06/10/2011: Has ECB done a sensible thing, at last?

Like a heavily Photoshopped version of Bill Gates can be expected to last, oh about a nanosecond in convincing the generation i-Apple of the need to buy Microsoft products, so did the interest rate’s junkies expectation that the ECB is about to drop rates to where Ben “The Helicopter” Bernanke has them proved to be short-lived.

Today’s decision  by the ECB not to alter the existent rates was both a shock to all those incapable of making a living in the real economy stagnated of cheap liquidity and to those who were expecting the ECB to miraculously discover some latent propensity to fuel inflation.

Yet, the decision was perfectly in line with ECB’s policies to-date. Worse, it was in-line with rational ECB policies to-date – the type of policies that should be predictable from the long-run perspective. ECB has held its nerve this time around. Here’s why.

Chart below shows the historical path relating ECB rates to the leading indicator for real growth in the euro area, eurocoin.

At the depth of the crisis back in 2009, rates consistent with the current eurocoin reading were justifiably lower than they are today because they were coming on the foot of severe contractions in economic activity from the tail end of 2008 and into 2009. In addition, monetary policy at the time was accommodative of growth recession, rather than of the banking and financial services crisis or the sovereign crisis. Today, the picture is different. While eurocoin has entered the period of signalling potential for renewed recessionary dynamics, the looming growth crisis is not underpinned by the change in economic fortunes for the euro area, but by a set of structural weaknesses (fiscal, banking and credit supply-related, depending on the specific country). Easy monetary policy can help, but it cannot restore the euro area economies to structural health. Instead, alleviating the pressure on growth through monetary tools can only delay the necessary adjustments in structural parameters. ECB is not about to do this and, perhaps, for a very good reason.

This means that the current leading indicators scenario should be compared not against 2008-2009 period, but against pre-crisis periods where eurocoin had also fallen to the current levels around zero. This is the period of December 2002-June 2003 and the underlying ECB repo rate at that time was around 2.5%. Get it? The policy-consistent move for ECB today would be from around 3% down to 2.5%, not from 1.5% to 1%. Given we are at 1.5%, the most consistent move would be to stay put. And this is what the ECB chose today.

By the way, in the long run, since eurocoin is the leading indicator of activity, there is a negative relationship between inflation and the growth projections it provides: higher growth signal into the future tends to coincide with lower inflationary pressures today. Or put differently, falling eurcocoin now is not necessarily a signal for well-anchored short-term inflationary expectations, something that coincides with the stated ECB concern expressed in today's statement.

Of course, ECB targets are set based on inflation, not leading growth indicators, although the two are strongly correlated with lags. Here, the same picture applies:

And the same logic holds. So based on inflationary dynamics, the ECB repo rate should be around 2.0% to 3.0% and falling from above 2% levels, but not below 1.75%. Given the starting position at 1.5%, a rational move would be to stay put. 

No surprise, then in today's decision. It could have gone like 25:75 - with lower chance for an irrational knee-jerk rates lowering reaction on the foot of the immediate crisis, and higher chance of what has been delivered.

Perhaps the only disappointing bit to today's ECB call is that the central bank will continue supplying unlimited liquidity to the insolvent banking sector under unlimited 1mo lending extended through July 2012. Perhaps the ECB had no choice, but to do that. Or may be a better option would have been to start properly assessing the quality of collateral pledged by the banks at the discount window. That would have achieved two things - simultaneously - both being good in the long run for the euro area banking sector:

1. It would have continued provision of supports to the banks with better quality assets (aka solvent but stressed banks), and
2. It would have put pressure on member states to purge their sick banks and drastically restructure the banking markets (getting rid of Dexia-esque zombies).

On top of that, ECB announced renewal of LTROs (12-mo and 13-mo) with delayed interest cover - in effect a heavy duty support for really stressed banks. Last time ECB did this was back in December 2009 and those operations were designed to shore up banks in the wake of the Lehman Bros bust.

Instead of applying some pressure on euro area's clownish 'leadership' in the banking sector, the ECB choose to call for some unspecified efforts by the banks to voluntarily shore up their balance sheets and retain earnings to provide cover for losses on their sovereign bonds exposures to weaker euro area countries. In the current climate, and with ECB providing unlimited liquidity, this is equivalent to suggesting that zombies should get out into the yard and work-off some of their rigor mortis. Good luck.

05/11/2011: Live Register surprises on improvement side

According to the latest Live Register data, standardised unemployment rate in September 2011 was 14.3%, down slightly from a rate of 14.4% in August and in line with the latest seasonally adjusted unemployment rate from QNHS (14.2%) for Q2 2011. The average unemployment rate during 2010 was 13.6% while the average rate for 9mos of 2011 to-date is 14.2%.

On a seasonally adjusted basis there was a decrease of 5,400 (-1.2%) on the Live Register in the month to September 2011 bringing the seasonally adjusted total to 442,200. Per CSO: "This decrease follows four consecutive months of relatively low increases in the seasonally adjusted series. Over the last twelve months the seasonally adjusted Live Register has remained in the relatively narrow range of

441,600 to 447,900". Importantly:

• We now have the largest decrease in seasonally adjusted LR since September 2007.
• Year on year LR declined 5,700 or 1.28% against previous month year-on-year increase of 1,200 (+0.27%)
• Q3 2011 average LR is now up 0.39% on Q2 2011 and 0.15% down on Q3 2010.

The above suggest significant decreases in LR, although the source of these decrease is unclear, as exits from benefits and/or emigration would reflect positively on LR figures, while having an adverse impact on overall economy.

Charts above illustrate the two trends - one of moderating decrease in LR and the other chart showing just how significant the drop of 5,700 is compared to historical monthly changes.

On a seasonally adjusted basis there were monthly decreases of 3,000 males and 2,400 females on the Live Register in September 2011 which implies that female unemployment (of lesser vintage than average male unemployment) is somewhat sticker for now. The same is confirmed by the annual data, with the number of female claimants increasing by 2,834 (+1.9%) to 155,453 over the year, while the number of male claimants decreasing by 7,810 (-2.7%) to 281,988.

The number of long term claimants on the Live Register continued to increase over the year with 41.9% of claimants in September 2011 on the Live Register for one year or more, up on 33.4% in September 2010.

Trends for national v foreign workers on LR and for casual and part-time LR signees are illustrated below:

So on the net - the new data is encouragingly strong on monthly decline side, but requires further confirmations in October-December to raise confidence that we are witnessing a sustained trend. It also requires cross-referencing to changes in the labour force that can only be performed using QNHS results for Q3.

05/10/2011: Ireland's 'Sustainable' Deficit through September

With Exchequer results for September (see earlier posts on the details of tax returns and tax burden), here's the update on overall Exchequer deficit for nine months through September 2011.

Overall 2011 Exchequer deficit currently stands at €20.66bn with ex-banks deficit at €12.31bn, implying net reduction in deficit ex-banks of €1.069bn on 2010 levels and absent pensions levy / expropriation 'measure', the deficit reduction achieved through September is now just €612mln.

This hardly represents a significant drop in our overall fiscal imbalances. Cumulative deficits for 2008-present are now at €76.76bn or €42,146 per each employed person or €54,990 per each full-time employed person in Ireland (per Q2 2011 QNHS numbers, not counting Nama debts, Government promisory notes and interest on these soon to be due). 

So a run-of-the-mill family of 2 full-time employed workers is now facing, on top of massive mortgage and Government-monopolized/regulated utilities and services bills, plus gargantuan costs of childcare, education, and health care, an additional debt pile of €109,000 on average, courtesy of the serial failure of the state to control its own spending habits. 

As the 'Green Jersey' crowd would say: "It's all sustainable" cause 'exports will save us' and we have 'jobs programmes' alongside 'homes retrofitting'/'windmills-potential' economy. Sure...

05/10/2011: Tax burden distribution: Q3 2011

Tax profile for September yielded another sign of continued shift in tax burden onto the shoulders of ordinary households, courtesy of:

1. Continued underperformance in corporate tax returns despite booming exports activity
2. Continued graft of household budgets under the USC and levies.

Overall tax burden in Q3 2011 has shifted as follows:

• Q2 2011 share of Income tax receipts in total receipts was 39.52%. Q3 2011 share of Income tax receipts in total receipts was 38.40% against Q3 2010 share of 33.20% and Q3 2007 share of 28.04%
• Q2 2011 share of VAT receipts in total receipts was 33.22%. Q3 2011 share of VAT receipts in total receipts was 33.17% against Q3 2010 share of 36.81% and Q3 2007 share of 37.41%
• Q2 2011 share of Corporation tax receipts in total receipts was 9.32%. Q3 2011 share of Corporation tax receipts in total receipts was 8.52% against Q3 2010 share of 9.86% and Q3 2007 share of 7.39%
• Q2 2011 share of Excise receipts in total receipts was 14.4%. Q3 2011 share of Excise receipts in total receipts was 13.4% against Q3 2010 share of 14.77% and Q3 2007 share of 13.79%
• Stamps, CGT and CAT combined share in Q2 2011 was 2.64% against Q3 2011 share of 5.67% and 4.73% in Q3 2010 and 12.67% in Q3 2007.

Charts to illustrate:

05/10/2011: Tax receipts for September

Tax receipts for September released yesterday show predictable evolution along the trend established in recent months - the trend of broadly matching the targets, but continuing to surprise on the downside in some core categories. In other words, no signs of recovery here, folks.

Here are the details.

Income tax came in at €9,254mln (this, of course, includes USC, rendering annual comparisons virtually meaningless). Compared to the target, Income tax receipts were up €147mln or 1.6%. Year on year Income tax came in at +25.7%, much of which is due to levies and USC, making multi-annual comparisons even less meaningful. Annual target for the category envisions an uplift of 25.3%yoy so we are slightly ahead of that for now.

The bright-ish spot that is Income tax is offset by the continued fall off in VAT. Through September 2011, VAT receipts stood at €7,994mln down on the target of €8,294mln (-3.6% or €300mln shortfall). Year on year VAT receipts are down 2.04% or -€167mln. VAT receipts are now down 7.7% on comparable period of 2009 and mark the worst year-to-date for 2007-present period.

Corporation tax - the Big White Hope of the 'exports-led recovery' is below target at €2,054mln (do notice that Government's Great Hope is less than 1/4 of the income tax as far as contribution to the overall Exchequer balance goes). Target was €2,085mln, so the shortfall now stands at -1.5% or €31mln. Corporation tax performance through September 2011 is now at the worst levels in 2007-present period despite all the record activities in exporting sectors, which again puts the boot into the Government's claims that exports-led recovery will restore our economy to health.

Excise tax is also underperforming the target, coming in at €3,229mln or €77mln (-2.3%) below the target. Excise tax revenues are also below 2010 levels by some 1.4% so far, implying that through September, 2011 is the worst year since 2007 in terms of excise tax collection.

In terms of smaller taxes:

• Stamps came in at surprisingly high levels of €1,124mln in 9 months through September, up €384mln or 51.9% on the target. This builds on gains in July and, most likely, represents incidental returns from one-off activities, such as €457mln expropriation of private pension funds via the FG/LP levy (HT to Jerry Moriarty of http://www.iapf.ie)
• Capital taxes are below target and posting the worst year so far for the entire 2007-present period.

Overall tax returns are now at €24.098bn, up 0.7% or €160mln on the taget and 8.7% on 2010 performance, with virtually all the yoy gains achieved due to USC reclassifying health levy into tax revenue, plus through increases in tax burden on households.

Relative to overall annual target, 0.7% increase on target through September 2011 and 8.7% increase yoy in outrun to-date are contrasted by the annual target set at 9.9% over 2010 outrun, so we do have to step up tax returns performance in months to come dramatically to deliver on the annual target.

More on the tax burden distribution in the subsequent post.

To conclude - tax receipts show no signs of substantive change in the overall Exchequer position on 2010 broadly confirming that 'exports-led recovery' thesis for restoring Irish economy to health, at the present, remains invalid.

05/10/2011: Profitability data for September

Irish PMIs for Manufacturing and Services, as well as their employment sub-components, are all continuing to signal lack of substantive recovery in the real economy. In the mean time, despite relatively strong confidence, profit margins are tanking across the main sectors. Here's the latest data:

• In September profit margin index (differential between output prices index and input prices index) in Services has fallen to -18.52 from -14.6. The index now stands well below all medium and long term averages. 12mo average is at -16.5, same as Q3 2011 average, a slight improvement on Q2 2011 average of -18.1. However, 2010 Q3 average was -9.1 and 2009 Q3 average was -5.6, implying dramatic worsening of the margins in the Services sector on 2009-2010. The last time profit margins were positive for Irish Services sector companies was in June 2009.
• In September profit margin index in Manufacturing was -9.67 adding onto dismal reading of -15.62 in August. 12mo average is at -19.6, and Q3 2011 average was -13.4, an improvement on Q2 2011 average of -19.7. Last time profit margins in manufacturing moved in favor of Irish producers was in February 2009.

As margins usually translate into expansion, investment and, thus, employment, the above numbers are not encouraging...