Economics 21/11/2009: Travel figures

Just the facts... so as not to be too controversial.

CSO's travel to Ireland data for September 2009 released yesterday:

Chart 1: 

The above shows a significant month-on-month fall in September. But it does not show the underlying trends:

The difference between trips to Ireland less trips from Ireland revels two things. First - a general downward trend in the series over time. Second, in terms of annual averages: a drop from pre-2008 average to 2008 average was followed by a further drop in 2009 average to date. If the correction was due to a recession, one would expect to see some stabilization in 2009, especially per summer months. This would have pulled the average line for 2009 above 2008 line. But it did not happen. Something other than a recession is working through our travel data. May be, just may be, it has to do with the overall cost of traveling here?.. If so, the Rip-off-Republic surely starts at the point of entry - the taxes and charges feeding into airfares (not airfares themselves, with or without baggage fees, Irish airfares are relatively cheap compared to other countries).

The same patterns are showing through in trips taken to Ireland by main countries of origins. Note that I did not show linear trend lines, but it is negatively sloped only for Great Britain, while sloping up for Other Europe and North America. The fact that current annual averages are completely out of line with general longer term trends and that 2009 represents continued deterioration on 2008 suggests once again that something more sinister than a recession is working through our figures.

I can't resist doing some analysis here. Chart below shows linear trends in travel data (difference between trips to Ireland and from Ireland) over time periods concerned.

So what do these lines tell us? The blue line reproduces the results from the second chart above - this is the historic trend toward secular decline in net trips from abroad to Ireland. Yellow and pink lines show linear trends for 2008 and 2009. These lines are parallel, but 2009 line is below 2008 line, which means that the rate of change in the number of trips to/from Ireland did not change between 2008 and 2009, but the intercept declined year on year. In other words, this deterioration in trips to/from Ireland has nothing to do with continuous recession (slope effect), but everything to do with a consistent travelers' selection against Ireland as a destination. The same is confirmed by comparison of the yellow line (2009 trend) against the green line (2008 & 2009 trend), as well as by comparison of pre-2008 trend line (blue) against the 2008&2009 trend line (green).

Economics 21/11/2009: State Directors Fees

Per RTE report (here), Anglo's 'Public Interest' directors are being paid handsomely for their gargantuan efforts to... do exactly what? Steer the bank out of trouble? Not really, Anglo is not any better today than a year ago. Carry out its ordinary business? Not really, Anglo is not doing any new business at all and is in effect sitting pretty until Nama cleans up the mess. Safeguard public 'investment'? Not really, for no one sane really expects any return from this 'investment'. So what exactly do these 'Public Interest' director do? No one dares to ask. 

In the mean time, Alan Dukes and Frank Daly - two, in my view fine individuals - collect public retirement pay and are receiving €99,360 each in fees from a publicly-owned Anglo. A figure more than six times the compensation for directors of other State bodies.

But things are not much better in BofI (where Tom Considine and Joe Walsh received total fees to €102,375 and Joe Walsh's to €78,750). AIB in contrast paid Dick Spring and Declan Collier €27,375 and also topped these with €3,000 for each committee meeting attended. IL&P's public guardians, Ray MacSharry (fees of €56,250) and Margaret Hayes (€63,500) were handsomely well off as well. At EBS, Tony Spollen and Ann Riordan both receive a basic fee of €29,000 each. State appointed noble folks of Nationwide, Rory O'Ferrall and Adrian Kearns, in line with a long-running tradition at the building society to behave like a secretive private bank, simply didn't disclose their earnings to the public.

Further irony: fully state-owned Anglo pays second highest rate to its non-execs, while the Irish Government is flustered with privately held banks (AIB & BofI and the rest of privately held 5) executives' remuneration. It looks like someone (Minister Lenihan?) can't control his own organization (Anglo), while trying to play tough with organizations he has little stake in. Oh, incidentally, the fees for Dukes & co were set on the 'recommendation' by the State own 'commission' - another state body that Minister Lenihan apparently cannot reign in.

Expected annual cost (inclusive of expected, but not disclosed fees) €760,000 plus.

After having a quick chat with few friends in academia, here is a bold proposal for the Minister for Finance - you can find at least 12 senior and experienced academics and industry practitioners, including my self, who would do these jobs for €10,000 per annum plus expenses. As a real exercise in our patriotic (Minister Lenihan's words from last Budget) duty.

How about it, Minister? You promise left right and center that you will save taxpayers money. Here is a chance to do so. Some €640,000 of taxpayers money!

Oh and while we are on the topic of silly/dodgy political news - there is a recent report in the US (here) that argues that President Obama evokes Jesus and God more frequently than his predecessor. Not that I have a problem with this myself, but I wonder what all the European 'Liberals' would make of this...

Economics 16/11/2009: Notes on Banks post-Nama & Eurozone recovery

There is an excellent issue on Financial Sector Regulation published tonight by The Economists' Voice of BE Press (free link here), it also contains a superb article by Rob Schiller of Yale on housing bubble.

Oh, and per today's Bloxham note: "...media speculation is suggesting that Anglo needs a €5.7bn capital injection if it is to continue lending. Finance Minister Lenihan said on November 13th that a second capital injection won't be needed, but reports now suggest that if Anglo is to form part of a new banking force in Ireland the eventual cost will be in the region of 5.7bn to meet international capital adequacy levels. Finally the report suggests that a wind down option is now believed to be gathering support in the Dept of Finance."

Hmmm, see my blogpost here. Two weeks ago I predicted this same exactly number - 5.7bn as the upper envelope of the capital demand from Anglo... Glad to see media now catching up...

Watch tomorrow's Mail for my comment on why Anglo can be wound up at a lower cost than continuing the sorry saga of the bank...


Now to news:


You all heard the news: five consecutive quarters of economic contraction later, and the euro area's economy finally grew by 0.4% in Q3 2009. Anemic (as in expectations were for 0.5%) but this does mark the region's exit from its worst recession since World War II.

Eurostat has yet to release a breakdown of the third quarter, but it looks like exports were the drivers for growth. Of course, the other side of the economic equation - European consumers - is still stalled in the quick sands and is now gearing up for higher taxes, lower incomes and permanently higher unemployment in years to come. All of this as the Euro area's debt to GDP ratio is now heading for 100% by 2014. For comparison, US National Debt today stands at around $11,996bn or 96.5% of GDP.

Back to Europe: France expanded by 0.3% (0.6% growth was expected by the markets), Germany grew by 0.7%, (against 0.8% expectation).

Now, Ireland's GDP was stagnant per Q2 2009, while GNP fell another 0.5%. Technicality might be that Ireland will post a positive growth in Q3 2009, but that would mean preciously little: Irish GDP is extremely volatile and another negative correction might be easily coming in Q4 2009 / Q1 2010. This volatility is driven by exports' mammoth share of the country GDP.

Lastly, there is a problem of European fiscal and monetary stimuli - both covered by me before. Once unwinding begins, even the stronger economies of Europe are not immune from a sudden growth reversal. what's there to say about Ireland, Spain and Greece?..


And on a separate note couple of thoughts concerning Nama's passage:

There is an excellent article in the October issue of the US version of Vanity Fair magazine about the legacy of TARP. To remind you - TARP is a US programme to help struggling banks that:

• started its life with an idea of purchasing distressed assets off the banks' balancesheets (just like Nama),
• ended up purchasing common and preferred equity in the banks;
• overpaid grossly (to the tune of 30%) for the equity bought (even though unlike in the case of Nama there was a ready and functioning market for these banks' shares); and
• like Nama promised to deliver easing of the credit crunch conditions.

Now, a year from its inception, we know that TARP:

• resulted in banks taking Government cash and parking it in Government bonds, lending out virtually nothing;
• was immediately followed by a severe tightening of existent lending contracts and revisions of performing loans to squeeze more cash out of households;
• has led to multiple defaults by cash-strapped students, homeowners and credit card holders as banks are going on with their business rebuilding profit margins.

Any idea now what we can expect from post-Nama Irish Banking sector? Or with that ESRI estimate of 300,000 households at risk of negative equity?

Economics 15/11/2009: When Ryanair gets serious...

Per my continued opposition to absurd tax measures, see the following statement from Ryanair and my comment below:

Apart from landing another rainy cloud on Mrs Coughlan's fine parade (after all it does call Tanaiste out as being somewhat disingenuous in her claims), this statement is worth looking at a bit closer:

If the Irish economy is losing €600mln in tourism revenue, the VAT on this loss will likely be ca €80-100mln (as some services bear reduced VAT). This is the first round of losses to the Exchequer.

But every euro spent by a tourist in this country goes to pay for goods and services here, which in turn generates banks deposits and payments to suppliers. These payments are then used to generate new economic activity, thus triggering a second round of tax receipts. And the merry-go-round then goes on to the third round and so on. 

Given the average OECD private spending multiplier is approximately equal to the M1/M3 multiplier, which is roughly 3.8-6 (depending on the range of years chosen, with the lower number coincidentally referring to the years of the most recent global markets boom), then these losses are indeed much greater than those claimed in Ryanair note. 

Back of the envelope calculation suggests the Exchequer will be foregoing some €120-250 million more in revenue on top of the first round losses. And this is before we factor in income taxes and other taxes, such as charges on fuel that foreign motorists might pay while touring Ireland.

So we are now back to the old equation: put a €10 tax in place, lose some €100-230 million in revenue. Good luck running the country with these mathematics...

Note: that article attacking my and Ryanair analysis of the travel figures that predicted the yet-to-materialise substitution effects of Irish travel tax is available from the Irish Times site (here).

Economics 14/11/2009: Irish Insitituional Accounts 2008

CSO is not the quickest of institutions when it comes to timely release of data, so when it comes to Institutional Accounts, all we have to go for now is 2008 end of year data released earlier this week. Here is my take on it.
Chart above shows broad GDP composition. The decline in GDP in 2008 is pronounced and it is relatively clear that Non-Financial Corporations lead the way in driving down our gross domestic product. To see this in more details, consider the decomposition below:
Absent real growth in private sectors, public sector becomes more pronounced. In other words, as overall economy decline, public spending picks up in relative terms. Everything else is tanking. Not surprising, really. But in percentage terms, this is throwing some additional insights (below):Now, the story of our economic downturn is very much in full view - productive part of domestic economy (non-financial corporations and households and financial sector) is in deep retreat. Non-productive public deficit financing of state consumption is swinging into positive. Also, note that household contribution fall off is pretty much in line with financial sector fall off. This is indicative of the fact that (as I have argued consistently before) our financial crisis was not caused by external forces of credit crunch, but by internal mountains of bad debts accumulated by corporates and households.

Another point from above is just how dire are the conditions in non-financial corporate sector. Only a fool would believe that this precipitous collapse in the relative share of GDP accruing to non-financial companies in Ireland can be repaired by injection of more debt into the system.
Chart above shows that Net National Income (NNI=GNI-depreciation, GNI=GDP+net receipts from abroad of wages and salaries and of property income), which by its definition nets out along with depreciation some of the effects of transfer pricing has fared pretty much in line with GDP. Interestingly, households contribution to NNI is in excess of their contribution to GNP, suggesting lower depreciation and potentially rising inflows of income from abroad when it comes to Irish households. It also reflects the outflow of foreign workers (either out of Ireland or onto unemployment benefits), reducing income outflow out of the country. General Government line shows clearly that net income multiplier of government spending is negative - which is logical when you consider the fact that the Government borrows from abroad to finance current spending at home.
Percentage contributions to NNI are equally revealing of the fact that Government spending cannot be seen as income-additive when it comes to net income accruing to this country. Remember - per earlier slides, Government spending was a positive contributor to GDP, but a negative contributor to NNI.
Gross operating surplus in the economy fell in 2008 across all private sectors and rose for Government sector. Why? Because while talking about the need to correct deficit, to cut spending and to take tough measures necessary to rebuild exchequer finances, our leaders were all too keen to actually pre-borrow as much as possible before 2009 hit. 'Do as I say, not as I do' is the motto...And thus net savings collapsed for Irish Exchequer as net borrowing soared. In contrast, households - scared first by rising joblessness and tanking stock markets and collapsed house prices, then by Leni's VAT measures and Government's inability to act - have moved early on into precautionary savings. Good for them - Irish non-financial corporations, in contrast decided to cut their savings - a sign of debt overhang in a recession. This means that overall, Irish corporations will emerge from this crisis with no spare cash to sustain restart of capital investment. This might be a good thing, given that over the last 10 years, most of Irish corporate 'investment' involved buying up competitors' firms at peak market valuations in a hope that if you make your company bigger, it will grow faster.

External balance has improved, but underlying it, trade flows to and from Ireland have come under pressure:
To nobody's surprise, net worth fell off the cliff in 2008 for the entire economy, although household savings allowed for a rise in their net worth position. 2008 marked the first year in modern history when Irish households net worth exceeded that of the Irish Government. Just think about it: the state dependent on taxpayers has had higher net worth than those who financed it... Spot anything here? How about 'fairness' idea our political leaders love waving around.Net lending positions (above) are also self-explanatory. But here is an interesting angle on CSO's data:
While Government share of GDP rose, its share of Net National Income declined. Even more dramatically, Government share of net disposable income fell even faster than that of NNI. Why? Because as Government deficit went through the roof, net disposable income fell -4.66% which is even faster than GDP (-4.18%). How? One word: Taxes!

Economics 12/11/2009: ECB's latest view

I will be blogging on the latest monthly bulletin from ECB published today, but here are few early previews:

One interesting snapshot showing just how silly is all the talk about decoupling in growth between emerging economies and the West:
Since mid 2008 there is absolutely no difference in leading indicators for two series. So anyone still thinks that emerging markets up 90% in a year is a good thing?

And here is a latent illustration of the trend I described some weeks ago using raw ECB data:
Of course anyone knows by now that money supply is not growing, despite the ECB vastly expanded liquidity pumping operations as banks hoard cash in capital reserves, while Government mop up all and any liquidity they can get into their vast deficit financing exercises. Clearly, M3 is showing that things are going swimmingly in the euro area economy.

Don't believe me? Well, here is another illustration:
So things are not getting much better on the credit markets side. The mountain of debt on private sector side is still intact, the mountain of debt on Governments' side is rapidly rising. Hardly a sound exit from the crisis.