20/12/2011: IMF IV Review of Ireland Programme

Fourth review of Ireland's programme under the Troika package is out and makes for some interesting reading. As usual, between-the-lines reading skills required. This is the first post on the report, focusing on housing markets and mortgages arrears.


The review is overall positive, complimentary and almost glowing. This warrants a number of caveats:

• The review is based on QNA data through H1 2011, so Q3 2011 fall-off in GDP and GNP are not factored in
• The review is based on the general data sources through mid-October, so November Exchequer results do not appear to have been factored in either

Aside from the strengths highlighted in the media, here are the critical points of the report. Mortgages arrears first, with subsequent posts dealing with other core issues covered.

"However, housing market and household debt indicators continue to deteriorate (Figure 2). With the fall in house prices accelerating in October to 15.1 percent on an annual basis, prices are down 45.4 percent from their peak in 2007. The rate of mortgage arrears by value continued to rise, reaching 10.8 percent in September 2011 (8.1 percent in terms of the number of mortgages), up from 6.6 percent in September 2010. With the share of longer-term arrears (greater than 180 days) continuing to rise, the authorities have deepened their analysis of the mortgage arrears problem (Box 1)."

Of interest here is the analysis the IMF refers to. Here is the summary (quoted from the IMF report, my comments in italics):

1. Aggregate mortgage arrears continue to rise sharply and in September 2011 reached 8.1 percent by the number of loans to owner-occupiers. 
2. To better understand the nature of mortgage distress, the CBI has utilized loan-by-loan data from end-2010 that were collected as part of the review of banks’ capital needs published at end-March 2011. [I am puzzled with this statement. CBI clearly stated at the time of PCARs that they did not analyse individual loans data for mortgages, but considered samples of mortgages. At a later date - in September 2011, CBI gave a presentation of a study based on the specific loans data, but this was also based on a sample of data, a large sample, but still a sample, not the entire population of the mortgages on the books of 4 banks.]
3. Of those households in arrears over 90 days, almost 40 percent have been in this position for a year or more. The average amount of arrears on these loans is €27,000, compared with an average outstanding balance of just over €200,000. [Please, keep in mind, per IMF, this is data through the end of 2010, so it is, by now - one year old!]
4. On top of arrears of 90 days or more, there are a significant number of borrowers who have restructured loans or delinquent payments of less than 90 days, bringing the total affected to about 20 percent of borrowers at end-2010. [These figures - 20% of borrowers either in arrears or restructured, or as I call these 'at risk' - is much greater than reported by the CBI in their quarterly report, showing for Q3 2011 that only 12.96% of all mortgages outstanding were either in arrears, restructured or repossessed]
5. Arrears tend to be highest in relation to buy-tolet properties and first-time buyers, as these purchasers took on large debts owing to high house prices during 2005–08. 
6. Negative equity is extensive. It is estimated that 36 percent of owner-occupier households with mortgages in these institutions are in negative equity (at September 2011 house prices). [This, of course, is now higher again, as October and November price declines totalled 3.71%] 
7. For owner-occupier loans taken between 2005 and 2008 (half of outstanding loans), 48 percent of properties are in negative equity, while 52 percent of buy-to-let loans are in negative equity. [The two numbers are remarkably close to each other.]
8. Negative equity does not imply arrears. Despite widespread negative equity amongst borrowers, the vast majority of negative equity borrowers, over 90 percent, were not in arrears at end-2010. 
9. About half of owner-occupier borrowers in arrears at end-2010 had positive equity, with around 38 percent having at least 20 percent equity in their homes. The average negative equity of owner-occupiers without arrears is €68,000, modestly smaller than the average of €84,000 for owner-occupiers in arrears. [Which, of course, means that these arrears can be dealt with at no loss to the banks via a combination of restructuring, equity stakes assumption by the banks and/or foreclosures. In the end, this also means that significantly less resources will be needed to help those who are in negative equity and at risk of arrears - i.e. those who are subject to punitive provisions of our personal bankruptcy code]
10. Buy-to-let properties. Of the total loan book analyzed, 22 percent (€20 billion out of €87 billion), relates to buy-to-let property debt. The average outstanding balance for the 52 percent of buy-to-let properties in negative equity is about €320,000 and the average negative equity is just over €100,000.
11. Within the four institutions covered by the Financial Measures Program, 33 percent of buy-to-let borrowers also have an owner-occupier mortgage with the same lender.  

Some very interesting observations from the IMF summary of the CBI evidence on drivers of arrears: 

• Studies, including from other countries, point to unemployment, debt service, and loan-to-value ratios as key determinants for arrears, although geography and loan vintage are also important, as are rental and payment rates for buy-to-let properties. 
• Data availability can be an issue, however, especially for current income. 
• An alternative approach developed a transition matrix for predicting mortgage arrears based on loan vintage, borrower type, interest rate type, and region.

There's no summary of the transition matrix provided.

Here are three more interesting charts relating to the Irish property market:

20/12/2011: The end of Neo-Keynesianism

I have recently written about the lack of debt reductions under the 'austerity' packages in Europe (see link here). Now, Washington Post weighs in with an excellent note on the demise of the Neo-Keynesian doctrine of unlimited borrowing-based deficit financing - link here. It is, therefore, perhaps befitting to note that today's Le Monde quotes Professor Jean-Marc Daniel of ESCP saying that "without doubt we are living in the last hours of a European Social model". The article, cited in the eurointelligence.com briefing note, but not linked, also cites absurd abuses of the Social Contract in Greece and other PIIGS.

This, of course, is a logical conclusion to the economically illogical proposition that states with severe debt overhang (in excess of 80% of GDP or GNP for public debts) can borrow their way out of the debt crisis.

But the problem goes deeper than that. Europe 2020 - the only growth policy platform for the EU27 - relies extensively on the Social Model as the core driver for growth, both in terms of justifying subsidies and transfers that are represented as 'socially productive' even if they are economically dubious in nature, and in terms of justifying more significant role for public investment in driving future growth capacity.

Neo-Keynesian doctrine of continued and accelerating deficit financing in the face of public debt overhang is now pretty much dead. Next step - the idea of 'Social Economy' that is based on achieving equality of outcome by transfers of income and wealth, both intra- and inter-temporal. States do run out of borrowing capacity, folks. And it doesn't matter a bit whether this happens when you need to run a deficit or not.

20/12/2011: Residential property prices for November

Today's data focus for Ireland is on residential property price index for November.

Prior to today's release, in the 12 months through October 2011, residential property prices were down 15.1% year on year - steeper decline than in July-September 2011 (12.5%, 13.9% and 14.3% respectively). In 12 months through October 2010 the rate of prices decline was 11.1%, shallower than in the 12 months through last October. So price drops were accelerating before November data release. In fact, mom prices dropped 2.2% in October, against 1.5% mom decline in September.

The latest data, therefore, was expected to come in with some moderation in the rate of decline. And in that, there was no surprise - mom change for November is at -1.54%, ahead of September, but behind October reading. 


November index of all residential properties prices is now at 70.1, down from october 71.2. 3mo MA is down to 71.37 from October reading of 72.63. We have to go back to November 2007 to see the first time that the overall index did not decline (it stayed flat in that month) and back to September 2007 to see the last monthly increase in the index. 12 mo MA of monthly changes is now at -1.41% mom and year-to-date monthly average change is -1.49%.


Nama is continuing taking a hit on its valuations. Referencing back to November 30, 2009 Nama valuations cut-off date, November 2011 prices are down 25.35%, which, adjusting for LTEV uplift applied by Nama implies that Nama valuations on its residential properties portfolio are 32.13% under water. Correcting the above for 'burden sharing' cushion applied by Nama legislation, Nama is nursing a loss of 28.9% on its residential properties-related holdings.

As chart above shows, overall residential property prices are now 46.28% down on the peak and year on year the prices are down 15.64%.

Houses prices index has fallen from 74.3 in october to 72.9 in November - down 1.88% mom, In October, monthly rate of decline was -2.24%, but November decline is second sharpest in the last 5 months. Year on year, house prices are down 15.72%, while in october the same rate of decline was 14.89%. Relative to peak, house prices nationwide are 44.78%.

Apartments fared better this time around, with index reading improving from 52.2 in October to 53.6 in November, a monthly rise of 2.68%. The index is also more volatile than that for all residential prices and house prices. Last time we saw a rise in house prices mom was in August 2010, and last time we saw monthly increase in apartments prices was in December and January 2010.

Apartments prices are now -16.89% down yoy and this marks an improvement on -19.82% decline yoy through October. Relative to peak, apartments prices are down 56.74%.

In my view, the divergence between apartments prices and house prices, if sustained over time, will be signaling the overall collapse of the purchasing power by the first time buyers, as well as demand push toward lower cost commuting locations as cost of transport continues to climb up courtesy of the Government policies. It can also signal the reflection of improving rental yields for some, especially city centre-located - properties. It is worth noting that Dublin apartments drove the monthly change for nationwide figures reported above, with Dublin apartments price index increasing from 50.8 in October to 53.2 in November a strong gain of 4.7% mom and driving year on year decline to -16.1% in November against -21.2% in October.


Prices in Dublin (all properties) posted index reading of 62.2 in November, down 1.43% mom on October reading of 63.1. This was the shallowest monthly decline since July 2011 when the index posted no change mom. Yoy index is now down 17.62% in November from 17.52% in October. Relative to peak the index is down 53.75%.

Updating annual forecasts, I expect overall RPPI to post a reading of ca 71.27-71.30 or a decline of 41.7% relative to peak. For houses, I expect index to run at 74.5-75.1 for 2011, marking a decline of 39.7% relative to peak annual index, while for apartment the same forecasts are for 56.5-56.7 index reading and a decline relative to peak of 49.7%. Dublin prices are expected to end the year on an index reading of 63.5-64.0 - a decline of 47.9% on peak. Mid-points are illustrated below:

So, overall, no surprise - another month of declines, another month on the road toward the average price around 60% off the peak. One to watch here is the sub-index for apartments prices, especially in Dublin.


It's worth noting here that per NTMA (source: Nama, December 2011), commercial property yields have been rising strongly in recent months. See chart below. This can also correlate positively with the rental yields for Dublin apartments, especially for centrally located properties.

19/12/2011: Relax, Keynesianistas!

My article for Canada's Globe & Mail in the Global Exchange section: here.

18/12/2011: Ballyhea & Charleville Protest Against the Bailouts

This weekend I was honored to be a guest of a group of real patriots of our country - a group of extraordinary people who over 40 weeks, one Sunday after another, take their families and friends into the streets of Ballyhea and Charleville to protest against the injustice of the banks bondholders bailouts.

It is a remarkable group of people - coming from all walks of life, united not by an ideology or by a vested interest, but by the knowledge that what is being done to our country behind the veil of the banking crisis is simply wrong. It is wrong on a multitude of levels - ranging from ethics to politics to economics to social justice. The people behind this protest are also united by their concerns for the future of Ireland, for the rising wave of emigration, for the simple fact that our country capacity to recover from this crisis is being destroyed for the sake of rescuing a handful of institutional bondholders.

I felt truly honored - and there can be no other word to describe it - to have been asked to speak to these courageous people last night, to share a delightful pint and a long conversation with them, and to march alongside them today.

Here are a couple of pictures from the march.

The group run a website listing all bonds coming due for repayment, called bondwatchireland.blogspot.com and a Facebook page for their events (link here). These are, in my view, a must to follow for anyone concerned with what has been happening in Ireland over the last 3 years.

17/12/2011: The Plan and a Pie

Yes, yes, folks, I know, we have a plan. It's the plan to pay our debts (well, at least Government debts) from our 'exports-led growth'. We even had foreign experts telling us that we can do it - coming down from the Continent with lectures full of graphs and sums.

In reality, of course, the plan is a porky. We have booming trade in goods which is slowing down on growth rates, but remains pretty healthy. We have trade in services - that is not reported by the CSO in monthly series. That is in a deficit. Then there are other so-called 'invisibles' that are negative as well (see below). On the net, in 2010, our 'external surplus' measured by trade alone, including the invisibles (current account) was just €761mln. But then we have to add capital account - the inflows and outflows of capital - and that gives us the full external surplus - the Balance of payments bit - of a whooping debt-busting... €88 million.

Let's run through those figures... shall we?

Merchandise trade balance in Q3 2011 stood at €9,862mln or 6.9% ahead of Q2. Year on year, however, trade in goods shrunk 1.02% and for the first 9 months of 2011, trade balance in goods was 2.78% behind the same period of 2010. In other words, not a spectacular development so far in our strongest exporting sector. Certainly not what we would expect if we were to reach that 4.3-5.8 targets various Government documents set out for exports growth in 2011.

Services trade balance shows a deficit as of Q3 2011 at €379mln. The encouraging thing is that this is falling, and falling rapidly. But income flows abroad and current transfers abroad are running high at €8,170mln and €463mln respectively. This means total invisibles balance is in a deep deficit of €9,012mln in Q3 2011, improved by €700 mln on Q2 2011, but worse than same period 2010 by €227mln.

Adding up trade balance in goods and invisibles yields current account surplus of €850mln in Q3 2011. But for the 9 months of 2011, cumulated current account stands in a deficit of €669mln, not a surplus. And compared to same period 2010 this deficit in an improvement of €125mln.

Capital account for Ireland is in a small deficit in Q3 2011 of €12mln, slightly deeper than €8mln in Q2 2011, but worse  for 9 months through September 2011 (at €6mln deficit) than for the same period a year ago (surplus of €23mln).

Adding current and capital accounts yields balance of payments for Ireland - the full external balance - which in Q3 2011 stood at €838mln surplus. In 9 months through September 2011, the balance of payments was in cumulative deficit of €675mln - an improvement on the same period of 2010 when the balance of payments was in a deficit of €771mln.

Charts below illustrate the trends on the annual basis, providing forecast for 2011 based on data through September.

So let's ask that uncomfortable question: Can external surpluses get us out of the debt jail? table below sums up cumulated external accounts balances for 1998-2011(forecast).

Yep, that's right. Suppose we want to pay down original €100bn of government debt out of the external surpluses consistent with the booming exports trade of 2009-2011 and we take the best quarterly performance for each metric of the external balance. Suppose we assume that debt is financed at 3.5% perpetually. How long will it take Ireland to half its current debt exposure? Roughly speaking - 64 years based on trade balance (current account surpluses) and 85 years based on full balance of payments.

And the above does not factor in any current or future slowdowns in trade etc. Just based on our best performance, with exports at boom levels and imports permanently shrunk, we still cannot count on that magic bullet of 'external trade will save us' from the debt overhang.

So that Plan for External Surpluses as a vehicle out of our debt jail... well it's sort of:

16/12/2011: Agricultural Output in Ireland 2011

Advanced estimates for production and value added in Agriculture for Ireland is out for 2011 and it makes for some interesting reading. The headline numbers are pretty exciting:

• Goods output rose from €4,7524mln in 2009 to €5,329mln (+12.8% yoy) in 2010. And it is now expected to increase to €6,190mln (+16.2%) yoy in 2011. 
• Net subsidies (net of all taxes collected) fell from €1,849mln in 2009 to €1,688mln in 2010, and now expected to rise again to €1,942mln in 2011.
• Overall, operating surplus - goods output value less intermediate inputs consumption and less subsidies - has risen year on year in 2010: from €1,544mln in 2009 to €1,967mln in 2010 (+27.4%) and is expected to rise 33.4% to €2,625mln in 2011.

Strong results, but over relatively tiny numbers. When you hear that the agriculture sector is worth €6.2 billion to the Irish economy, do keep in mind that in reality it is worth just €2.6 billion. The rest of the 'worth' is more like rich uncle buying you a dinner and sending you a subsidy cheque...

And for being the 'agriculture island' - well, our operating surplus in 2010 in agriculture stood as 12th highest in absolute terms in the EU27, same as in 2009. This is against the backdrop of Irish economy being 15th largest in EU27 in the same period. So here's the neighborhood we are in, when it comes to agriculture's contribution to our economy:

Wedged between such 'knowledge" economies with high value added as other agricultural states of Cyprus, Lithuania, Estonia, Hungary... Ireland is the only country of the advanced EU27 states that finds itself in the group of countries with agriculture's share of GDP above 1%. In fact, our share in 2010 was 1.26%. The closest to us advance EU27 member state - Finland, had the same share of 0.88%.

The fact is, you can't build a modern economy on agriculture. A healthy agricultural sector with high value added activities and high levels of specialization is something to be proud of. A generally larger agricultural sector as a share of overall economy, in contrast, is a feature of underdeveloped economies.

16/12/2011: QNA for Q3 2011: 'exports-led recovery' myth

In the first post on Q3 Quarterly National Accounts, we looked at the data on real rates of growth in the Irish economy based on sectoral decomposition (linked here). Now, let's take a look at the expenditure-based data. Please keep in mind - Q3 2011 was the record-busting quarter in terms of exports growth for Ireland, with the latest data pointing to falling growth rates in Irish external trade for Q4 2011 (see here). In addition, keep in mind that unlike the DofF that projects Irish GDP growth to be 1.3-1.6% in 2012, most of the euro zone is factoring in contractions for H1 2012 (see details here).

So down to data now.

In nominal terms,

• Personal consumption continued its precipitous fall in Q3 2011, declining €291mln (-1.4%) qoq and €283mln (-1.4%) yoy. Relative to Q3 2007, personal consumption is now down €3,085mln or 13.3%.
• Net expenditure by central and local government, is down €61mln (-1.0%) qoq and €110mln (-1.7%) yoy. Compared to Q3 2007, net government spending is down 12.1% or €869mln.
• Exports of goods and services are up €373mln (+0.9%) qoq and €1,025mln (+2.5%) yoy. Exports are also up on Q3 2007 by some €3,849mln (+10.2%)
• Imports of goods and services are down €192mln (-0.6%) qoq but up €1,033mln (+3.3%) yoy.

Thus, GDP at current market prices is now down €703mln qoq in Q3 2011 (-1.8%) and down €1,011mln (-2.5%) yoy. Compared to Q3 2007, GDP is down €7,030mln (-15.4%) in current market prices.

In current market prices, value of profits expatriated abroad net of profits inflowing from abroad has risen €189mln (+2.4%) qoq and is up €1,076mln (+15.5%) yoy.

As the result, GNP is now down €612mln (-1.9%) qoq and down €2,063mln (-6.3%) yoy. GNP in current market prices is down €9,092mln or 22.8% on Q3 2007.

Personal consumption in nominal terms now stands close to the level of Q3-Q4 2005. Fixed capital formation is at the level roughly 1/3 of the Q1 2005.

Things are pretty dire in constant market prices terms as well:

• Personal consumption fell €182mln (-0.9%) qoq and €822mln (-3.9%) yoy. Relative to Q3 2007, personal consumption is now down €2,744mln or 12.1%.
• Net expenditure by central and local government, is down €88mln (-1.4%) qoq and €259mln (-3.9%) yoy. Compared to Q3 2007, net government spending is down 13.9% or €1,035mln.
• Gross domestic capital formation also continued falling in Q3 2011, with qoq decline of €1,234mln (-27.1%) and yoy fall of €955mln (-22.2%). Relative to pre-crisis level in Q3 2007, Q3 2011 investment in this economy came in at €5,754mln less (a decline of 63.2%).
• Value of stocks of goods and services has contracted €173mln in Q3 2011 qoq (-26.7%). 
• Exports of goods and services are up €786mln (-1.9%) qoq and €947mln (+2.4%) yoy. Exports are also up on Q3 2007 by some €2,650mln (+7.0%)
• Imports of goods and services are down €1,865mln (+5.9%) qoq but up €997mln (+3.3%) yoy.

GDP at constant market prices is now down €836mln qoq in Q3 2011 (-2.0%) and down €57mln (-0.1%) yoy. Compared to Q3 2007, GDP is down €3,318mln (-7.6%) in constant market prices.

Value of profits expatriated abroad net of profits inflowing from abroad has fallen €262mln (-3.1%) qoq but is up €1,347mln (+19.8%) yoy.

As the result, real GNP is now down €574mln (-1.8%) qoq and down €1,404mln (-4.2%) yoy. GNP in current market prices is down €5,398mln or 14.4% on Q3 2007.

So once again, that 'exports-led recovery' is, predictably not enough to keep economy above the waterline. And this is the case for Q3 2011, when "net exports (exports minus imports) grew by

21.8% at constant 2009 prices compared with the same quarter of last year." Record growth in exports before the slowdown hit in Q4 2011, and still recession in the overall economy.

16/12/2011: QNA for Q3 2011 - that R-thing again

Initial estimates for Q3 2011 released by CSO today show that seasonally adjusted, GDP fell 1.9% qoq  and GNP declined 2.2% qoq. Year on year, GDP is down 0.1% and GNP is down a whopping 4.2%.

In constant prices terms, real GDP fell €836mln qoq in Q3 2011 (-2.0%) and €57mln yoy (-0.1%). Relative to the peak in 2007, real GDP is now down €3,318mln or -7.6%. In constant prices terms, real GNP is now down €574mln (-1.8%) qoq and €1,404mln (-4.2%) yoy. Compared to peak 2007, GNP is down €5,398mln (-14.4%).

Output in Agriculture, Forestry and Fishing has fallen (in constant market prices and seasonally adjusted) €348mln (-30.2%) qoq, but is up 15% or €105mln in yoy terms. Relative to pre-crisis 2007 levels, sector output is up €104mln (+14.8%).

Industrial production declined €1,036mln (-8.7%) qoq and is up €419mln (+4%) yoy, while registering an increase of €227mln (+2.1%) on Q3 2007. These figures combine booming exporting sectors and collapsing building and construction sector. In building & construction, output grew €16mln (+1.9%) qoq, but is down €224mln (-20.4%) yoy and is down €1,423mln (-62%) on Q3 2007.

Distribution, transport & communications sector - a brighter spot last quarter, shrunk €129mln (-2.4%) qoq and is down €¡37mln (-2.6%) yoy. Compared to Q3 2007, the sector is down €1,064mln (-17.1%).

Other services, including rent are up €225mln (+1.3%) qoq, but down €531mln (-3.0%) yoy. The sector is down €1,889mln (-10%) on Q3 2007.

Chart below shows annualized returns by sector using data for the 11 months through November 2011 annualized using historical trends:

And the chart below shows in more detail the plight of Building & Construction sector:

Overall forecast for real GDP and GNP for 2011 based on data through November 2011 is not encouraging:

In the chart above, analysis of the latests data and historical trends suggests that 2011 GDP can come in at 0.7% growth rate, with GNP declining by -0.7% at the same time.

Net factor income from abroad - aka MNCs profits expatriations - declined in Q3 2011 to €8,136mln - or €262mln less than in Q2 2011. MNC's profits expatriation is now running €1,347mln ahead of Q3 2010 and €2,197mln ahead of Q3 2007 as record exports are fueling transfer pricing. So that 'exports-led recovery' thing... oh, it's dead in the water, folks. As predicted, record exports are not enough to sustain the entire economy. But more on this in a follow up post with detailed analysis of expenditure-based QNA.

16/12/2011: Ireland-Russia bilateral trade, September 2011

Based on yesterday's data for external trade, let's update Irish bilateral trade in goods data with Russia.

Irish exports to Russia totalled €46.9 million in September, up 61.2% yoy, against Irish imports from Russia of €7.8 million, up 14.7% yoy.

Irish trade surplus with Russia stood at €39.1 mln in September, up 75.3% yoy.

Revising annual forecast, I now expect Irish exports to Russia to reach €520 million in 2011, against €373 million in 2010, while Irish imports from Russia to settle at €125 million, down from €159.7 million in 2010. The resulting annual trade surplus will be around €398 million or more than the combined trade deficits in Irish trade with China and India in 2010.

January-through-September period trade surplus data for various non-EU countries expressed in millions of euros are detailed in the table below:

So in terms of trade surplus, Russia was Ireland's 5th most important trading partner.

15/12/2011: Euro zone and Euro Big 4 forecasts

Here's the latest summary of the Insee forecasts for Euro Big 4 and euro zone as a whole:

These are largely consistent with the Eurocoin forecasts to-date. Do note in the table above that unique Irish strength of 'exports-led recovery'. When it comes to 2010 exports growth - Ireland recorded growth of 8.07% (QNA data) in overall exports expansion, les than euro area's 10.9%, Italy's 8.9%, Spain's 13.5%, Germany's 13.4% and France's 9.3%... and these are all large economies (with less openness to trade than Ireland).

15/12/2011: External Trade for October 2011

Data for external trade for Ireland for October 2011 is out (preliminary estimates) and the picture of the general slowdown in the economy in Q4 is now being confirmed in the exports sector.

Overall,

1. Seasonally adjusted exports fell by 4% to €7,652m in October, while imports increased by 3% to €3,937m, resulting in an 11% decrease in the trade surplus to €3,715m.
2. Overall exports fell €358.4mln mom (-4.47%). Year on year exports in october were up €299.1mln (+4.04%) and relative to October 2009 exports are up €1,306.9mln or +20.60%. It is worth noting that average exports volumes for January-October 2011 stand at €7.692bn - ahead of the October monthly reading by €40mln - a small difference, but this is the first month since July that we are seeing exports below average.
3. Imports rose €98.4mln (+2.56%) mom and €339.3mln (+9.43%) yoy. Relative to October 2009, imports are up €526mln or +15.42%.
4. Trade balance fell €456.8mln mom in October (=10.95%) and €42.1mln (-1.12%) yoy. Relative to October 2009, trade balance is still up hefty €780.9mln (+26.6%).

Charts below illustrate:

Note that the trade balance remains on the upward sloping trend and the sub-trend is both steeper and above the historical trendline, which is, obviously a very strong development. Imports continue to underperform below the trendline, something that we can expect to be corrected once capes returns to exporting sector and also as the euro depreciates (margins on transfer pricing shrinking).

Terms of trade improvements are now virtually exhausted (although the data here is through September, not reflective of the gains in terms of trade that are materializing out of the latest weakening on the euro).

 Mom terms of trade deteriorated by 0.7 index points of 0.92%, however, year on year Irish exporters are enjoying strong gains of 7.88% and relative to September 2009, terms of trade have improved 10.54%. (Note: in the chart above, improvement in terms of trade is reflected in the lower value of the index).

It's worth noting (chart above) that exports are responding to terms of trade improvements well ahead of trend for the third year in a row, consistent with increasing transfer pricing component in our trade. This picture is further confirmed by the increasing sectoral concentration of our exports in pharmaceutical and medical devices sectors.

Overall imports-intensity of exports - the ratio of exports value to imports value has risen in October, as index moved from 208.7% in September to 194.4% in October (-6.86%) and year on year there has been relatively similar deterioration of 4.9%. This compares against the historical average ratio of 156.0%, implying that currently transfer pricing is running at a higher rate than average.

As noted earlier, imports are now rising faster than exports, reflective of cyclical stocks of inputs exhaustion and this can be a net negative going forward if the MNCs begin to see slowdown in new orders. In other words, as imports of inputs begin to outpace exports of outputs, stocks of finished goods will rise, implying that in the future, stocks of finished goods contribution to GDP will shrink, unless new orders take these stock out.

Despite good performance, seasonally adjusted trade flows are suggesting some troubles ahead for the trade balance. Annualized data based on previous years monthly series generates the forecast for Irish imports of €48.53bn in 2011 (+5.98%yoy against average annual contraction in 2008-2010 of -9.85%) and exports at €91.41bn (+2.42% yoy - well behind the target of 4.3% and well behind 2010 annual gain of 5.26%). This implies the forecast trade surplus of €42.89bn or some 1.35% less than in 2010. The crucial point for the GDP is how much stock build up activity we are going to see in November-December. And for GNP, the added critical issue is whether the MNCs will accelerate their profits expatriation or not.

Overall, there are signs (albeit still relatively weak) of the slowdown momentum building up in exports.