2/2/2012: Exchequer non-returns from January

Exchequer returns pose no surprise - and none were expected, given this is just January - so no point of updating the detailed data sets.

Some top figures.

On tax receipts:

• Income tax revenues are up at €1,260mln in January 2012 over €987mln in January 2011 as USC kicks in full tilt this year.
• VAT is at +3% yoy to €1,725mln in part boosted by small gains in sales over Christmas period in terms of volumes.
• Corporation tax is up to €271mln from €72mln a year ago, but €250mln of this was due to delayed receipts from December 2011, so in reality, Corpo is down on 2011. 

None of the above are really significant as timing might have been a factor in all of these. It will take through March to see the real changes in the underlying numbers.

Exchequer deficit is at €393.7mln down from €483.2mln a year ago. So now, deduct that €250mln from the receipts side and you get Exchequer deficit at €643.7mln or some €160mln ahead of January 2011. Not pretty, eh?

Of course, as I said above, there is no point of doing any analysis on returns for just one month, so take the above comment with a huge grain of salt.

2/2/2012: Sunday Times 29/01/2012 - irish property bust

This is an edited version of my Sunday Times article from January 29, 2012.

In a recent Annual Demographia International Housing Affordability Survey of 325 major metropolitan areas in Australia, Canada, Hong Kong, Ireland, United Kingdom and the United States, Dublin was ranked 10th in the world in terms of house prices affordability. The core conjecture put forward in the survey is that Dublin market is characterized by the ratio of the median house price divided by gross [before tax] annual median household income of around 3.4, a ratio consistent in international methodology with moderately unaffordable housing environments.

Keep in mind, the above multiple, assuming the median household income reflects current unemployment rates and labour force changes, puts median price of a house in Dublin today at around €175,000 – quite a bit off the €195,000 average price implied by the latest CSO statistics. But never mind the numbers, there are even bigger problems with the survey conclusions.

While international rankings do serve some purpose, on the ground they mean absolutely nothing, contributing only a momentary feel-good sensation for the embattled real estate agents. In the real world, the very concept of ‘affordability’ in the Irish property market is an irrelevant archaism of the era passed when flipping ever more expensive real estate was called wealth creation.

What matters today and in years ahead are the household expectations about the future disposable after-tax incomes in terms of the security and actual levels of earnings, stability of policies relating to household taxation, plus the demographic dynamics. None of these offer much hope for the medium-term (3-5 years) future when it comes to property prices.

Household earnings are continuing to decline in real terms (adjusting for inflation) in line with the economy. The CSO-reported average weekly earnings fell 1.2% year on year in Q3 2011 once consumer inflation is take out. But the average earnings changes conceal two other trends in the workforce that have material impact on the demand for property.

Firstly, reported earnings are artificially inflated because the workforce on average is becoming older. Here’s how this works. Younger workers and employees with shorter job tenure also tend to be lower-paid, and are cheaper to lay off. Thus, the rise in unemployment, alongside with the declines in overall workforce participation, act to increase average earnings reported. This explains why, for example, average weekly earnings in construction sector rose 2.5% in Q3 2011 year on year, while employment in the same sector fell 4.1% over the same period. This means that fewer potential first-time buyers of property are having jobs, and at the same time as the existent workers are not enjoying real increases in earnings that would allow them to trade up in the property markets.

Secondly, the real world, rising costs across the consumer expenditure basket, further reducing purchasing power of households, is compounded by the composition of these costs. One of the largest categories in household consumption basket for those in the market to purchase a home is mortgage interest. This cost is divorced, in the case of Ireland, from the demand and supply forces in the property markets and is influenced instead by the credit market conditions. In other words, the 14.1% increase in mortgage interest costs in the 12 months through December 2011, once weighted by the relative importance of this line of expenditure in total consumption is likely to translate into a 2-3% deterioration in the total after-tax disposable income of the average household that represents potential purchaser of residential property.

And then there are effects of tax policies on disposable income. One simple fact illustrates the change in households’ ability to finance purchases of property in recent years: between 2007 and 2011 the overall burden of state taxation has shifted dramatically onto the shoulders of ordinary households. In 2007, approximately 46% of total tax collected in the state came directly out of the household incomes and expenditures. In 2011 the same number was 58%.

The above factors reference the current levels of income, cost of living and tax changes and have a direct impact on demand for property in terms of real affordability. In addition, however, the uncertain nature of future economic and fiscal environments in Ireland represents additional set of forces that keep the property market on the downward trajectory. For example, in Q3 2011 there were a total of 116,900 fewer people in employment in Ireland compared to Q3 2009. However, of these, 113,700 came from under 34 years of age cohort. Unemployment rate for this category of workers, comprising majority of would-be house buyers, is now 20.4% and still rising, not falling. Given the long-term nature of much of our current unemployment, no one in the country expects employment and income growth to bring these workers back into the property markets for at least 3 years or longer. Without them coming back, only those who are trading down into the later age of retirement are currently selling, plus those who find themselves in a financial distress.

Tax uncertainty further compounds the problem of risks relating to unemployment and future expected incomes. Government projections that in 2013-2015 fiscal adjustments will involve raising taxes by €3.1 billion against achieving current spending savings of €4.9 billion are rightly seen as largely incredulous, given the poor record in cutting current spending to-date. Thus, in addition to already draconian pre-announced tax hikes, Irish households rationally expect at least a significant share of so-called current expenditure ‘cuts’ to be passed onto households via indirect taxation and cost of living increases.

In short, there is absolutely no catalysts in the foreseeable future for property markets reversing their precipitous trajectory. No matter what ‘affordability’ ranking Irish property markets achieve, the demand for property is not going to grow.

This, of course, brings us to the projections for the near-term future. The latest CSO data for the Residential Property Price Index released this week shows that nationwide, property prices were down 16.7% in December 2011 compared against December 2010. Linked to the peak prices as recorded by the now defunct PTSB-ESRI Index, the latest CSO figures imply that nationally, residential property prices have fallen from the peak of €313,998 in February 2007 to ca €166,000 today (down 47% on peak). In Dublin, peak-level average prices of €431,016 – recorded back in April 2007 – are now down to close to €195,000 (almost 55% off peak).

Using monthly trends for the last 4 years, and adjusting for quarterly changes in average earnings and unemployment, we can expect the residential property price index to fall 11-12% across all properties in 2012. Houses nationwide are forecast to fall in price some 12-14% - broadly in line with last year’s declines, while apartments are expected to fall 11-12% year on year in 2012, slightly moderating the 16.4% annual fall in 2011.

More crucially, even once the bottom is reached, which, assuming no further material deterioration in the economy, can happen in H2 2012 to H1 2013, the recovery will be L-shaped with at least 2-3 years of property prices bouncing along the flat trendline at the bottom of the price correction. After that, return toward longer-term equilibrium will require another 1-2 years. Assuming no new recessions or crises between now and then, by 2015-2016 we will be back at the levels of prices recorded in 2010-2011. Between now and then, there will be plenty more reports about improving affordability of housing in Ireland and articles about the proverbial foreign investors kicking tyres around South Dublin realtors’ offices.

Chart: Residential Property Price Index, end of December figures, January 2005=100

Source: CSO and author own forecast

Box-out:

Ireland’s latest shenanigans in the theatre of absurd is the fabled ‘return to the bond markets’ with this week’s swap of the 2 year 4.0% coupon Government bond for a 4.5% coupon 3-year bond. The NTMA move means we will be paying more for the privilege to somewhat reduce the overall massive debt pile maturing in 2014, just when the current Troika ‘bailout’ runs out. So in effect, this week’s swap is a de fact admission by the state that Ireland has a snowball’s chance in hell raising the funding required to roll over even existent debt in 2014 through the markets. Which, of course, is an improvement on the constant droning from our political leaders about Ireland ‘not needing a second bailout’. Of course, as far as our ‘return to the markets’ goes – no new debt has been issued, no new cost of financing the state deficits has been established in this swap. The whole event is a bit of a clock made out of jelly – little on substance, massive on PR, and laughable from the functionality perspective.

2/2/2012: Euro area credit supply remained constrained in Q4 2011

ECB's Bank Lending Survey (BLS) for January 2012 is out, showing dramatic failure of the December 2011 LTRO to kick start supply of credit to the real economy.

According to the BLS, credit standards by euro area banks tightened in the fourth quarter of 2011 on:

• loans to non-financial corporations (35% of euro area banks report tighter lending to NFCs in net terms, up from 16% in  the preceding quarter),
• loans to households for house purchase (29% of the euro area banks reporting net tightening of lending to households, up from 18% in the preceding quarter), and 
• loans for consumer credit (13%, up from 10% in the preceding quarter). 

Looking ahead, euro area banks "expect a further net tightening of credit standards, albeit at a slower pace than in the fourth quarter of 2011" in Q1 2012.  There is no easing of lending conditions on the horizon.

Overall rise in the net tightening  of credit standards was caused by:

• "the adverse combination of a weakening economic outlook" and 
• "the euro area sovereign debt crisis, which continued to undermine the banking sector’s financial position",
• In addition, "increased market scrutiny of bank solvency risks inQ4 2011 is likely to have exacerbated banks’ funding difficulties."

Euro area banks also reported a net decline in the demand for loans to NFCs in Q4 2011, albeit at  a slower pace than in the previous quarter (-5% in net terms, compared with -8% in Q3 2011).

• Banks indicated a sharp fall in the financing needs of firms for their fixed investment. 

The net demand for loans to households  declined further in Q4 2011, "broadly in line with previous expectations and with actual figures quoted in the previous survey round (-27% in the last quarter of 2011, compared with -24% in Q3 2011 for loans for house purchase, and -16% in the last quarter of 2011, compared with -15% in the third quarter for consumer credit).

For Q1 2012 banks expect a sizeable drop in the net demand for housing loans, while the decline in net demand for consumer credit is expected to remain in the same range.

Despite a massive LTRO in December 2011, "euro area banks reported a slight easing of access to wholesale funding in the last quarter of 2011, compared with replies from the previous survey,
although still a large number of euro area banks  (in net terms) continued to report significant
difficulties. ... Looking ahead, banks across the euro area overall expect some improvement  in access to wholesale market funding in the next quarter, potentially reflecting the anticipated effectiveness of non-standard measures taken by the ECB."

Banks also indicated that "sovereign market tensions led to a substantial deterioration of their funding conditions through balance sheet and liquidity management constraints, as well as through other, more indirect, channels. Banks also reported that vulnerabilities to risks stemming from the sovereign  crisis have significantly contributed to the tightening of credit standards, although some parts of the banking system were in a position to shield their lending policies from the impact of the crisis."

"...On the impact of new regulatory requirements on banks’ lending policies, banks’ replies point
to a further adjustment of risk-weighted assets and capital positions during the second half of 2011, to a larger extent than in the first half of the year and more than envisaged in July 2011. The same
applies for the impact of regulation on the net tightening of credit standards. In the coming months
banks indicate a further intensification of balance sheet adjustments and related constraints on the
bank lending channel."

30/1/2012: Irish Long-term Unemployment Saga

Unemployment figures, by age - distinguish youth and adult unemployment - have been preoccupying many analysts in recent weeks. Loads of media attention has been paid - internationally, if not in Ireland - to the plight of youth unemployment. In the next several posts, I will take a closer look at the data for EU27, including Ireland. All of the data comes courtesy of the Eurostat and covers the latest available period Q3 2011.

First, let's take a look at long term unemployment (defined as unemployment spell of 12 months or more) and very long-term unemployment (defined as 24 months or more).

Table below summarizes the data:

As you can see, we are not exactly a good performer. Prior to the crisis, Irish long-term unemployment averaged just 1.4% of the active age population - 23rd lowest in the group of EU27 plus Norway. In Q3 2011 our long-term unemployment stood at 8.8% - the third highest in the sample of 28 states. Over the period covered we have experienced an increase in long-term unemployment of 7.4 percentage points - the steepest rise in the EU27+Norway.

Matters are even worse when it comes to very long-term unemployment, where our rate has moved from  0.7% average for Q3 readings pre-crisis to 5.4% in Q3 2011 - an increase of 4.7 percentage points. Only Slovakia (6.0%) is worse performer than Ireland in terms of overall very long-term unemployment rate and we are the absolute worst in the EU27 + Norway group in terms of increase in very long-term unemployment.

Here is a chart to illustrate some of the above:

\Broken down by gender:

Long-term unemployment rates for men and women:

Ireland used to rank 22 in the EU 27+Norway in the size of its long-term unemployment pool amongst the males prior to the crisis. By Q3 2011 we had the highest rate of male long-term unemployment. We fared much better in terms of long-term female unemployment, moving from the lowest unemployment in the sample of countries prior to the crisis to 9th highest position. However, in both male and female long-term unemployment, Ireland experienced the largest and second largest, respectively, increases during the crisis.

Things are even worse for Irish very long-term unemployed figures. Prior to the crisis, very long term unemployment amongst Irish males averaged 1.0% (22nd highest in the EU27+Norway). In Q3 2011 that number rose to 7.5% (the highest in the EU27+Norway). This increase was the largest in the sample of countries over the period.

Very long-term unemployment amongst the females in Ireland averaged just 0.4% in pre-crisis period - third lowest in the EU27+Norway sample. In Q3 2011 this rose to 2.4% - 10th highest reading in the sample. Ireland's rate of increase in female very long-term unemployment was the fastest in the EU27 + Norway group of countries.

In the next post we will take a look at the unemployment figures by age.

30/1/2012: Dublin gets horrific ranking on economy

Dubious distinction for Dublin - identified as the World's 4th Worst-Performing City (see link here): and here are the snapshots of our 'neighborhood' in the rankings:

Source: http://www.businessinsider.com/the-10-worst-performing-cities-in-the-world-2012-1#

Between, I am puzzled by the pic selected for Dublin. Can't think of where it was taken...

30/1/2012: Fake Doctors Treating Fake Disease in Greece

There are many 'expert' voices in the media saying Greece should exit the Euro zone in order to return to growth. This, as I commented earlier today, is a gross oversimplification of the reality.

There is simply no evidence whatsoever that Greece can grow on its own any faster or more sustainably than it did within the Euro. In fact, the evidence presented below shows that the only period during the last 30 years in which Greece was able to somewhat marginally close the gap in growth between itself and the Advanced Economies group is the period immediately following its accession to the Euro.

It is a fallacy of 'alternative expectations' to believe Greece will be enabled to grow its economy under post-euro devaluation beyond achieving a 1-2 years-long 'bounce'. Analysts who expect Greece to recover on the back of exiting the euro & devaluing are deluding themselves for two major reasons:

1. Greece has no fundamentals for growth & its debt overhang will remain, unless it defaults hard. Even with a default, removing debt overhang is not going to deliver growth to Greece beyond simple mechanical post-depression bounce, as Greece lacks all fundamentals for growth - institutional, cultural and historical. 
2. However, with a hard default option, post-Euro, Greece will not be able to borrow & absent Government spending Greece has no capacity to grow. This is clearly shown in the charts below which highlight that in 23 out of the last 29 years, Greece has managed to achieve growth only with accompanying fiscal imbalances. 

In summary, Greece never once had any fundamentals to grow on its own without massive subsidies either via loose monetary policy or overinflated expectations relating to the country accession to the European common structures. Greece is not about to get real growth-driving fundamentals within or outside the euro area.

In short, all those talking about 'Greece must exit euro zone to achieve growth' are nothing more than fake doctors treating a patient who himself is faking a disease. Greece's problem is not the Euro. It's problem is Greece itself.

Here are the charts proving the point.

Fiscal imbalances:

Structural failure:

External insolvency:

Rotten growth fundamentals:

And lastly, rotten growth record

QED.