Economics 03/07/2009: Ireland's Research Sectors - a net positive

CSO released their latest data on R&D spend in Ireland for 2007/2008.
Chart above shows overall R&D expenditure by type of firm in 2007 and 2008. In both 2007 and 2008 larger firms dominated overall R&D expnditure in Ireland, but there was a marginal increase in the share acruing to small firms as well. There has been only marginal growth in terms of overall spend between 2007 and 2008. Still a net positive, when compared to the rest of economic activity.
Total capital spending on R&D declined for larger firms, but rose for smaller firms. Ditto for foreign owned enterprises as opposed to domestic enterprises. Across the board, foreign owned companies vastly dominate R&D spending space in Ireland, though domestic enterprises are closing the gap. Again, a net positive. Capital spending overall declined, as expected, given the fall in the value of land and buildings.
Current expenditure on R&D (inclusive of labour costs) rose for all categories of firms. The smallest percentage increase was for foreign owned enterprises and manufacturing. Again, net positive, albeit marginal. And in the long run, this might be signalling rising pressure on R&D competitiveness. No analysis is provided in terms of off-set in R&D Capital spending savings agains Current spending inflation.Labour costs rose at a significant margin for all players, except for manufacturing enterprises. Net negative for the 'knowledge' economy. Apparently - doubling PhDs output does little to reduce their cost.Own funds are dominant as a source for R&D financing, with small firms, expectedly, leading larger firms in the importance of public funding. In general, public funding is extremely marginal. Again, this is good news. This is true in relative - percentage - terms (above) and in absolute terms (below).
Table below shows the sectoral breakdown of total R&D spending:
Predictably, MNCs-led sectors account for over 70% of the total spend. This is ok in the short run, but must be reduced in the long run if we are to lower the risk of significant withdrawal of one or two leading MNCs from the market.

Economics 03/07/2009: Exchequer returns

So we have June Exchequer returns. Pretty nasty stuff, though some say it’s all ok. Here is why I disagree:

Much of the effect in flatter declines in tax revenue was due to frontloading corporation tax (October 2008 Budget). Now, Government April 2009 budgetary forecast did not reflect the expected revenue from this source, so the windfall should have boosted the overall tax receipts in June. Hmmm... but we are still €188m or 1.2% behind forecasts.

What gives? Brian Leninham has unleashed a savage April 2009 mini-Budget (-1.3% of the national disposable income was expropriated by the State or Euro 1.23bn, split as 2/3 to income tax and 1/3 to Health and PRSI levies – the latter two not entering tax receipts on the Exchequer banalce sheet, but counted as income to Government departments, yet another trick by which our obscenely high tax regime is classified as a ‘low tax’ one) and June was the first month where all new changes (errr – tax hikes) were in. So consumers are now on a renewed push down in spending:

Excise duty down 11.5% yoy in June, as opposed to 8.1% in May – tell me that after the improbably strong fall in 2008 a new double digit dip is not a collapse, and I would have to ask you what you are having for a drink that’s so strong;

VAT was down 23.3% in June yoy – also deeper than the -21.2% average decline in a year to May (although these are not seasonally adjusted figures);

Income tax is down 15.6% yoy or 2 percentage points behind DofF estimates.

Net result: deficit is now at €14.71bn against revenue of €16.31bn. Chart below illustrates revenue trends in terms of monthly average receipts.

All of this, however, is beyond the main point - even if revenue is flowing in at the rate the DofF forecast - which seems to be the desired objective of all our observers, analysts and the Government, this revenue will be bleeding the real economy. There is no point of balancing the Government expenditure at the cost of killing the economy - which is what our Exchequer is currently attempting to do...

Economics 02/07/2009: Downgrade on Irish debt

Moody's downgraded Ireland from top Aaa government-bond ratings one notch to Aa1 (hat tip to PMD) saying that Ireland's policy response to the economic downturn had been decisive and the government had a strong balance sheet before the crisis struck, so there was only a need for a moderate downgrade. The ratings were on watch for possible reduction since April. So the move was widely expected.

"The review process focused on the nature of the policy response and the extent to which the Irish economic model was durably affected by a sudden and brutal economic and financial adjustment," said Moody's Sovereign Risk Group analyst.

Despite politically correct chatter about ‘decisive response’ etc, Moody's still has a negative outlook on Irish ratings. Why? Risk of further deterioration in terms of debt affordability (as measured by the share of government revenue used for interest payments) and financeability (the cost at which the country can raise more debt).

Per WSJ report, the ratings agency said debt dynamics will remain unfavorable for the country for several years, and that downside risks outweigh upside risks in the near to medium term.

Economics 01/07/2009: Live Register

Per CSO release today, standardised unemployment rate is now at 11.9% in June (as compared to 10.2% as measured in Q1 2009 by QNHS) as the seasonally adjusted Live Register increased from 402,100 in May to 413,500 in June, an increase of 11,400. In the year to June 2009, there was an unadjusted increase of 197,781 (+89.6%). This compares with an unadjusted increase of 195,115 (+96.7%) in the year to May 2009.
Unadjusted change in LR for males between May and June was +10,302, for Females +11,419 so we are now seeing female unemployment moving ahead (in rates of growth). This shift was evident in both under 25 year olds and 25+ years of age categories. The new risk to household solvency now comes from second earners starting to lose jobs at a faster pace.
When looking at weekly changes, chart below shows clearly the renewed pressure on employment. Clearly no 'green shoots' here.

Economics 01/07/2009: UK Ad Spend, QNA & US Consumer Confidence

Per Adweek, advertising spend in the UK fell 4% to £18.6bn in 2008. All media experienced declines, apart from internet and cinema fell, according to figures released on 29 June by the Advertising Association. The drop compares with a rise of 4.3% in 2007. Press (newspapers and magazines) was the biggest spending category at £6.8bn in 2008, down 11.8% yoy. TV was the second-biggest spending category (£4.4bn), down 4.9%. Internet spend was third at £3.6bn up 19.1% on 2007. Radio was down 8.5% to £488m, outdoor and transport fell 3.8% to £1bn, while cinema rose 1% to £205m. Three things are worth noting in these figures:

• As consumer confidence and spending collapsed, overall advertising spend stayed surprisingly firm;
• Internet has probably benefited from substitution from costlier print and TV/radio to cheaper on-line advertising. This is potentially a 'recession factor' (in a recession, such substitution is usually a temporary phenomena - once growth returns, the old spending/consumption patterns return rather swiftly), so internet advertising will need to look at adopting some new proposition for selling once the growth cycle restarts;
• The figures do not specify what share of spending contraction can be attributed to lower costs of advertising, in other words, we do not know whether the fall was due to declining client activity or due to improved cost of advertising.
  

More on yesterday's Quarterly National Accounts data. Here is the snapshot of the widening GDP/GNP gap in Ireland - a clear sign of rising weaknesses in domestic sectors:
Note the trend peak in Q1 2005 and the absolute peak in Q4 2006. The first one corresponds to the end of post 2001-2002 correction and the latter to the SSIAs craze sweeping the nation.

Next, to the sectoral contributions to GDP.Our earnings from abroad are negatives and rising in absolute value - those Bulgarian and Romanian properties we've snapped up. Agriculture is overall the least important sector when it comes to GDP contributions. It used to account for 2.54% in Q1 2003, it accounts for 2.51% today (an increase from 2.33% a year ago). I wonder if that yoy increase captures the pumping of dioxins subsidies to pork producers. That was something, as the gravy trains go: Irish pork industry is worth €385mln pa, but in December last, the Government doled out €180mln to the industry in compensation for a one week stoppage (worth just €7.0mln in economic losses).

Then come Public Administration (up slightly from 3% an year ago to 3.25% this Q1, with another pesky side to it in the form of continued inflation in the sector).

Building and construction fell from a high of Q1 output of 8.93% of GDP back in 2006 to 5.99% in Q1 2009.

For what it's worth as an intellectual exercise, were we to invest all overseas property money back in the country, while shutting down:

• Option 1: Agriculture, Building & Construction, and Public Administration all together, we would be still 6% of GDP better off;
• Option 2: Agriculture, Public Administration and all Taxation, we would be 1.9% of GDP better off.

Of course - this is just an accountancy exercise, not a real economic policy, but it does put into perspective the fact that we have a sector accounting for just 2.5% of the economy and yet commanding its own Department with thousands of bureaucrats in employment...


Expecting the expected: US Consumer Confidence has taken a fall, once again, proving that the previous 'rebounds' were just a temporary mathematical correction before new jobs losses and continued weakness in the economy feed through to consumer sentiment. US consumer confidence fell to 49.3 in June from a downwardly revised 54.8 in May, the Conference Board reported Tuesday. Following a large confidence jump in May, consumers grew more pessimistic in June about their present and future. The present situation index declined to 24.8 in June from 29.7 in May, while the expectations index fell to 65.5 from 71.5. Note that the change in expectations was largely in-line with current conditions move, signaling that the US consumers are not exactly treating the current deterioration as temporary decline on significant May improvement.

A lesson for Obama? Don't give tax breaks to the elderly and the poor - give them to the middle classes. Last month improvement in personal income in the US was almost entirely due to Federal tax rebates to the elderly and the poor. This might be fine in the economy that is running at around trend growth, where consumption of non-durables is a problem, but it is not as efficient as a middle class tax break in the economy where precautionary savings are a problem.

A lesson for Ireland? Given that our own economic conditions are much worse than those in the US, and given that the government tax policies in Ireland are intirely internicine, I doubt we can expect significant gains in consumer confidence in months ahead. Instead, we should expect a new wave of layoffs to hit in Autumn 2009 and then again in January 2010.

Economics 30/06/2009: Growth Collapse, Balance of Payments, Travel tax; Public earnings

Above figure shows that our GDP/GNP growth continued to deteriorate dramatically in Q1 2009, with GDP shrinking a whooping 8.5% at constant prices and GNP falling 12%.
Consumer spending in volume terms was 9.1% lower in Q1 2009 compared with the
same period of the previous year. Capital investment, in constant prices, declined by 34.1% in Q1
2009 compared with Q1 2008. Net Exports in constant prices were €2,814mln higher in Q1 2009 compared with Q1 2008.

The volume of output of Industry (incl. Construction) decreased by 10.5% in Q1 2009 compared with Q1 2008. Within this the output of the Construction sector fell by 31.4%, output of Distribution, Transport and Communications was down 10.9% while Output of Other Services was 3.5% lower in Q1 2009 compared with the same period of last year.
Note declines in GVA above - we are not getting any better on value extraction either, with exception of 'other services' sector...

Domestic activity simply collapsed, as evidenced by the expanding GDP/GNP gap. More taxes, please, Mr Cowen!



Today's Fáilte Ireland May traffic figures confirmed the accelerating nature of collapse in air passenger traffic. In May, traffic fell by 15%, following a 10% decline of the first four months to April. Since the Government’s €10 tax was introduced on April 1st, the rate of traffic decline and tourism collapse has accelerated. The most significant fall was in arrivals to Ireland (down 19%). See Balance of Payments figures below for more details. Since the beginning of 2009, Belgian, Dutch, Greek and Spanish governments have all scrapped tourist taxes and/or reduced airport charges to zero. In contrast, our pack of policy idiots in the Leinster House decided that taxing tourists is just fine, as, apparently, they believe that Germans, Italians, Spaniards, Chinese, Americans and other nationals have no choice but travel to this global epicenter of cultural life and history that is Ireland. Time to call for an encore, Mr Lenihan.


Per CSO release today, the gross external debt of all resident sectors (i.e. general government, the monetary authority, financial and non-financial corporations and households) at the end of Q1 2009 stood at €1,693bn, an increase of €32bn on Q4 2008. The increase arose from a combination of exchange rate effects and the availability of new data.
Per CSO, "the liabilities - mostly loans - of monetary financial institutions (i.e. credit institutions and money market funds) amounted to €723bn. This was €56bn lower than for end-December and, at 43% of the total debt, was a smaller share than in the previous quarter. The decrease was due to a large reduction in debt liabilities, particularly short-term loans, and is to an extent reflected by an increase of over €50bn in Monetary Authority liabilities to the European System of Central Banks (ESCB) including balances in the TARGET 2 settlement system of the ESCB." General Government liabilities increased to €60bn driven by long-term bond issues more than offsetting a reduction in short-term money market instrument issues.

In other words - all's grand in the ZanuFF land: the banks are getting better and the taxpayers are getting deeper into debt.


And if debt figures are not bad enough, here are the latest Balance of Payments data - courtesy also of CSO release today: "The Balance of Payments current account deficit for Q1 2009 was €2,530m, over €1.6bn lower than that of €4,175m for the same period in 2008". Sounds good? Not really.

Due mainly to much lower imports:

• Q1 merchandise surplus of €8,020m was over €3.7bn higher yoy;
• The invisibles deficit increased by almost €2.1bn to €10,550m;
• Services (€2,180m) and income (€7,586m) deficits were both about €1bn higher.
  
• Total service exports at €16,050m dropped €360m largely due to insurance and financial services.
  
• Service imports at €18,230m were up over €600m due mainly to higher royalties/licences and miscellaneous business services.
• Tourism and travel receipts (€640m) and expenditure abroad (€1,324m) were down.
  
• The higher income deficit results largely from reduced profits and interest earnings by Irish-owned businesses abroad (€1,808m) along with increased outflows of profits and interest from foreign-owned enterprises in Ireland (€8,631m).
  
• Interest outflows on Government External Debt also increased.
  
• In the financial account, Irish (mostly IFSC) residents redeemed €40bn of foreign portfolio assets and repaid €27.8bn of portfolio liabilities.
  
• Inward direct investment was low at €794m and was similar to outflow.

Not too good for an exporting nation? You bet.


Of course, reasoned our seasoned policy morons, we simply have no alternative to raising taxes everywhere, for the public sector wages must be paid at an increasing rate. Never mind recession and Government promises to cut the public sector excess fat - if anyone had any mistaken beliefs that this Government is serious about tackling our state of public sector insolvency, hold your hope no longer. CSO figures for public sector employment and earnings released yesterday show once again that Brian Cowen is hellbent on robbing the ordinary taxpayers to pay for public sector cronies' privilege to earn lavish wages and perks. Public sector wages rose 3.4% yoy last month and public sector employment was up 1,000. So let's tax and borrow our way to pay public sector wages and pensions, should we? Irish Economic Model (as opposed to a real economic model) at last.

Economics 29/06/2009:

IMF Report last week highlighted some pretty nasty sides to our policies of the past, present and the future. For those of you who missed my Sunday Times article this week, here is the unedited version:


“They who delight to be flattered, pay for their folly by a late repentance,” said Phaedrus of Macedonia some 2000 years ago. No matter how much our Ministers herald this week’s IMF report as ‘being supportive’ of the Government policies, these words can be a leitmotif for the international organization’s view of our economy.

The IMF clearly states that the bulk of our economic problems was predictable and stems from our own policies choices.

Structural deficit, notes the report reached 12.5% of GDP back in 2008. Now, even following the savagery of April supplementary budget, the deficit remains at 11% of GDP for 2009.

Profligate in spending, Irish authorities project deficits of 10.75% of GDP in 2009 and 2010 falling to 2.5% of GDP by 2013. IMF projects – as a benign scenario - deficits of 11.75% in 2009 and 12.75% in 2010, and 4% in 2013. Bang-on in line with my forecasts published in January 2009. And this is before we factor in our ongoing short-term borrowing binge and the costs of NAMA.

IMF staff’s baseline scenario implies “stronger expenditure consolidation than currently projected by the authorities”. Read: Minister Lenihan is off the mark in his fiscal consolidation exercise. Over 2009-2014 primary expenditures will have to be brought down by a whooping 9.5% of GDP – a cut of some €16.2bn against additional revenue raising of €4.3bn. A note: An Bord Snip is toiling overtime to reportedly cut just €4bn.

The balance between new taxes and spending cuts that the IMF suggests is so out of line with the Government approach two Budgets and two policy documents issued to date that it is impossible to interpret the Report as anything more than a motivational platitude that a senior scholar would accord to a not-too-bright student attempting a difficult proof. That Minister Lenihan failed to notice this irony is truly remarkable.

The IMF has a right to be critical of our policies. The Fund has been at the forefront of warning the Government about the problems we facing today. Annually, in Article IV Consultation Papers of 2003-2007 Fund analysts said that Ireland must focus on reforming grossly inefficient public services, stabilizing tax revenues, and deflating the property and public spending bubbles. Time and again the Government presented the IMF polite warnings as the marks of its approval of our policies. Cheers were sounded at numerous press conferences and nothing was done to address specific risk factors.

In its 2004 paper the Fund noted, that “Increases in public sector employment ...gradually inched up from a low of 3.7 percent in January 2001 to 4.8 percent by July 2003. Domestic demand was supported by the ECB’s easing of monetary policy and an expansionary fiscal policy.” Later, the Fund told the Government that “progress in improving public expenditure efficiency, controlling public sector wages, and increasing domestic competition has been limited.”

Throwing good money after bad to ‘improve’ public services as the Government preferred to do was never sustainable for the IMF: “the size of government [in Ireland] is not small in comparison with other OECD countries when compared to GNP, the more relevant measure of domestic economic activity.”

Bertie Ahearne’s response to this was to declare himself the last standing socialist in Europe and accelerate spending growth, triggering a wave of public sector waste. By 2007, Ireland became the country with one of the most generous welfare systems in the OECD.

“The ongoing rise in debt levels over the past decade has placed Ireland above the average of household debt-to-income ratio for Euro area countries, only surpassed by the Netherlands and Luxembourg,” said IMF in 2006.

Neither CBFSAI nor the Department of Finance stepped in to reign in this activity, despite IMF warnings. No tightening in reserve ratios or regulatory restrictions on excessive and risky loans took place. Capital to risk-weighted assets ratio has fallen from 14% in 2003 to 12% in 2005 for domestic banks. Contingent and off-balance sheet accounts have risen from 538% of total assets to 879%. Annual credit growth to private sector ballooned doubled to 29%. Today, the Government continues to promote our low public debt with no references to the private sector indebtedness.

In 2007 the IMF warned about the risks to our fiscal sanity: between 2003 and 2006, Irish real GDP grew by 22%, while real primary public spending rose 27%. Unfunded forward expenditure commitments have swallowed all existent and expected future primary surpluses.

Not surprisingly, this week, the IMF found that cyclical public deficit (the deficit that can be attributed to the world-wide recession) accounts for less than 30% of our total shortfall – in line with my own analysis published in August 2008. We are, as a nation, borrowing tens of billions of euros in order to pay grotesquely over-paid public sector employees their wages.

Perhaps the most perverted reading of the report by the Government concerned the IMF assessment of NAMA. Far from being an unguarded endorsement of the Government strategy, the report is tactfully telling our leaders to start thinking about the basics.

Per IMF, the main risks to NAMA are with pricing of the loans, post-NAMA recapitalization, narrowness of its remit and potential lack of flexibility. Protection of taxpayers’ funds is a serious concern. All these issues were raised by a number of critics of the Government approach to NAMA over the recent months. None have been addressed by the Government.

Crucially, the IMF sees a room for considering nationalization of the banks with shareholders taking full hit on their asset values. The IMF suggests that such nationalization can be triggered by either insolvency of the bank or by cash flow constraints. Given that the IMF estimates that some €34bn of the loans can end up in the rubbish bin, the cash-flow constraints that can trigger nationalization may apply to all major banks in Ireland. This is hardly comforting to the Government that categorically ruled out nationalizing well before it got to do the sums on NAMA itself.

Interestingly, a much over-looked sentence inserted in just two places in the report states: “A number of Directors considered that, for bank restructuring, other [than NAMA] options including a greater equity interest by the government should not be ruled out.” Given the current market valuations, any ‘equity interest by the government’ in our ailing banks would spell an outright nationalization to have any meaningful impact on the financial institutions. This hardly constitutes the IMF endorsement of the Government strategy.

On potential for NAMA success, the IMF says that “if well managed, the distressed assets acquired by NAMA could, over time, produce a recovery value to compensate for the initial fiscal outlays.” Note that the Fund says nothing about recouping the cost of final outlays: bond financing, managing NAMA, inflation or recapitalization post-NAMA. These lines of expenditure are likely to yield tens of billions in taxpayers’ losses.

In short, IMF report, even after rounds of ‘consultations’ inputs and delays by our officials, presents a picture of Ireland as a country that is yet to address the grave and domestically rooted policy disasters it faces – 22 months after the onset of the crisis. Hardly an endorsement we can be proud about.

Box-Out:
Another week, another bond offer from Ireland Inc. Last week, NTMA has sold a syndicated bond offer worth €6bn, with a whooping 5.9% annual coupon. The good news: it was a large issue and the maturity date for the new paper was 2019 – well away from 2012 and 2014 dates in previous two syndicated issues of this year. The bad news was the cost of the latest borrowing to the taxpayers. If the first €4bn bond raised this year was pricing each €1 in borrowed funds at €1.25, once expected inflation is factored in, the latest offer will cost us over €2.31 per each €1 borrowed. Not exactly a deal of a century. Another interesting feature of the syndicated bond offers to date is that the demand from banks, including Irish banks, remains very strong, covering more than 50% in all three placements despite continued problems in the banking sector. Funds allocations into Irish bonds rose steadily from 10% in the earlier offer to 26% in the latest placement. This can suggest two possible things. Either the fund managers re-discovering genuine interest in Irish paper or there is some sort of parking facility arrangement between the dealers and the issuer to store-up bonds for future use in NAMA-related transactions. Of course, one can only speculate…


And here are few quotes from earlier IMF reports on Ireland that did not make it into the article:

In its 2004 Article 4 Consultation Paper the Fund noted, in relation to the 2000-2003 period that: “The substantial contribution of multinationals to Irish output and associated profit flows creates significant differences between measures of output, and the recent cycles in GDP and GNP have not been synchronized. ...Increases in public sector employment ...gradually inched up from a low of 3.7 percent in January 2001 to 4.8 percent by July 2003. Domestic demand was supported by the ECB’s easing of monetary policy and an expansionary fiscal policy.”

Thus, the IMF was diplomatically telling the Government that by 2003 Ireland was running overheated housing markets, slowing productive sectors and unsustainable expansion in the public sector employment and spending. Per IMF “...steps toward improving efficiency in public transportation have been met with resistance by public sector unions,” clearly identifying the main obstacle to the path of public sector reforms in Ireland.

The Fund had also serious criticism of the rising levels of public spending in Ireland. Preserving the emphasis placed by the IMF itself, Article 4 document told the Government that “the size of government is not small in comparison with other OECD countries when compared to GNP, the more relevant measure of domestic economic activity in Ireland. Lower tax rates in Ireland as compared to the EU reflect favorable demographics, prudent fiscal policies that have delivered lower debt and debt-servicing costs, smaller defense requirements and lower unemployment-related social spending.”

2006 Article IV paper identified “several macro-risks and challenges facing the authorities. As the housing market has boomed, household debt to GDP ratios have continued to rise, raising some concerns about credit risks. Further, a significant slowdown in economic growth, while seen as highly unlikely in the near term, would have adverse consequences for banks’ non-performing loans.”

Government response to this was extending a range of property tax incentives schemes and encouraging banks lending. No tightening in reserve ratios or regulatory restrictions on excessive and risky loans took place. Indeed by 2005, regular capital to risk-weighted assets ratio has fallen from 15% in 2003 to 13.6% in 2005 for all banks, and from 13.9% to 12% for domestic banks. Contingent and off-balance sheet accounts as a percentage of total assets have risen from 538% to 879%. This deterioration in the quality of our financial systems took place against the backdrop of rapidly rising lending with annual credit growth to private sector balooning from 15% pa in 2003 to 28.8% in 2005.

In 2006 and later in 2007 the IMF staff “suggested broadening the tax base by phasing out the remaining property based incentive schemes, reducing mortgage interest tax relief, or introducing a property tax.” Despite agreeing with the staff, Irish Government has gone into 2007 election year with double digit growth in current expenditure and massive handouts to the pressure groups. The tax base was not only left unreformed, but new tax measures were introduced that pushed the state deeper into dependency of property tax revenues.

In September 2007 the IMF took a look at the quality of Irish Government targets delivery. Table A.1 of the report contains an often neglected line specifying the rising disconnect between the policymakers’ rethoric and the actual outrun. Between 2003 and 2006, Irish primariy surpluses rose from 1.1% to 3.4%. Over the same period of time, real GDP grew by 21.8%, while real primary public spending rose 27%.