26/09/2011: French and German indices signal continued slowdown in September

This week's early trickle of data is continuing to signal ongoing process of deteriorating macroeconomic conditions in core euro area economies.

According to the latest reports, Portugal's economy is likely to post 2.3% decline in GDP in 2012 (revised from 1.8% decline forecast earlier) and shrink 1.8% in 2011 - an improved estimate on 2.2% contraction predicted in Q1 2011 (the swing in 2011 is due to strong H1 2011, while the swing in 2012 forecast is due to weak expectations for H2 2011 and after).

France's MNI survey of economic forecasts (here) are coming in weaker by the week. For previous week, median forecasts were for

• Manufacturing PMI at 48.2 down from 49.1 a week before, both below growth line of 50;
• Services PMI at 54.4 down from 56.8, above the growth line, but slowing

Confirming these, Insee Index of Business Climate posted the first below 100 reading since June 2010, coming in at 97 in September, down from 101 in August. 3mo average through September is now at 101 against the previous 3mo period average of 108. Year on year, index is down 5 points. Just as with German data below, the latest result marks the third month of continued declines.


And today, German Ifo index came with further downgrades to business expectations and conditions. Here's the chart:

• Business climate assessment came in at 107.5, above expansion line, but down for the third month in a row. 3mo average through September is now at 109.7 down from previous 3mo average (through June) at 114.3. Year on year the index is down 3.7 points.
• Business situation sub-index came in at 117.9, down from 118.1 in August, marking 3rd month of continued declines. Q2 average is 121.9 and Q3 2011 average is now at 119.1.
• Business expectations sub-index has hit contraction territory at 98.0 against August reading of 100.1. Q2 2011 expectations average was 107.1, while Q3 2011 average is 101.0. Year on year September 2011 reading is down 9.9 points.
  

26/09/2011: Youth unemployment problem

The latest QNHS data for unemployment in Ireland - discussed in detail here - was not a pretty picture by any means. But the ugliness of age-breakdown in unemployment is something else altogether.

Now, recall that Ireland is a young country. Per CSO, 1.5% of our workforce is age 15-19, 6.7% age 20-24, 28.9% age 24-35 and a full 37.1% of the workforce is aged less than 35. This has many good implications for the economy and the prospect for future growth, but it also places some tough demands on the economy. You see, young people are quite pesky subjects. They (unreasonably - from our, older folks point of view) want in life:

• Improved prospects for the future as far as their careers, earnings, quality of life etc go,
• Good chances for beating their parents performance in terms of gaining jobs and progressing up the career ladders,
• Ability to enjoy some of younger years' offers of decent consumption, comforts of some certainty in life, while earning returns to their efforts and education.

Not exactly an easy bunch to satisfy, younger people tend to be more mobile. And the greater their skills set / potential, the more they invested in education or training, the more mobile they are. This is why, in my view, the idea of the 'demographic dividend' is a bit of a silly old hat - the dividend is there (or rather here, in Ireland) if and only if the asset is here.

But the QNHS data does not lie (well, kinda - it does lie in so far as it underestimates true extent of unemployment by omitting those over-extending their education and training in the absence of jobs). The assets we have in the form of our younger people are... err... extremely highly jobless, pretty much deprived of hope of gaining any of the above points.

Here are some stats, all from QNHS for Q2 2011.
Overall,

• 38,400 males of age 15-24 and 116.2 males of age 25-44 were unemployed in Q2 2011
• 25,100 females aged 15-24 and 53,900 females of age 25-44 were also unemployed in Q2 2011

However, these absolute numbers do not tell the entire story as the size of the labour force itself has been changing over time (shrinking). In terms of unemployment rates:

• Overall unemployment rate for those under the age of 20 is now at 40.1%, implying that a person aged 15-19 who wants to be employed is facing 2.8 times higher probability of not having a job than an average person in the workforce. For the age group of 20-24 years of age, these numbers, respectively are 27.7% and 1.94 times. For those in their prime employment years - 25-34 year olds - the numbers are 16.5% and 1.16 times.
• A woman of age 15-19 is facing unemployment rate of 33.7%, while her slightly older counterpart of age 20-24 is facing probability of unemployment of 21.8%.

Dramatic as the above figures are, the picture is much worse for males:

• A young male of age 15-19 seeking employment is facing unemployment rate of 46.1%, while a male of age 20-24 is facing the prospect of 33.7% unemployment. Unemployment amongst males age 25-34 is 21.5%.

This is desperate, folks. But it gets worse. per Table S9b in QNHS, in Q2 2011, of all persons aged 18-24:

• 79% of all early school leavers were either unemployed or not economically active a number that rose from 77% in Q1 2011
  
• 59% of all other persons in this age category were either unemployed or not economically active, same as in Q1 2011
  

For comparison, for all persons 25-64 years of age, the above numbers were:

• 55% of all early school leavers either unemployed or not economically active, up from 54% in Q1 2011
  
• 27% of all other persons either unemployed or not economically active, down from 28% in Q1 2011.
  

This is a dire prospect for our 'demographic capital', folks, as it shows that the gap by age for even educated unemployed is a vast 22 percentage points - statistically most likely indifferent from the same gap for those with little or no education.

26/09/2011: Irish property prices hit Early Paleozoic layer

Another month, another "Splat, Zap, Squish!" from the Amazing Property Bust Land, Ireland. CSO's RPPI data out for August today is showing continued falls in property markets and accelerating on the July 'performance'. Here are the updated charts and numbers.

Headlines are not pretty, folks:

• RPPI down 13.87% annually in August against a fall of 12.47% in July index now stands at 73.9 down from 85.8 in August last year.
  
• In 12mo through August the decline was 10.8%.
• Mom prices are down 1.6% in August. 3mo MA is at 74.9 down from 76.0 in July.
• Relative to peak, prices are now down 43.4%
• Relative to Nama valuations cut-off date of Nov 30, 2009, prices are down 21.3%. Adding LTEV uplift applied by Nama to purchased loans, state-held residential portoflio is now down in values some 28.5%.
  

Headlines on property prices by type are even less pretty:

• RPPI for houses is at 77.0 in August, down 1.41% on 78.1 reading in July. 3moMA is now 77.9, down from 79.0 in July. Year on year prices are down 13.58% from index reading of 89.1 in August 2010. Relative to peak prices are down 41.7% (September 2007). This is the steepest rate of decline since March 2011.
  
• RPPI for apartments is at 54.9, down 4.7% on July reading of 57.6. August 2010 reading was 67.2, so we are now 18.3% down yoy. 3moMA is now at 57.3, down from 59.0 in July. Monthly rate of declines is now accelerating for the 3rd month in a row. August rate of decline is the steepest monthly decline in the history of the series. Relative to peak (February 2007), apartments prices are now down 55.69%.
  

Geographical distribution of price changes:

• Dublin residential property prices fell by 3.76% in August and were 14.85% lower than a year ago. Dublin house prices decreased by 3.4% in the month and were 14.7% lower compared to a year earlier. Dublin apartment prices fell by 6% in the month of August and were 17.4% lower when compared with the same month of 2010. 3mo MA for Dublin properties is now at 68.23, down from 69.7 in July. Relative to peak (February 2007) Dublin prices are down 50.56%. House prices in Dublin are 48% lower than at their highest level in early 2007. Apartments in Dublin are now 57% lower than they were in February 2007.
• The price of residential properties in the Rest of Ireland (ex-Dublin) fell 0.3% in August compared with an increase of 0.2% recorded in August 2010. Prices were 13.2% lower than in August 2010. The fall in the price of residential properties in the Rest of Ireland relative to peak is at 40%.

My forecast for the annual results is below. In summary - we've gone from the penthouse to the ground floor, through the parking levels and still going - services levels, sewer, imaginary metro tunnel.... next "Splat" is due at around middle Paleozoic layer... see you in October's Early Mammals exhibit...

26/09/2011: Ireland's Debt Overhang - unprecedented, unmanageable & unsustainable

A recent paper, titled "The real effects of debt" by Stephen G Cecchetti, M S Mohanty and Fabrizio Zampolli (05 August 2011) presented at the "Achieving Maximum Long-Run Growth" symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming, 25-27 August 2011 put forward evidence on the overall effects of debt overhang - across public, private corporate and household debts - on the real economy.

Here is the summary of their findings, followed by a closer look at the implications of these for Ireland. I have to warn you - the latter are highly disturbing.

The authors argue that although debt can be used to drive growth and development, "...history teaches us that borrowing can create vulnerabilities. When debt ratios rise beyond a certain level, financial crises become both more likely and more severe (Reinhart and Rogoff (2009)). This strongly suggests that there is a sense in which debt can become excessive."

The authors set out to answer a simple question: When does the level of debt go from good to bad? 'Bad' as in producing the effect of lowering long term economic growth in the economy.

To do so, the authors used a new dataset that includes the level of government, non-financial corporate and household debt in 18 OECD countries from 1980 to 2010.

The core results "support the view that, beyond a certain level, debt is bad for growth":

• "For government debt, the threshold is in the range of 80 to 100% of GDP... Our result for public debt has the immediate implication that highly indebted governments should aim not only at stabilising their debt but also at reducing it to sufficiently low levels that do not retard growth. Prudence dictates that governments should also aim to keep their debt well below the estimated thresholds so that even extraordinary events are unlikely to push their debt to levels that become damaging to growth." Furthermore, "when government debt rises to [threshold] level, an additional 10 percentage points of GDP drives trend growth down by some 10-15 basis points."
• "Up to a point, corporate and household debt can be good for growth. But when corporate debt goes beyond 90% of GDP, our results suggest that it becomes a drag on growth."
• "And for household debt, we report a threshold around 85% of GDP, although the impact is very imprecisely estimated."
  

The table below shows the core results from the paper and adds the comparable data for Ireland (Ireland was not included in the analysis). Make sure you are seating before reading it:
As shown in the table above, using the study estimates, the potential reduction in Irish GDP growth over the long term horizon arising from the combined debt overhangs is 2.1%.

The table also shows that the largest impact from debt overhang for Ireland arises from corporate debt, followed by household debt. Despite this, our Government's core objective to-date has been to deleverage banks and to contain Government debt explosion. In fact, the Government is consciously opting for loading more debt onto households - by reducing disposable after-tax incomes and refusing to implement significant savings in the public sector expenditure.

Yet, folks, our debt levels are extreme. They are more than extreme - the table below shows comparable combined public and private (non-financial) debt for the countries in the study sample, plus Ireland.
And the reates of our debt increase during the crisis are also extreme:

In fact, we have both - the highest level of debt to GNP ratio, the second highest debt to GDP ratio and the fastest increases in 2000-2010 in both ratios in the developed world. In the nutshell, this means we are more bust than the most bust economy in the world - Japan. Unlike Japan, however, we are faced with:

• No prospect of devaluation
• No prospect of controlling our interest rates
• Young population that requires growth and jobs creation, and
• Much heavier levels of private and corporate debt - i.e. debt that has more significant adverse economic effects than sovereign debt.
  

Yet, even exporting powerhouse of Japan is not delirious enough to believe their debt overhang can be brought under control via 'exports-led' growth.



Now, much of the issues and data discussed in this post relate to the question raised in the Dail by Peter Mathews, TD, who relentlessly pursues, in my view, public interest in raising such questions. The record of his question and Minister Noonan's answer is provided below:

25/09/2011: Returns to Education in Europe

CEPR working paper No. 8568 (link) "RETURNS TO EDUCATION ACROSS EUROPE" by Daniela Glocker and Viktor Steiner, published last week, provides some interesting (and intuitively consistent) evidence on the overall structure of the market returns to education.

Education is generally considered to be a key driver for economic growth and as such forms a specific target in many policy programmes for growth and development, such as the Europe 2020 strategy.

Since the seminal work of Gary S. Becker (starting from his 1960s papers) from an economic perspective, "the optimal level of education depends on the returns to education". Individuals invest in education if the life-time returns to education exceed the cost. These returns drive at least some of the differentials in education outcomes found across the countries. The CEPR study compares "the private returns to education across selected EU countries to explain cross-country differences in educational attainment."

The analysis is based on the 2008 panel data from the EU Statistics on Income and Living Conditions (EU-SILC) which provides comparable micro data for the member states of the European Union. The authors "estimate separate augmented Mincer-type wage equations for Austria, Germany, Italy, Sweden and UK, countries which differ significantly regarding both their education system and labour market structure."

"While the Austrian and German educational system are broadly similar and differ significantly in terms of enrollment rates in higher education from the other countries considered here, labour market outcomes in the two countries are quite distinct. Whereas Austria's unemployment rate is persistently one of the lowest in the European Union, Germany has one of the highest rates. Italy also features a relatively low enrollment rate in tertiary education, but does not have the system of vocational training prevailing in Austria and Germany which is said to be an important factor contributing to the relatively low levels of youth unemployment in these two countries. While Sweden and the United Kingdom both have relatively high enrollment rates in higher education, its financing differs significantly between these two countries and they also differ markedly in terms of labour market outcomes."

Table below - reproduced from the paper - summarizes some of the difference in outcomes across various countries.


The study estimates returns to education by country and by gender. Across countries the study finds that:

• The direct effect of education on wages is positive and significant for all countries.
• Education has a negative effect on unemployment duration, with effect being the strongest in Germany, and lowest for Swedish men where it is not statistically significant.
• The probability of an unemployment spell is lower by up to 23 percentages points, for those with 16 years of education (university level) relative to those with nine years of education (basic education). The highest decrease in probability of unemployment spell is observable for German and Austrian men, and the lowest for Swedish men and women.
• Similarly, the unconditional expected length of the cumulated unemployment declines with education. "For German men the decrease in the expected unemployment duration is the highest with six months, and the lowest for Swedish women"
• Wage decreases due to time spend in unemployment reduce hourly wages in Germany, Austria and Italy, so that "education has an indirect effect on wages in these countries."
• "The returns to education are positive and significant for men. Comparing the gross returns to education across countries, the UK has on average the highest returns to education with an increase in the hourly wages by 9 percent with an additional year of education. Sweden has the lowest gross returns to education with 4 percent."
• "The effect of the expected cumulated unemployment duration is negative, but not statistically significant for Sweden and the UK. Although the level of schooling has a significant effect on the cumulated unemployment duration in the UK, the expected cumulated unemployment duration itself has not a significant effect on wages. The indirect effect of education on wages through the channel of the cumulated unemployment duration is the highest for Germany."
• Focusing on the net returns broadly confirms the above results for gross (pre-tax) returns. "A slight change occurs when comparing Austria and Germany. While Austria has slightly higher gross returns (7.2 percent compared to 7 percent), Germany has with 6 percent 0.2 percentage points higher net returns. Looking how the returns to education change when comparing gross and net hourly wages, the UK has, on average, the highest reduction, i.e. by roughly 2 percentage points. In Austria, Italy and Germany, the respective net returns are approx. one percentage point lower than the gross returns. Sweden shows the smallest change with 0.7 percentage points. Interpreting this difference between gross and net returns as the "social return to education", the UK benefits the most from a high level of education in the population."
• "For women [data shows] significant positive returns to education as well. As for men, the cumulated unemployment duration is significant for Austria, Germany and Italy. The combined gross as well as the net returns to education is highest for UK and Austrian women with 9 percent (and 7 percent when considering the net returns). As for men, Swedish women are estimated to have the lowest returns with respect to education."
• "Comparing the returns of education by gender across countries, [the study] finds that there are no significant gender differences in the UK. While the returns are slightly lower for women in Germany and Sweden than for their male, the opposite is true for Austria and Italy."
  

24/09/2011: Anglo Bonds and National Accounts

Note: corrected figures below (hat tip to @ReynoldsJulia via twitter).

Per Nama Wine Lake blog - an unparalleled true public service site on Irish debacle called Nama and many matters economic and financial, Irish Government (err... aka ex-Anglo Irish Bank, aka Irish Bank Resolution Corporation*) is on track to repay USD $1bn (€725m) unsecured unguaranteed senior Anglo bond on 2nd November 2011.

The gutless, completely irrational absurdity of this action being apparent to pretty much anyone around the world obviously needs no backing by numbers, but in the spirit of our times, let's provide some illustrations.

According to the latest QNA, in current market prices terms, Irish GNP grew in H1 2011 by a whooping grand total 0f €307 mln from €64,337 mln in H1 2010 to €65,012 mln in H1 2011, when measured in real terms. This means that Anglo bondholders payout forthcoming in November will be equivalent of erasing 28 months and 10 days worth of our economic growth.

According to the CSO data on national earnings, released on September 8, 2011, Ireland's current average earnings across the economy stand at €687.24 per week, implying annualized average earnings of €35,736.48. Irish tax calculator from Delloite provides net after-tax (& USC) income on such earnings of €28,287.39 per annum. This means that Anglo bond payout in November is equivalent to employment cost of 25,630 individuals.

According to CSO's latest QNHS data, in April-June 2011 there were 304,500 unemployed individuals in Ireland. This means the jobs that Anglo bond payout could cover are equivalent to 8.42% of the current unemployment pool.


I am not suggesting for a minute that we should simply use the money to 'create' government jobs - anyone who reads this blog or my articles in the press etc would know I have no time for Government-sponsored jobs 'creation'. But, folks, the above numbers are startling. We are about to p***ss into the proverbial wind the amount of money that is enough to cover our entire economy's growth over 2 years, 4 months and 10 days! For what? To underwrite 'credibility' of the institution that is a so completely and comprehensively insolvent?

* Note 1 that Anglo still calls itself Anglo (until October 14th) and still insists it is a bank as the web page http://www.angloirishbank.ie/ states clearly [emphasis mine] that: "As a Nationalised Bank since January 2009, the key objective of Anglo Irish Bank’s Board and new senior management team is to run the Bank in the public interest... The Bank continues to provide business lending, treasury and private banking services to our range of customers across all our locations."

Note 2:
The above, of course, assumes that €725mln exposure is hedged against currency fluctuations. If not, as Nama Wine Lake points out, the exposure rises to ca €740mln. The above figures therefore change to:

• GNP growth equivalent of 2 years, 4 months and 28 days
• Number of average earnings jobs of 26,160, plus one part-time job
• 8.59% of currently unemployed