints!"

Economics: 24/06/2009: OECD Unemployment stats

OECD's latest unemployment forecast is out for the Euroarea. Two things worth noting:

First, the OECD has gotten Irish unemployment spectacularly wrong (they used QNHS official data that is lagging). Correcting for this, chart below shows the discrepancy delivering up to date numbers. Scary.
Second, even the original chart numbers show Ireland as having the most extreme rise in the Euro area in unemployment. In sheer numbers, Australia, Denmark, Germany, Italy and Sweden all had smaller increases in unemployment than Ireland. Taking into account Live Reg latest numbers, Ireland's 230,000 newly-added unemployed (since December 2007) mean that our unemployment increase was greater than that for Australia and Denmark combined, or Denmark and Italy combined, or Denmark and Sweden combined...

Globally: unemployment in OECD countries is now expected to continue to rise well into 2010, per yesterday’s data from the OECD. The average unemployment rate will be approaching 10%, up from 7.8% in April, according to new projections.

“More than 57 million people will be unemployed in OECD countries by the end of 2010, according to OECD estimates, up from 37.2 million at the end of 2008, when the average unemployment rate was 6.8%. The expected increase will bring OECD-wide unemployment to 9.9% at the end of 2010, its highest level since the 1970s, with an average for the year of 9.8%. Unemployment touched a recent low point of 5.5% in the last quarter of 2007, standing at 31.6 million at the end of that year,” says OECD.

Previous downturns show that the jobs recovery will lag a long way behind the pickup in economic growth.

Economics 24/06/2009: Agriculture's Value in Economy

Let the number speak for themselves. Per CSO data release yesterday:
Subsidies as a share of total value of production are creeping up, accounting in 2008 for 31.6% of the entire sector output. Intermediate consumption is also up, made up of various inputs. Net value added is down - the contribution of the sector to this economy through activities actually attributable to production: from 32.3% in 2004 to 13.7% in 2008. Why are we still having a Department of Agriculture in this country if the net and gross value added by this sector is smaller than the net subsidies the sector receives, i.e the sector produces less real value than it takes out of the EU in handouts...

Economics 24/06/2009: SMEs feeling the heat

Yesterday's business conditions survey from ISME paints a picture of dire operating conditions for Irish SMEs.

Q2 2009 survey results "confirm that smaller companies are still in the throes of economic despair with employment levels, investment and sales remaining extremely negative. Despite this harsh environment business optimism has improved for the second quarter running, albeit from historically low levels." The survey was based on 600 companies responses shows both that there is no 'green shoots' improvement and that expectations for 12 months ahead are not offering much hope of an upturn "with companies further readjusting downwards their employment and investment levels."

Business confidence "has improved since the previous quarter with a net 56% of companies less optimistic in comparison to a net 71% in the previous quarter. The most negative sector is Construction with a net 73% less optimistic, followed by Retail at 71%, Distribution (70%), Manufacturing (51%) and Services at 48%." In contrast, "74% of companies, up from 69% in the previous quarter, viewed the current business environment as being either ‘poor’ or ‘very poor’." Only 23% expect business conditions to improve over the next 12 months, up from 16% in Q1 2009. 66% of companies said viability of their businesses was under threat over the next 12 months, if present conditions remain.

Employment conditions continue to deteriorate dramatically:
"Nearly two thirds (62%), (56% in the previous quarter), of companies employing less than this time last year and only 6% employing more. These figures are the worst ever recorded and confirm that there has been no slowing down in job losses in the sector, with evidence suggesting that this trend is to continue over the next number of months. The Construction sector was worst affected with 83% of companies letting people go in comparison to 72% of Distributors, 61% of Retailers and Manufacturers, and 43% of Service firms."

Furthermore, "employment prospects remain bleak with 43% of companies anticipating letting people go over the next 12 months, with only 7% planning to increase employment numbers. Distribution companies are the most pessimistic with a net 52% expecting to let people go, in comparison to 40% in the Construction sector, 35% Retailers, 32% Manufacturers and 28% of service businesses."

Clearly distribution services are feeling the squeeze of higher excise duties, VAT and other consumption damaging taxes and retail sector collapse. Construction sector, despite having bled jobs at the fastest rate of all segments of Irish economy in the past still remains one of the focal points of jobs destruction. Ditto retailers. The spread between these sectors and services is narrow enough signifying that we are indeed heading for the second wave of layoffs in the higher wage sectors.

"Sales continue to fall off a cliff with a net 77% of companies reporting lower sales in comparison to a net 72% in the previous survey. To put this in context there has been an eight fold increase in the number of companies reporting reduced sales in comparison to the same period last year. Only 23% of companies expect to increase sales over the next 12 months. Not surprisingly profit levels are badly affected with a massive 73% of companies anticipating a reduction in net profits, while 61% expect revenues to decline over the next 12 months, down from 69% in the previous quarter."

A massive 81% of companies said their sales/order books are down in comparison to last year. But only 33% of companies reported that their stock levels are down for the year, in comparison to 24% in the previous quarter, suggesting that overcapacity is still plaguing this economy and putting more pressure ahead on employment levels.

Credit crunch is also getting worse: "26% of companies have orders, production capacity and markets unserviced for want of working capital."

And new orders are being pressured by existent orders cancellations (implying even more pressure on employment in the short term) as "54% of companies have encountered cancellation of orders in the last quarter." Interestingly (the level of detail supplied in the survey is remarkable), cancellations were from,

• Locally Based Multinationals 16%.
• Export Destinations 7%
• Local Indigenous Firms 77%
  

This means only one thing - domestic economy is still in a free fall and exporters are the last line of defense we have left. It is Stalingrad time for Brians & Mary and they are still in denial that the winter has arrived.

SMEs continue to reduce "investment in their businesses with 32% having done so in comparison to 30% in the previous quarter. 19% indicated they increased investment, down from 25% in the previous 3 months. Only 16% of companies anticipate an increase in investment over the next 12 months."

This puts to an end any arguments the Government might have had about aiding the investment cycle through 'knowledge' economy programmes and tax changes they 'introduced' in December 2008. It ain't working, folks.

Although our Government economists are keen on talking about deflation, "firms continue to experience inflationary pressures, with increases of 5% plus being reported for transport, energy, raw materials, Insurance and waste. However, there is evidence of reductions in wage costs and rents." So in the nutshell - the Government and its cronies in the unionised, state-controlled and priced sectors are still ripping-off consumers and producers, while ordinary workers are taking a pay hit.

Finally, "47% of companies apportion blame to the Government for the current economic crisis, with a significant number of SMEs concerned at the lack of direction being provided."

I don't have much to add to this one.

NAMA Costs: in full detail

Here is a full run of several assumptions scenarios for NAMA costings as based on joint work by Brian Lucey and myself. Note the changes in various assumptions. And note what is required for a break even scenario. It is beyond any doubt in my mind that NAMA cannot be made to work so as not to yield a substantial loss to the taxpayers. Any claims to the contrary are, in my view, a patent lie or an egregious error of judgement.

Economics 23/06/2009: CB of Ireland

One question: where is the 2008 central bank financial stability report? Hat tip to BL who spotted the minor inconvenience: its half past 2009 and the latest FS report CBofI website is for 2007... They must be trying to work out the title for it.



And while on Financial news, AIB announced yesterday that its trick-o-treat debt swap Tier 1&2 for Tier 2 'raised' €1bn in new capital. In a statement the bank said it was exchanging tier 1 and tier 2 securities for the equivalent of circa €1.3bn of new lower tier 2 capital qualifying securities. The face value of the securities received in the exchange is approximately €2.4bn. "The securities will be exchanged for between 50pc and 67pc of their face value in line with the previously announced exchange prices," the bank said. Commenting on the exchange, Goodbody Stockbrokers said AIB will need €935m more to bring its equity tier 1 to 4% by 2011.

Ok, folks, and Citi did generate the profits they booked last quarter... sure. In reality, this is rather pathetic. 4% T1 ratio is hardly a gold standard to begin with, but AIB's creative accounting is turning even this into mockery. If T1 is a true hedge against default or a bank run, what on earth will the bank do with the newly minted T2 securities? Default and hope no one will notice?



Now on to the real economy: last week Irish Small & Medium Enterprises Association (ISME) reported that according to its regular Credit Watch survey, average payment period for SMEs in Ireland is now the longest on record at 73 days, 23% are paid within 30 days, 45% are paid in 90 days or more and 15% are paid in over 120 days (up from 10% in March survey).
ISME CEO Mark Fielding: "The recent announcement that Government had approved formal arrangements to reduce the payment period by Government Departments to their business suppliers from 30 days to 15 days is purely a sop from the Tanaiste and does little to assist. Despite an increase in SME credit management training and practice, half of small businesses (50%) are waiting longer for payment, with the average payment period being 73 days; among the highest in Europe... The situation is continuously deteriorating as the delays have increased from 60 days in Autumn 2007 to the current excessive 73 days, and bans are, in the main, refusing to extend credit limits to assist cash-flow."

Surely, this is not doing much good to our already extreme rates of business insolvencies, but the real matter here is with the banks. In recent weeks, I have heard a number of acquaintances who run their own businesses telling me the stories of horror when BofI and AIB forced rent and loan terms reviews onto functioning and paying businesses in apparent attempts to 'extort' income up front ahead of schedule. The same banks have rolled over, day after day, for their developer-borrowers. It looks to me like may be some of the credit flows have gone from the functional enterprises to zombie development projects. What's next? Mortgages holders squeeze?