11/10/2011: Industrial Production & Turnover: Ireland August 2011

Production for Manufacturing Industries for August 2011 surprised to the strong upside rising 11.4% higher on August 2010 (unadjusted basis) and 1.2% (seasonally adjusted) over three months from June through August, compared to 3 months prior to June. Industries volume of production rose 10.4% year on year in August, also a strong gain. Monthly increase in volume in Manufacturing (3.6%) was the strongest monthly gain recorded since 9.0% increase in September 2010, and 4.4% monthly gain in Industries was also the strongest since September 2010 monthly rise of 6.9%.

Manufacturing and Industry indices, as shown above, rose well above the shorter-term average. However, the core break out from the previously established pattern of volatility around the flat trend was in the Traditional Sectors. Specifically, Modern Sector volume of production expanded by 10.2% year on year and 0.9% monthly. These were the strongest yearly gains in the series since December 2010 and introduce a break from annual contractions posted in three months between May and July. Traditional Sectors posted a massive 16.7% jump in volume of production in monthly terms - the largest monthly gain on the record and 10.8% annual rate of growth - also the strongest growth on record.

As the result, the gap between Modern and Traditional sectors activity by volume has closed substantially in August, from 43.3 in July to 30.3 in August posting the shallowest gap since August 2010.

Equally importantly, the seasonally adjusted industrial turnover index for Manufacturing Industries

was 7.0% higher in August 2011 when compared with August 2010, and 4.9% higher mom. The annual rate of growth in August was the highest since February 2011 and the monthly rate was the highest since May 2010.

Again, as per chart above, both series now have broken well above their flat recent trend, although the breakout is consistent with volatility in the Q4 2010-Q2 2011.

Another encouraging sign is that Modern Sector employment grew from 64,700 to 66,000 between Q2 2011 and Q1 2011, although it remains below 66,300 in Q3 2010. All other sectors employment expanded from 129,600 to 129,900 Q2 2011 to Q1 2011 and All Industries employment grew from 194,300 in Q1 2011 to 195,900 in Q2 2011.

In 3 months between June 2011 and August 2011, in year-on-year terms, the following notable gains and declines in volume activity were recorded in:

• In Food products and Beverages there was 0% growth in volume - an improvement on preceding 3 months period which recorded a yoy contraction of 5.4%, with Food Products contracting 2.4% yoy (improving on 8.5% yoy contraction in 3 months from May through Jul 2011), while Beverages grew by a substantial 12.2%, building on 10.6% yoy expansion in May-July.
• Textiles and wearing apparel volumes declined 28.5% yoy
• Printing and reproduction of recorded media sub-sector volumes shrunk 14.7%, a slight improvement on 15% contraction recorded in yoy terms for May-July period.
• Chemicals and chemical products grew 27.3% (there was 23.9% rise recorded in May-July period), while Basic pharmaceutical products and preparations sub sector volumes grew 2.0% offsetting 2.9 contraction in May-July.
• Computer, electronic, optical and electrical equipment sector volumes contracted 10.9% yoy, virtually unchanged on 11.0% decline recorded in May-July, primarily driven by Computer, electronic and optical products which account for 90%+ of total value added in the sector and which declined in volumes by 10.5% yoy (worse decline than 10.1 contraction in May-July)
• Machinery and equipment not elsewhere classified expanded by 19.1%
• Transport equipment grew by 14.8%
• Other manufacturing contracted by 8.8%
• Electricity, gas, steam and air conditioning supply volumes were up 1.5% yoy
• Capital goods sector volumes posted another contraction of 1.0% yoy, improving on 1.3 decline recorded in may-July
• Intermediate goods production volumes fell 13.2%, also better than 14.1% decline in May-July
• Consumer goods production grew 3.0%, reversing 1.8% decline in May-July, of which durable goods production volumes were up 12.2% although these account for 1/32nd of the total value added in the category, non-durable goods grew by 2.9%.
• 
  

10/10/11: The Gathering

According to the latest CSO data, 6,037,100 foreign visitors came to Ireland in 2010 and in January-July 2011, there were 3,696,000 overseas visitors to Ireland. Of the above, in the same two periods, 935,500 visitors (2010) and 594,700 visitors (January-July 2011) from overseas to Ireland came from North America a rise of 13% on January-July figures for 2010.

In 2009 (the latest for which data is available via CSO), visitors from North America spent €620mln excluding international airfares during their trips to Ireland. The number of visitors in the same period from North America amounted to 980,000, implying per-person per visit spend of €632.65.

Given that since 2009 continued deflation in domestic economy has reduced the costs of travel to Ireland, suppose the number above applies in today's terms. Let us, therefore, assume that per-visit per-person spend for North American visitor to Ireland is somewhere around €650.00.

"Global Irish Forum" promised to increase these numbers by 325,000 additional visitors in 2013 or ca €211.25mln for the year 2013.

This means that the GIF promises to yield a whooping:

• 5.38% increase in the total number of visitors on 2010;
• 5.13% increase in the total number of visitors on projected number of visitors in 2011;
• 34.74% increase in the total number of visitors from North America in 2010;
• 31.88% increase in the total number of visitors from North America projected for 2011 based on January-July data
• 5.45% increase in the total spending by visitors to Ireland on 2009 annual levels

Over the period during which GFI guests wined and dined in Dublin contemplating this dramatic economic stimulus, Irish state moved 3 days closer to repaying €737mln of yet another Anglo unsecured, un-guaranteed bonds to largely foreign investors. The cost of these bonds will be equivalent to repeating the achievements of The Gathering for 3 years, 5 months 26 days 9 hours and 36 minutes, not accounting for costs and inflation.

In the end of the GIF the delegates also agreed another substantial measure for boosting the Irish economy and improving Irish society - the Diaspora Awards, which will be carried out at the expense of the Irish taxpayers and will comprise annual gathering of the best and the brightest minds who have concocted the idea of The Gathering.

07/11/2011: Is Ireland a Poster-Boy for "Austerity & Growth" paradigm?

My article on the real dynamics in Irish economic 'recovery' and 'austerity miracle' is available on LISWire: http://liswires.com/archives/1359. 

07/10/2011: Tax returns - truth and DofF-ised surreality

In his statement, following the publication of Exchequer returns for September (here), Minister for Finance, Michael Noonan stated (emphasis mine): "Tax receipts in the period to end-September were 8.7% above the same period in 2010 and slightly ahead of expectations. Although the minor surplus is due to some favourable timing factors and receipts from the Pension Levy introduced to fund the Jobs Initiative, it is encouraging that overall tax revenue is growing again. Individual tax-head performance has been mixed. VAT receipts are weaker than expected but income tax is performing well." The Minister further positioned improved tax and fiscal performance within the context of Irelands 'return to economic growth'.


Note: there is an excellent post on this topic available from Economic Incentives blog (here), although our numbers do differ slightly due to my numbers resting on explicit model for Health Levy revenues and some rounding differences. In addition, my post focuses on comparatives, including to pre-crisis dynamics and returns. I also attempt to cover slightly different questions as outlined below. Furthermore, Economic Incentives blog post also covers the issue of distorted timing on DIRT payments in April and July that I omit in the following consideration.


Another note: over the last 4 years we became accustomed to brutish spin from the previous Government when it comes to painting the tape on Ireland's 'progress' and 'recovery'. The current Government, however, is much more subtle in presenting the positive side of the 'recovery' and Minister Noonan's statement quoted above shows this. However, the real issue here is that in the name of transparency, DofF should be reporting actual figures that are comparable year on year. It's their job and they are failing to deliver on it.


The above statement, of course, raises the following three questions:

1. Did Ireland's tax revenue performance for 9mo through September deliver a significant enough change on 2010 and/or pre-crisis performance to warrant the above optimism?
2. Is Ireland's tax revenue performance attributable to 'return of growth'? and
3. Are the overall tax revenues really 'growing again' in any appreciable terms worthy of the Ministerial claim?

Table below summarizes the data on tax revenues through September 2011, including adjustments to tax heads that reflect:

• USC charge conversion from Health Levy to Income Tax measure: prior to 2011, health levy was collected within PRSI contributions, without being classified as Income Tax. In 2010, the levy collected amounted to €2.02bn for the year as a whole. Using distribution of income tax revenues across months for 2008-2010 average, I estimate that 65.9% of Health Levy would have been collected through September 2011 and account for this in the Income Tax ex-USC line. This is an imperfect estimate that errs on the downside of the overall USC impact as it disregards changes to the Health Levy rates & bands applied. In other words, my estimate assumes that USC incorporated into Income Tax today carries within it unchanged revenues from the Health Levy as per 2010.
• Pensions levy of €457mln is aggregated in the official figures into Stamp Duty returns and the table below provides for this in the line on Stamps ex Pensions levy. Note that the target for Pensions levy receipts was set at €470mln, so there is a shortfall on the target of €13mln which I do not account for in the relevant figures, making my ex-levy estimates erring on cautious side.
• Lastly, the total tax revenue ex-USC Health and Pension Levies incorporates the €122mln delayed payment

So let me run through the above:

• Income Tax revenues, once the Health Levy is factored out (revealing better comparatives to 2010 and before) are up 7.65%, not 25.7% in January-September 2011 compared to same period of 2010 that the DofF claims. Compared to 2009, Income tax revenues are up just 0.6%, not 17.5% implied by DofF numbers. See any significant uptick in the economy feeding through to significant rise in tax revenues? Well, stripping out tax rates increases and tax bands widening, I doubt there is anything but continued contraction in like-to-like revenues here.
• VAT is still tanking compared to 2010 (-2.0%) and to 2009 (-7.7%) as correctly reflected by DofF data. And VAT revenue gap is widening from H1 2011 to Q3 2011 as compared against 2010.
• Corporation tax revenue is falling - down 6.1% on 2010 and down 21% on 2009 and that is amidst historically record levels of exports! So if you know some evidence that 'exports-led recovery' is taking place, it is not showing up in the Exchequer receipts.
• Excise is down 1.4% on 2010 and 2.5% on 2009 and that dynamic is worsening from H1 2011 to Q3 2011.
• Stamps are down 1.4% once we factor out the hit-and-run on Pensions, not up 58.7% as DofF claims.
• CGT, CAT are down in double digits
• Customs are up as DofF shows.
• So total tax revenues are up 1.17% in comparable terms to 2010, not 8.7% as DofF claims and relative to 2009 total tax receipts are down 5.37%.

Relative to target figures are also severely skewed by USC reclassifications and Pension Levy receipts and show, in the end, that in comparable terms we are not delivering on targets. Of course, USC reclassification is reflected in the targets, so without netting out USC, total tax receipts are 0.69% behind the target as set in the Budget, not 0.7% ahead of it as DofF claims. And that is inclusive of timing error of €122mln and excluding USC reclassification change.

So what about our cumulative 'progress' since the crisis on-set in delivering on fiscal stability? Let's compare each year achievements to 2007 levels of total tax revenues:

Again, per table above, the entire set of draconian, growth-retarding tax hikes that have hit households since 2008 delivered virtually no improvement on the crisis dynamics. The shortfall on tax revenue for 9 months January-September period relative to same period pre-crisis (in 2007) in 2010 was €9,290mln and it currently stands at €9,030mln - an improvement of €260mln or less than €30mln per month!

Can anyone still claim that Ireland's public finances are on track to achieve some meaningful targets whatsoever? As Seamus Coffey (in the blog post linked above) points out: "I must say that I cannot see the justification for greeting the figures in such glowing terms" as those used by Minister Noonan and the DofF. I agree.

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.