10/8/2012: What's driving trade surpluses in Ireland?

Here's a question I asked myself recently: Given Irish exports are so heavily dominated by the MNCs, and given that the MNCs operating from Ireland are primarily concerned with transfer pricing and tax optimization (entering as negative factor to our overall trade), does our exports growth (positive contribution to our trade balance) really determine change in our trade balance?

It's a cheeky question. You see - Government policy in effect says "To hell with domestic enterprises, let's put all our bet for a recovery on exports". And furthermore, the policy also says that "Ireland will remain solvent as long as we can generate growth in our external surpluses". Of course both of these strategic choices imply state reliance on MNCs to increase our external balances surpluses, i.e. trade surplus.

So here are two charts (caveat to first chart - obviously estimated relationships are just illustrative, rather than conclusive, since we have few observations to consider as consistent data from CSO covers only 1997-2011 annually, but strangely enough the quarterly data - not suffering from same limitations - confirms annual data results):

The conclusions are rather interesting and worth much deeper exploration:

• Imports growth explains more of the variation in trade surplus growth than exports expansion
• Exports growth explains negligible amount of variation in trade surplus growth
• Growth in profits repatriation by MNCs out of Ireland relates stronger (almost 27 times more) to  trade surplus growth than either imports or exports.

So more questions should be raised than answers given in the end...

9/8/2012: Rip-off Ireland roars again in July

Latest consumer price indices are out for Ireland. Headline number for annual comparatives is moderate inflation at 2.0% in HICP metric and 1.6% on CPI metric. M/m we have deflation.

Alas, the headlines do not tell the whole story. Much is revealed in the following three charts which, in summary, show that most of inflation, including double-digit rampant inflation, is concentrated in state-controlled or state-set prices (marked in red).

You can see that even when it comes to energy, state-controlled prices (e.g. electricity and natural gas) are ahead of inflation driven by virtually identical underlying oil and gas prices (other hydrocarbons-linked fuels).

The above, of course is consistent with the State policies that have prioritized extraction of rents from the private economy in order to close fiscal gap. The State is doing this even though Irish Government is aware that we face a deleveraging crisis among our households and companies. In other words, prioritization of the policy is clear - skin consumers to save the Exchequer and to hell with households barely capable of making ends meet.

Don't think that this is not a prescription for an economic disaster. Killing off private economy to sustain public sector's lack of real reforms as well as to sustain exceptionally costly measures to underwrite Irish financial sector meltdown is not a good thing to do. But, hey, 'international investors' seem to approve.

8/8/2012: Updating 2012-2017 forecasts for Russia

Updating my outlook for Russian economy:

First a table summarizing my outlook and IMF forecasts for key macro variables (note: IMF forecasts are as of July 2012, updating WEO database from April 2012).

Second, two significant trends that will dominate Russian macroeconomic themes in near- and medium-term future:

Both charts above are based on IMF data and projections.

The key to both is understanding that the underlying capital dynamics suggest strong capital investment contribution to the GDP and that much of this will be driven by the private sector. This implies strong growth potential in core capital equipment, construction and manufacturing sectors.

However, my estimates of public investment are above those for the IMF, based on two factors:

1. Last Presidential elections have been dominated by the rhetoric concerning modernization and re-structuring of key Russian sectors and the economy overall. Coupled with accelerating depreciation of infrastructure stocks, this suggests elevated public investment in years to come.
2. Recent portests against the Government have clearly been met with a complex response that includes strong recognition by Moscow that accelerated development of the quality-of-life infrastructure and structural reforms in the economy cannot be postponed. This too suggests that the Federal authorities will likely accelerate public investment.

As the result, my projections for private investment remain in-line with those by the IMF, but public investment projections are likely to be ahead of those by the IMF by some 1-1.5% per annum in 2013-2014, rising to 2% over IMF forecast post-2015.

7/8/2012: Once forgotten Growth & Jobs Plan

So, by now we all have forgotten that little bit of June-July newsflow that promised a Compact for Growth to help the EU recover from the euro area-induced depression. And for a good reason - whole thing was a complete fudge. The problem is - this was supposed to be the second half of the EU policy equation. If the entire half of that equation is really a pure fake, what confidence can we have in the validity or sustainability of all other euro area commitments delivered at the last summit of June?

Answer - none.

Now, here's the reminder of the June 'growth fudge'. Alongside the euro area council, the European Commission singled out the European Investment Bank as the core instrument for stimulus measures - which in reality, given EU Commission's total lack of economic policy imagination amounts to public works and infrastructure investments. On July 31, the EU Commission issued a paper covering EU construction sector and calling for the sector to become the core driver of its grandiose scheme to kick-start the euro area economies. Let's keep in mind - the construction sector accounts for just about 10% of total GDP in the euro area, while being responsible for the lion's share of total losses in the euro area banking sector and for the majority of debts in the private sector that currently hold the economies of the euro area hostage.

Back on June 30th, the EU agreed a 'new' stimulus package worth €120 billion - the Growth and Jobs Pact. This 'new' measure, of course consisted of €55 billion of already allocated in the budget, but will be diverted from such worth-while activities as building EU's 'social(ist) / green / nano / smart / knowledge-filled economy' to EU's 'bricks-and-mortar economy'. Of the remaining €60 billion, only €10 billion will come from actual funds, which will be 'leveraged' by EIB (read: more debt) to raise up to €60 billion in funding which the EIB can then lend out to the 'struggling' economies for the purpose of building 'stuff'. There's a problem, Roger, as some would say. Last year, EIB has managed to lend out just €61 billion on the foot of raising €76 billion. In other words, apparently, EIB sees not enough worthwhile investment opportunities to allocate funds it already has. Back in 2010, EIB lent out €72 billion. But with the EU Commission plans, the bank should simply double its lending overnight. 

Despite the fact that by EIB's own admission (see annual report) the levels of lending in 2010 were 'exceptional' and the bank would like to return back to 'normal' lending volumes.

Recap the above: EIB is already lending at 'exceptional' levels and would like to scale this lending back, and EIB would have to double its lending capacity to deliver on EU Commission plan.

Now, what can possibly go wrong with this?

7/8/2012: Real-time evidence on Irish lending bubble collapse

A revealing table from the danske Bank H1 2012 results which hardly needs much of a commentary:

Impairments:

• Northern Ireland 3.5% of lending
• Banking Activities Ireland (non-toxic stuff) 4.16%
• Non-core Ireland (toxic stuff) 18.67%
• Total Banking Activities 0.80
• banking activities Denmark, Finland, Sweden, Norway from 0.17% to 0.47%

And that's about all you need to know. 

But in case you want more - the report is available here.

Oh, and few more revealing tables:

Now, in the above, non-core (toxic) stuff from Ireland is accounting for 72.5% of all charges taken. Nicely done!

6/8/2012: Financial Crises, Recessions and Government Debt

Another interesting chart from The Great Leveraging, by Alan M. Taylor, CEPR DP 9082. This one shows “Excess” Credit Growth (in other words the extent of credit contraction during the crisis) and the Paths of Real GDP in Normal (blue line) and Financial Recession (red line) Contingent on Initial Public Debt Levels.

Here's Taylor's own explanation: Figure 12 from work in progress (Jorda, Schularick, and Taylor, forthcoming) studies the impact of a similar "marginal treatment" [shock of 1% per annum extra loan to GDP growth during the expansion prior to the crisis over an above normal long run levels of growth - and recall that in Ireland's case this rate was probably 3-5 times the shock considered by Jorda et al], subject to starting Government debt/GDP ratio condition (taken as 0% of GDP to 100% of GDP). The central forecast lines - solid lines - provide for assumed 50% of GDP starting assumption for public debt to GDP ratio.

"First look at normal recessions (blue dashed line, dark shaded fan). Extra credit growth in the prior expansion is correlated with mild drag in the recession, say 50-75bps in the central case, but the effect is small, and does not vary all that much when we condition on public debt to GDP levels (the dark fan is not that wide). Now look at financial crisis recessions (red solid line, light shaded fan). Extra credit growth in the prior expansion is correlated with much larger drag, almost twice as large at 100-150bps, and the impact is very sensitive to public debt to GDP levels going in (the light fan is very wide). At public debt to GDP levels near 100% a sort of tailspin emerges after a financial crisis, and the rate of growth craters down from the reference levels by 400bps at the end of the window. Recall, effects in this chart are shown as non-cumulative."

This is serious stuff, folks. In effect the chart above shows that, had Ireland entered the crisis with, say 80% Government debt/GDP ratio, we would have been losing some 2.03% percent on average annually over 6 years. Funny thing - we are, so far on track to exceed this number.

Many say we had a very enviable, low Government debt to GDP ratio at the onset of the crisis - officially - at 44.23% in 2008. Alas, that is platitudinal bull when it comes to hard reality. The problem for the argument involving the 44% figure above is that starting with 2008, Ireland promptly loaded onto the shoulders of the Exchequer massive banks debts, which have pushed Irish Government liabilities up by at least €67 billion, or well above 90% of GDP. Not all of this was taken as debt (NPRF funds) and not all of this was taken as immediate debt (with banks recaps running into 2011), but as far as resources available to combat the crisis go [something that low Government debt at the onset of the crisis should have allowed], banks resolution measures exerted direct drag on Irish Exchequer capacity to use low initial debt levels to fund transition out of the crisis. In other words, as the real data and comparison of it to Taylor's results show, the idea of our low initial starting debt levels being a boom to our situation is bollocks.

Thus, in terms of the chart above, we are closer to 80-90% starting point for debt/GDP ratio for the onset of the crisis period (thanks to Brian Cowen's Government efforts). Which implies that over the 6 years horizon of the crisis, we should expect a cumulative decline in the economy GDP of ca 12%. The fact that over the last 5 years we have seen our GDP declining by 9.52% (using IMF data and 2012 forecast) means only one thing: more pain is yet to come.