02/07/2011: Was banks Guarantee 2008 a subsidy to foreign lenders?

Please note: the figures below are estimates, based on Table A.4.2 data from the Central Bank of Ireland for 6 covered banking institutions liabilities as of September 2008. These charts illustrate the comment I provided to the Quarterly Journal of Central Banking - forthcoming issue for Q3 2011.
First, straight forward composition of liabilities as shown in the chart above.

Next, the same expressed as percentages of total liabilities:
Finally, assumptions and calculations of total implicit subsidy from the Irish taxpayers/Exchequer to foreign liabilities holders:
Click on the chart to enlarge and see assumptions and calculations. Euro area residents accounted for €39.572 billion of our banks' liabilities or 6.42%, while non-Euro area residents accounted for €218.836 billion or 35.5% of total Ireland-6 liabilities at the time the Guarantee was issued. Thus, Euro area residents received an implicit subsidy from the Irish taxpayers to the tune of €5.5-6.7 billion over the time of the Guarantee - well in excess of the life-time cost of 1% reduction in the interest rate on our EU loans.

Of course, this is a crude estimate based on official provided and expected default rates on assets held by the Irish banks - excluding Anglo and INBS. Which means it is likely to be an under-estimate. Expected losses at INBS and Anglo are multiples of those assumed for the Ireland-4 covered in the main PCARs. With Anglo & INBS thrown into the mix, subsidy to Euro area residents rises to ca €8 billion.

Another issue here is that I am using estimates through 2013 only. This means that, like the CBofI I am assuming (ad hoc) that post-2013 IRL-6 will be able to cover their own losses without resorting to taxpayers capital injections. This assumption, in my view, is absolutely unrealistic.

Finally, no allowance is made here for the Irish Government underwriting of the funding debts incurred by the banks vis-a-vis ECB and CBofI - the debts which, at least in the case of Anglo & INBS, should be treated as largely reckless lending to insolvent institutions and which should not be a liability of the taxpayers.

In the end, in my opinion, Irish Government had no business underwriting a Guarantee for any of the liabilities in excess of €130.2 billion of domestic deposits and €2.813 billion of its own deposits with the IRL-6.

Note - another issue not addressed in these estimates, but also likely to increase the implicit subsidy extended to Euro area residents is that Monetary & Financial Institutions deposits figures cover IRL-20 banks regulated here, which include a large number of deposits from Euro area banks that are within IRL-20.

02/07/2011: Irish Manufacturing PMI

Last month I was expressing some concerns about the direction of the PMIs, as well as questioning the argument that confidence of its own, is causally capable of driving fundamentals, rather than reflect them. The latest data for PMIs in Manufacturing from NCB Stockbrokers released today (covering June 2011) confirms the validity of my concerns. Here are the headlines:

• Manufacturing PMI for June fell to 49.8 - below the critical 50 mark, implying contraction in the overall manufacturing activity. The PMIs are down from 51.8 in May 2011. This is the first time since September 2010 that PMIs are below 50. While in order to establish a trend the PMIs should drop below ca 48, the swing from 51.8 to 49.8 is statistically consistent with at least 70% chance of this drop being a sign of real deterioration.
• The 12mo MA now stands at 52.6, with 3mo average at 52.5 down from 56.1 in 3 months for January-March 2011. Same period 3mo average for 2010 was 53.1 and for 2009 it was 39.3.
• Output overall also moved into contraction territory with June reading of 49.3 down from May reading of 52.6. Again, the magnitude of the swing is statistically significant. 12 mo MA now stands at 54.0 while 3mo average at 53.5 down from the previous 3mo average of 59.2.
• Output has not been below 50 since February 2010.
  

• New orders are down to 48.7 in June from 52.9 in May - a very strong decline and are now below 50 for the first time since September 2010. In Q2 2011 the average new orders reading was 53.0 against 58.6 for Q1 2011. 12mo MA is 53.3 in June 2011 well ahead of the current monthly reading.
• New export orders are the only component of PMIs that still signals expansion, albeit at 51.5 in June this expansion is much slower than 58.7 recorded in May 2011. New exports orders 12mo MA in June was 56.0. Q2 2011 reading of 56.4 is significantly below Q1 2011 reading of 60.4. same period average for 2010 was 57.4.
• Backlogs and inventories are also signaling troubles ahead. Per NCB analysis: "As has been the case in each month since March, backlogs of work at Irish manufacturers decreased in June. Moreover, the rate of depletion accelerated sharply to the strongest since October 2009. According to respondents, reduced demand was a key factor behind the fall in outstanding business. More than 31% of panellists reported a drop in backlogs over the month, compared with just 9% that posted a rise." While inventories are still being depleted, the rate of depletion has slowed down to lowest since May 2008.
• Suppliers delivery time extended to 19 months with the survey respondents highlighting "both shortages of raw materials and capacity pressures at suppliers as reasons for the latest deterioration."
• Lastly, for the second consecutive month Irish producers cut back on their purchases of inputs into production in line with falling orders.
  

• On prices front, "June data pointed to a further considerable increase in input prices at Irish manufacturing firms. Input costs have now risen throughout the past year-and-a-half. However, the rate of inflation eased for the third month running to the weakest since September 2010. Respondents noted that oil-related costs had been a key factor behind higher input prices." Input price index stood at 63.5 in June - down from 68.9 in May and down on 3mo and 12mo averages. At the same time, output prices index fell from 54.3 in May to 53.2 in June. "The rate of inflation [in terms of output prices] moderated for the third consecutive month to the slowest in the current period of increased charges. Panellists reported that the passing on of higher raw material costs to clients was the principal cause of the latest rise in output prices." So output prices are not catching up with input prices, implying margins are not being rebuilt.
  

• In terms of employment, "staffing levels at Irish manufacturing firms decreased for the second consecutive month in June, with respondents largely attributing this to falling workloads. The rate of job cuts accelerated to the steepest since September 2010. All three monitored market groups posted a decline in employment." Employment index in manufacturing fell to 48.3 in June from 49.9 in May. The index now stands below 12mo average of 50.2, Q1 2011 reading of 53.2 and Q2 2011 average of 50.7. Q2 2010 reading was 49.0 - ahead of June 2011 reading.

All of this means that I was correct in pointing to the weaknesses in PMIs in May 2011 and, unfortunately, it means that per PMIs our Manufacturing has now re-entered a recessionary territory:

01/07/2011: Retail Sales for May 2011

With a delay due to technical issues with the blog - here are the updated figures for retail sales for May:

• The volume of retail sales declined 2.1% in May 2011 when compared with May 2010 but rose 1.3%. mom. Current reading for the index is now 92.7, up from 91.5 in April but still below 2010 annual average of 93.3. The index is now above its 3mo average of 92.17. The index is now down 17.96% on its peak.
• Value fo retail sales is up 1.1% mom and down 1.5% year on year. The index reading in May 2011 was 88.4 against April reading of 87.4. May reading is still below 88.85 2010 average, but above 3-mo average of 88. Relative to the peak, value of sales is now down 24.44%.
  

• Ex-Motor Trades, the volume of retail sales decreased by 5.1% in May 2011 against May 2010 and declined 0.6% mom. The index now stands at 98.2 against 98.9 in April, and 99.1 3mo average. The index is also lower than 6mo average of 99.38. The latest yoy drop comes after 5.2% decrease in April 2011 and marks the second largest decline since December 2009 when index contracted 6.3% yoy
  
• Ex-Motors value index fell 1.2% mom and 3.5% yoy and now reads 95.2 against 96.3 in April. This was the largest annualized drop since September 2010 when yoy decline was 3.8%
  

Per CSO: "Motor Trades (+13.0%) and Electrical Goods (+2.9%) were the only categories that showed year-on-year increases in the volume of retail sales this month. Hardware Paints & Glass (-13.9%), Other Retail Sales (-10.3%) and Fuel (-9.9), were amongst the eleven categories that showed year-on-year decreases in the volume of retail sales this month." Interestingly, despite declines in volume, fuel sales were up 1.1% yoy in terms of value, implying rampant inflation in the category. In contrast, decline in value of sales in Furniture & Lighting (-14.5%) outpaced declines in volume of sales (-13.9%) implying deflation on top of collapsing volumes. In Electrical Goods, a rise in volume was offset by a 3.1 drop in value (yoy), implying deflation canceling out positive effects of growth in the volume of sales.

As of April 2011, Ireland (-4.9%) posted the second largest monthly drop in retail sales volumes in the Euro area after Malta (-8.0%), although Greece (likely to show deeper fall than Ireland) is yet to report comparative data. In March 2011 we recorded 5th highest drop in volumes, same as in February and January.

29/06/2011: Live Register - June 2011

Live Register figures for June are out, so let's updated the charts.

Headline numbers are for implied standardised unemployment rate which is up in June to 14.2% from 14.1% in May. Remember, this change is reflective of the past adjustments made to the Live Register-implied standardised unemployment rate made on the foot of latest QNHS-derived official unemployment rate which in Q1 2011 stood at 14.0%.

So:

• Standardized unemployment rate was driven up by 2,900 new entrants to seasonally adjusted LR (+0.7% mom)
• Overall in June 2011 there were 457,948 people signing on the Live Register (not seasonally adjusted) -- an increase of 5,066 (+1.1%) yoy. In May 2011, yoy increase was 3,025 (+0.7%)
• Increase in the first 6 months of the year was 37,420(+9.0%) relative to the first six months of 2010. Obviously, that is down from a massive jump of 194,651 (+88.2%) in Live Register for the first six months period between 2009 and 2010

In seasonally adjusted terms: there was a 5,000 (+1.13%) increase in the numbers on Live Register in June 2011 relative to June 2010. May 2011 increase on May 2010 was 2,900 (+0.66%). Taking 3-mo MA: current 3mo MA (Q2) rose 0.604% on previous 3-mo period (Q1) and current (Q2) 3mo average is up 0.925% yoy. This suggests renewed acceleration, albeit weak, in LR numbers. Monthly increases in LR were 2,900 (seasonally adjusted) for June and May, a decrease of 600 in April and a rise of 1,000 in March. Not an exceptional level of volatility in the series to suggest general upward trend. Since January 1, 2011 we have added 5,300 to the seasonally adjusted Live Register figures.

Some other results from the latest release:

• Seasonally adjusted, there was a monthly increases of 2,000 males and 900 females, but year on year the number of females on LR has risen by 3.8% (+5,975) while the number of males is down 0.3% (-909). In the six months through June 2010, 15,797 (+11.3%) females were added to the LR against 21,623 (+7.9%) males
  
• Perhaps expected, but extremely worrisome is the rise of long term claimants by 49,448 in the year to June 2011, in the words of CSO: "bringing to 40.8% the number of claimants that have now been on the Live Register for one year or more. In June 2010 long term claimants made up just over 30% of the total Live Register." The problem with is that long duration of unemployment spell implies structural unemployment, with requisite loss of skills, continuity of experience and subsequently reduced employability.
• Youth unemployment has eased somewhat in June. LR for those under 25 years of age has fallen 4,500 year on year (-5.18%), but zero percent mom. In May 2011, yoy decline in this category was 4,800 (-5.50%), so not exactly an improving trend here. But at least some good news. In contrast, LR for those 25 years of age and over increased 9,500 yoy (+2.68%), against May 2011 yoy increase of 7,600 (+2.15%).

• Numbers of casual and part-time workers on LR increased 6,526 yoy (+8.23%) in June, up from the increase of 6,058 (+7.68%) in May, suggesting that the overall quality of employment gained by LR signees is low. Current 3mo average yoy rise is 8.04% against previous 3mo average rise of 7.82%. Not dramatic, but certainly not signaling any improvement in jobs creation quality.
• Lastly, the numbers of non-Irish nationals on LR has risen by 76 in June 2011 relative to June 2010 (+0.1%) while the number of Irish nationals was up 4,990 (+1.33%). In May 2011, yoy changes in these two groups were: -1,091 (-1.40%) and +4,116 (1.14%). 3mo averages also suggest strong divergence in LR in favour of lower non-Irish nationals participation and higher Irish nationals participation.

25/06/2011: Daft.ie v CSO RPPI - property prices in Ireland

Courtesy of the CSO RPPI - published for the first time this year - Ireland now has two series of property prices data to compare - Daft.ie asking prices and rents, and CSO's RPPI. Since Daft.ie pre-dates CSO dataset and since Daft.ie is a private undertaking with no access to the resources of the state in paying for and collecting data, it might be of interest to see how the two series compare.

This is exactly the exercise I performed.

Let's take a look at the CSO RPPI (an index) and Daft.ie (prices):
So a strong relation in terms of asking prices and RPPI - some 97% of variation explained.

Similarly, a very strong relationship between RPPI and Daft.ie reported asking rents:
Note that there are serious lags in the asking prices and rents relative to what RPPI is measuring, but overall, Daft.ie seems to be doing as good of a job of capturing prices over the long term as CSO data.

It is worth noting that when I converted Daft.ie prices to an index comparable directly to CSO RPPI, the results remained the same. So well done to Daft.ie gang - they really managed to run (and continue running) a superb database.

Another interesting issue is the relationship between property prices and rents:
Really, self-explanatory.

23/06/2011: Quarterly National Accounts Q1 2011

QNA results for Q1 2011 are in today. Some are expected, some are not. Her's a quick snapshot of the core data. Keep in mind - these are initial estimates subject to future revisions.

Seasonally adjusted GDP rose 1.3% qoq. Surprised? You shouldn't be - in 2010 the same Q1 rise was 1.0%.

If a base year chosen for real variables adjustment was 2008 as before Q1 2011, year on year the increase in Q1 2011 was just 0.04%, so annualized growth extrapolated from Q1 result is effectively zero. At the same time, as predicted in my analysis of Q4 2010 results, GNP crashed on the back of strong outflows of net factor income. GNP is now down 4.32% qoq and down 0.65% yoy. The GNP decline was, as I mentioned before, predictable. In Q4 2010 many MNCs parked their profits in Ireland in hope of getting a new repatriation deal out of the US administration in 2011. Thus, they forward-loaded profits into Q1 2011, pushing transfers up and GNP down. Net factor outflows abroad rose to €7,712mln (constant prices seasonally adjusted terms) up 34.3% qoq.

Of course, CSO re-based their data to 2009 for the main series, which means that in constant prices terms, seasonally adjusted:

• Agriculture, Forestry & Fishing sectors output in GVA terms fell 2.2% qoq and rose 4.3% yoy, while still posting a 5.4% decline on the peak
• Industry GVA fell 0.4% qoq and 0.9% yoy to post -4.5% contraction on the peak quarterly performance
• Building & Construction sub-sector of Industry posted a 15.4% contraction qoq and 18.7% fall yoy, to end Q1 2011 at 75.7% below its quarterly historical peak
• Distribution, Transport & Communications sector grew 1.3% qoq, but still down 0.9% yoy and 15.7% below peak
• Public Administration and Defence shrunk 0.7% qoq and 2.2% yoy - not exactly what you'd expect in the age of severe austerity. The sector GVA is now 8.2% below its peak
• Other Services, including rents show 0.7% increase qoq and 1.7% decline yoy and are 8.3% below the peak
• Taxes net of subsidies were 2.2% down qoq and 2.2% down yoy, showing overall decline of 36.6% on the peak, implying that savings from austerity are not catching up with declines in taxes net of subsidies
• GDP in constant market prices and seasonally adjusted terms, based on GVA, had risen 1.3% qoq and is flat at +0.04% yoy and down 11.5% on peak
• GNP based on GVA is down 4.3% qoq, down 0.65% yoy and is 15.4% below its quarterly peak
  

Thus, the GDP/GNP gap has widened once again. On GVA basis (constant prices seasonally adjusted) the gap is now 19.62% up from 14.93% in Q4 2010 and 19.07% in Q1 2010. This is the record quarterly GDP/GNP gap in the history of the series.
So on the basis of GVA (Gross Value Added), Irish economy (GDP) grew solely on the back of Distribution, Transport & Communications sector expansion (qoq) and Other Services, including rents (qoq). For all the boom in manufacturing we are experiencing, industry still contracted qoq. Year-on-Year, the only positive contributor to GDP was Agriculture, Forestry and Fishing sector. Not exactly a boom time, folks.

Now, take a look at the expenditure basis of GDP calculations. Chart below illustrates:

Let's take a closer look. In constant market prices, seasonally adjusted:

• Personal consumption of goods and services fell 1.88% qoq and 2.72% yoy. This was the first time since Q2 2005 that personal consumption fell below €21 billion in any quarter. Relative to peak quarter performance, Q1 2011 consumption stands at -12%
• Net expenditure by central and local government has declined 1.93% qoq and 4.16% yoy, reaching -10.3% decline on peak historical quarterly performance. If you think that this austerity, then let's put it into euro value terms. Q1 2011 net government expenditure was just €131mln below Q4 2010 and €290mln below Q1 2010. Relative to the peak quarterly expenditure, Q1 2011 spending was down just €765mln or annualized savings of less than €3.1 billion. Not to say this is not a painful correction, but hardly a sign of severe austerity and certainly not enough to undo our €17 billion-odd annual deficit
• Gross domestic fixed capital formation improved - at last, posting 1.08% gain qoq, although still 8.85% below Q1 2010. Relative to peak, investment in fixed capital is now 59.2% below historical quarterly high
• Exports of goods and services boomed once again, rising 3.79% qoq and 6.85% yoy (an annual rate consistent with the IMF forecasts, but well behind the projections by the DofF and ESRI). Relative to historical peak Q1 2011 exports were 0.9% above historical high
• Imports have fallen 0.34% qoq providing positive contribution to GDP, but are up 3.79% yoy. Imports are now 10.6% below quarterly historical high
• Thus, GDP at constant market prices was 1.26% above Q4 2010 and 0.04% above Q1 2010, while GNP was 4.32% below Q4 2010 and 0.65% below Q1 2010.
  

In other words, GDP was supported in growth by Gross domestic fixed capital investment, smaller stocks drawdown, exports increases and imports declines. Qoq, net exports (exports minus imports) grew by €1,557m (20.6%) at constant 2009 prices. Domestic demand, on the other hand, declined by €990m (-3.1%) over the same period with personal consumption down by 2.9%.
Note the line showing trade surplus net of transfers of factor income abroad - after 3 quarters of registering positive net trade surplus, Irish economy has posted another deficit in Q1 2011 of €358mln. In other words, the value of all of our trade, once imports and profits of MNCs are accounted for, is negative, broadly speaking.