I will be blogging on the latest story from the 'emerging' economy of Ireland - emerging, allegedly from the recession - in a few hours time, so stay tuned. But for now, while cooking the dinner for my 3-year old let me bring to you the latest news from the 'Knowledge' economy Ireland.
Now, as a researcher I must admit, I know first hand that electronic editions of scientific journals are the sole source of published refereed research material I consult on a daily basis. Physical copies are too hard to use in modern research and archiving. And they arrive with a significant delay. And are environmentally less sustainable than e-versions.
Thus, electronic journals access is a must for any modern research in any field.
And here comes a bomb: Access to e-journals might be dropped by Irish Universities in 2010. Courtesy of the Science and Research strategy from the Government that just a week ago was science and research as the main strategy for our economic revival.
Here are the details from a leaked memorandum... I suppress personal names...
"Dear Fellows and Fellows Emeriti,
This note has been prepared by Dr F.B. of ... (Academic Department).
...alerting all interested parties including students that the Irish Government is about to burn the books. The universities of a knowledge based society must have access to electronic journals.
signed DMcC
Chairman of ... (academic body)
Dear All
Last night the Librarian ...briefed the Fellows on the current state of play with regard to the IREL/ on-line journal access service.
The position is not good and could have serious implications for staff and students at all Irish universities.
Briefly and from memory, the facts are as follows.
The service costs about €8-€8.5 million a year. Up to now, about €4.5m of this has been paid by SFI for science technology and medicine titles, but SFI have always said that their commitment was in the form of seed money and are now withdrawing their support. The HEA, which paid €4 million for humanities and social sciences titles are also stretched. But they may come up with some money. The worst case scenario may be €2 million, the best €3.5 million all from the HEA.
The IUA have been approached about bridging the gap, but either cannot or will not provide the ~€5+ million needed.
...In the short end of the medium term it will cripple research activity and undermine teaching in most areas throughout the universities...
Signed: FB"
Let me give you my quick 5-cents on this. E-journals access in Ireland is already relatively restricted compared to the US & UK universities. Cutting what we do have access to will simply mean plunging our science into the dark age of physical print, slow mail and distant archiving. In the age when Google and Microsoft are racing each other to put libraries on line, and IDA is promoting Ireland as a knowledge and innovation campus for global business, the savings of some €5-6 million at the cost of disconnecting Irish science and students from the rest of the world is just mad.
Thursday, December 17, 2009
Wednesday, December 16, 2009
Economics 16/12/2009: Budget 2010 Analysis
As promised - here is my more in-depth view of the Budget 2010. This is an un-edited version of the Sunday Times (13/12/2009 issue) article.
After weeks of leaks, speculations and over-dramatized Partnership talks, this week Brian Lenihan has delivered the final move in the Government v Economy chess game. Lisbon, Nama and the Budget 2010, we were promised, were all that the Cabinet had to do in 2009 in order to manage the nation through the worst economic storm in its history.
In its last stance of 2009 the Government has reluctantly and belatedly recognised the reality of the crisis we face. Thus, the Budget has done just about enough to delay our descent into the nightmarish company of Greece. For this Brian Lenihan deserves praise.
A Chance at Reforms - Missed
But the net outcome of the Budget 2010 is that we are now entering the third year of recession with virtually no reforms that can support future growth.
There is no real stimulus to the rapidly contracting private sector. Cost efficient and much needed export credits are not in and neither are foreign exchange risk supports – the two cornerstone policies for sustaining exports, especially for indigenous companies.
Taxes remain regressively skewed toward ‘soaking the rich’, by which the Government means the middle class. As in 2009, the burden of taxation in 2010 will be borne squarely by those in the most productive employment with above average skills and aptitude. If a combination of consumption and income taxes accounted for under 68.9% of total tax revenues in 2009, by the end of the next year these taxes will account for 70.3% of total tax take.
Today, some 40% of Irish households deliver 90% of non-corporate dosh for the Exchequer. By the end of 2010, given current trends in unemployment and wages, this ‘honor’ will befall just 37% of households. This is hardly a sign of resilience in the economy.
In 2009, 4% of top earners – many of whom are wealth and jobs creating entrepreneurs and business owners – pay 50% of total income tax. Next year, we are risking to hike this share to 55%. This is hardly a sign of the economy promoting jobs growth.
Should Ireland-based multinationals reduce their transfer pricing activities in 2010 – a prospect consistent with a possibility of a restart of new investment cycle in Asia and the US – an even greater share of the burden of paying for public sector expenditure will be falling onto the shoulders of rapidly thinning minority who still have higher value-adding jobs.
Cuts to unemployment benefits in excess of reductions to social welfare imply that Budget 2010 only strengthened the incentives to transfer from unemployment benefits roster onto social welfare for anyone in long-term unemployment. This will lead a decline in labour force participation rates throughout 2010. Paradoxically this will result in lower official unemployment but a higher cost to the taxpayers.
Uncompetitive Costs Base - Remains Intact
The Budget has done nothing to address the issue of uncompetitive costs imposed onto businesses by our state-owned utilities and suppliers of services. It also did nothing to address excessively high local authorities’ charges and rates.
A net positive of the Budget was honorable mentioning of the internationally trading financial services. However, it remains to be seen what exactly will be done on this front.
Brian Lenihan missed another chance of reforming our business-crippling quangoes. In doing so, the Budget failed to recognize the real damages state and local authorities’ costs inflation poses to the survival of both domestic and exporting companies. If anything, the Budget further expanded the Fas empire – an unchecked state behemoth that yields dubious benefits and wastes hard cash in truckloads. The policy, it seems, is to shove more unemployed into perpetual training programmes with little hope of gainful employment in the foreseeable future.
A failure to introduce university fees means that our education system will spend another year mired in funding uncertainty. It will also mean that many graduating students will desperately cling to education for another 1-2 years. For some, this is a productive opportunity to invest further into their future skills. For many, however, it is an unnecessary extension of studies that will not lead to any meaningful skills augmentation but will consume precious resources. Classroom sizes will rise, international rankings will be threatened, but we will increase output of devalued in quality degrees, certificates and diplomas.
Retaining prohibitively high rates on PRSI, health and income will undoubtedly keep jobs growth on ice. Other, so-called soft labour costs, could have been tackled through simple measures, such as for example abolishing risk equalization scheme in health insurance to lower the costs of employees benefits. These opportunities were missed.
Banking Sector Costs - Unpriced
There are no provisions whatsoever for the banking sector in the Budget. Yet, two future developments with respect to the sector are now virtually assured for 2010.
First, we are likely to see significant demands from the banks for new capital. My estimates suggest that our six banking institutions will need €9.7-12.4 billion in capital post-Nama. If even a half of this falls in 2010, Budget deficit risks reaching 14.5% of GDP. The only way to avoid such a debacle will be to use Nama as a vehicle for issuing even more State-guaranteed bonds. This will make Ireland even more dependent on ECB’s good will.
Second, the Minister has introduced a set of new conceptual frameworks for using Nama to apply pressure on lenders to increase funding for SMEs and distressed households. All are ambivalent, although well-meaning, and all are regressive when it comes to securing stable future for our banking system. None will actually expand real lending.
Structural Deficit - Unaddressed
The Budget has failed to significantly tackle our structural deficit. The pre-Budget projections suggested that Brian Lenihan was facing €14-16 billion worth of structural deficit. The Budget promises to reduce this number to €10-12 billion. Even if this comes to pass the Government is now facing two stark choices. One – hope for a spectacular recovery from the crisis with an average rate of growth in the economy of over 5% per annum over the next 5 years. In this case, the Government will need to cut some €4-6 billion more in 2011 and 2012. Two – take the medicine and cut at least €8 billion in 2011. We have clearly opted for the first option to the detriment of the future growth.
Carbon Tax - More of the Same
Carbon tax introduction is a purely revenue raising and economically distortionary measure. In theory, carbon tax should alter environmentally harmful behavior of consumers and producers, pushing them to adopt cleaner technologies and habits, thus gradually reducing carbon tax revenue. Alas, in the case of Ireland, years of poor planning and zoning, successions of absurd spatial development plans and politically motivated capital investment programmes have resulted in a situation where many Irish consumers and producers have no room for altering their choices. Living and working in the Greater Dublin area often means no alternative but to use a car to commute to work, or even to visit grocery stores. The same can be said about all other parts of the country. Our family structures – with high fertility and dispersed households – mean that many of us have no choice but to do school runs in a car, to undertake international air travel and to deal with employment patterns that do not favor efficient time management that can be conducive to reducing emissions. Ireland’s shambolic (in quality and scope) public transport system simply compounds the lack of choices.
Hence, despite its ‘Green Policy’ label, carbon tax is nothing more than an extension of an income tax with all the associated disincentives when it comes to higher value-added jobs creation in Ireland. Irony has it, transforming this economy into more human capital intensive and thus environmentally cleaner ‘knowledge’-based one is an objective poorly served by the carbon tax introduction.
On the net, Budget 2010 turned out to be more a whimper than a bang. Whether or not it will pave the way for economically more constructive policies in 2010 remains to be seen. But the task left unfinished is daunting – Ireland will need to cut some €10-12 billion more off the Exchequer annual bill in 2011 through 2012. So far, we’ve only made a first step in a longer journey.
Box out:
In light of this week’s events, it worth quickly revisiting one aspect of our budgetary trends – their frightening stickiness to historic targets that runs contrary to any change in the underlying economic realities. Looking at Budget 2007 estimates, one gets a sense of history playing a cruel trick on Department of Finance forecasting section. Back then, the Department projected a steady rise in spending from ca €45.5 billion to ca €58 billion in 2009. In line with this, the revenue was expected to rise from ca €47 billion in 2006 to roughly €58 billion in 2009. What actually happened between then and now is that the expenditure has shot up, settling at above €60 billion in 2009, while revenue has fallen to below €35 billion. Thus, Department for Finance forecasters were almost 97% right on the expenditure forecast side, but some 60% wrong on their revenue predictions. This implies an error swing of some160 points for the Department of Finance. A random error would be consistent with a 50-point range between two calls. In household economics such accuracy of forecasting could earn one a trip to a debt court. In public sector it guarantees the job for life and a nice tidy pension at the end of an errors-prone journey. Accountability is not really a strong point of Ireland Inc.
After weeks of leaks, speculations and over-dramatized Partnership talks, this week Brian Lenihan has delivered the final move in the Government v Economy chess game. Lisbon, Nama and the Budget 2010, we were promised, were all that the Cabinet had to do in 2009 in order to manage the nation through the worst economic storm in its history.
In its last stance of 2009 the Government has reluctantly and belatedly recognised the reality of the crisis we face. Thus, the Budget has done just about enough to delay our descent into the nightmarish company of Greece. For this Brian Lenihan deserves praise.
A Chance at Reforms - Missed
But the net outcome of the Budget 2010 is that we are now entering the third year of recession with virtually no reforms that can support future growth.
There is no real stimulus to the rapidly contracting private sector. Cost efficient and much needed export credits are not in and neither are foreign exchange risk supports – the two cornerstone policies for sustaining exports, especially for indigenous companies.
Taxes remain regressively skewed toward ‘soaking the rich’, by which the Government means the middle class. As in 2009, the burden of taxation in 2010 will be borne squarely by those in the most productive employment with above average skills and aptitude. If a combination of consumption and income taxes accounted for under 68.9% of total tax revenues in 2009, by the end of the next year these taxes will account for 70.3% of total tax take.
Today, some 40% of Irish households deliver 90% of non-corporate dosh for the Exchequer. By the end of 2010, given current trends in unemployment and wages, this ‘honor’ will befall just 37% of households. This is hardly a sign of resilience in the economy.
In 2009, 4% of top earners – many of whom are wealth and jobs creating entrepreneurs and business owners – pay 50% of total income tax. Next year, we are risking to hike this share to 55%. This is hardly a sign of the economy promoting jobs growth.
Should Ireland-based multinationals reduce their transfer pricing activities in 2010 – a prospect consistent with a possibility of a restart of new investment cycle in Asia and the US – an even greater share of the burden of paying for public sector expenditure will be falling onto the shoulders of rapidly thinning minority who still have higher value-adding jobs.
Cuts to unemployment benefits in excess of reductions to social welfare imply that Budget 2010 only strengthened the incentives to transfer from unemployment benefits roster onto social welfare for anyone in long-term unemployment. This will lead a decline in labour force participation rates throughout 2010. Paradoxically this will result in lower official unemployment but a higher cost to the taxpayers.
Uncompetitive Costs Base - Remains Intact
The Budget has done nothing to address the issue of uncompetitive costs imposed onto businesses by our state-owned utilities and suppliers of services. It also did nothing to address excessively high local authorities’ charges and rates.
A net positive of the Budget was honorable mentioning of the internationally trading financial services. However, it remains to be seen what exactly will be done on this front.
Brian Lenihan missed another chance of reforming our business-crippling quangoes. In doing so, the Budget failed to recognize the real damages state and local authorities’ costs inflation poses to the survival of both domestic and exporting companies. If anything, the Budget further expanded the Fas empire – an unchecked state behemoth that yields dubious benefits and wastes hard cash in truckloads. The policy, it seems, is to shove more unemployed into perpetual training programmes with little hope of gainful employment in the foreseeable future.
A failure to introduce university fees means that our education system will spend another year mired in funding uncertainty. It will also mean that many graduating students will desperately cling to education for another 1-2 years. For some, this is a productive opportunity to invest further into their future skills. For many, however, it is an unnecessary extension of studies that will not lead to any meaningful skills augmentation but will consume precious resources. Classroom sizes will rise, international rankings will be threatened, but we will increase output of devalued in quality degrees, certificates and diplomas.
Retaining prohibitively high rates on PRSI, health and income will undoubtedly keep jobs growth on ice. Other, so-called soft labour costs, could have been tackled through simple measures, such as for example abolishing risk equalization scheme in health insurance to lower the costs of employees benefits. These opportunities were missed.
Banking Sector Costs - Unpriced
There are no provisions whatsoever for the banking sector in the Budget. Yet, two future developments with respect to the sector are now virtually assured for 2010.
First, we are likely to see significant demands from the banks for new capital. My estimates suggest that our six banking institutions will need €9.7-12.4 billion in capital post-Nama. If even a half of this falls in 2010, Budget deficit risks reaching 14.5% of GDP. The only way to avoid such a debacle will be to use Nama as a vehicle for issuing even more State-guaranteed bonds. This will make Ireland even more dependent on ECB’s good will.
Second, the Minister has introduced a set of new conceptual frameworks for using Nama to apply pressure on lenders to increase funding for SMEs and distressed households. All are ambivalent, although well-meaning, and all are regressive when it comes to securing stable future for our banking system. None will actually expand real lending.
Structural Deficit - Unaddressed
The Budget has failed to significantly tackle our structural deficit. The pre-Budget projections suggested that Brian Lenihan was facing €14-16 billion worth of structural deficit. The Budget promises to reduce this number to €10-12 billion. Even if this comes to pass the Government is now facing two stark choices. One – hope for a spectacular recovery from the crisis with an average rate of growth in the economy of over 5% per annum over the next 5 years. In this case, the Government will need to cut some €4-6 billion more in 2011 and 2012. Two – take the medicine and cut at least €8 billion in 2011. We have clearly opted for the first option to the detriment of the future growth.
Carbon Tax - More of the Same
Carbon tax introduction is a purely revenue raising and economically distortionary measure. In theory, carbon tax should alter environmentally harmful behavior of consumers and producers, pushing them to adopt cleaner technologies and habits, thus gradually reducing carbon tax revenue. Alas, in the case of Ireland, years of poor planning and zoning, successions of absurd spatial development plans and politically motivated capital investment programmes have resulted in a situation where many Irish consumers and producers have no room for altering their choices. Living and working in the Greater Dublin area often means no alternative but to use a car to commute to work, or even to visit grocery stores. The same can be said about all other parts of the country. Our family structures – with high fertility and dispersed households – mean that many of us have no choice but to do school runs in a car, to undertake international air travel and to deal with employment patterns that do not favor efficient time management that can be conducive to reducing emissions. Ireland’s shambolic (in quality and scope) public transport system simply compounds the lack of choices.
Hence, despite its ‘Green Policy’ label, carbon tax is nothing more than an extension of an income tax with all the associated disincentives when it comes to higher value-added jobs creation in Ireland. Irony has it, transforming this economy into more human capital intensive and thus environmentally cleaner ‘knowledge’-based one is an objective poorly served by the carbon tax introduction.
On the net, Budget 2010 turned out to be more a whimper than a bang. Whether or not it will pave the way for economically more constructive policies in 2010 remains to be seen. But the task left unfinished is daunting – Ireland will need to cut some €10-12 billion more off the Exchequer annual bill in 2011 through 2012. So far, we’ve only made a first step in a longer journey.
Box out:
In light of this week’s events, it worth quickly revisiting one aspect of our budgetary trends – their frightening stickiness to historic targets that runs contrary to any change in the underlying economic realities. Looking at Budget 2007 estimates, one gets a sense of history playing a cruel trick on Department of Finance forecasting section. Back then, the Department projected a steady rise in spending from ca €45.5 billion to ca €58 billion in 2009. In line with this, the revenue was expected to rise from ca €47 billion in 2006 to roughly €58 billion in 2009. What actually happened between then and now is that the expenditure has shot up, settling at above €60 billion in 2009, while revenue has fallen to below €35 billion. Thus, Department for Finance forecasters were almost 97% right on the expenditure forecast side, but some 60% wrong on their revenue predictions. This implies an error swing of some160 points for the Department of Finance. A random error would be consistent with a 50-point range between two calls. In household economics such accuracy of forecasting could earn one a trip to a debt court. In public sector it guarantees the job for life and a nice tidy pension at the end of an errors-prone journey. Accountability is not really a strong point of Ireland Inc.
economics 16/12/2009: Unemployment and Jobs Destruction in Ireland
QNHS data is out for Q3 2009 and guess what... well, nothing new, really. Official unemployment rate is now 12.4% - just 10bps away from the Live Register-based Q3 average estimate of 12.5%. The cheerleaders are shouting 'A slowdown in the rate of growth in unemployment! Happy times ahead!'
But the real world data shows much darker picture. The biggest problem with unemployment is how you define it. If a person would like to have a job but is so discouraged by the labor market that he or she decide to stop looking for one, then they are not in the labor force and thus are not unemployed. Similarly, if a person had a job and upon losing it moves out of the country is search of better prospects elsewhere, then they are no longer unemployed. And if a person, disheartened by the prospect of long-term unemployment simply stops answering CSO phone calls, then she is also not unemployed.
But in the real world, all of these people are unemployed. All of these people's lives are lost in the economy even if they are not measured by the CSO.
This is not to criticise the ways in which CSO collects data. That is not the point. The point is that we need to understand just how many jobs were lost and not regained during the current crisis. And this we can glimpse from the QNHS data.
In Q3 2009 total employment fell 40,200 on Q2 2009. In 12 months to the end of Q3 2009, Irish economy shed net of 183,400 jobs - the rate of loss of 8.8% or the highest rate of jobs destruction on the record. In the course of this recession, we have now lost some 236,300 jobs.
Let's do the maths. The above losses imply:
And the problem of falling labor force is a sticky one. The overall participation rate has contracted from 64.2% in Q3 2008 to 62.5% in Q3 2009.
Much of the fall in the labor force is being driven by:
And so on the net, CSO data shows that while unemployment climbed by roughly 120,000 over the last 12 months, the actual fall in employment was 185,000 or 65,000 greater. It is the net loss of jobs figure that is more telling of the realities of Irish unemployment than the headline unemployment rate.
Finally, courtesy of Ulster Bank - a table showing that unlike in earlier QNHS releases, Q3 saw industry displacing construction sector as the main source of jobs destruction:
This is another batch of bad news for anyone who, like our Minister for Finance, believes that things are past their worst. In addition, notice that wholesale & retail trade is about to take over construction as the second greatest contributor to unemployment. Wait until Christmas sales are over for that...
But the real world data shows much darker picture. The biggest problem with unemployment is how you define it. If a person would like to have a job but is so discouraged by the labor market that he or she decide to stop looking for one, then they are not in the labor force and thus are not unemployed. Similarly, if a person had a job and upon losing it moves out of the country is search of better prospects elsewhere, then they are no longer unemployed. And if a person, disheartened by the prospect of long-term unemployment simply stops answering CSO phone calls, then she is also not unemployed.
But in the real world, all of these people are unemployed. All of these people's lives are lost in the economy even if they are not measured by the CSO.
This is not to criticise the ways in which CSO collects data. That is not the point. The point is that we need to understand just how many jobs were lost and not regained during the current crisis. And this we can glimpse from the QNHS data.
In Q3 2009 total employment fell 40,200 on Q2 2009. In 12 months to the end of Q3 2009, Irish economy shed net of 183,400 jobs - the rate of loss of 8.8% or the highest rate of jobs destruction on the record. In the course of this recession, we have now lost some 236,300 jobs.
Let's do the maths. The above losses imply:
- €13, 450 million in lost economic activity in Ireland
- €1,500 million in lost income tax to the Exchequer (using lower rate and no income levies)
- €3,750 million in lost consumption
- €675 million in lost VAT receipts, and so on
And the problem of falling labor force is a sticky one. The overall participation rate has contracted from 64.2% in Q3 2008 to 62.5% in Q3 2009.
Much of the fall in the labor force is being driven by:
- long term unemployment pushing people into permanent welfare traps;
- exits from the workforce by students who are at a risk of completing new education and not finding new jobs afterward (for 15-19 yo participation rate has fallen to 22.7% from 30.8% a year ago, while for 20-24 yo group it stands at 72.9% as opposed to 77.4% a year ago), and
- emigration.
And so on the net, CSO data shows that while unemployment climbed by roughly 120,000 over the last 12 months, the actual fall in employment was 185,000 or 65,000 greater. It is the net loss of jobs figure that is more telling of the realities of Irish unemployment than the headline unemployment rate.
Finally, courtesy of Ulster Bank - a table showing that unlike in earlier QNHS releases, Q3 saw industry displacing construction sector as the main source of jobs destruction:
This is another batch of bad news for anyone who, like our Minister for Finance, believes that things are past their worst. In addition, notice that wholesale & retail trade is about to take over construction as the second greatest contributor to unemployment. Wait until Christmas sales are over for that...
Tuesday, December 15, 2009
Economics 15/12/2009: Denmark cuts 2010 deficit by almost 50%
An interesting way of dealing with deficits: Denmark shows the way to lower taxes and deferred tax liabilities, while restructuring public expenditure away from direct spending to more pro-business, growth oriented spending. Read the details here.
Another interesting key fact: "The general government budget balance is estimated to decrease by DKK 154bn from 2008 to 2010. This corresponds to a reduction of 8.9 per cent of GDP of which one third reflects the loosening of fiscal policy... Measured by the fiscal effect fiscal policy is estimated to stimulate economic activity by 1.0 per cent of GDP in 2009."
So run this by me again? Cut balance by 8.9%, of which roughly 3% of GDP goes to fiscal spending to generate growth of ca 1%. suggested multiplier? Lowly 30cents on the euro... or rather DKK... not exactly a big bang for a buck, given that over 5 years interest alone would eat up some 15.8 cents out of this amount.
Another crucial bit: "The deficit on the central government net balance, which is essential for the central government debt, is estimated at DKK 141½bn in 2009 and 74½bn in 2010." Implied cut in deficit 2009 to 2010 is 49.6%. Irish Government approach to the cuts (see my estimates here) is to cut 15.2% of the deficit (if no banks recapitalization is taken into the account) or under 1% reduction (if banks recapitalization is factored in at €4 billion in 2010). DofF own rosy projections imply a cut in the deficit of 29.7%, which is still shallower than Denmark's.
So, the Siptunomics is not what Denmark subscribes to when it comes to fiscal discipline.
Another interesting key fact: "The general government budget balance is estimated to decrease by DKK 154bn from 2008 to 2010. This corresponds to a reduction of 8.9 per cent of GDP of which one third reflects the loosening of fiscal policy... Measured by the fiscal effect fiscal policy is estimated to stimulate economic activity by 1.0 per cent of GDP in 2009."
So run this by me again? Cut balance by 8.9%, of which roughly 3% of GDP goes to fiscal spending to generate growth of ca 1%. suggested multiplier? Lowly 30cents on the euro... or rather DKK... not exactly a big bang for a buck, given that over 5 years interest alone would eat up some 15.8 cents out of this amount.
Another crucial bit: "The deficit on the central government net balance, which is essential for the central government debt, is estimated at DKK 141½bn in 2009 and 74½bn in 2010." Implied cut in deficit 2009 to 2010 is 49.6%. Irish Government approach to the cuts (see my estimates here) is to cut 15.2% of the deficit (if no banks recapitalization is taken into the account) or under 1% reduction (if banks recapitalization is factored in at €4 billion in 2010). DofF own rosy projections imply a cut in the deficit of 29.7%, which is still shallower than Denmark's.
So, the Siptunomics is not what Denmark subscribes to when it comes to fiscal discipline.
Monday, December 14, 2009
Economics 14/12/2009: Nama comparatives
It was an honor today to speak on the issues of Nama and the future of Irish development and construction sectors at the gathering of a number of architects put together by FKL Architects (see the site here). The panel that I was a part of was very engaging and, despite my disagreement with some of its members on the matters of policy, very informative. And the event, highlighted at the above site, was very interesting and engaging - some cool ideas out there, at least to my non-professional eye.
After the event, I was exchanging a couple of views with the representative of our construction sector, who agreed with my prediction that by the end of this crisis, Irish construction sector will shrink to no more than 5% of GNP or just 20% of its pre-crisis peak. And that the risk is for our construction sector to remain at that level (instead of rising to a healthy 10-12% level) for a very long period of time.
Alas, something else has driven me to a realisation that anyone who is hoping for stabilization of our property values at their current (or near) price is inhabiting an invented reality. This:
Now, think of this...
A four-bedroom, two-bath brick historic federal in Little Falls, N.Y., a city of about 5.000 on the Erie Canal, is on the market for $250,000, the house was built in 1827 and is on the National Register of Historic Places.
Off the house's center hall are east and west parlors. Both have fireplaces.
Though it has been renovated several times over the years, it retains some original details, including mantels, and some pine and chestnut flooring.
All four bedrooms are on the second floor, two with original pine and chestnut flooring and one with a fireplace and a walk-in closet.
Ok... I can go on and on, but... check it out for yourselves here. And all for €170,000 in one of the wealthiest states of the nation that is the wealthiest on planet Earth.
My prognosis - median price in Ireland in real terms (2009 Euros) of €120,000 by the end of this crisis. Why? Because there is no reason why our average homes should be trading above 4bed historic properties in upstate New York. None.
After the event, I was exchanging a couple of views with the representative of our construction sector, who agreed with my prediction that by the end of this crisis, Irish construction sector will shrink to no more than 5% of GNP or just 20% of its pre-crisis peak. And that the risk is for our construction sector to remain at that level (instead of rising to a healthy 10-12% level) for a very long period of time.
Alas, something else has driven me to a realisation that anyone who is hoping for stabilization of our property values at their current (or near) price is inhabiting an invented reality. This:
Now, think of this...A four-bedroom, two-bath brick historic federal in Little Falls, N.Y., a city of about 5.000 on the Erie Canal, is on the market for $250,000, the house was built in 1827 and is on the National Register of Historic Places.
Off the house's center hall are east and west parlors. Both have fireplaces.
Though it has been renovated several times over the years, it retains some original details, including mantels, and some pine and chestnut flooring.
All four bedrooms are on the second floor, two with original pine and chestnut flooring and one with a fireplace and a walk-in closet.Ok... I can go on and on, but... check it out for yourselves here. And all for €170,000 in one of the wealthiest states of the nation that is the wealthiest on planet Earth.
My prognosis - median price in Ireland in real terms (2009 Euros) of €120,000 by the end of this crisis. Why? Because there is no reason why our average homes should be trading above 4bed historic properties in upstate New York. None.
Sunday, December 13, 2009
Economics 13/12/2009: News and confirmations
A quick post - per Sunday Times report today, Irish Nationwide will need 1.2-2 billion in recapitalization post-Nama. This beats my estimate for the society provided here. To remind you - back in October 2009 I estimated that post-Name demand for capital will be:
On retail sales side: October figures released last week show continued weakness across consumer spending - despite some bounce up in car sales (+1.4 mom). Total sales fell 0.3% mom and ex-motors sales declined 1.7% erasing all gains made in September. Core sales 9e-motors) are now at 2005 levels down 13% from the November 2007 peak. Despite seasonal shopping going into Christmas, 'other goods' sales (including toys, jewelry, sports wear etc) posted a drop of 4%. Furniture and lighting posted a fall of 3.2% and would have probably fallen even further if not for Ikea. This, of course implies that a rational forecast for 2010 should be in the region of 3% fall in retail sales, compounding the 7% drop in 2009 and leaving retail sales at some 84% on 2007 peak. More urgently, staying on the established trend, December retail sales are risking to sink 10-15% on 2008, which might trigger a new wave of layoffs in January-February 2010.
Services Exports data also released last week shows that our services trade deficit has widened in 2008 relative to 2007 by 370% as imports rose much faster than exports.
The detailed data clearly shows that we lack geographic diversification of exports in most services, with 76% of our services exports (allocated to specific geographic destinations) destined for Europe. And we are failing to benefit from substantial cost savings from outsourcing services to Asia - with just 2.4% of our services imports coming from Asia (Asia accounted for 7.9% of our exports of services).
In higher value added services:
- AIB €3.2-3.5bn in equity capital post-Nama;
- BofI €2.0-2.6bn;
- Anglo €4.5-5.7bn;
- INBS/EBS & IL&P €1.1-1.2bn.
- Total system demand for equity will be in the range of €9.7-12.4bn.
- AIB will require €3.0-3.5bn in equity capital;
- BofI will need €2.2-2.6bn;
- Anglo will need up to €5.7bn;
- INBS will require total of €1.2-2bn.
On retail sales side: October figures released last week show continued weakness across consumer spending - despite some bounce up in car sales (+1.4 mom). Total sales fell 0.3% mom and ex-motors sales declined 1.7% erasing all gains made in September. Core sales 9e-motors) are now at 2005 levels down 13% from the November 2007 peak. Despite seasonal shopping going into Christmas, 'other goods' sales (including toys, jewelry, sports wear etc) posted a drop of 4%. Furniture and lighting posted a fall of 3.2% and would have probably fallen even further if not for Ikea. This, of course implies that a rational forecast for 2010 should be in the region of 3% fall in retail sales, compounding the 7% drop in 2009 and leaving retail sales at some 84% on 2007 peak. More urgently, staying on the established trend, December retail sales are risking to sink 10-15% on 2008, which might trigger a new wave of layoffs in January-February 2010.
Services Exports data also released last week shows that our services trade deficit has widened in 2008 relative to 2007 by 370% as imports rose much faster than exports.
The detailed data clearly shows that we lack geographic diversification of exports in most services, with 76% of our services exports (allocated to specific geographic destinations) destined for Europe. And we are failing to benefit from substantial cost savings from outsourcing services to Asia - with just 2.4% of our services imports coming from Asia (Asia accounted for 7.9% of our exports of services).In higher value added services:
- Virtually all insurance services exports went to Europe (69%) and the US (22.1%);
- Financial services exports went to Europe (67.2%), the US (10.45%), and Asia (10.3%), but some 12% of financial services were traded into offshore centres;
- Computer services posted a massive surplus, as usual, with 86.7% of all exports flowing to Europe, and just 1.07% to the US, while Asia received 8.7%;
- Other business services exports - comprising a number of high value-added subcategories - went to Europe (69.7%), US (only 4.5%) and Asia (12.9%).
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