10/06/2011: Industrial turnover and production - April 2011

Industrial Production and Turnover data was released today for April, indicating the overall activity in the manufacturing sector and the broadly defined sources of this activity.

In line with this, I went back and linked - re-based - 2006 and 2007 CSO data to current base to show some comparatives to pre-crisis dynamics.

Here are the highlights:

• Manufacturing activity was up 4.09% on annual basis, compared to April 2010. Monthly increase was 2.24%. However, Manufacturing activity was down 1.44% on 3 months ago and 4.16% on April 2007 (pre-crisis). The seasonally adjusted volume of industrial production for Manufacturing Industries for the 3mo period to April 2011 was 1.8% lower than in the preceding 3mo period
• All industries activity was up 1.32% mom and 2.67% yoy, but down 2.095% on 3 months ago and down 5.33% on April 2007.
• Modern Sectors posted a volume increase of 2.52% yoy and 1.41% increase mom. The activity in Modern Sectors is up 4.79% on April 2007, but is down 2.4% on 3mo ago.
• Traditional Sectors activity was up 1.39% yoy and 1.15% mom, but down 0.57% on 3mo ago and a whooping 18.05% on April 2007.
• It is interesting to note that Modern Sectors are positively correlated with Manufacturing output to the tune of 0.772 for the full sample (January 2006-present), but this correlation grew to 0.863 for the sub-sample covering the crisis (since January 2008) and continues to grow today - up to 0.926 for the sub-sample since January 2010.
  
• In terms of Modern Sectors influence on All Industries volumes, the same relationship holds, with full sample correlation of 0.713 rising to 0.812 for the crisis period and to 0.887 for the period since January 2010.
• The predominant role of Modern Sectors in driving Irish Industrial production is contrasted by a very modest role played by Traditional Sectors, where correlation with All Industries has declined from 0.416 in the full sample since January 2006, to 0.290 in the sub-sample covering the crisis since January 2008, to 0.142 for the sub-sample since January 2010.
  

Chart to illustrate:
Of course, the driving factors discussed above imply that:

• The collapse of construction and real estate investment exposed the extreme degree of indigenous industries dependence on these areas of economic activity;
• MNCs-dominated modern sectors, free of constraints of domestic demand, have been experiencing strong recovery. Manufacturing has regained pre-crisis peak of 109 (attained in 2007) back last year (reaching index reading of 110.1 for the year), which also pushed All Industries index a notch above pre-crisis peak. Modern Sectors have shot to new historic highs in 2010, reaching 124.7 index reading, compared to pre-crisis peak of 111.2 attained in 2007. It is worth noting that Modern Sectors have recovered from the recession back in 2009, having posted volume of production index reading of 112.7 - above the pre-crisis peak.
• These trends continued in April 2011, as CSO notes, since "the most significant changes [in Volume of Production Indices] were in the following sectors: Basic Pharmaceutical products and Preparations (+11.3%) and Beverages (9.9%)... The “Modern” Sector, comprising a number of high-technology and chemical sectors, showed an annual increase in production for April 2011 of 2.6% and a increase of 1.4% was recorded in the “Traditional” Sector.

Next, consider turnover indices:

• Turnover in Manufacturing sector in April registered index activity at 95.9, which is 3.01% above March activity and 3.45% above April 2010 activity. However, turnover is 4.29% below that recorded 3 mo ago and 14.40% below April 2007. The turnover in April was also lower than the turnover in any of the months from May 2010 through February 2011
  
• Turnover in Transportable Goods Industries posted index reading of 95.4, which was up 2.69% mom and 3.02% above April 2010 reading. The index was down 4.6% on 3 mo prior to April 2011 and 15.22% below April 2007 reading.
• This suggest that output sales conditions have improved mom (monthly changes in turnover exceed change in volumes), but are still down yoy.

Chart to illustrate:
Lastly, the above chart also shows new orders activity which has risen from 90.7 in March to 95.9 in April for all sectors. However, new orders activity remains slowest for any month since the end of April 2010 through February 2011. New orders index is therefore up 5.73% mom (good news) and 3.79% yoy (also good news), but it is still down 4.39% from 3 mo ago and is down 15.52% on April 2007.

09/06/2011: CPI data for May

Consumer Price Inflation data for May is out today. Recall that a month ago, higher mortgage costs and oil prices pushed inflation to a 30-month high, with prices in April up 0.4% mom and 3.2% yoy. This was the second highest rate of annual inflation since 2008. This time around, the catalyst for inflationary pressures was supposed to be mortgages costs, as ECB hike of 25bps in April was expected to feed through to retail rates. CSO is very careful about this aspect of inflation, having issued in the latest release an explanatory note (see below). Market expectation, consistent with my view expressed in December-January issue of Business & Finance magazine, is for inflation to average around 2.8-3.1% in 2011.

Now, on to today's data:

• May CPI rose 0.1% mom - below the markets expectations and below 0.6% mom rise in May 2010. Yoy inflation was at 2.7% in May 2011, again below expectations in the market.
• HICP - omitting, among others, cost of mortgages, car and home insurance, car taxes etc (see CSO note on this in the main release) - posted 0% change mom against 0.3% increase mom in May 2010. Annual HICP rose 1.2% relative to May 2010.

Charts to illustrate - first CPI, then two indices of prices:
In annual terms, largest increases were posted in

• Housing, Water, Electricity, Gas & Other Fuels - up 8.5% after posting 11.8% rise in April and 12.5% in March. Within the category, Rents posted a 1.0% decline yoy and 0.1% increase mom, while mortgages interest costs posted a 0.6% mom rise and 20.1% increase yoy. Electricity, gas & other fuels sub-category posted a 1.0% decline mom and 6.6% rise yoy with Liquid fuels falling 3.8% mom and rising 17.9% yoy.
• Miscellaneous Goods & Services posted a 8.4% increase yoy primarily driven by Insurance (+15.9% yoy) of which Health Insurance (+21.6% yoy, but -0.6% mom) was the biggest culprit. Motor car insurance was up 7.6% yoy and 0.7% mom.
• Communications were up 4.1% yoy - driven solely by 4.3% rise yoy in Telephone & communication services.
• Health was up 4.0% yoy - hospital services up 11.4% yoy (no change mom) followed by Pharmaceutical products (+2.5% yoy and 0% change mom)
  

Deflation was recorded in

• Furnishings, Household Equipment & Routine Household Maintenance (-1.9% yoy and -0.1% mom) with strong deflationary momentum in Furniture & furnishings (-5.7%), and Major household appliances (-4.0%)
  
• Education - down -1.3%- driven by 1,8% yoy decline in Other education and training and -1.4% drop in Third level education. On the opposite side of the spectrum, Primary education costs rose 1.3% yoy and Second level education costs were up 0.8% yoy.
  

Charts to illustrate these trends:

As usual - an imperfect measure of state v private sector controlled prices - first straight forward state-controlled or dominated or influenced sectors:

Next - an index of prices in two broadly defined sectors:
One point worth making - the above chart clearly shows that inflation has moderated in state-controlled sectors. It remains to be seen if this welcome change mom will translate into a longer term trend.

Finally, a point, as promised above, on the issue of mortgages costs. CSO provides a handy explanation of their terminology on page 10 of the main release, from which I quote here:

"... current approach to measuring mortgage interest in the CPI reflects the situation in the base reference period December 2006 when the standard variable rate was dominant. Subsequently, tracker mortgages have become more popular. This did not give rise to any difficulties while the standard variable and tracker mortgage interest rates moved broadly in line with one another, which would be the normal expectation. However, the decoupling that has taken place since August 2009 has resulted in dramatically different trends emerging. For example, between September 2009 and September 2010 the standard variable rate increased from 2.93% to 3.66% whereas the tracker rate did not change. The Mortgage Interest component of the CPI, which is largely determined by the trend in the standard variable rate, increased by 25.1% as a result and contributed +1.25% to the overall change in the All Items index. It is crudely estimated that the latter impact would have been reduced by between 0.2% and 0.5% had the Mortgage Interest component been calculated on a current weighting basis."

So what CSO are saying is that current mortgages costs metric overstates the overall impact of mortgages costs increases on CPI because more mortgages, since 2006, were issued in the form of tracker mortgages. That's fine, but there is also a sticky problem of the weights assigned to all spending categories, which are all based on December 2006. If since December 2006 the following changes took place:

1. Overall costs of mortgages rose relative to other costs,
2. Home ownership proportion in population rose (which could have been due to emigration out of the country selecting predominantly non-homeowners, for example),
3. There have been significant exits from tracker mortgages and fixed-rate mortgages since 2006 (perhaps due to either selection bias in defaults or due to bias in favor of fixed rate mortgages in maturing mortgages, for example)
   

Then the weights used for this sub-category of spending might be below their current levels, off-setting the above effects of tracker mortgages.

07/06/2011: Residential property prices

An impressively decent dataset from CSO on residential property prices has been released for the second monthly installment, so here are the charts and some high level analysis.

• Overall Residential Property Price Index (RPPI) for April was 78.2 or 0.8 points below March levels. Hence, mom the index has fallen 1.013% and is now 1 point below its 3mo MA. Year on year the index has fallen 12.233% and relative to peak of 130.5 reached in September 2007 it is now down 40.077%.
• Overall RPPI has recorded its 8th month of consecutive declines having risen statistically and economically insignificant 0.11%mom in August 2010. Year on year, April marked 38th consecutive month of declines.
  
• April index for houses fell 0.9 points to 81.3, down 1.095% mom, or 1 point below 3mo MA. Year on year index has fallen 12.013%. The peak for this sub-index was reached in September 2007 at 132.0.
• April index for apartments fell to 60.4, down 0.6 points - a mom decline of 0.984% and a yoy decline of 15.288%. April reading was 1.233 points below 3mo MA. This sub-index peaked at 123.9 in February 2007.
• Dublin properties sub-index has fallen 0.5 points in April to 70.5, a decline of 0.704%mom or 12.963% yoy. The sub-index now stands 0.77 points below 3mo MA and 47.584% below the peak of 134.5 in February 2007

Charts to illustrate:
To summarize - the deflation of house prices continues, although the monthly rate of decline has now fallen below both 6mo and 12mo average. This, however, might be due to seasonality, since April marks a relatively moderate month in terms of price movements in every year since 2008. house prices have now fallen 38.41% since their peak, while apartments prices have declined 51.25% from their peak.

It is worth noting - not as a criticism of the CSO, since it cannot do anything about the data - that the index is computed based on mortgages drawdowns, hence excluding any share of transactions that might take place on the 'gray market' (tax evading payments, swaps etc), as well as cash-only purchases and mortgages issued by lenders other than the 8 largest lending institutions from which the data is available.

Another issue, again - little that CSO can do for this - relates to hedonic adjustments undertaken in index computation. Hedonic characteristics used by CSO exclude a number of relevant parameters, such as number of bathrooms and the site size, as well as existence of garage and/or off-street parking. This, alongside with the tendency - due to planning permissions restrictions - to under-report actual floor area and number of bedrooms - means that the hedonic model might be relatively weak.

Finally, CSO employes a Laspeyers-type indexation method, which is "calculated by updating the previous month’s weights by the estimated monthly changes in their average prices". However, like all types of indices, Laspeyers indices suffer from some specific drawbacks. In particular, these indices are weaker in periods of adjustment in the markets. Here's a quick non-technical discussion:

Laspeyers index is designed to answer the question: "How much is the sales price today for the house that is of the same quality as in the base year (2005)?" Quality is compared using the hedonic model mentioned above, based on specific size of the house (floor area), its amenities (number of bedrooms, house type) and location (note - we do not know the granularity of such 'location' adjustment, which can be critical. For example, I live in Dublin 4, but not the "fashionable" part of it. This means that if location code used is D4 for my house, it will receive signficantly higher locational weight relative to true value of my location than a house in a "fashionable" D4 locale.

One key objection to Laspeyers index is that it is computed while assuming that the base year (2005) house remains unchanged over time. Hence, quality is assumed to be constant for referencing, implying the index over-states inflation and under-states deflation.

In addition, index does not capture the effects of substitution in housing. In other words, Laspeyers index does not reflect conversions of house features to substitute away from more expensive options, etc, or purchases shifting in favour of smaller properties.

Index also assumes that geographical distribution of house sales does not change over time - a feature that introduces significant biases into the index when locational markets are not uniform (when there are significant differences within the markets).

Finally, the index overstates price appreciation at the peak of the bubble, since at that point, less desirable properties were disproportionately represented in the market as buyers chased any home available for sale. This is known on the basis of the US data where at the top of the markets 'gentrification' of lower quality locations in many states has led to Laspeyers indices understating price inflation.

For thes reasons, Laspeyers indices are known as 'constant quality' indices.

Chain-linked indexation, employed by CSO, helps addressing some of these issues, but it does not eliminate them. Of course, that too has its drawbacks, namely the more substantial data requirement, plus the lack of index additivity (you can see this indirectly in the first chart above by the gravitational pull of the houses index on overall index.

07/06/2011: Irish Trade in Goods & Services

Having completed a new dataset on Irish trade - for both Goods and Services - here's the latest data we have.

Please, note, CSO does not report monthly stats for trade in services, which form a significant share of our exports and influence our trade balance and current account. Instead, CSO's monthly series make a claim about 'trade' without explicitly identifying that this 'trade' only covers goods. That identification, instead is buried in the 'fine print' methodology pages.

Ok, to the numbers. Given the vast size of Irish economy, the latest data on overall trade we have comes from QNA and covers Q4 2010. By the end of Q4 2010:

• Exports from Ireland stood at €40.073bn, down 1.35% qoq and up 11.67% yoy. Annual increase in Q4 2010 was €4.187bn, making Q4 2010 the highest level of exports in Q4 of any year since 1997.
• Lowest level of exports during the current cycle (since 2007) was reached in Q3 2009, implying that growth in exports returned in Q4 2009. Highest level of exports were reached in Q 3 2010.
  
• Imports stood at €34.546bn, up 8% qoq and 12.99% yoy
• Trade balance as of the end of Q4 2010 was a positive €5.527bn, down 35.98% qoq and up 4.05% yoy (+€215mln).
• Ireland's quarterly trade balance bottomed out in Q1 2008 and grew since then, peaking at €8.633bn in Q3 2010.

Charts below illustrate:

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.