06/06/2011: Putting IMF's comment against data

According to the report by RTE: "The acting Managing Director of the International Monetary Fund has said Ireland's economic recovery programme 'appears to be on track'... However it still requires what he described as 'forthright action by the Irish authorities to re-establish the basis for sustained growth.' Mr Lipsky said there were positive signs in the Irish economy, such as a return to export growth. However Mr Lipsky described Ireland's economic recovery as 'a difficult challenge'." [emphasis is mine]

One cannot expect RTE news to critically challenge Mr Lipsky on his pronouncements, but... can someone ask Mr Lipsky what did he mean by the 'positive signs in the Irish economy, such as a return to export growth'?

Here are two charts showing that export growth did not return to Ireland any time recently, but in fact was here for some months before IMF showed up in Dublin and certainly well before this year.
So let's give Mr Lipsjy a quick briefing:

• Irish exports reached their recession bottom at the annual value of €82.238 in 2009. Hence the growth in Irish exports returned in 2010 when annual exports value rose to €89.427bn.
• In terms of annual trade balance, local minimum occurred in 2007 when Irish trade balance stood at €25.740bn. Since then, every year throughout the crisis our trade balance grew, reaching €43.785bn in 2010.
• In monthly time series, our exports reached the bottom of the cycle in December 2009.
• Relative to 2003-present trend, March 2010 was the month when Irish exports have fully recovered from the recession. That is full 8 months before IMF waltzed into Dublin and full 14 months before Mr Lipsky discovered our return to export growth.
• In terms of Trade Surplus, Irish external trade has 'returned to growth' back in January 2009, when our monthly exports exceeded long-term trend.
• Lastly, if we are to take Mr Lipsky's phrase on its face value, the return to growth in our exports dates back to January 2010 (17 months before Mr Lipsky's statement recognizing the phenomenon) and our trade balance (monthly series) returned to growth in January 2008.
  

06/06/11: Travel to Ireland

A quick post on the recently released data for travel to and from Ireland. Now, several caveats to cover before we plunge into the numbers:

1. The present Government has prioritized (not unlike the previous one) tourism as core area for stimulus and recovery. I am not going to pass my judgment on this plan - let's wait and see what comes of it.
2. The data relates to Q1 2011, so it predates the present Government.
3. Some Q1 2011 data covers pretty dismal - weather-wise - weeks in January, but to offset that, it compares against even more poor - again, weather-wise - Q4 2010.

So, here are the headline figures, as issued by CSO (analysis is mine):

• Irish trips overseas have fallen to 1,270,100 in Q1 2011, down 3.96% qoq and 11.75%yoy. Comparing to the Q1 peak in 2007, trips overseas are now 19.37% down. This means that in Q1 2011 some 305,100 fewer Irish residents took trips outside Ireland than in Q1 2010.
  
• Trips to Ireland from abroad have fallen to 1,177,600 in Q1 2011 from 1,414,300 in Q4 2010 - a decline of 16.74% qoq. In year-on-year terms, Q1 2011 was up 8.55% on Q1 2010 - which, of course, is good news. Relative to Q1 2007, trips from abroad are down 20.34%. This means that in Q1 2011 some 300,700 fewer foreigners visited Ireland than in Q1 2007.
• Net travel to Ireland in Q1 2011 was -92,500, which means that 92,500 fewer people visited Ireland than the number of Irish people who traveled outside Ireland. This metric is sort of a tourism trade balance. Despite posting another deficit, Q1 2011 saw a significant improvement in terms of net travel to Ireland relative to Q1 2010 (-354,400), Q1 2009 (-137,600), Q1 2008 (-220,300) and Q1 2007 (-96,900), although in Q1 2006 there was a positive net travel into Ireland of 43,300. Unfortunately, most of the improvement in the net travel to Ireland in Q1 2011 came from the precipitous decline in the number of Irish people traveling abroad.

It is worth noting that in both charts above there is a marked downward trend over time in terms of Ireland's ability to attract foreign visitors as well as to retain domestic travelers. This is especially surprising for a number of reasons:

1. The decline in the net travel, for example, is persistent since before the crisis and is, therefore, likely to be structural, rather than recessionary.
2. Despite lower cost of traveling in Ireland, induced by the crisis, the numbers of visitors from abroad is not rising. This too suggests that something structural is going on, as overall international travel is recovering from the global recession.

Looking at core geographical areas from which visitors to Ireland traditionally come:

• Trips from Great Britain have declined to 564,300 in Q1 2011 (47.9% of all visitors) from 657,600 in Q4 2010 (a decline of 16.4% qoq). However, compared with Q1 2010, visitors from Great Britain were up 7.16%. Compared against Q1 2007, the number of visitors from GB to Ireland is down 26.86% or 207,200. It is worth noting that overall Ireland's tourism industry reliance on visitors from GB is up in Q1 2011 (see chart below).
• Number of visitors from the rest of Europe was 399,000 in Q1 2011, down 16.4% on Q4 2010, but up 8.87% on Q1 2010. The number is down 19.62% on Q1 2007 or 97,400.
• Number of visitors from North America in Q1 2011 stood at 153,600 (down 23.73% qoq and up 11.87% yoy). The resilience of this market for Irish tourism is highlighted by the fact that Q1 2011 numbers were only 1.66% down on Q1 2007 (only 2,600 visitors less).
  

It will be interesting to see in months to come if the recent royal and presidential visits to Ireland have any impact on tourists' preferences for traveling to Ireland. It will, of course, be very difficult to detect, in part due to data inconsistencies and in part due to other factors that influence travelers' choices of locations.

Lastly, I must say I am glad the Government had removed the senile €10 travel tax. We might not see an immediate positive impact of this move on Irish tourism, but in the long run, we need to focus on removing every possible impediment for people to opt out of choosing Ireland as their preferred destination.

04/06/2011: The 'Confidence' trick?

Updated below: In the update below I address one particular point raised by some readers of this blog relating to PMIs and my analysis of these.


As promised in the earlier post, for the fans of the 'If only we were confident in Ireland' school of economic thinking... The school of thought, also known as the 'Green Jerseys', maintains that if confidence is high, then growth and employment will follow, so to get Ireland out of the crisis, positive thinking is needed.

Let's take a look at the data.

Keep in mind that we only have data for the period of May 2000-present and only for Services sector. Of course, Services is the largest sector in the Irish economy and it is more labour intensive, so the conclusions drawn from these observations should be expected to remain broadly valid for Manufacturing as well.

If the 'Confidence' thesis holds, we should expect some strong relationship between Confidence reading in PMIs and employment sub-index of the very same PMIs as well as PMIs main index which captures activity. This relationship might be subject to lags, of course, as Confidence sub-index is self-assessment of the future some 12-mo in advance, while Employment sub-index reflects current staffing levels, and the core PMI reflects current activity. Now, keep in mind that the 12-mo in advance expectations is for a continuum, not spot, in other words, growing confidence means expectations for improving business over the 12 months horizon.

First, consider whether there is a coincident relationship between Confidence and PMIs and Employment sub-indices:
Yes, there is a strong positive relationship between expansion signaling readings of confidence today the future and current levels of economic activity as measured by employment and PMIs. In other words, things tend to be optimistic (pessimistic) when PMIs are booming (shrinking) and employment is rising (falling).

Sounds like the 'Confidence' theory working? Not really - what's happening here is that when things are great, we expect them to stay great, on average. Alternatively, when things are bad, we expect them to stay bad for some time ahead. Which, of course is consistent with the fact that data we have covers 2000-present - two periods of pretty much persistent boom and then bust.

So let's take a look at change from month to month.

• Does change in confidence imply change in current PMIs and employment? (If the 'Confidence' theory is right - it should, as future expected changes in activity should have a positive growth effect on current activity)
• Does change in confidence today imply a change in future PMIs and employment? (If the theory is correct, then it should, with some lag kick in in terms of positive real outcomes)

Sorry, but it appears that a change to higher Confidence in the future in any given month relative to previous month has virtually no relation to either present or future Employment changes or future PMIs. It has a tiny positive connection to present PMIs, however, but barely enough to be called 'significant' from statistical point of view. In other words, we might get all giddy chirpy about the great future we have, and yet it will be unlikely (highly unlikely) - according to the PMIs data - to translate into significant gains in either services activities or employment, neither today, nor in the near future (I tested longer lags up to 12mo and the results do not change by much).

This of course does not mean that positive sentiment is not a good thing for the economy. If positive sentiment is backed by something more tangible - reforms, improved exports, growth in consumer or investor confidence - some real productive fundamentals, then of course it will matter. But that is not the 'Confidence' theory. The 'Confidence' theory says 'negativity hurts economy'. No, folks - it doesn't. You can't talk yourself into a recession. And the 'Confidence' theory claims that if we get 'positive' about the future, things will improve (presumably improve significantly, otherwise, what's the point). This is not what the data is showing.

So what's going on, then? We know that Confidence is associated with performance, but we also now know that at least in Ireland, over the period looked at, changes in confidence are not associated with changes in performance either today or in the future.

Of course, Ireland is a small open economy. Which means it is volatile and is subject to constantly shifting external 'winds' of change. May it be the case that 'Confidence' theory doesn't work in Ireland because our real economy is subject to external forces and shocks? Ok, let's test this proposition. Let's control for contemporaneous backlog of orders, leaving only that component of Confidence that is not influenced by these backlogs. In other words, let's consider that part of our self-assessed optimism (pessimism) that is unrelated to the actual observed increases in new orders (decline in these orders). Furthermore, let's slightly smooth the series tor educe volatility by using a 2mo moving average on all variables.
An interesting result above. The link between confidence and contemporaneous PMI and Employment is now virtually gone (compare the results with Chart 1 above), which exactly supports my conclusions made following Chart 1. What matters to the turning of the economy, folks, is the real economic activity - rising backlogs, new orders, new export orders. What doesn't matter much at all, it appears, is 'Confidence'. So, please, go on, feel great - it might improve your smile, your utility, your view on life - all of which are great results. But don't hold much hope that it will improve the economy and reduce unemployment.

In the end, to achieve these two objectives, we need new businesses to be created, new markets to be accessed, new products and services to be developed and marketed, and so on, and new reforms implemented. Unfortunately, the 'Confidence' theory can lead us into complacency of avoiding making hard choice to have such reforms, to support our entrepreneurs, our companies and workers.

Ignoring the rain might make getting wet tolerable or even fun, but it won't make you any less soaked.

Update: Some websites contain references to these series of posts on PMIs. In particular, there is an occasional refrain to my view that (1) I would prefer seeing strong (above 60) readings in some sub-indices, and (2) my insistence that an 'improvement' in the sub-index reading from a number below 50 to another, higher number below 50 is not an improvement. Let me explain my views on these 2 points.

1. Readings above 60 are rare, that is true. But PMIs refer to comparative/relative performance metrics. Now, real recovery is not, I repeat - not - associated with growth returning to a long-term trend, but growth overshooting long-term trend as economy goes from negative growth (contraction) to expansion. Thus, for example in the Services series, near-recession of 2001 is returned to growth by PMIs reaching for 60.8 by April 2002. In Manufacturing series contraction in October 2001 to 46.1 is returned to growth with June 2002 reading of 54.5 (so -3.1 from 50 to +4.5 - a ratio of 1.45), contraction of July 2003 (45.8) is returned to growth with a peak of 55.2 in June 2004 (-4.2 to +5.2 - a ratio of 1.24). Now, bottom of the latest contraction was at 32.6 which should be consistent - if we take the above two episodes averages (ratio of 1.35) - with a rise to above 67. We've gone up to 62 in March 2010, but we have not seen this translate into overall economic growth. Hence, my preference would be to see more episodes of 60+ readings in PMIs. Either way, all of the episodes we have on the record so far are episodes relating to either 'near recessions' or temporary declines in the series not associated with a recession at all. Except for the current crisis, that is. O course, this 60 is not a 'hard' target. Read carefully what I said (here): "Either way, of course, I'd rather see PMIs at above 60 reading, than heading for a downward territory". This is a statement of 'truism' - as in: I'd rather see things improve than get worse. Sadly, some anonymous commentators on some of the forums out there are not getting even this simple concept...
2. When the series read below 50, the series show contraction. Thus, for example, a reading of 44 in one month followed by a reading of 46 in the next month does not mean that economy has improved from month to month. It means that the economy has deteriorated at a slower rate. If you are familiar with compounded effects of recessions (expansions), you would know that having a loss of 10% in month 1 followed by a 5% decline in the other month implies a cumulative decline of 14.5%. An improvement would be if following a 10% drop in on month, economy grows by, say, even 1% in the next month, thereby reducing the original decline to a cumulative decline of 9.1%. Let me quote Brad DeLong on this: "Getting worse more slowly is not the same as getting better".

04/06/11: Services PMIs - detailed breakdown

The last post on latest PMIs - this time detailed breakdown of Services data. In previous post I have covered:

• Manufacturing PMIs
• Manufacturing and Services PMIs - showing relationships between Employment and PMIs (the 'Jobless Recovery' slowing down story, as well as between Exports New Orders and Employment, showing that probability of having a jobless 'growth' through exports is over 40% for both Services and Manufacturing)

So no on to detailed Services PMIs analysis.

Headline numbers:

• Overall Business Activity has improved marginally to 50.5 in May from 50.2 in April. Both readings fall within the area above 50 which signals extremely weak expansion. Since 2000, Services PMI standard deviation was 7.966, and since 2008 - the beginning of the crisis it stands at 6.839. The latest move puts Services PMI at a level below both the 12mo average of 51.9 and the 3mo average of 50.6. Previous 3mo average was 52.1, while 2010 annual average was 51.
• New Business activity index stands at 48.2 in May, down significantly on 50.6 reading in April and crossing into a full contraction territory, breaking three consecutive months of signaling extremely modest gains. 12mo average stands at 50.3 and 3mo average stands at 50.2, but what is even more disappointing is that the latest monthly reading falls below the already poor index reading for the 3 months of December 2010-February 2011 which were adversely impacted by the inclement weather.

• There's been a clear (although volatile) side-ways flat trend around zero growth in Services New Business activity for some time now - from about the beginning (Feb-Mar) 2010. And it is not changing so far.
• Next, consider prices - the signal of profit margins. These were discussed in an earlier post and I produced a new sub-index using NCB PMIs data for Services and Manufacturing profit margins conditions (see the third chart in here).
  
• Output prices have posted deeper deflation in May, falling to 43.9 from April's already deflationary 45.4. Overall, this marks 34th consecutive month of deflation in output prices.
• Meanwhile, input price inflation has moderated slightly from 55.7 in April to 54.7 in May. This marks 6th consecutive month of continued inflation in terms of inputs costs.
• It is worth noting that the traditional metrics of 'competitiveness', based on unit labour costs fail to account for the non-labour inputs costs, thus missing the full picture of declining competitiveness in the Irish economy. My index (referenced above and shown here) clearly indicates that in terms of inputs costs relative to output prices competitiveness Irish economy has been trading at zero net improvement for both sub-sectors over the entire period since September 2002.

• Employment sub-index in Services sector has posted significant deterioration in May, falling to 48.1 from 51.1 in April. April above 50 reading was the first one since February 2008 and this glimmer of hope was now firmly erased by the latest data.
• For the fans of the 'If only we were confident in Ireland' school of economic thinking, Service PMIs show the fallacy of groundless hopes. Irish businesses in the Services Sector were showing high levels of confidence (in excess of 55 and most in the 60s) since August 2009. Every month after month. They still do - May reading of 62.3 was extremely robust, although down on 66.6 in April. Oh, yes, folks - 12mo average for Confidence is now at a blistering 64.8, matched by 3mo average through May and virtually identical to 3mo average for December 2010-February 2011 64.7. 2010 March-May average was 66.7. So does Confidence translate into growth? Or does Confidence translate in jobs? I will examine this in a separate blog post below.
• Lastly - New Export Business slipped marginally from 54.6 in April to 54.4 in May. Moderate growth continues in the exports territory - the only solidly good news over the last 5 months on Services side.
  

03/06/2011: Services and Manufacturing PMIs signal a slowdown

A quick post on some additional analysis of the PMIs released this week. Combining Services and Manufacturing PMIs.

As noted in the previous post, Manufacturing PMIs have posted weakening performance, declining to 51.8 in May from 56 in April and falling below 12mo and 3mo averages. Detailed analysis of Services PMIs is to follow in the next post, but the headline figure showed a marginal improvement to 50.5 from 50.2 in May, also below 12mo and 3mo averages.
Thus, as the chart above shows, both Manufacturing and Services PMIs reflect extremely slow rates of expansion. This is reflected in employment data:
Employment sub-index has now fallen to 48.1 from 51.1 in April for Services, which means that employment is now set to contract in the sector. At 48.1, employment sub-index in Services stands below 12mo, 3mo average, 3mo to May 2010 average and relative to 2010. Employment in manufacturing is also now in the contraction territory with a reading of 49.9 in May, down from 54.0 in April. 3mo average and 12mo average both were above 50.

Using PMI data, I computed my own index of profitability or index of profit margins based on the sub-indices for prices of inputs and outputs. Chart below illustrates:
What is clear from the above chart is that deflation of final output prices is being contrasted by slightly moderating inflation in the input prices, which in turn means that both sectors of the economy are continuing to operate in the environment of shrinking profit margins. This cannot be good. Also note that in the last 2 months, the rate of decline in profit margins is the third fastest for Services and fourth fastest for manufacturing since September 2002.

In longer-term outlook, we are clearly regressing relative to January 2011 in both Services and Manufacturing:
We are also operating in the environment of very weak recovery and continued growth in unemployment.

Lastly, lets look at some relationships between unemployment and exports orders. Remember the idea of exports-led recoveries?
Well, couple of things can be noted from the chart above. Firstly, as expected, there is a stronger relationship between stronger exports orders growth and jobs creation in the Services sector than in Manufacturing. This explains why we had months of booming PMIs on Manufacturing side and no serious new jobs creation. Second thing to note: historically (the data is since 1998 for Manufacturing and 2002 for Services), there is a 40.3% chance on Manufacturing side that an expansion in Exports orders is going to be associated with contraction in employment (a Jobless Recovery scenario). For Services sector this probability is 43%.

03/05/11: Exchequer receipts for May

Exchequer returns for May are in and the results are pretty much in line with everyone's expectations. On the surface things are improving, but in reality, our fiscal problems are not going away.

Here's the analysis of receipts (analysis of expenditure will follow in a separate post):

• Income tax receipts came in at €5.061bn inclusive of the USC, which is 9.2% above 2009 levels and 19.93% above 2010 level. How much of this is due to USC and how much was substituted away from other sources of revenue, such as health levies etc.

• VAT receipts offer a more direct comparative - VAT receipts stood at €4.867bn in May 2011 slightly down on €4.873bn a year ago.
• Corporate tax receipts - another gauge of economic activity, this time dominated by MNCs - are down: May 2011 level was €599mln, as opposed to €748mln a year ago. Thus Corporate tax receipts are down 19.92% on 2010 and 47.41% on 2009. For comparative purpose, May 2008 receipts were €1.357bn - more than double 2011 levels, while 2007 receipts were €1.484bn.
  

• Excise tax receipts came in at €1.791bn in May, slightly up on May 2010 when they reached €1.704bn, the variation of 5.1% yoy, the receipts are also up on May 2009 - by 2.11%.
• Stamps continue unabated decline - down to €235mln in May 2011 or 3.69% yoy and 20.07% on 2009. To put things into perspective, May 2007 stamps were €1.438bn.

• Capital taxes are really taking a serious dive. CGT is down 25.23% year on year and 56.09% on 2009, reaching just €83mln in May 2011. CAT is down 66.09% yoy and 63.21% on 2009 at €39mln in May 2011. Combined CGT and CAT stood at €1.168bn in May 2007, €744mln in May 2008, €295mln in May 2009, €226mln in May 2010 and €122mln in May 2011. Ouch - that global capex boom of 2010 has clearly passed Ireland untouched and this can only mean one thing - we are into the 4th year of collapsed investment now.
• Lastly, customs duties stood at €98mln in May, 18.1% up yoy

• Total tax receipts, therefore, came in at €12.795bn in 5 months through May 2011. This is 5.6% above the level of tax receipts for the same period of 2010 and 5.43% below 2009.
  

• The Exchequer deficit for the five months through May 2011 now stands at €10.231bn inclusive of €3.060bn promisory notes capital injections to INBS and Anglo in March. May 2010 deficit was €7.867bn (ex-banks) and 2009 deficit for the period was €10.588bn.
  

So on the net, tax receipts suggest to me that economic activity has stalled. All comparable tax heads across years relating to economic growth - corporate tax, VAT, capital taxes - are performing either in line with 2010 or below. The only significant increases in tax heads are where new taxes were implemented and some of these are in effect transfers from non-tax receipts side, implying that increase in tax receipts via USC, for example, includes transfer of health levy which has an effect of increasing expenditure side.