12/09/2011: Bilateral trade with Russia - latest data

Speaking at today's Croke Park conference "Finding New Markets: Doing Business in Russia, Central & Easter Europe and the Gulf", organized by Enterprise Ireland and Ulster Bank, I realized that in the rush of recent markets and crises, I forgot to update the charts on our bilateral trade with Russia, to reflect the latest data for May 2011 (released a couple of weeks ago).

Not to be a harbinger of only bad news, here's the latest bilateral trade results. And they are even more impressive, folks, than our overall external trade performance (see the latest data covered here).

The chart above shows truly dramatic gains in Irish exports since the beginning of this year. In May 2011, Irish exports to Russia amounted to €63.3 million against our imports from Russia of €9.2 million, implying the monthly trade balance of €54.1 million - the highest on the record. May was the second consecutive month of records-breaking trade surpluses in our bilateral trade with Russia with April surplus standing at €36.5 million.

In annualized terms, these numbers are also impressive. Using data from January through May 2011 and historical trends for monthly series from 2004 through present, my forecast for Irish exports to Russia for 2011 is to reach €569 million (range of €560-575 million) against projected imports of €115.7 million, to deliver a massive trade surplus of €454 million for the year as a whole.
If delivered, this level of trade surpluses will be more than double achieved in 2010 (€213.1 million) and will be 83% above the trade surplus achieved in 2007.

In terms of international comparatives, Russian market importance to Irish exporters is hard to overestimate. Take the first 5 months of 2011. Against bilateral trade surplus of €231.3 million achieved with Russia (an increase of 162% on same period in 2010), we have:

• Bilateral trade surplus of just €33.4 million with Brazil (with trade surplus falling in the first five months of 2011 by 23.7% compared to the same period of 2010)
• Bilateral trade deficit of €130 million with China (with trade deficit in the first five months of 2011 contrasted by the small trade surplus of €74 million achieved in the same period of 2010)
• Bilateral trade deficit of €86.2 million with India (with trade deficit in the first five months of 2011 showing further yoy deterioration on the deficit of €56.2 million achieved in the same period of 2010)
• Bilateral trade surplus with our traditional trading partners: Australia (€262 million down from €291 million yoy), Canada (€89.9 million down from €123.8 million yoy), Japan (€340 million down from €382.7 million yoy), Turkey (€99 million up on €83 million yoy)

11/09/2011: What gold coins sales tell us about the 'bubble'

Here is the extended version of the article published by Globe & Mail on the topic of US Mint sales of gold coins.

Of all asset classes in today's markets, gold is unique. And for a number of reasons(i).

Firstly it acts as a long-term hedge and a short-term flight to safety instrument against virtually all other asset classes.ii Secondly, it supports a wide range of instruments, including physical delivery (bullions, coins and jewellery), gold-linked legal tender, gold-based savings accounts, plain vanilla and synthetic ETFs, derivatives and producers-linked equities and funds. All of these are subject to diverse behavioural drivers of demand. Thirdly, gold is psychologically and analytically divisive, with media coverage oscillating between those who see gold as either a long-term risk management tool, or a speculative investment, a "barbaric relic" prone to "bubble"-formation.

In the latter context, it is interesting to look closer at the less-publicised instrument - gold coins, traditionally held by retail investors as portable units to store wealth. Due to this, plus demand from collectors, gold coins are less liquid and represent more of a pure 'store of value' than a speculative instrument. Lower liquidity of coins is not driven by shallow demand, but by reluctance of owners to sell them when prices change. Gold coins are economically-speaking "sticky" on the downside of prices - when price of gold falls, holders of coins are not usually rush-prone to sell as they perceive their coins holdings to be 'long-term accumulations', rather than speculative (or yield-sensitive) investments. They are also "sticky" on the upside of prices - while demand is impacted by price effects (with generally higher gold prices acting to discourage new accumulation of coins), holders of coins are not quick to sell to realize capital gains, again due to entirely different timing to the holdings motives. Think of a person setting aside few thousand dollars worth in gold coins to save for child's college fund.

In general markets, classical bubbles begin to arise when speculative motives (bets on continued and accelerating price appreciation) exceed fundamentals-driven motives for opening new long positions in the instrument. Bubbles blow up when these tendencies acquire wide-based support amongst retail investors.

In late stages of the bubble, we should, therefore, expect demand for gold coins to falter compared to the demand for financially instrumented gold (ETFs shares and options). In the mid-period of bubble evolution, however, as retail investors just begin to rush into the asset, we can expect demand for coins to rise in line with demand for jewellery and smaller bullion. But we do not expect a flood of gold coins into the secondary market (and hence a collapse in gold coins sales) until literally past the turn of the fundamentals-driven prices toward the stage of mid-cycle "bubble" collapse.

The US Mint data on sales of gold coins suggests that we are not in the last days of the "bubble". But there are warning signs to watch into the future.

August sales by the US Mint were up a whooping 170% year on year in terms of total number of coins sold, while the weight of coins sold is up 194%. On the surface, this gives some support to the theory of gold becoming short-term overbought by retail investors (see chart below), but it also contradicts longer-term view that gold coins sales should fall around bubble peak.

Source: US Mint and author own analysis

In part, monthly comparatives reflect huge degree of volatility in US Mint sales. Looking at the longer term horizon, since January 2008, US Mint sales volumes averaged 97,011 oz with average coin sold carrying 0.82 oz of gold, the standard deviation of these sales was 45,196 oz and 0.19 oz/coin, implying that August results comfortably fit within the statistical bounds of +/- 1/2 STDEV of the mean for the crisis period. Equally importantly, August results fit within +/-1 STDEV band of the historical mean since 1986 through today. In other words, current gold coinage sales do not even represent a 1-sigma event for the entire history of gold coins sales supplied by the US Mint and are within 0.5-sigma risk weighting for the crisis period since January 2008.

Neither is the current monthly increases in demand represent a significant uptick on previous months or years demand. At 112,000 oz of gold coins sold, August 2011 is only the 19th busiest month is sales since January 2008. It ranks as the 34th month in terms of the gold content per coin sold. Again, not dramatic by any possible metrics. Since January 1988 there were 87 months in which average gold content per coin exceeded August 2011 average and on 38 occasions, volumes of gold sold in the form of coins by the US Mint exceeded last month's volume.

Again, not dramatic by any possible metrics, especially once we recognize that in terms of risk-related fundamentals, August was an impressive month with US and EU debt crises boiling up and economic growth slowdown weighing on global equities markets.

Charts below illustrate these points.
Source: US Mint and author own analysis
Source: Author own calculations based on the US Mint data
Source: Author own calculations based on the US Mint data

The data also shows that physical demand for coins is largely independent of the spot price of gold. Historically, since 1986, average 12-months rolling correlation between the spot price of gold and the volumes of gold sold in US Mint coins is negative at -0.09. Since January 2008, the average correlation is -0.2. And over the last 3 years, the trend direction of gold spot price (up) and the volumes of gold sold in coinage (down) have actually diverged (see chart). The latter is, of course, concerning and will require closer tracking in months to come. The correlation between price of gold and volumes of gold sales through US Mint coins is now negative or zero for 13 consecutive months.

Source: Author own calculations based on the US Mint data

Source: Author own calculations based on the US Mint data

The chart above also highlights the fact that the current trend levels of US Mint sales are significantly elevated on previous periods, with exception of 1986-1987 and 1998-1999 demand spikes. Since the global economic crisis began, annual coinage sales rose 7-fold from just under 200,000 oz in 2007 to 1,435,000 oz in 2009, before falling back to 1,220,500 oz in 2010. Using data through August, I expect 2011 sales to remain at around 1,275,000 oz. This implies that the 2008-2011 average annual sales of US Mint coinage gold are likely run at slightly above 2 times the average annual rate of sales of coinage gold in the period 1988-2007.

Given the state of the US and other advanced economies around the world since January 2008, this is hardly a sign of dramatic over-buying of gold by masses of retail investors. Instead, we are witnessing two core divergent trends emerging from the coins markets:

1. Since, roughly-speaking, 2009, the trend in coins sales is moving counter to the trend in spot price for gold, implying that retail investors are not rushing into gold, as one would expect were gold to be a bubble, and
2. The levels of sales of US Mint coins remain elevated, on average, since the crisis began, implying that high demand for coins, relative to historic trends, is most likely being driven by fundamentals-underpinned demand for safety.
   

In short, there is no indication, in the data reviewed, of the bubble beginning to inflate (sharp rises in gold coins demand along the trend with prices) or close to deflating (sharp pull-back in demand for gold coins).

Of course, the evidence above does not imply any definitive conclusions as to whether gold is or is not a "bubble". Instead, it points to one particular aspect of demand for gold - the behaviorally anchored, longer-term demand for gold coins as wealth preservation tool for smaller retail investors. Given the state of the US and other advanced economies around the world since January 2008, US Mint data does not appear to support the view of a dramatic over-buying of gold by the fabled speculatively crazed retail investors that some media commentators are seeing nowdays.


Disclosure: I am long physical gold and hold no long or short positions in other gold instruments.


i These and other facts about gold are summarized in my recent presentation available at http://trueeconomics.blogspot.com/2011/08/20082011-yielding-to-fear-or-managing.html.

ii As shown in the recent research paper by Profs Brian Lucey, Cetin Ciner, and myself, covering the period of 1985-2009: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1679243

09/09/2011: VIX - another blow out

EU debt disaster and US own woes or just EU debt disaster, who knows, but VIX - that indicator of overall risk perceptions in the markets - is again above the psychologically important 40 mark.

Charts to illustrate:
Vix has gone to close at 40.50 today having opened at 35.53 and hitting the high of 40.74. In terms of historical comparatives:

• Intra-day high achieved today was 170th highest point reached by VIX since Jan 1, 1990, 147th highest reading since Jan 1, 2008 and 15th highest since Jan 1, 2010
• VIX closing level was 156th highest in history since Jan 1, 1990, 129th highest since Jan 1, 2008 and 8th highest since Jan 1, 2010. The latter being pretty impactful

Intra-day spread was pretty high, but not too remarkable, ranking as 179th highest since Jan 1, 1990, 102nd highest since Jan 1, 2008 and 49th highest since Jan 1, 2010, suggesting possible structural nature of elevated readings in VIX overall.
3 mo dynamic standard deviation of VIX index reached 8.981 - the highest level of volatility in VIX since January 1, 2010 and 90th highest since both Jan 1, 2008 and Jan 1, 1990. We are now clocking the highest level of VIX volatility (on 3mo dynamic basis) since February 2009.

Looking at semi-variance:
1mo dynamic semi-variance for VIX is now running at 15.73 - not dramatic, but showing persistently elevated trend since August 5, 2011. Today's reading was, nonetheless, only 27th highest since Jan 1, 2010. To flag that - below is the snapshot of short series range:Yep, folks, with VIX stuck at elevated levels with occasional blowouts like today, with European banks beefing up their deposits with ECB and Bank of Japan, with investors throwing money at Uncle Sam and Bundesbank (at negative interest rates) and demand for CHF undeterred by the threats of continued devaluations, what we are seeing is fundamentals-driven run for safety. Nothing irrational here, unless feeling sh***less scared is irrational...

06/09/2011: Recapitalization of Irish Banks 2011

On August 31, 2011 Irish Government committed €17.3 billion of our - taxpayers - money to underwrite banks recapitalization following the PCAR 2011 exercise carried out by the CBofI. Three "banks" - BofI, AIB and IL&P received the funds. Here is the official summary of how these funds were distributed. No comment to follow.

06/09/2011: Euro area 2Q 2011 GDP analysis

Euro area GDP increased by 0.2% qoq in 2Q 2011, same rate as GDP growth in EU27, according to second estimates released by Eurostat. 1Q 2011 respective growth rates were +0.8% in the euro area and +0.7% in the EU27. Year-on-year, GDP was up 1.6% in the euro area and 1.7% in EU27 in 2Q 2011, down from annual growth rates of 2.4% (both EU27 and euro area) for 1Q 2011.

US GDP also grew 0.2% qoq in 2Q 2011 up from +0.1% in 1Q 2011. Year-on-year US GDP expanded by 1.5% in 2Q 2011 and 2.2% in 1Q 2011. Japan's GDP contracted 0.3% in 2Q 2011, following -0.9% contraction in 1Q 2011. Year-on-year Japan's GDP fell 0.9% in 2Q 2011 and fell 0.7% in 1Q 2011.

Components of GDP:

• In 2Q 2011, household consumption fell 0.2% in the euro area and 0.1% in EU27. In 1Q 2011, the respective numbers were +0.2% and +0.0%.
• Gross fixed capital formation was up 0.2% in 2Q 2011 in the euro area (+1.8% in 1Q 2011) and up 0.4% in EU27 (+1.2% in 1Q 2011).
• Exports were up 1.0% (+2.0% in 1Q 2011) in the euro area and +0.6% (+2.2% in 1Q 2011) in the EU27 (after +2.0% and +2.2%). Imports rose by 0.5% in the euro area (+1.5% in 1Q 2011) and by 0.4% in the EU27 (+1.4% in 1Q 2011).
  

Table below summarizes some of the results.

In terms of Gross Value Added in q/q terms:

• Agriculture, hunting & fishing contracted by -0.2% in 2Q 2011 (against +0.6% in 1Q 2011) in the euro area and contracted -0.5% in EU27 (+0.9% in 1Q 2011)
• Industry, including energy expanded by 0.4% in 2Q 2011 (against +1.7% in 1Q 2011) in the euro area and +0.3% in EU27 (+1.4% in 1Q 2011)
• Construction expanded by 0.0% in 2Q 2011 (against +2.5% in 1Q 2011) in the euro area and +0.3% in EU27 (+1.5% in 1Q 2011)
• Trade, transport and communication services expanded by 0.2% in 2Q 2011 (against +0.6% in 1Q 2011) in the euro area and +0.4% in EU27 (+0.7% in 1Q 2011)
• Financial and business services expanded by 0.2% in 2Q 2011 (against +0.2% in 1Q 2011) in the euro area and +0.3% in EU27 (+0.2% in 1Q 2011)
• Other services expanded by 0.2% in 2Q 2011 (against +0.2% in 1Q 2011) in the euro area and +0.2% in EU27 (+0.4% in 1Q 2011)
• Total gross value added expanded by 0.2% in 2Q 2011 (against +0.7% in 1Q 2011) in the euro area and +0.3% in EU27 (+0.7% in 1Q 2011). In annualized terms, total GVA expanded 1.6% in 2Q 2011 (against 2.2% in 1Q 2011) in the euro area and by +1.7% (against 2.2%) in the EU27.
  

If you think we are in the age of austerity, think again. Government expenditure contributions to GDP, seasonally adjusted series, stood flat in 2Q 2011 at +0.0% growth (against +0.1% in 1Q 2011) in the euro area and in the EU27. Annualized rate of increase for Government spending was +0.1% in 2Q 2011 (+0.2% in 1Q 2011) in both the euro area and the EU27.

Now, on to forecasts forward. Chart below plots updated series for GDP growth against the leading economic activity indicator eurocoin. The series suggest that Euro area GDP for 3Q 2011 consistent with July-August readings of eurocoin is 0.3% (unadjusted for 2Q realization) and adjusting for 2Q 2011 realized rates of growth, the forecast is in the range of -0.1% to +0.1% GDP change.

05/09/2011: Ackermann: cover us

Deutsche Bank CEO, Josef Ackermann, speaking today at a conference "Banks in Transition", organized by the German business daily Handelsblatt in Frankfurt, made some far reaching comments on the state of European banking system.

"We should resign ourselves to the fact that the 'new normality' is characterized by volatility and uncertainty... All of this reminds one of the autumn of 2008." And as a reminder of these very days 3 years ago, the ECB reported that banks have raised their overnight deposits with ECB to €151 billion - the highest level in more than 12 months. Overnight deposits with ECB are seen as a safe haven as opposed to lending money in the interbank markets, with latest spike suggesting that even European banks are now becoming weary of lending to each other.

Crucially, according to Ackermann, "it is an open secret that numerous European banks would not survive having to revalue sovereign debt held on the banking book at market levels" to reflect their current market value. This is an interesting point - not because it is novel (every dog in the street knows that to be true), but because it is being made by the man who leads the largest banking institution in the land where banks have vigorously fought EBA on methodology and disclosure of stress test results. The battle line drawn back then was precisely their sovereign bond holdings.

And there is an added contradiction in what Ackermann was saying - if banks in Europe will not survive mark-to-market revaluation of their books, then how come Mr Ackermann claims they don't require urgent recapitalization?

In truth, Ackermann was really saying that were the banks in Europe forced to mark-to-market their holdings of PIIGS and Belgian bonds, they would take such losses that can lead to destabilization of banks equity valuations across the EU, thus triggering calls on governments' funding, which will therefore destabilize the bonds markets. Truth hurts, folks. It hurts over and over again when it is denied.

Mr Ackermann also appears to be saying: "Hey politicians. Don't force us to fix our books to the market. Fix the market for us."

Ackermann also repeated his earlier statement that calls for robust and rapid recapitalization of the banks were "not helpful" and threatened to undermine European efforts to assist crisis-stricken euro-zone sovereigns. In his view, such a recapitalization would send the message that the EU had little faith in its own strategy for dealing with the crisis. In other words, in Ackermann's view, if banks need urgent capital to cover losses on sovereign bonds, then the current valuations of these bonds in the market are irreversible. Which, of course, would mean that all efforts of the EU to roll back sky-high yields on PIIGS + Belgian debt are not likely to produce long-term results any time soon.

Which brings us to the point of asking: if so, why the hell are we burning through tens of billions of ECB and taxpayers' funds to buy out sovereign bonds and repay banks bond holders? Is it simply an exercise of buying time?

Another interesting comment from Ackermann relates to longer term prospects of the banking sector: "Prospects for the financial sector overall ... are rather limited... The outlook for the future growth of revenues is limited by both the current situation and structurally." What this means is that with regulatory tightening, new capital requirements (both on quality and quantity of capital) and with devastated savings and investment portfolia of investors, plus rising taxes on income and capital, margins in the banking sector will be depressed over long term horizon, while more risk averse investors will be weary of buying into higher margin high risk structured products.

In other words, all that Mr Ackermann's speech today amounts to is a call by a banker on the European governments to cover up the banks' cover up of losses: "Print money, buy out our bonds, but don't restructure or recapitalize us".

But Ackermann's warning presents an even more dire warning for the Irish officials who have made significant bets (using taxpayers money) on Irish banking sector returning to high rates of profitability soon. If Ackermann is correct and long term profitability of the entire sector is on decline, Irish banks will be unlikely to recover without a dramatic restructuring of their books.

05/09/2011: Euro area governance indicators: evolution or decline?

In recent years, the EU has embarked on a set of institutional reforms and unveiled a number of institutional platforms for reforming the core principles of governance, transparency and accountability. These reforms are rooted in 2000-2005 processes that accompanied direct evolution of the Euro area and the EU enlargement.

In this light, it would be instructive to take a closer look at the dynamics of EU governance evolution, focusing on the specifically more integrated group of countries – the Euro area. Using data from the World Bank Governance Indicators for 1996-2009 (latest available) we can draw some interesting conclusions on the topic.

Before we begin, however, note that WB data is lagged in some cases up to 2 years. In addition, many variables are "sticky" - in a sense that they do not change dramatically year on year as institutional reforms take time to feed through to actual delivery on metrics. Hence, the period from 1996 through 2002 is really covering a period of data closer to 1985 through 2001, on average. Thus, I separate the data into 2 periods: the period prior to the Euro area creation (1996-2002) and post Euro area creation (2003-2009). In addition, note the following two facts: that help support this division:

1. I tested the results for the period split 1996-2001 against 2002-2009, for split 1996-2000 vs 2001-2009 and for split 1996-2003 vs 2004-2009. All came back with very similar, qualitatively, results.
2. A number of Euro area states were in a mode of EU accession prior to 2004, thus splitting the sample at 2002-2003 makes some logical sense to capture better the average effects of governance reforms coincident with the euro period.

Now to the results: charts below plot changes across two periods for the countries members of the euro area, plus euro area as whole (simple average), the new accession states and the old (core) euro area member states. The plots capture all 6 core components of the World Bank Governance Indicators in terms of change in each indicator score (higher score implies better ranking in the league tables).

So to summarize - a table

What the above clearly shows is that Governance scores improvements across the euro area were driven primarily by improvements in the Accession States. In 4 out of 6 criteria, Core euro area member states have, on average, posted deterioration in the scores. Thus, overall euro area scores improved in 3 out of 6 criteria, remained unchanged in 2 criteria and deteriorated in 1 criteria.

Pretty poor performance for the group of states that set out as their core agenda to achieve transparency, good governance, government effectiveness, etc. And even worse for the idea that more integration yields better policy outcomes. Clearly, in the case of governance at least, it does not.

3/09/2011: Returns to Beauty

A fascinating study by Daniel S. Hamermesh and Jason Abrevaya, titled "BEAUTY IS THE PROMISE OF HAPPINESS?" was released yesterday by the NBER (Working Paper 17327 http://www.nber.org/papers/w17327). This is, folks, economics at its best: great question, great analysis and something that is way more relevant to life than banks, property and/or Obama's administration again blasting through the debt ceiling (oh yeah, they did that this week too - here).

Here's what I am talking about: "We measure the impact of individuals’ looks on life satisfaction/happiness. Using five data sets, from the U.S., Canada, the U.K., and Germany, we construct beauty measures in different ways that allow placing lower bounds on the effects of beauty. Beauty raises happiness: A one standard-deviation change in beauty generates about 0.10 standard deviations of additional satisfaction/happiness among men, 0.12 among women. Accounting for a wide variety of covariates, particularly effects in the labor and marriage markets, including those that might be affected by differences in beauty, the impact among men is more than halved, among women slightly less than halved."

"There are two main general mechanisms through which people’s looks could affect their satisfaction/happiness. The first is through the many channels that have been shown in the beauty literature to offer routes by which beauty affects economic outcomes. These indirect effects may be at least as important as the direct effects of beauty on satisfaction/happiness — the halo that good looks might impart to a person independent of the effects of beauty on any market-related outcomes. In the main economic exercise in this study, ...we decompose any measured impact of beauty on satisfaction/happiness into its direct and indirect components and thus examine the extent to which any beauty-happiness relation works through markets."

Hence, "The main economic question in this study is whether the effect of beauty on
satisfaction/happiness works through markets:

• How much of the effect is direct—with people who are otherwise identical in every respect being happier/more satisfied than their less good-looking peers?
  
• How much is due to the fact that beauty enhances one’s outcomes in various markets, including the labor and marriage markets?"

And here are the conclusions: "Taking the results at face value suggests that roughly half of the gross effect of looks works through the marriage and labor markets". However, "the available data do not allow us to account for impacts in other markets. As just one example, there is growing evidence that beauty confers benefits on good-looking borrowers in lending markets... Moreover, our proxies for the outcomes in the labor and marriage markets that are affected by beauty are far from perfect. It thus seems fair to conclude that the expanded estimates suggest that the direct effect of beauty is at most one-half of the total effect, and perhaps much less. The majority of the impact of beauty on satisfaction/happiness appears to be economic—through its effects on outcomes in various markets."

Yep, being beautiful pays. And hence, investing in beauty is a big business.

One other interesting point - notice that men-women differential in 'returns' to beauty are 0.1:0.12 - not exactly a massive one. "The results ...show only slightly greater gross effects of beauty among women than among men. The direct effects, however, are larger among women, with relatively less of the impact of beauty on women’s satisfaction/happiness working through markets. This gender difference may explain why, although most of the studies measuring the impact of beauty on earnings find larger effects among men than among women, laypeople believe that looks matter more to women."

I will have to add this to my reading lists for Investment Analysis and Economic Risk courses... Simply brilliant!

2/09/2011: Competitiveness in the long run: did the euro help?

Another look at the evolution of euro area competitiveness: in the chart below I plot ECB’s Harmonized Competitiveness Indicators for the euro area since 1995 as measured by the average annual HCIs deflated by unit labour costs. The higher the value of the index, the lower is competitiveness.

Here are some interesting points to observe, based on the data:

• The period since introduction of the euro witnessed deterioration or no improvement in overall competitiveness in all countries, save Germany, once the lags are accounted for (note, there is strong path dependency in many countries’ wages/labour costs due to long term contracts and generally sticky wages). Hence, for the period 1995-2001, euro area HCI averaged at 98.8, while for the period 2002-2010 the HCI averaged 99.8. Similarly, for France, HCI averages for the two sub-periods were 99.1 against 101.7, for Italy: 97.0 against 107.1, for Spain 98.4 against 108.3, for Finland, the Netherlands (Nordics) & Austria: 99.91 against 99.94 (statistically identical), for Ireland: 100.2 to 117.5 and for the rest of the euro area: 99.2 to 113.0.
• The period of highest competitiveness for all countries, except Germany, coincides with the period when pre-euro qualification period forces of improving competitiveness reach their peak: 2001-2002. This overall euro area competitiveness peaks in 2001, France’s competitiveness peaks in 2001, Italian, Spanish, Nordics’ & Austrian, Irish and Rest of euro area competitiveness peaked in 2001.
• After 2001, losses of competitiveness become pronounced across all economies, except Germany, with lowest competitiveness post-2000 points reached around 2008 (France, Spain and Ireland) or 2009 (all other countries, plus euro area as a whole).
• Since the onset of the crisis (again, accounting for lags) there have been significant gains in competitiveness. As I noted elsewhere, in some cases (Ireland and Spain, for example) these gains came primarily due to a wholesale destruction of a number of non-competitive domestic sectors (construction and retail).
• Gains in competitiveness have been very shallow in France (decline in HCI off the local pre-crisis peak of just 2.4%) and Italy (-3.2%), moderately weak in Germany (-5.22%), Nordics + Austria (-4.69%), Rest of Europe ex-Ireland (4.5%). Gains were close to euro area overall average (-9.2%) in Spain (-7.2%) and spectacularly strong in Ireland (-17.1%). It is worth noting once again that Irish gains in competitiveness came to a large extent from destruction of jobs in sectors that were least competitive before the bust (construction and domestic retailing and hospitality).
  

Overall influence of impressive German economic performance over the 2000s in terms of competitiveness can be clearly seen from the chart below.

But what the two charts above clearly suggest in terms of analysis for Ireland is really rather disturbing. Despite significant gains in competitiveness, Ireland remains well behind its peers in terms of absolute levels of HCIs – according to the latest data, we are lagging behind Germany, France, Italy, Spain, Finland, the Netherlands, Greece, Cyprus, Luxembourg, Malta, Austria, Portugal and Slovenia.

More importantly, delivering a similar magnitude decline over the next 2 years (a task that will either require unemployment rising to over 22% or a gargantuan effort in terms of productivity growth not seen in modern history of any state) will get us to the level of competitiveness comparable to 2001 – achieving HCI of ca 96.2.

It might be not bad, but should the trends across the other euro area countries also remain identical to those over the last 2 years, Ireland (with projected HCI under this scenario reaching 98.8) will be still less competitive than the euro area as a whole (92.9), Germany (82.8), the Nordics and Austria (98.7). If anyone expects this type of miracle to occur, good luck to them, but if anyone expects the result of this miracle to be a huge boost to our economic growth, let me point out the last little factoid that the data reveals: back in the 1990s our average HCI was 102.7 – below the euro area average of 104.2. With two consecutive ‘miracles’ we are not even aiming to get to parity of the euro area average.

1/09/2011: Manufacturing PMI for Ireland - a mixed bag for August

Figures for PMIs for Euro area economies released today are hardly encouraging:

• German manufacturing index stands at 50.9 in August, close to contraction, against the local peak of 62.7 in February 2011
• Spain's August data shows fastest fall in output since June 2009, with headline PMI at 45.3.

Now, Irish manufacturing PMIs (released today by NCB) are showing no clear direction from the contraction momentum established in July.

Here are the updated figures:

• Core PMI for manufacturing remains in contraction territory for the third month in a row at 49.7 in August, although the index is marginally up on 48.2 in July. Index 12 mo MA is at 52.2 and 3mo MA is now at 49.2. 2010 same-period 3mo MA is 51.4 against 2009 same period 3mo MA of 43.4. This does not square well with the ESRI assertion that stronger economic performance might emerge in H2 2011.
  
• Output sub-index is out of contraction territory in August (52.4) compared to July (49.8), breaking two consecutive months of contraction.
• New orders sub-index, however, is now at 47.7 down from 47.9 in August, marking the lowest point since September 2010. 3mo MA is now at 48.1 and 12mo MA at 52.7. Per NCB analysis: "The decline in business conditions in August mainly reflected a solid reduction in new orders. Panellists indicated that slowing demand had been behind the contraction in new business, which was the fastest since September 2010".
• In contrast to overall new business measure, sub-index for new export orders increased in August to 53.5 since July 51.3. This marks the eleventh successive month of the index being above 50 expansion marker and the first rise since January 2011. However, August reading was still below the local peak of 61.6 attained in February 2011 and stands well below 12mo MA of 55.7, with 3mo AM of 52.1. New exports demand grew, according to the respondents, in aprticularly strongly in the UK.
  
• Backlogs of work in August were reading 41.7, up on 41.1 in July. The fall in overall new business in August drove this further decline in backlogs of work as companies transferred spare capacity to work on existing projects. This is now the sixth successive reduction in outstanding business and the reduction was substantial.
• August responses pointed to a further and sharper reduction in stocks of finished goods with the sharpest rate of stocks depletion since March - down to 45.2 in August from 49.6 in July. Per NCB: "Post-production inventories have now fallen in each of the past 40 months. Panellists reported that they had made efforts to reduce stock holdings over the month."
• After falling for three successive months, employment increased during August, with the rate of job creation being extremely shallow at 51.1 in August, up from contraction in July of 49.1 and breaking three consecutive months of declines.

Last point to make comes from the final chart above: profit margins have deteriorated in August once again from -15.01 to -15.62 as input prices continued to expand at 58.9 in August, down from 59.3 in July, while output prices switched into contraction territory with a reading of 49.7 in August down from 50.4 in July.

31/08/2011: Irish Live Register - unemployment's up in August

Live Register data for August shows that the seasonally-adjusted number of signees increased from 448,000 in July to 449,600 in August - a rise of 1,600 mom. The same rate of increase was recorded in June.

In 3 months through August, Live Register rose by 5,700, while in preceding 3mo period (through May) it was up 3,300. Year on year LR rose 4,600 in July or 1.04%, in August, yoy increase was 2,500 or 0.56%.

Live Register-implied unemployment rate rose from 14.3% in July to 14.4% in August.

Charts to illustrate:

Some more details on the latest figures:

• In August, the numbers of those 25 years and older on the LR has increased by 2,000 (+0.55%) mom from 366,100 in July to 368,100. Year on year, this category of LR is now up 7,100 or +1.97%. For the 3 months through August, the number of LR signees rose 2.24% compared to the 3 months through August 2010.
• Number of persons under 25 years of age on LR has fallen 400 in August, compared to July and now stands at 81,500. The number is down 6.54% yoy (-5,700).
• Numbers of casual and part-time workers on LR in August stood at 85,296 (down 569 on July) - first monthly drop in the series since May 2011. Part-time and casual workers numbers are now up 7,014 yoy (+8.96%).
  

• Numbers of non-Irish nationals on LR has declined 290 in August, compared to July, from 79,285 in July to 78,995 in August. Year on year, August numbers are up 138 (+0.18%)
• Numbers of Irish nationals on LR have also fallen in August from 390,999 in July to 390,719 in August. This follows 11,972 increase in June-July and 15,058 increase in May-June. Number of Irish nationals on the LR are now up 2,653 in August 2011 compared to August 2010 (+0.68%).

In unadjusted terms there were 469,713 on the LR in August 2011, up 2,790 (+0.6%) over the year. This increase was, per CSO, "slightly less than that recorded in July 2011 (+3,460 or +0.7%) and is far less than the increase of 30,198 (+6.9%) seen in the year to August 2010."

Per CSO: "The number of female claimants increased by 5,888 (+3.5%), to 172,860 over the year while the number of male claimants decreased by 3,098 (-1.0%) to 296,853. This compares with increases of 14,419 (+9.5%) and 15,779 (+5.6%) for females and males respectively in the year to August 2010." Which suggests that we are still in the second stage of jobs destruction, with services jobs going at a faster pace and with women (traditionally last to be laid off) continuing to suffer from jobs destruction.

Perhaps the most worrisome sign of the labour markets flat on the ground is that the number of long term claimants continued to increase with 40.8% of claimants in August 2011 on the Live Register for one year or more. In August 2010 long term claimants made up 31.8% of the total Live Register. Further, per CSO: "The number of male long term claimants increased by 30,488 (+28.3%) in the year to August 2011, while the comparable increase for females was 12,688 (+31.3%) giving an overall annual increase of 43,176 (+29.1%) in the number of long term claimants".

31/08/2011: Europe's economic, business & consumer confidence sink in August

Following a precipitous collapse of the US consumer confidence this month (see posts here and here for details), the EU has just posted a series of consumer, business and economic sentiment indicators that are showing a massive drop in overall economic activity across the board. Here are the details.

Starting with Economic Sentiment Indicator (ESI) first:

• August ESI reading for EU27 came in at 97.3 (contraction territory) down from July 102.3. 3mo MA for the index is now at 101.4 and yoy the index is down 5.7%.
• Euro area ESI is also in contraction zone at 98.3 for August, lowest since May 2010, down from 103.0 in July and off 3.8% yoy. 3mo MA of the series is now at 102.2.
• ESI for Germany is still in expansion at 107.0 in August, but down from 112.7 in July and down on 3mo MA of 111.4. The index is now down 3.1% yoy. This is the lowest reading since July 2010.
  
• ESI for Spain is showing deeper contraction in August, reaching 92.7, down from July 93.0 and registering uninterrupted contractionary performance since (oh, sh**t) September 2007. ESI, however is up in Spain yoy by 1.6%.
  
• ESI for France latest reading is at 105.9 for July, which was down from 107.4 in June.
• ESI for Italy signals recession at 94.1, down from 94.8 in July and off 4.8% yoy. 3mo MA is at 96.1 and the index has remained in contraction zone for consecutive May 2011.

Two charts to illustrate - one of complete historical series, and one of a more recent snapshot:
What the historical series show is a worrisome trend:

• Before January 2001, Euro area average ESI reading was 102.1, post-introduction of the Euro, the average reading is 98.9. This implies a swing from shallow expansionary optimism in pre-Euro period average, to a shallow pessimism in post-Euro introduction period.
• In Germany, prior to 2001, the average ESI was 103.9 and post January 2001 the average stands at 98.0
• In Spain, prior to 2001, the average ESI was 101.9 and post January 2001 the average stands at 98.7
• In France, prior to 2001, the average ESI was 99.4 and post January 2001 the average stands at 101.9 - the only major economy to buck the trend
• In Italy, prior to 2001, the average ESI was 101.5 and post January 2001 the average stands at 99.5

Next, consider the Consumer Confidence Indicator (CSI):

• CSI for the EU27 has fallen from -12 in July to -17 in August, the lowest reading since September 2009 and well below 3mo MA of -13.4. In August 2010 index stood at -11.
• CSI for Euro area is also at -17 in August, down from -11 in July.
  
• August reading is the lowest since June 2010, as Euro area consumers are generally less optimistic than the EU27 average. EU27 average historical reading is -11.1 and Euro area average historical reading is -12.0. Prior to January 2001 the historical averages were: -10.7 for EU27 and -11.3 for Euro area. post-introduction of the Euro, average historical readings are now at -11.7 for the EU 27 and -13.1 for the Euro area, suggesting that the Euro introduction was not exactly a boost to consumer confidence in either the EU27 or in the Euro area.
  
• Germany's CSI came in at +0.5 in August, down from 1.4 in July. The index is now well below 3mo MA of 1.1 but is well above -3 reading attained a year ago.
• Spain's CSI is now at -17, down from -13.4 in July and below 3mo MA of -14.1. In August 2010 the index stood at -19.8, so there has been a yoy improvement in the degree of consumer pessimism.
• France's CSI stands at -18.4 (recall that France is the only large Euro area economy with strong focus on consumer spending) in July (latest data), down from 17.60 in June and an improvement on -25.8 yoy.
• Italy's CSI is reading at -28.8 in August, down from -27.4 in July, down on -26.6 3moMA and well below August 2010 reading of -21.3.

Again, two charts to illustrate:

Some historical trends concerning the Consumer Confidence Index:

• As noted above, consumer confidence had shifted, on average, from cautious optimism in pre-Euro era to cautious pessimism since January 2001.
• In Germany, before January 2001, consumer pessimism (average) stood at -7.26. Post January 2001, the average pessimism became deeper at -10.83. In effect, then, that 'exports-led' economic growth model for Germany has meant the wholesale historical undermining of consumer interests.
• In Spain and Italy, the picture of long-term historical trends is identical to Germany, with levels of pessimism being higher than in Germany across entire history.
• In France, consumer pessimism in pre-2001 period stood, on average, at -19.36 - deeper than in other Big 4 EU economies. Post 2001, average pessimism actually declined to -16.94, still the heaviest level of pessimism (on average) across the Big 4 economies.

Lastly, consider Business Confidence Indicator (BCI):

• EU27 BCI has fallen from +0.1 in July to -2.50 in August, hitting the lowest reading since July 2010. The index is now down compared to +0.17 3mo MA and is below -2.10 reading in August 2010.
• Euro area BCI has declined from +0.90 in July to -2.90 in August, behind +0.5 3mo MA. A year ago, BCI reading was -2.60, making current reading the lowest since July 2010.
• Germany's BCI has declined from +9.60 in July to +4.60 in August, behind +8.67 3mo MA. A year ago, BCI reading was +3.80, making current reading the lowest since September 2010.
• Spain's BCI remained unchanged in August at -13.90, behind +-12.27 3mo MA. A year ago, BCI reading was -13.0, making current and previous month readings the lowest since June 2010.
• France's BCI has declined from +5.10 in June to +0.8 in July (latest data), making the latest reading the lowest since December 2010.
• Italy's BCI has declined from -4.50 in July to -4.80 in August, behind -3.93 3mo MA. A year ago, BCI reading was -7.0.

Historically:

• Business confidence readings averaged -5.62 across the EU27 in pre-2001 period, and have since then fallen to -6.77 average reading for the period post-2001. BCI for the Euro area averaged -5.60 in pre-2001 period and -6.23 in post-2001 period. This, again, shows that the introduction of the Euro did not have a positive effect on business confidence.
• In Germany and Italy, pre-2001 BCI averages were better than post-2001 averages, while in Spain there was an improvement in the levels of business pessimism post-2001. In France, pre-2001 average BCI was -6.59 and post-2001 average BCI is -6.41 - implying statistically identical readings.