Economics 2/9/10: Exchequer results - tax receipts

So folks, with some trepidation - given the ambitious statements concerning yet another 'turnings of the corner' by Minister Lenihan in today's 'Voice of the Irish Civil Services Gazette' (err... commonly known as The Irish Times) - I awaited the August Exchequer results.

The surprise, I must say, is all my, at least on the tax take side. Things have improved... dramatically... by what I would described as a 'nil change'. In other words, there is no improvement on the tax side.
Total tax take is now moving deeper down relative to 2009 and is nowhere near 'turning around'. It is not even stabilizing on the downward trajectory. Year-on-year total tax take is down 9%. End of July the same figure was 8.2%. Oops...

Income tax and Vat two mega tax heads:
The two are 8.2% and 6.4% behind January-August figures for 2009. A slight improvement on the gap in 7 months to July (8.4% and 6.9% respectively), but not that much of an improvement.

Corporate and excise taxes:
Corporate tax take is now on a trend of erasing the surplus on 2008 accumulated since June. This is bad, folks. In 7 months to July 2010, corporate tax receipts were 13.8% behind 2009 figure. In 8 months to August 2010 these are a massive 24.1% behind. As far as excise tax goes - receipts in 7 months to July 2010 were -3.3% behind corresponding period for 2009, by August 2010 8-months cumulative receipts gap to 2009 period shrunk to 2.7%. Good weather and more partying at home (instead of taking vacations) means booze is being consumed, while euro weakness relative to 2009 means we are buying more of it at home instead of N Ireland.

Next the 'Celtic Tiger Taxes', aka Stamps:
No sign of a serious improvement on abysmal 2009 here either. Poor showing continues with receipts down 18.2% on 2009 in seven months to July and down 11.1% on the first 8 months of the year in August. Let's see what happens in the big boost month of September.

Capital gains:
CGT was down on 2009 in the first 7 months of the year by 44.1% and down on the first 8 months of the year by 42.6%. Marginal gain in relative performance is clearly not enough to bring us even close to the extremely poor performance of 2009.

Summarizing year on year changes in all tax heads:
And to entertain our 'official analysts' favorite pass time: performance relative to targets
One noticeable and real change in monthly returns is the share of the burden that befalls our ordinary incomes:
Table below summarizes:
Nothing really to add to this except this: Minister Lenihan clearly thinks we are seeing improvements on the fiscal side. I see continuously increasing burden of Minister Lenihan's deficits on the ordinary taxpayers and consumers. In my economics books, this is bound to add pressure on Irish growth. Severe pressure.

Economics 1/9/10: Live Register

Live Register came in with no surprise - a moderate increase in the calm of August was so predictable, my forecast for unemployment to reach 13.8% in August made back in May came in bang on.

Here are few charts and some analysis.
Per chart above, seasonally adjusted LR rose from 452,500 in July to 455,000 in August, an increase of 2,500. Added cost to the Exchequer - ca €63mln per annum. Added cost to the economy - 2.5 times that. Added cost to the society - much greater than the latter. Added cost to those who lost their jobs and their families - incalculably high.

So far, year on year to August 2010 there was an unadjusted increase in the Live Register of
30,198 (+6.9%). This compares with an increase of 34,403 (+8.0%) in the year to July 2010. Now, that doesn't look like a stabilization to me.

There was an increase of 700 males and 1,900 females in the seasonally adjusted series in August. Which means services are tanking faster than manufacturing.

The average net weekly increase in the seasonally adjusted series in August 2010 was 625, which compares with a weekly increase of 1,700 in the previous month. Chart below illustrates
Both monthly and weekly increases are now below 6 months moving average lines, both of which are still trending up. Momentum suggests moderate mean reversion in September/October. Which brings us to unemployment levels.
Standardised unemployment rate in August was 13.8%, and all indications are it will continue to rise.

Finally, charting the changes together:

My suggestion that latest breakdown between men and women joining LR shows jobs destruction in services sectors is supported by the CSO analysis of detailed data.

Overall,

• Craft and related (25.5%) was the largest occupational group on the Live Register in August,
  
• Plant and machine operatives (15.4%) second largest, followed by
  
• Personal and protection service (10.7%) and
  
• Clerical and secretarial (10.7%).
  

Six of the nine occupational groups showed monthly Live Register increases in August:

• Largest percentage increase was in the Professional group (+1.2%)

In the six months to August 2010 Professional (+26.8%) group also showed the largest increase, followed by Clerical and secretarial (+14.6%) and Sales (+ 11.9%). The smallest percentage increase was in the Managers and administrators group (+1.0%).

Per CSO: "There were increases in six of the nine occupational groups in the six months to August for males on the Live Register. The largest percentage increase was in the Associate, professional and technical group (+12.0%), with the largest decreases in the Managers and administrators and Personal and protective service groups (both -0.8%). For females there were increases in all occupational groups in the six months to August 2010. The largest percentage increase was in the Professional group (+43.3%) followed by the Other occupation group (+25.8%)."

Live Register duration also rose, for males and females in 6 months to August 2010, suggesting severe pressures in the jobs market continue.

Of greater interest will bee changes in the labor force participation - to be shown in QNHS results. I suspect we will see severe contraction in overall number of people working or seeking work in the country.

Economics 1/9/10: Retail Sales

Today's retail sales figures continue to provide the backdrop to my previous analysis of the Irish economy as the one still facing strong headwinds and showing no real signs of a recovery. After months of 'turning the corner' statements (by now clearly deserving to be serialized in The Simpsons or perhaps in the Sponge Bob) and the drone of the ESRI data on 'consumer confidence' improvements, people still continue to vote by withdrawing their spending.

Here are the charts and the results.

Overall volume of retail sales (i.e. ex-price effects or ex-deflation that is ruining retail sector jobs that is) contracted 0.1% yoy in July 2010. There was a monthly decrease of 0.2% - steeper than the annual decrease. We now have 3 months of continued declines.

Ex-Motor Trades the volume of retail sales shrunk by an impressive 2.5% in July 2010 yoy and -1.0% mom. Year-on-year and mom volumes rose in Motors, Fuel and Food, and decreases in everything else.

Stop for a second and think. Volume is just the bulk of stuff we buy. If the retail sector were to stop losing jobs and start growing again, increased volumes of sales (not that we have them anyhow, but give it a thought nonetheless) must be accompanied by non-falling value of sales.
Oops... the value of retail sales collapsed by 3.2% in July 2010 yoy and fell -0.6% mom. Ex-Motor Trades things were even worse: sales values fell 4.9% yoy and -0.6% mom. In fact, per CSo own admission: "only Motor Trades and Fuel showed year-on-year value increases in July 2010. All other sectors showed year-on-year declines in the value of retail sales" And boy these declines were rather large:

• Non Specialised Stores (-1.5%)
• Department Stores (-7.3%)
• Pharmaceutical Medical & Cosmetics (-10.6%)
• Clothing, Footwear and Textiles (-5.7%)
• Other Retail (-8.8%)
• Bars (-13.8%)
  

In mom terms, Motor Trades, Non-Specialised Stores and Electrical Goods showed increases in
the value of retail sales in July 2010. All other sectors showed mom value decreases in July 2010.

Now, these are not the results of 'improving consumer confidence' are they?

Overall, retails sales suggest that Q2 consumer spending will be a likely positive contributor for GDP growth, but Q3 will do the opposite. Of course, there is a catch here - the RSI data covers only sales of goods, but not of services, yet consumption expenditure on the latter accounts for 55% of the total consumption spending. Indications are - based on Live Register results showing contraction in services employment - services sales might be even weaker. Another sign of hidden weaknesses is in the ex-Motors sales. Ex-Motor volumes posted Q1 growth of 1.2%, followed by a preliminary estimate of 1.1% growth in Q2. The latter has been now revised down to a miserly 0.3% for Q2. Since then, ex-motor sales have been falling in both July and August.

Economics 31/8/10: IL&P reporting

The ‘healthiest of the sick’, IL&P reports its numbers today. Here are the headlines:

• Operating loss is €10mln in H1 2010, down from a loss of €51mln H1 2009 – causes – lack of further deterioration on 2009 figures on the bank side and serious gains on the life insurance side.
• Operating profits on the life side are €92mln (up from €84mln in H1 2009)
• Bank operating loss of €131mln – equivalent to that in H1 2009. Its clear that 'healthy' IL&P is bleeding heavily on ptsb side.
• Ptsb is one of the largest mortgages lenders in the country, so their mortgages book should be – on average – performing above other banks. Here are some data: arrears > 90 days to the end of June 2010 in Irish residential mortgage book increased to 5.2% of the portfolio (H12009 figure was 3.9% so there was a significant jump). Non-performing mortgages are at 6.9% of the total loan book, up on 4.9% at the end of H2 2009. 32% of arrears cases are related to 100% mortgages – a predictable result as (a) 100% interest-only mortgages are of more recent vintage, hence written against younger families with higher probability of unemployment, and (b) these types of mortgages are more likely to involve purchases of buy-to-rent properties .
• Bad debt provisions are at €150mln compared with €189mln in H1 2009, highlighting the fact that more realistic provisioning earlier in cycle usually helps to underpin the book better than the AIB-style denials. Overall provisions balance is up €141mln to €618m.
• Margins are down to 0.81% (2009 full year margin was a poor 0.83%) despite hikes in the mortgage rates.
  
• As IL&P needs to raise ca €1.3-1.8bn more in bonds (good luck to them trying), higher cost of borrowing is going to further depress margins. So expect even more mortgage rates hikes from IL&P in months ahead. The bank has currently a €8 billion reliance on the ECB, unchanged. Hefty for a minnow.
• Bank’s loan to deposit ratio was down to 240% from 246% - far, far away from the prudential banking model that would imply LTDs of 95-100%.

Economics 30/8/10: Euro area growth indicator slows in August

Eurozone's leading growth indicator, Eurocoin has fallen once again to 0.37 in August from July already anemic reading of 0.4. This means that my updated forecasts for Euro area growth remain in the range of 0% - 0.26%, with mid-range forecast of 0.20% for Q3 2010.

Chart below illustrates:In the mean time, continued pressures on Euro area economies and unbalanced nature of recovery (with Germany powering ahead, while the rest of Europe stagnates or continues to decline) are taking their toll on public confidence in European institutions.

Overall voters confidence in EU has dropped to record lows in most countries according to the Eurobarometer published on August 26th. Just 49% Europeans think that their country's membership of the EU is a "good thing" – lowest in 7 years. Trust in EU institutions has dropped to 42% from 48% recorded in Autumn 2009. Latest survey results are most likely impacted by the survey timing - carried out in May 2010 - at the peak of sovereign debt crisis worries. But it is unlikely that August events would have done much to repair this. PIIGS, plus Cyprus, Lux and Romania lead in terms of declines. Confidence in all PIIGS countries declined 10-18% yoy.


The latest Eurocoin leading indicator reading clearly suggests that unemployment and economic performance will remain leading causes of concerns across the EU (Eurobarometer recorded 48% of EU citizens being primarily concerned with rising unemployment, while economic crisis in general is a cause for concern for 40%). For the first time Eurobarometer also included Iceland, now a candidate for EU accession. Only 19% believe accession will be a good thing for their country and only 29 percent believe their country will benefit from EU membership.

Another interesting result was that when asked what they associate the EU with – most of the respondents said free travel and the euro, followed by peace and, amazingly, "waste of money" (23%). The latter category was led by Austrians (52%), Germans (45%) and Swedes (36%). Just 19% of respondents said the EU stands for democracy, a drop of seven points yoy. Just 10% of respondents in Finland, UK and Latvia identified "democracy" as a principle that is linked to the EU objectives. Romania (33%), Bulgaria (32%) and Cyprus (30%) were the countries with most positive view of the link between democracy and the EU. Overall, in no country did 'democracy' figure as the EU core objective for more than 1/3 of the population.

Support for EU acting as a policeman of financial markets was much stronger. 75% of the respondents said more coordination of economic and financial policies among member states would be effective in fighting economic crisis. 72% back a stronger supervision by the EU of international financial groups (though this majority increased just 4 points since 2009).


Perhaps encouraged by the public support for greater coordination, French and German authorities continue to move in the direction of enhanced harmonization of their tax systems. French budget minister Francois Baroin visited his German counterpart Wolfgang Schaeuble, making an announcement that "Germany is a model which should be a source of inspiration for [France]." Baroin also stated that France "intends to accelerate the harmonisation of both fiscal systems, on corporate as well as personal income taxes". President Sarkozy has requested the French court of auditors to issue a report (due for early findings release at the end of September) looking at areas of fiscal convergence with the German system. The report is due by the end of the year, but a pre-report will be published at the end of September. It is likely that France might move to abolish wealth tax as Germany did back in 1997. Per reports: "in the longer term, Paris is also looking at harmonising Vat, which is higher in France – 19.6% compared to the German 19%" and "capping the EU budget" to give national Governments more opportunities to slash domestic deficits. Mr Schaeuble indicated that Berlin wants consensus on European harmonisation on bank profits taxation - a subject for the next ministerial meeting between the French and German finance ministers in September.

Economics 27/8/10: The path & cost of banks bailouts

On the foot of today's comment in the Financial Times, here are few quick estimates as to the extent to which current policy on banks recapitalization is bleeding the economy dry.

As estimated by myself (comfortably within the S&P projections), Ireland will stand to lose net:

• Nama - net loss of (mid-range) €12-19bn;
• Banks - net losses are €50-55.6bn.

These are mid-range estimates.

My estimates translate into:

• Anglo Irish Bank expected supports are likely to exceed the overall decline in our GDP by a factor of more than 1.5 times (constant prices GDP fell €20.26bn between 2007-2009). Thus Anglo alone will cost Irish economy more than the entire Great Recession;
  
• The bailout will cost us €23,422-34,880 per each person in our labour force as of Q1 2010. Mid range estimate loss is €27,121. Note, labour force includes both employed and unemployed.
• The entire bailout of the banking system can end up costing Ireland in excess of x3 times the total economic loss incurred during this Great Recession.
• Anglo alone will cost us the equivalent of providing unemployment benefits for 2 years to over 1.25 million Irish workers.
• Anglo bailout would cover current Live Register costs for more than 6 years
• The banking bailout would have covered over one half of all outstanding mortgages in the nation once we adjust for interest accruals (a note to our FR: that's one hell of a real moral hazard, Mr Elderfield, much more real than any aid to mortgage holders you can ever fathom)
• The cost of bailout risks running at over €69,000 per family of 2 able-bodied adults either employed or unemployed
• 'Repairing' the banks Government-way can cost 35% of constant prices 2010 GDP or 43.2% of 2010 Gross Disposable National Income, using mid-range estimates for the expected bailout
  

Lastly, let me note that the alternatives to this 'blank cheque' recapitalization approach always existed and were known to the Government: see links here & here. Members of the cabinet were briefed as to the above-linked proposal and were provided with full cost estimates of these proposal. In at least one case, one cabinet member sought analysis/appraisal of the above proposal from official advisers, with evaluation returning 'no objections to the numbers cited' according to my source. In other words - they couldn't find anything wrong with it at least on the basis of quick evaluation.