11/06/2011: Irish Competitiveness: latest data

Q4 2010 data for Euro area-wide competitiveness indicators is now out and it's worth updating my old charts and crunching through some numbers.

Remember - Irish and some European policymakers are quick to point to improving competitiveness as a core strength of Irish economy. I am slightly in a more skeptical camp on this. Improving competitiveness is good, but it matters where these improvements come from and whether our competitiveness is improving not in absolute terms, but relative to the rest of Euro zone. Let's take a look at what data tells us:

• Euro area Harmonized Competitiveness Indicator (unit labour cost-based) deteriorated in Q4 2010 to 97.9 from 96.3 in Q3 2010 (higher values reflect lower competitiveness). This means that qoq HCI for Euro area (the average benchmark to compare ourselves against) has deteriorated 1.66%, while yoy it is still showing improvement of 9.69%. For the 6mo from July through December 2010 Euro area competitiveness improved 9.55% on same period in 2009.
• Irish HCI has moved from 110.8 in Q3 2010 to 113.8 in Q4 2010 - a deterioration in competitiveness of 2.71% - much deeper drop than for the Euro area average. However, year on year we are still outpacing Euro area gains in competitiveness, with our competitiveness improving 10.60% on Q4 2009, against Euro area improvement of 9.69%. For the 6 mo through December 2010, Irish competitiveness improved 10.62% yoy again outpacing improvements in the Euro area at 9.55%.
• So the speed at which our competitiveness indicators are improving is about 16-17% faster compared to Euro area for the Q3-4 2010, but in Q4 our competitiveness has deteriorated about 10% faster than that of the Euro area.

Charts to illustrate:

This means that we have to think not only in terms of the rates of change, but in terms of actual levels of competitiveness. And here we are not exactly a shining example of a competitive economy:

• In Q3 2010, Ireland was the third least competitive economy in the Euro area, scoring 110.8 HCI reading against 111.7 for Luxembourg and 171.3 for Slovakia. In Q4 2010 we slipped down to the second least competitive economy ranking with 113.8 for Ireland, against 113 for Luxembourg. Not exactly where we would like to be, nor the direction we would like to be heading in. Especially since wages are not growing and unemployment is not improving, while overall employment is declining - in Ireland, while the opposite is true for many of our competitors. Which suggests that the value added of our output is declining to drive our HCIs readings up.
• More significantly, since Slovakia and Lux are not exactly our immediate comparators, as chart below shows, our performance remains extremely poor compared to other core Euro area economies.

So let's use the FF slogan from the past: "Lots done, more to do" to describe our situation. At the peak of our 'non-competitiveness', Irish HCI's exceeded Euro area reading by 25.9 points (Q1 2008). In Q4 2010, we exceeded Euro area benchmark by 15.9. Less than half of the gap in competitiveness has been erased by Ireland Inc. To get ourselves down to the level of our direct competitors (other Small Open Economies, SOE) we would need (assuming they stay put at Q4 2010 levels and excluding Slovakia and Ireland) to shave off roughly speaking another 8 points from our HCIs. In other words, you can think of this in the following terms - for all the pain we've experienced, we've traveled so far just under 56% of the road to becoming as competitive as the average other similar SOE. "Lots done, folks. Yet much left to do, still."

10/06/2011: Capital Assets Acquisition in Industry - Q4 2010 data

Another data update for Ireland - Capital Investment in Industry, based on the CSO data for Capital Acquisitions.

Updating to Q4 2010:

• Total volume of new capital acquisitions in the industry in Ireland reached €911mln in Q4 2011, up32.5% yoy.
• New investment in capital acquisitions in Ireland for 2010 reached €2.333bn, down 25.4% on 2009 and less than half the level recorded in 2008 (€5.033bn). This was the lowest amount of capital acquisitions over the years 2006-2010.
• Combined investments into capital acquisition in Pharmaceutical, Computer and Machinery sectors reached €261mln in Q4 2010 up 43.4% yoy. Total annual level of new investment in capital acquisition in these sub-sectors stood at €592mln in 2010, down 42.7% on €1.034bn n 2009 and down on annual levels in 2008 (€1.695bn), 2007 (€1.603bn) and 2006 €1.054bn)

Chart to illustrate:

10/06/2011: Industrial turnover and production - April 2011

Industrial Production and Turnover data was released today for April, indicating the overall activity in the manufacturing sector and the broadly defined sources of this activity.

In line with this, I went back and linked - re-based - 2006 and 2007 CSO data to current base to show some comparatives to pre-crisis dynamics.

Here are the highlights:

• Manufacturing activity was up 4.09% on annual basis, compared to April 2010. Monthly increase was 2.24%. However, Manufacturing activity was down 1.44% on 3 months ago and 4.16% on April 2007 (pre-crisis). The seasonally adjusted volume of industrial production for Manufacturing Industries for the 3mo period to April 2011 was 1.8% lower than in the preceding 3mo period
• All industries activity was up 1.32% mom and 2.67% yoy, but down 2.095% on 3 months ago and down 5.33% on April 2007.
• Modern Sectors posted a volume increase of 2.52% yoy and 1.41% increase mom. The activity in Modern Sectors is up 4.79% on April 2007, but is down 2.4% on 3mo ago.
• Traditional Sectors activity was up 1.39% yoy and 1.15% mom, but down 0.57% on 3mo ago and a whooping 18.05% on April 2007.
• It is interesting to note that Modern Sectors are positively correlated with Manufacturing output to the tune of 0.772 for the full sample (January 2006-present), but this correlation grew to 0.863 for the sub-sample covering the crisis (since January 2008) and continues to grow today - up to 0.926 for the sub-sample since January 2010.
  
• In terms of Modern Sectors influence on All Industries volumes, the same relationship holds, with full sample correlation of 0.713 rising to 0.812 for the crisis period and to 0.887 for the period since January 2010.
• The predominant role of Modern Sectors in driving Irish Industrial production is contrasted by a very modest role played by Traditional Sectors, where correlation with All Industries has declined from 0.416 in the full sample since January 2006, to 0.290 in the sub-sample covering the crisis since January 2008, to 0.142 for the sub-sample since January 2010.
  

Chart to illustrate:
Of course, the driving factors discussed above imply that:

• The collapse of construction and real estate investment exposed the extreme degree of indigenous industries dependence on these areas of economic activity;
• MNCs-dominated modern sectors, free of constraints of domestic demand, have been experiencing strong recovery. Manufacturing has regained pre-crisis peak of 109 (attained in 2007) back last year (reaching index reading of 110.1 for the year), which also pushed All Industries index a notch above pre-crisis peak. Modern Sectors have shot to new historic highs in 2010, reaching 124.7 index reading, compared to pre-crisis peak of 111.2 attained in 2007. It is worth noting that Modern Sectors have recovered from the recession back in 2009, having posted volume of production index reading of 112.7 - above the pre-crisis peak.
• These trends continued in April 2011, as CSO notes, since "the most significant changes [in Volume of Production Indices] were in the following sectors: Basic Pharmaceutical products and Preparations (+11.3%) and Beverages (9.9%)... The “Modern” Sector, comprising a number of high-technology and chemical sectors, showed an annual increase in production for April 2011 of 2.6% and a increase of 1.4% was recorded in the “Traditional” Sector.

Next, consider turnover indices:

• Turnover in Manufacturing sector in April registered index activity at 95.9, which is 3.01% above March activity and 3.45% above April 2010 activity. However, turnover is 4.29% below that recorded 3 mo ago and 14.40% below April 2007. The turnover in April was also lower than the turnover in any of the months from May 2010 through February 2011
  
• Turnover in Transportable Goods Industries posted index reading of 95.4, which was up 2.69% mom and 3.02% above April 2010 reading. The index was down 4.6% on 3 mo prior to April 2011 and 15.22% below April 2007 reading.
• This suggest that output sales conditions have improved mom (monthly changes in turnover exceed change in volumes), but are still down yoy.

Chart to illustrate:
Lastly, the above chart also shows new orders activity which has risen from 90.7 in March to 95.9 in April for all sectors. However, new orders activity remains slowest for any month since the end of April 2010 through February 2011. New orders index is therefore up 5.73% mom (good news) and 3.79% yoy (also good news), but it is still down 4.39% from 3 mo ago and is down 15.52% on April 2007.

09/06/2011: CPI data for May

Consumer Price Inflation data for May is out today. Recall that a month ago, higher mortgage costs and oil prices pushed inflation to a 30-month high, with prices in April up 0.4% mom and 3.2% yoy. This was the second highest rate of annual inflation since 2008. This time around, the catalyst for inflationary pressures was supposed to be mortgages costs, as ECB hike of 25bps in April was expected to feed through to retail rates. CSO is very careful about this aspect of inflation, having issued in the latest release an explanatory note (see below). Market expectation, consistent with my view expressed in December-January issue of Business & Finance magazine, is for inflation to average around 2.8-3.1% in 2011.

Now, on to today's data:

• May CPI rose 0.1% mom - below the markets expectations and below 0.6% mom rise in May 2010. Yoy inflation was at 2.7% in May 2011, again below expectations in the market.
• HICP - omitting, among others, cost of mortgages, car and home insurance, car taxes etc (see CSO note on this in the main release) - posted 0% change mom against 0.3% increase mom in May 2010. Annual HICP rose 1.2% relative to May 2010.

Charts to illustrate - first CPI, then two indices of prices:
In annual terms, largest increases were posted in

• Housing, Water, Electricity, Gas & Other Fuels - up 8.5% after posting 11.8% rise in April and 12.5% in March. Within the category, Rents posted a 1.0% decline yoy and 0.1% increase mom, while mortgages interest costs posted a 0.6% mom rise and 20.1% increase yoy. Electricity, gas & other fuels sub-category posted a 1.0% decline mom and 6.6% rise yoy with Liquid fuels falling 3.8% mom and rising 17.9% yoy.
• Miscellaneous Goods & Services posted a 8.4% increase yoy primarily driven by Insurance (+15.9% yoy) of which Health Insurance (+21.6% yoy, but -0.6% mom) was the biggest culprit. Motor car insurance was up 7.6% yoy and 0.7% mom.
• Communications were up 4.1% yoy - driven solely by 4.3% rise yoy in Telephone & communication services.
• Health was up 4.0% yoy - hospital services up 11.4% yoy (no change mom) followed by Pharmaceutical products (+2.5% yoy and 0% change mom)
  

Deflation was recorded in

• Furnishings, Household Equipment & Routine Household Maintenance (-1.9% yoy and -0.1% mom) with strong deflationary momentum in Furniture & furnishings (-5.7%), and Major household appliances (-4.0%)
  
• Education - down -1.3%- driven by 1,8% yoy decline in Other education and training and -1.4% drop in Third level education. On the opposite side of the spectrum, Primary education costs rose 1.3% yoy and Second level education costs were up 0.8% yoy.
  

Charts to illustrate these trends:

As usual - an imperfect measure of state v private sector controlled prices - first straight forward state-controlled or dominated or influenced sectors:

Next - an index of prices in two broadly defined sectors:
One point worth making - the above chart clearly shows that inflation has moderated in state-controlled sectors. It remains to be seen if this welcome change mom will translate into a longer term trend.

Finally, a point, as promised above, on the issue of mortgages costs. CSO provides a handy explanation of their terminology on page 10 of the main release, from which I quote here:

"... current approach to measuring mortgage interest in the CPI reflects the situation in the base reference period December 2006 when the standard variable rate was dominant. Subsequently, tracker mortgages have become more popular. This did not give rise to any difficulties while the standard variable and tracker mortgage interest rates moved broadly in line with one another, which would be the normal expectation. However, the decoupling that has taken place since August 2009 has resulted in dramatically different trends emerging. For example, between September 2009 and September 2010 the standard variable rate increased from 2.93% to 3.66% whereas the tracker rate did not change. The Mortgage Interest component of the CPI, which is largely determined by the trend in the standard variable rate, increased by 25.1% as a result and contributed +1.25% to the overall change in the All Items index. It is crudely estimated that the latter impact would have been reduced by between 0.2% and 0.5% had the Mortgage Interest component been calculated on a current weighting basis."

So what CSO are saying is that current mortgages costs metric overstates the overall impact of mortgages costs increases on CPI because more mortgages, since 2006, were issued in the form of tracker mortgages. That's fine, but there is also a sticky problem of the weights assigned to all spending categories, which are all based on December 2006. If since December 2006 the following changes took place:

1. Overall costs of mortgages rose relative to other costs,
2. Home ownership proportion in population rose (which could have been due to emigration out of the country selecting predominantly non-homeowners, for example),
3. There have been significant exits from tracker mortgages and fixed-rate mortgages since 2006 (perhaps due to either selection bias in defaults or due to bias in favor of fixed rate mortgages in maturing mortgages, for example)
   

Then the weights used for this sub-category of spending might be below their current levels, off-setting the above effects of tracker mortgages.

07/06/2011: Residential property prices

An impressively decent dataset from CSO on residential property prices has been released for the second monthly installment, so here are the charts and some high level analysis.

• Overall Residential Property Price Index (RPPI) for April was 78.2 or 0.8 points below March levels. Hence, mom the index has fallen 1.013% and is now 1 point below its 3mo MA. Year on year the index has fallen 12.233% and relative to peak of 130.5 reached in September 2007 it is now down 40.077%.
• Overall RPPI has recorded its 8th month of consecutive declines having risen statistically and economically insignificant 0.11%mom in August 2010. Year on year, April marked 38th consecutive month of declines.
  
• April index for houses fell 0.9 points to 81.3, down 1.095% mom, or 1 point below 3mo MA. Year on year index has fallen 12.013%. The peak for this sub-index was reached in September 2007 at 132.0.
• April index for apartments fell to 60.4, down 0.6 points - a mom decline of 0.984% and a yoy decline of 15.288%. April reading was 1.233 points below 3mo MA. This sub-index peaked at 123.9 in February 2007.
• Dublin properties sub-index has fallen 0.5 points in April to 70.5, a decline of 0.704%mom or 12.963% yoy. The sub-index now stands 0.77 points below 3mo MA and 47.584% below the peak of 134.5 in February 2007

Charts to illustrate:
To summarize - the deflation of house prices continues, although the monthly rate of decline has now fallen below both 6mo and 12mo average. This, however, might be due to seasonality, since April marks a relatively moderate month in terms of price movements in every year since 2008. house prices have now fallen 38.41% since their peak, while apartments prices have declined 51.25% from their peak.

It is worth noting - not as a criticism of the CSO, since it cannot do anything about the data - that the index is computed based on mortgages drawdowns, hence excluding any share of transactions that might take place on the 'gray market' (tax evading payments, swaps etc), as well as cash-only purchases and mortgages issued by lenders other than the 8 largest lending institutions from which the data is available.

Another issue, again - little that CSO can do for this - relates to hedonic adjustments undertaken in index computation. Hedonic characteristics used by CSO exclude a number of relevant parameters, such as number of bathrooms and the site size, as well as existence of garage and/or off-street parking. This, alongside with the tendency - due to planning permissions restrictions - to under-report actual floor area and number of bedrooms - means that the hedonic model might be relatively weak.

Finally, CSO employes a Laspeyers-type indexation method, which is "calculated by updating the previous month’s weights by the estimated monthly changes in their average prices". However, like all types of indices, Laspeyers indices suffer from some specific drawbacks. In particular, these indices are weaker in periods of adjustment in the markets. Here's a quick non-technical discussion:

Laspeyers index is designed to answer the question: "How much is the sales price today for the house that is of the same quality as in the base year (2005)?" Quality is compared using the hedonic model mentioned above, based on specific size of the house (floor area), its amenities (number of bedrooms, house type) and location (note - we do not know the granularity of such 'location' adjustment, which can be critical. For example, I live in Dublin 4, but not the "fashionable" part of it. This means that if location code used is D4 for my house, it will receive signficantly higher locational weight relative to true value of my location than a house in a "fashionable" D4 locale.

One key objection to Laspeyers index is that it is computed while assuming that the base year (2005) house remains unchanged over time. Hence, quality is assumed to be constant for referencing, implying the index over-states inflation and under-states deflation.

In addition, index does not capture the effects of substitution in housing. In other words, Laspeyers index does not reflect conversions of house features to substitute away from more expensive options, etc, or purchases shifting in favour of smaller properties.

Index also assumes that geographical distribution of house sales does not change over time - a feature that introduces significant biases into the index when locational markets are not uniform (when there are significant differences within the markets).

Finally, the index overstates price appreciation at the peak of the bubble, since at that point, less desirable properties were disproportionately represented in the market as buyers chased any home available for sale. This is known on the basis of the US data where at the top of the markets 'gentrification' of lower quality locations in many states has led to Laspeyers indices understating price inflation.

For thes reasons, Laspeyers indices are known as 'constant quality' indices.

Chain-linked indexation, employed by CSO, helps addressing some of these issues, but it does not eliminate them. Of course, that too has its drawbacks, namely the more substantial data requirement, plus the lack of index additivity (you can see this indirectly in the first chart above by the gravitational pull of the houses index on overall index.

07/06/2011: Irish Trade in Goods & Services

Having completed a new dataset on Irish trade - for both Goods and Services - here's the latest data we have.

Please, note, CSO does not report monthly stats for trade in services, which form a significant share of our exports and influence our trade balance and current account. Instead, CSO's monthly series make a claim about 'trade' without explicitly identifying that this 'trade' only covers goods. That identification, instead is buried in the 'fine print' methodology pages.

Ok, to the numbers. Given the vast size of Irish economy, the latest data on overall trade we have comes from QNA and covers Q4 2010. By the end of Q4 2010:

• Exports from Ireland stood at €40.073bn, down 1.35% qoq and up 11.67% yoy. Annual increase in Q4 2010 was €4.187bn, making Q4 2010 the highest level of exports in Q4 of any year since 1997.
• Lowest level of exports during the current cycle (since 2007) was reached in Q3 2009, implying that growth in exports returned in Q4 2009. Highest level of exports were reached in Q 3 2010.
  
• Imports stood at €34.546bn, up 8% qoq and 12.99% yoy
• Trade balance as of the end of Q4 2010 was a positive €5.527bn, down 35.98% qoq and up 4.05% yoy (+€215mln).
• Ireland's quarterly trade balance bottomed out in Q1 2008 and grew since then, peaking at €8.633bn in Q3 2010.

Charts below illustrate: