26/10/2011: Irish GNP projections under new US tax proposals

Much ignored by irish media so far, the US Congressional proposals to reform corporate tax system are gaining speed and have serious implications for Ireland. In the nutshell, today, US House Ways & Means Committee Chairman Dave Camp described some of his report proposals (see Bloomberg report here), which include:

• Lower corporate tax rate to 25 from 35%
• Exempting 95% of overseas earnings from US tax
• Introducing a tax holiday on repatriated profits

For US MNCs operating in Ireland this will serve as a powerful incentive to on-shore profits accumulated in Ireland. While the full impact is impossible to gauge - it is likely to be significant, running into 50% plus of retained earnings. 

This will, in turn, translate into higher Net Income Outflows from Ireland (see QNA) and thus directly depress our Gross National Product.

I run two scenarios - based on IMF WEO (September 2011) forecasts for Irish GDP, current account and Government expenditure and on historical data from CSO QNA. The baseline scenario assumed that MNCs will expatriate the same share of their profits relative to GDP as they have done before (3 year moving average). The first adjustment scenario adds a 10% uplift on the above scenario and expected growth in GDP to repatriation of profits. The second adjustment scenario adds a 25% uplift. The results are in the charts below.

Pretty dramatic. And this is for rather conservative assumption on increased outflows.

26/10/2011: ECB madness

Updated: includes latest data through September 2011:

ECB's past policy in a pic:

And he above madness is consistent with price stability mandate. No, I am not kidding - it was consistent with price stability mandate, even though it was killing weakening euro area economy...

In fact, price stability at 2% target for HICP would require current ECB rates to be in the neighborhood of 2.5-2.75%.

And note from the second chart below - of all major central banks, ECB is the only one to have raised rates since November 2010.

Let me provide a quote from the economist I rarely agree with: "The bitter truth is that it’s looking more and more as if the euro system is doomed. And the even more bitter truth is that given the way that system has been performing, Europe might be better off if it collapses sooner rather than later." Paul Krugman (source: here)

25/10/2011: Residential property prices: September

According to CSO Residential Property Prices index, September 2007 saw the historical peak in prices for overall RPPI at 130.5. Today's data shows that the index now stands at 72.8, implying that property prices have fallen nationwide by 44.2% on average since 4 years ago. Miserable news.

Now, September RPPI for all properties has fallen 1.49% mom and 14.25% yoy, exceeding (in terms of fall) analysts expectations for 13.4% decline. 12mo MA of monthly declines now stands at 1.27% and year-to-date average monthly decline is at 1.41%.

Relative to Nama's cut-off valuation date of November 30, 2009, factoring in average LTEV uplift of 10%, Nama residential properties-linked assets portfolio is now on average 29.52% under water. Factoring 5% burden-sharing (subordinated bonds), the downside is now 26.2% which means that Nama will need a lift-up of 35% on current values to break even.

For Houses, nationwide, RPPI fell to 76 in September from 77 in August a decline of 1.3% mom and 13.93% yoy. The index is now down 42.4% on peak of 132 achieved in September 2007. Apartments sub-index is down to 53.2 in September from 54.9 in August, with mom contraction of 3.1% - the sharpest monthly decline since March. Yoy the sub-index is down 19.03% and relative to the peak of 123.9 (February 2007) the sub-index is down 57.06%.

Nama holds loads of apartments, so applying the earlier assumptions on LTEV, Nama apartments-linked sub-portfolio is under water 36.9%, implying, net of subordinated bonds, a 33.9% decline in valuations to November 2009 cut-off date. This suggests an average required uplift in apartments prices of 55.12% for break-even.

Dublin properties prices are now 51.6% off their peak, with sub-index for Dublin declining to 65.1 in September from 66.5 in August - a drop of 2.11% mom and 15.56% yoy.

Annual forecasts, updated to include September figures, are below

24/10/2011: Euro CDS disaster Redux?

A picture (table) worth a 1,000 words...

via CMA.

24/10/2011: Euro area competitiveness indicators update

ECB posted updated Harmonized Competitiveness Indicators data for Q2 2011

Chart above shows that euro area HCI (unit labour cost adjusted) have deteriorated (higher values in the graphs reflect lower competitiveness) from 96.4 in Q1 2011 to 99.2 in Q2 2011. Q2 2011 reading was 2.5% above Q2 2010 reading, but 6% below Q2 2009 reading. Relative to Germany, euro area HCI(ulc) index now stands at 17.4% premium, reflecting relatively much stronger competitiveness of German economy.

Considering the charts above (note that the top chart reflects annualized data, while quarterly data is shown in the second chart above), Ireland retains its relatively uncompetitive position vis-a-vis all 'old' euro area countries. For larger economies:

• Germany's HCI(ulc) rose from 82.6 in Q1 2011 to 84.5 in Q2 2011, marking deterioration in competitiveness qoq. Year on year, index is not 3% higher, and the gains in competitiveness since 2009 have been virtually erased, as Q2 2011 index reading is just 0.3% below Q3 2009 reading. However, Germany remains the most competitive economy in the euro area in terms of HCI(ulc) index with own index reading currently 14.8% below euro area overall index.
• Spain's HCI(ulc) was virtually unchanged, rising from 107.3 in Q1 2011 to 107.4 in Q2 2011. Spain's competitiveness index has fallen (improved) by 2.0% yoy in Q2 2011 and is down 5.0% on same period 2009. Spain remains 8.3% less competitive than the euro area and 27.1% less competitive than Germany.
• France's HCI(ulc) deteriorated from 102.6 in Q1 2011 to 104.2 in Q2 2011, rising (deteriorating competitiveness) 1.8% yoy and 0.1% no Q2 2009. Relative to Germany, France is 23.3% less competitive in terms of HCI(ulc) and 5% less competitive than euro area.
• Italy's HCI deteriorated from 110.1 in Q1 2011 to 111.2 in Q2 2011, rising (deteriorating competitiveness) 1.65% yoy and improving (falling) 1% on Q2 2009. Relative to Germany, Italy's HCI is now at 31.6% premium (poorer competitiveness) and Italy is 12.1% less competitive than euro area average.

Smaller economies are charted above.

For Ireland, HCI(ulc) also posted deterioration in Q2 2011 rising from 113.2 in Q1 2011 to 113.8 in Q2 2011, marking decline in Ireland's competitiveness as measured by HCI. Ireland's competitiveness, however, improved yoy by 1.6% and is up on Q2 2009 level by 12.1%. Despite these gains, Ireland remains the least competitive 'old' euro area economy with Ireland's competitiveness gap of 34.7% compared to Germany and 14.7% compared to euro area.

As I have noted on numerous occasions before, much of the gains in our competitiveness in 2009 can be explained by the wholesale destruction of less competitive sectors: construction and domestic services (retail, security etc). The concern is that our future competitiveness gains will be compressed by the fact that from here on, we will need much harder to attain productivity growth in remaining sectors. So far, some nascent costs inflation in other economies have helped us to continue improving compared to euro area average. But in absolute terms, it is clear that since Q2 2010 we have lost momentum in gains in HCI(ulc) measures.

24/10/2011: New Orders for Industry: August data

Cheerful update today from the Eurostat on New Orders in Industrial Production series:

"In August 2011 compared with July 2011, the  euro area (EA17) industrial new orders index rose by 1.9%. In July the index dropped by 1.6%. In the EU27 new orders increased by 0.4% in August 2011, after a fall of 0.6% in July. Excluding ships, railway & aerospace equipment, for which changes tend to be more volatile, industrial new orders rose by 0.7% in the euro area and by 0.5% in the EU27. In August 2011 compared with August 2010, industrial new orders increased by 6.2% in the  euro area and by 6.5% in the  EU27. Total industry excluding ships, railway & aerospace equipment rose by 5.0% and 5.2% respectively."

Here are the details:

Start at the top: EU17 new orders index is now at 115.11 for August, up on 112.93 in July, down on 115.54 in May. The index is now back into the comfortable expansion territory, where it has been since April 2010. 

2008 average reading was 110.09, 2009 average was 86.99 and 2010 annual average was 102.2. So far - through August - 2011 average is 112.93 - not a bad result. But miracle it is not - reading of 100 is consistent with activity back in H1 2005, so in effect, through August 2011 we have achieved growth of 2.05% annualized in terms of volumes of output. Given that since then we had pretty hefty doses of inputs inflation and moderate gate prices inflation, the margins on the current activity have to be much lower than for pre-crisis years. Which means relatively robust improvements in volumes of industrial new orders are not necessarily implying robust value added growth in the sector.

Meanwhile, German new orders have shrunk in August 2011 from 122.4 in July to 120.9 in August. Month on month German new orders are down 8.04% and year on year activity is down 13.34%. This marks the lowest reading since April 2011.

 Of the big players:

• France posted an increase in new orders index to 102.90 in August from 100.1 in July. France's 2011 average to-date is 100.43, well ahead of 2010 average of 90.93 and 2009 average of 84.31. France's new orders index averaged 100.06 in 2008.
• Spain posted a surprising improvement in August to 96.43 from 93.85 in July and yoy rise of 2.0%. Spain's 2008 average was 102.93, 2009 average of 81.57 and 2010 average of 89.61. For 8 moths through August 2011, Spain's new orders index averaged 94.27.
• Italy;s new orders index hit 117.21 - very robust increase of 6.14% mom from 110.56 in July. Italy's new orders index is now averaging 113.58 for eight months of 2011, up on 2010 annual average of 103.09, 2009 average of 89.75 and 2008 average of 104.59. It's worth noting that Italy exemplifies the fallacy of 'exports-led growth' argument - the country has posted very robust recovery in its significant and highly exports-oriented industrial sector, and yet it also posted virtually no growth over the last 2 years.

Other countries are illustrated below.

 So on the net, industrial production new orders signal some bounce back from the troughs of the slowdown in early summer 2011, but this can be immaterial for the wider Euro area economic growth and a temporary improvement. September and October data will be more crucial, signaling into early 2012.