22/06/11: Residential Property Index - May 2011

The CSO released their latest data for the new Residential Property Price Index (RPPI) for May 2011. Here are the highlights and updates, including forecast for 2011 (see last chart).

• Year on year May 2011 residential property prices nationally are down 12.16% with RPPI standing at 77.3 in May down from 78.2 in April. The 6mo average rate of decline is now at 1.2% per month and 12mo average rate of decline is now 1.07% monthly.
• Relative to peak prices across the nation are down 40.77%.
• 3mo MA RPPI is at 78.17 in may, down from 79.2 in April.
• RPPI is now down consecutively month on month since its peak in September 2007 with exception for August 2010 when it posted no change mom relative to July. Last time the index posted increase in yoy terms was January 2008.
  

So per chart above, the crunch is getting crunchier (note accelerated average rate of decline for 6mo relative to the average for 12mo), and mom changes are also posting acceleration downward from -1.01% in April to -1.15% in May.

Breaking down across two property types:

• RPPI for houses fell to 80.4 in May from 81.3 in April, down 1.11% mom. This marks consecutive monthly contraction since August 2010 when it rose statistically insignificant 0.11%. Relative to peak the series now down 39.1%. the 6mo average monthly rate of decline is 1.21% well ahead of 12mo average of 1.03%
• RPPI for apartments is down at 60 in may from 60.4 in April (-0.66%). Apartments prices index is down 51.57% on peak and 6mo average at -1.19% per month is signaling slower rate of decline compared to 12mo average of 1.41%

As a signal of stronger regional economy, Dublin presents a slightly divergent picture to May national level data:

• Dublin RPPI rose from 70.5 in April to 70.8 in May (+0.43%mom), marking the first monthly increase since April 2008. This increase is statistically insignificant, however. In addition, 6mo average decrease rate of 1.06% monthly is still ahead of 12mo average of 1.01%, suggesting the latest move is unlikely to be a trend-breaker to the upside.
• Dublin prices index is now 47.4% below the peak.

Now, using 5 months data for 2011 we can attempt a very crude forecast for the entire 2011, as shown in the figure below.
So far, all indications are - we are looking at another brutal year when it comes to property prices here. then, again, with zombie banks not lending and continuously hiking the cost of mortgages for existent clients, with Nama still hell-bent on derailing any sort of market bottoming-out dynamic, with all fundamentals signalling decreasing demand for property and reduced ability to pay for mortgages, it is hard to imagine the upside trend establishing in Irish property markets any time soon.

22/06/2011: DofF latest fiasco

A very revealing article in today's Irish Times - link here and a HT to Prof Brian Lucey - states that "The memo from a senior official in the department rejected the assertion from UCD economist Morgan Kelly of a possible 60 per cent fall in values over nine years. It also advised Mr Cowen, who was minister for finance at the time, that he should warn against overreacting to falling house prices. The document, drawn up by economist John McCarthy in July 2007 and sent to the former taoiseach pointed out that the housing values remained above 2006 levels."

This is another piece in a long string of evidence trickling down from the Merrion Street that points to the nature of advice and analysis conducted by the DofF. In Summer 2007 Irish property markets started showing signs of significant stress and by August we experienced the first slowdown in the rate of growth in stamp duty receipts. National average asking prices for homes, according to Daft.ie, posted seasonally unexpected decline of 0.34%mom in March, bouncing off the historic peak in February 2007. This was followed by another seasonally unexpected decline of 0.44% in April, rebound of 0.69% in May, a decline of 0.09% in June (again out of line with seasonal patterns) and a drop of 0.56% in July. The signs of some sort of sickness in the market were already visible, therefore, at the time the DofF note was issued.

Of course, DofF can be excused for not spotting the turning point in the property market - after all, virtually all data through July 2007 was at the very best inconclusive. But, the report leaves several issues worth addressing:

1. By August it was clear that the global financial markets were suffering significant pressures, which warranted some DofF attention, including on the side of the property markets;
2. What was DofF's business in advising the Minister to 'warn against overreacting to falling house prices'? Should, in an ethical society, the Minister for Finance make any calls whatsoever on private asset markets? Or should, in a functional economy, DofF job cover the need for preparing a policy response to the potentially dangerous situation developing in the major sector of the economy? In other words, was DofF doing its job advising the Minister on a PR exercise, and was it not doing its jobs in not preparing for the contingency of a property market collapse?

Of course, all of this remains academic compared to the brutish bullying stupidity of Mr Cowen's boss who famously barked in response to Prof Morgan Kelly’s articles in 2007 that: “Sitting on the sidelines, cribbing and moaning is a lost opportunity, I don’t know how people who engage in that don’t commit suicide.” (see full record here).


Oh, and just in case you might think DofF has learned any lessons from the July 2007 note debacle? Think again. Per same Irish Times report: "According to fresh analysis conducted by department economist Ronan Hickey – and published yesterday – house prices had fallen by 40 per cent from their 2006 peak by the fourth quarter of 2010." (emphasis is mine)

Err, what a wonderful revelation that is. In fact, the DofF 'analysis' is so ground-breaking that it simply confirms the data released by CSO last month - see report on that here.

But don't blame Mr Hickey for this - blame Irish Times bizarre reporting style. Mr Hickey didn't carry any 'fresh analysis' that Irish Times claims he did. instead, Mr Hickey clearly and transparently quotes from a now discontinued time series data from ESRI and ptsb index that were publicly available for ages now.

You can see this in his own paper/presentation/post available here. Just go to page 10 to see this 'fresh analysis'. Again, Mr Hickey is not doing anything wrong here, it's just the excited Irish Times failing to read his paper reporting old news and new news.

What is, however, amazing about Mr Hickey's paper/presentation/post is that this very information and the same analysis is being provided for free on a number of blogs around the country. In many cases, blogs analysis is actually way better, more data-intensive and detailed. Yet, in age of austerity, the Gov see fit to spend thousands on wages of PR-spin economists working for DofF.

21/06/2011: Bilateral trade between Ireland and Russia

As promised earlier today - the latest updates on bilateral trade between Russia and Ireland, courtesy of the latest CSO release.

Imports from Russia rose from €10.6mln in February 2011 to €15mln in March, down on €18.8mln a year ago. Exports to Russia rose from €39.5mln to €40.6mln mom in March. Q2 2011 Exports now stand at €116.5mln while imports are €39.1mln implying a trade surplus in favour of Ireland of €77.4mln for Q1 2011 - up from €15.9mln a year ago. Overall, trade surplus to Russia for Q1 2011 is now above trade balance for Brazil (€19.1mln), Canada (€68.7mln), Malaysia (€56.7mln), Mexico (€69.5mln), Singapore (€54mln), South Africa (€38.5mln), South Korea (€14.6mln) and Turkey (€57.4mln). It is worth noting that trade with China, India and Taiwan registered trade deficits against Ireland.

Few charts to illustrate (note the annualized projections based on Q1 data - not for the accuracy points, but for the directionality).

So should the performance so far through Q1 continue, this will be another record year for bilateral trade with Russia both in terms of exports from Ireland and in terms of trade surplus.

21/06/2011: Trade Data for April

Per latest CSO data released today: Ireland's seasonally adjusted

• Imports rose from €3,721m in March to €4,914.3m in April (+32%)
  
• Exports decreased from €7,717.6m to €7,530.4m (-2%)
  
• Please note, these figures cover only goods trade

Ireland's trade surplus was €2,616.1m in April 2011, down on €3,758.1m in April 2010 and down on €3,996.6m in March 2011.

January-March 2011 imports rose strongly in:

• Food & Live Animals - from €1,066.1m to €1,248.0m yoy
  
• Crude Materials, Inedible, except fuels - from €152.7m to €189.9m yoy
• Mineral fuels, lubricants and related materials - from €1,347.9m to €1,748.1m yoy
• Animal and vegetable oils, fats and waxes - from €37.7m to €57.5m yoy
• Chemical and related products - from €2,131.3m to €2,524.0m yoy
• Manufactured goods classified chiefly by material - from €802.7m to €922.0m yoy
• Machinery and transport equipment - from €3,203.7m to €3,707.0m yoy
• Miscellaneous manufactured articles - from €1,408.2m to €1,494.0m yoy

Changes in imports in mineral fuels, lubricants and related materials, as well as in chemical and related products is broadly in line with MNCs demand for inputs to deliver increases in exports. Machinery and transport equipment imports increases were characteristic of some replacement of lost (depreciated) capital base in the industry.

Exports increased by 9% to €23,346m in Q1 2011 compared to Q1 2010 with:

• Exports of Medical and pharmaceutical products increased by 18% or €1,065m
  
• Exports of Organic chemicals rose by 15% or €716m.

Exports of Electrical machinery decreased by 6% or €48m.

Lastly, terms of trade deteriorated for Irish exporters from 78.0 (price of exports ratio to price of imports) in February 2011 to 77.1 in March 2011. March reading was the lowest since January 2003 and compares unfavorably to 86.3 reading in March 2010 and 86.6 reading in March 2009.
This, of course, means reduced profit margins for Irish exporters and pressure on tax returns from external trade activities, as well as potential pressure (it will take more than a couple of months of low readings) on employment in the traded sectors. Broadly-speaking (ignoring a slight rise from 80.8 in November 2010 to 80.9 in December 2010), terms of trade have been deteriorating now for 10 months.
So as chart above shows, high exports volumes are coming in at the cost of reduced profit margins. Of course, much of this can most likely be attributed to transfer pricing by MNCs, suggesting that we might see increased emphasis on booking profits via Irish operations. This, n turn, can provide artificial support for GNP in the same way as it did in Q4 2010.

20/06/2011: Two good news from Minister Bruton

It's not all doom and gloom, folks, so when good news do arrive, or at least there is a hint at such news..., time to share. (A major HT to the fellow twitterati: @BriMcS).

The first piece comes from Minister Richard Bruton (see full release here). Let me focus on few points of interest:

"The Minister held individual meetings with 22 companies across a number of targeted sectors, including five of the top ten technology companies in the USA. The companies he met include several top internet companies with household names. The 22 companies employ a total of over 350,000 people worldwide, with combined revenues of over $230billion."

This suggests that the Minister was meeting with large MNCs, which is good. But importantly, he also met with "several rapidly growing “new technology” companies which are characteristic of the new Silicon Valley boom". This suggests that the Minister has met with some younger and faster growing internet companies, especially companies past the first/second round of fundrasing and only starting their operations outside the US. The domain of such companies is a new territory for IDA and they represent hige untapped potential for Irish market.

Also encouraging is the fact that the Minister also met a number of "companies in international services, entertainment and aviation" - areas outside the traditional focus on ICT and life sciences.

Also crucially, the Minister explicitly recognized one of the core problems faced by Irish companies and MNCs in the ICT sector today - the problem of skills shortages. "... it is estimated that there are currently approximately 3,500 vacancies in the ICT sector in Ireland. The Minister for Education and Skills has recently announced over 2,000 one-year ICT training places as part of the Springboard programme from this September. However we must also go beyond immediate needs, and I together with Minister Quinn will shortly start an ambitious process of examining measures we can take to respond to the future requirements of the ICT sector."

I recently spoke at the Irish Internet Association annual conference where the issue of specialist skills shortages in ICT and the lack of incentives for entrepreneurs in the sector were raised repeatedly. It is clear from my sources that:

1. We are currently experiencing net outflow of high end skills in ICT due to absolutely regressive, skills- and entrepreneurship-penalizing changes in personal income taxation in the Budgets 2010 and 2011. In particular, high upper marginal tax rate and absurd USC rates and penalty for self-employed workers and entrepreneurs are having dramatic effect of pushing the younger and most skilled high-end ICT specialists out of the country.
2. Skills base of indigenous workforce in the area of high-end ICT specialists cannot be improved significantly within reasonable time frame (less than 4-5 years) as such skills require a combination of education (beyond 3rd level) plus on-the-job training.

Another excellent change comes also courtesy of Minister Bruton (details here). Minister Bruton will legislation facilitate formation of co-operative societies to further facilitate formation of new enterprises. The move is aligned with the publication of the new Companies Bill and is designed to reduce red tape (which, is welcome, but incidentally, is not as important to the entrepreneurs and companies operating in Ireland, despite FG's excessive focus on 'red tape'). But the value of the new changes to co-operative societies regulations is of great value in itself.

Co-operative ownership represents one of the oldest forms of alternative enterprises and having more streamlined, easier regulatory environment for co-ops can be a net positive for entrepreneurship. Co-operative ownership is also rather efficient in the conditions of constrained credit availability for SMEs because it allows for better anchoring of household savings into investment.

Here's some interesting literature on co-operatives:
Link 1: The study of co-operatives in modern economics: a methodological essay
Link 2: A study into co-operative enterprise for instrumenting and marketing auctions in agricultural produce and a related later study which is even broader here.
Link 3: An interesting study on co-operative's reforms in Italy (where co-operative ownership stretches from traditional agricultural and tourism sectors to banking and distribution)
Link 4: Another study from Italy focusing on the future of financial co-operatives in relation to post-crisis financial services recovery
Link 5: An excellent discourse on the issue of co-operative firms role in bridging the gap between social and market objectives, containing some best practice in regulatory frameworks to support co-operative efficiencies (which might be of help to Minister Bruton as well).

20/06/2011: Europe's Corporate Tax Rates

The Institute for International and European Affairs provided a comprehensive list of EU member states' effective corporate tax rates - here - with a handy graphic depicting various states as either highest or lowest in terms of their corporate tax rates in a continuous color coded scheme.

Statistically-speaking, the cool graphic is slightly the case of 'more design, than substance' as it does not provide analysis for what constitutes a 'high' or 'low' rate. Below, I provide a chart based on IIEA's data with specified boundaries for cut-offs for the tax rate categories. These bands are based on the +/- 1/2 of STDEV and +/- 1 STDEV from the mean. Please note that the parameters are:

• Mean (EU-wide less Malta) = 12.55%
• Mean (Euro area) = 13.88%
• Median (EU-wide) = 12.55%
• STDEV = 6.40

For the sake of an argument: Ireland is just below the EU average and is firmly in the 'Average' tax rates category. France and Denmark are firmly in the 'Low' tax rates category and Belgium and Lux are in 'Very Low' category. Ireland's 'neighborhood' in terms of plain statistics, includes: Austria, Portugal, Greece and Cyprus.

So, statistically, Irish effective corporate tax rate is indistinguishable from EU Average and from Euro Area Average. I'd say: "Bugger-off, Sarko!"