Economics 08/07/2009: We are not in a recession! Davy

Per Davy morning note last: "Whole economy no longer in recession, but employment-intensive sectors shrinking: Last week's national accounts figures for Ireland made a lot of intuitive sense. The output side of the accounts gets little attention but perhaps provided the best snapshot of what was going on in the economy. Construction (for a seventh quarter out of eight) and services declined (sixth out of seven) in size, but (multinational) industry and agriculture actually emerged from recession and grew quarter-on-quarter. Extrapolating ahead to the second quarter, those trends continued, except that construction and services contracted at a slower pace."

All is great, then, folks. No need to panic.

Forgive me for not repeating the trifle-stuff about unemployment rising, personal disposable incomes shrinking (unless you are a truffle-stuffed senior public sector manager), consumers staying off the high street and more businesses going into liquidation. But what on earth are they eating there in their offices on Dawson Street?

To be fair to Davy, the note does say that: "The problem is that the two parts of the economy that have improved account for less than one-third of output and a much smaller share again of employment. Multinational industry grew again thanks in part to its defensive nature: it is dominated by pharma and software (which has held up). But the rest of it also got a lift from cyclical improvement abroad. Agriculture returned to growth due to the lift in commodity prices from growth in the global economy in Q2."

But what does this mean? Gibberish, my friends.

Kick out to touch the 'return of' agriculture bollocks - how can anyone measure real output in a sector so vastly dependent on public transfers defies my understanding of economics.

Now, Pharma is not a pro-cyclical sector because recession or not, people need drugs and drugs purchasing is governed heavily by very long-term and sticky price agreements.

And when it comes to software - this is a sector also relatively better off in a recession: if demand for new hardware collapses, businesses and consumers are more likely to upgrade software then invest in new machines.

But at any rate, how important are these sectors to what matters most - our disposable incomes? Not hellishly important - total MNCs count for less than 12% of the national disposable income, when you consider their average earnings and share of employment.

Now, I am not saying these sectors can be forgotten. I am simply stating the bleating obvious. Recession is not a concept of the external economy. It is a concept of the domestic one. In other words, does any care about net exports if these are not leaving much of an impact in your and my pockets?

Take a closer look at the real data that Davy didn't bother to show in their note. Here is what CSO had to say:

• "Consumer spending (personal consumption of goods and services) in volume terms was 9.1 per cent lower in Q1 2009 compared with the same period of the previous year." Yeah, recession is not over for consumers (some 3/4 of this economy);
• "Capital investment, in constant prices, declined by 34.1 per cent in Q1 2009 compared with Q1 2008." Oh, it ain't over for investment either.
  
• "Net Exports (exports minus imports) in constant prices were €2,814 million higher in Q1 2009 compared with Q1 2008." But, hold on, they also improved in Q4 2008 - by €1,768 million. Was it the end of the recession then? Well, actually, errrr... this is not really true once you adjust for changes in the exchange rates, changes in prices and, crucially, seasonality. See charts below for the real picture.
  
• "The volume of output of Industry (incl. Construction) decreased by 10.5 per cent in Q1 2009 compared with Q1 2008. Within this the output of the Construction sector fell by 31.4 per cent over the same period. Output of Distribution, Transport and Communications was down 10.9 per cent while Output of Other Services was 3.5 per cent lower in the first quarter of 2009 compared with the same period of last year." So no end of a recession in sight in these sectors...

Here are few charts.To start with - seasonally adjusted, constant prices expenditure on GNP - the stuff we are made off sans transfer pricing. The main chart shows Q1 2003-Q1 2009 quarterly data and the insert blows up the current recession period. Not a single variable, save for Gov Expenditure, shows the end of this recession (not one variable is above the zero line for even the last quarter, let alone for two consecutive quarters - a standard timeline for calling recessions).

Couple more charts:
This takes a knife to the Davy-babble about our trade sector doing so spectacularly well...

I agree with Davy's note that Pfizer, Dell, Intel, and the rest of our illustrious MNCs pack are probably close to coming out of the recession. Hell, they might have never slid into one for all I know. But this is about as comforting to us all as a discovery of another mega crater on the Moon's dark side - we can't see it, we can't feel it, and worse of all - we don't really give a damn. Brian Cowen's hand in our pocket comes the tax day will be far more important.

But then again, Davy wouldn't have anything to say about that, would they?

PS: Oh, the would... Here is a comment on Irish tax policy given in 2008: "I would be surprised if Lenihan increased taxes," said White, economist with Davy. "Income tax, corporation tax and capital gains tax are unlikely to change. It would go against Fianna Fail's economic thinking. Given that business conditions are more difficult, I don't think Lenihan will go the stealth tax route." White said the Government was more likely to cut back on public spending than to cut taxes. "The first thing Lenihan will make sure to do is to limit future liabilities in current spending by keeping pay deals pretty tight. The Government will have to look at wages in the public sector." That was June 8 last year...

Economics 07/07/2009: Daft.ie data - s***t is still hitting the fan in housing markets

Latest daft.ie data is out today (hat tip to RL). And I am bringing you these ahead of the media pack... (Gotta get myself a pat on the back, since no one else will)

Things are not looking good, folks. Here are charts - you know I love charts, and I blame Britten's Simple Symphony for that withdrawal from words - that explain the trends:
Note the black arrow behind the red one on the right? Well, that shows how much faster rents are falling now relative to asking prices... Now, do the thinking here - if rents are falling faster than prices, what will happen to yields on rental property? Aha, collapse is the word you've been searching. And this has two interesting implications:

1. There will be renewed pressure on asking prices; and
2. The only reason rents are falling is (given that first time buyers are now opting almost exclusively to rent) because the foreigners are leaving the country... in droves... and that means that the oversupply of rental properties is not going to fall - it is only going to rise over the next few months (especially if the rest of the world starts picking up, while Cowen/Lenihan/Coughlan continue to tax this economy deeper and deeper into a recession).
   

The stuff I said about rates of decline are evident above and below:
So here are my forecasts for both markets
A Frolicsome Finale, indeed, is not in sight, unlike in Britten...

Economics 06/07/2009: Irish Economy Exclusive

I've crunched through some Eurostat data on GDP/GNP and here are some interesting illustrations of where we are at and where we are heading next.
First off, chart above shows where we are at in terms of GDP and GNP per capita, prices-adjusted, relative to the Euroarea and EU27 averages. The GNP line clearly breaches EU15 and Euro area average line in 2009, so by 2010 we will be income-poor of the bunch. A bit more countries to compare against below:
Again, the number of our advanced peers that will surpass our income per capita in GNP terms is frightening. The same holds for major OECD economies - puts that international crisis into perspective...
And the US dynamic is worth a story here as well - all the EU convergence myth is clearly visible. But remember the hype that the Irish Times loves selling us: "Ireland as the wealthiest economy..." stuff that is designed to make us feel somehow better when parting with our taxes...
To me the above chart is really telling. This is the gap between what we are made believe and where we really are.

Two more charts. First, GDP and GNP forward using Eurostat projections:
And now the GAP: Anyone needs a better illustration of the 19th century domestic economy pitted against a 21st century MNCs-led economy? They don't tell you this in investor presentations, do they?


And here is a good post from a student of economics on the topic...

Economics 05/07/2009: EU Report on Euro area... Ireland's Banking obligations

The EU Commission has published its quarterly report on the Euro area economic performance. There is really very little new in the report relative to Q1 report, but some things worth highlighting (available here).

The Commission report providers two tables worth considering in more details. Table 3 below is not new - it has featured in January report by the IMF and then subsequently in other IMF/OECD/EU commission reports since.
But Table 4 is now published alongside Table 3 (if only a handful pages below), which provides for an interesting comparison. Suppose we take as a measure of affordability of banking measures, the projected overall health of the real economy, as reflected in the expected growth rate in real GDP. We compare this against the total level of liabilities assumed by the states in respect to the banking crisis... we plot the two things:
Oh yes, you've got it right - the country that is least able to pick up the tab takes upon itself the greatest level of liabilities... And, in case you wonder who is that lingering in the +/+ quadrant (combining economic growth and no bailouts):Yeps, that low tax export-oriented economy, called Slovakia and Financial Services exporting powerhouse of Luxembourg. Ever wondered if there is any proof that, contrary to Messrs Cowen, Lenihan and Mrs Coughlan's assertions, our failure is neither in our exposure to Global Finance, nor to Low Tax. Our failure is in our policies exposure to the likes of Messrs Cowen, Lenihan and Mrs Coughlan...

Interesting Research: Happiness on Venus is Falling Relative to Mars

Brilliant paper titled The Paradox of Declining Female Happiness by Betsey Stevenson and Justin Wolfers (UofPennsylvania) (see here) is tackling a paradoxical development of the last 35 years, whereby although "objective measures of lives of women in the US have improved... measures of subjective well-being indicate that women's happiness has declined both absolutely and relative to men." If you think this stuff is esoteric (albeit very exciting) research, you are wrong. Remember - academics flash out paradoxes, but politicians devise pork-laden policies aiming at 'addressing' such paradoxes. Hence, authors' claim that: "The paradox of women's declining relative well-being is found across various data sets, measures of subjective well-being, and is pervasive across demographic groups and industrialized countries. Relative declines in female happiness have eroded a gender gap in happiness in which women in the 1970s typically reported higher subjective well-being than did men. These declines have continued and a new gender gap is emerging - one with higher subjective well-being for me." So that will be a new round of subsidies for closing an emerging new gender gap, then? Women are now relatively poor in terms of happiness than men... someone, quick, call the CORI!

Fair Trade: Implicit Ethical Investment Opportunity Space?

I am a skeptic when it comes to the idea of Fair Trade - an idea that on its surface suggests that we should use our preferences biases in the West to determine winners and losers in the trade game vis-a-vis the rest of the world.

However, for some time now, I am hearing various noises about evidence on superior returns to fair trade-affiliated enterprises. Again, taking this with a grain of salt suggests that some of this effect, if true, can be attributed to the artificially increased market share of the fair trade-affiliated producer: I buy Fair Trade, so I discriminate against non-affiliated producer, thereby increasing the market share of a Fair Trade-affiliated one. On the other hand, some theory might suggest that FT-affiliated producers can benefit from higher productivity of better paid and better incentivize employees or coop-members.

Is Fair Trade Honey Sweeter? An Empirical Analysis on the Effect of Affiliation on Productivity is a recent (July 1, 2009) study from Leonardo Becchetti and Stefano Castriota (UofRome II) published by CEIS Tor Vergata, Research paper 141, Vol 7 Issue 1 (available here). The study evaluates the impact of FT affiliation on Chilean honey producers. "Evidence from standard regressions ...shows that affiliated farmers have higher productivity (income from honey per worked hour) than the control sample. Additional results on the effects of affiliation on training, cooperation and advances on payments suggest that affiliation contributed both to, and independently from, the economies of scale effect. Therefore, we show that the productivity effect is partially explained by the superior capacity of affiliated workers to exploit economies of scale."

In other words, what they do find is that FT link to productivity is a mixed bag. One issue - the beggar thy competitor effect of FT (scale) is certainly contributive to 'higher' productivity. As FT spreads over more and more producers, this effect will diminish. The paper controls for this effect.

Another issue is the price effect of FT - members of FT programmes receive higher prices for their products because we, consumers, are willing to pay that premium. This implies that per fixed number of units revenue of FT-affiliated producers is artificially inflated by our preferences. Again, should FT spread, this effect will also be driven down to nil. Interestingly, the authors report that in the case of Chilean honey producers, "The (wholesale) price of honey sold to the FT affiliated cooperative is obviously lower than the retail price, but surprisingly is also lower than the price paid by local, traditional and international intermediaries. Beyond the myth of higher prices, the most valuable services provided by FT organizations are price and demand stabilization, training courses, technical assistance (in this case, lab tests on honey chemical properties) and zero interest advance payments. The local retail price is lower for Apicoop’s members, thus there are no positive externalities of FT affiliation on their bargaining power with local buyers."

But the most interesting issue from my point of view is what is left as a 'residual' once the above two factors are accounted for. Controlling for selection bias, authors estimate the following relationship relating to output productivity:
and obtain the following results:This is really exciting evidence from my point of view (and do recall - I am a skeptic): authors' "analysis on Chilean honey producers in a period of high market prices highlights that, beyond the fair price myth, non price conditions are much more important... More specifically, ...FT affiliation, in spite of an insignificant price differential in times of rising market prices, has helped local farmers to improve their productive skills across years. In this process more favorable financial conditions (advances on payments at 0% interest rate), internalization of Marshallian externalities via interactions among local producers and training courses are the distinguishing features with respect to a control sample of non affiliated producers which seem to have paid an important role."

Great stuff... but... "On the overall, our findings show that affiliation years significantly contribute to increase producers’ productivity by moving farmers above the inverse U-shaped average product curve in the sample. These results, together with those on similar projects lead us to believe that Fair Trade identifies the right path of action to promote inclusion of marginalized farmers in LDCs (even though not all projects have the same degree of effectiveness and depend crucially on management abilities of the local cooperatives). This is because they correctly identify that the problem at stake is not just one of underproduction but,
mainly one of market power, market access and capacity building. FT by definition offers a diversification of marketing channels, aims to address part of the premium to innovation and part to social needs and has the goal to strengthen local producer organizations and their market power in the value chain with respect to local transportation intermediaries."

What the hell does this mean? Well, it means that FTs greatest benefits are real, but some of these are also predatory vis-a-vis non-FT producers because:

• FTs gain from preferential access to finance (so they pocket risk premium);
• FTs gain from preferential access to the markets (so free trade would eliminate their advantage); and
• FTs gain from marketing premium generated by FT retailers.
  

On the net, the picture therefore is mixed. But I find it very interesting...