5/9/2012: The balance of imbalance: Irish Exchequer deficit in January-August 2012

In the previous two posts I examined the Exchequer receipts and net voted expenditure for January-August 2012. Now, on to the overall balance.

In July 2012, the Exchequer deficit stood at €9.13 billion against July 2012 headline deficit of €18.89 billion. In August, cumulated 2012 deficit rose to €11.35 billion (up €2.22 billion in one month) compared to €20.43 billion in 2011 (2011 monthly rise in August was €1.54 billion).
Fact 1: Irish Exchequer deficit rose at faster pace in August 2012 than in August 2011, so in monthly changes terms, August 2012 was not an improvement on August 2011.

However, the headline figures are incorporating several factors that gold-plate our deficit performance in 2012 compared to 2011, none of which the Government is willing to actually directly separate to identify the true performance. Let's try doing this job for them:

• As mentioned earlier, €233 million on 2011 revenue side came from the one-off sale of the Bank of Ireland shares, while €251 million of corporate tax receipts booked into 2012 is really the revenue from 2011. This means the deficit in 2011 should be adjusted by -€18 million and the balance in 2012 should be adjusted by +€251 million.
• In January-August 2011 the state spent €7.6 billion on recapitalizing banks, while this year the spending was only €1.3 billion plus there was a payment of €450mln in 2012 into the ICF (Insurance Compensation Fund). This means we should adjust the Exchequer balance on 2011 side by -€7.6 billion and 2012 by -€1.75 billion.
• Promo notes 'restructuring' this year meant the net cost of the Notes booked at €25mln, against €3.1 billion in 2011. This means adjusting 2011 deficit by -€3.1 billion and 2012 deficit by €25 million.
• In 2011 revenues from the banks measures - clearly a temporary source, as the EU Commission has warned Ireland already about the future tapering off of these receipts - amounted to €1.27 billion, while in 2012 they amount to €2.06 billion.

Accounting for the above one-off and temporary measures, the underlying deficit figures are:

• 2011 January-August period: €10.98 billion or €9.71 billion if we omit accounting for banks receipts;
• 2012 January-August period: €11.88 billion or €9.82 billion if we omit accounting for banks receipts.
• Hence, January-August 2012 period deficit, comparable to that for the same period in 2011 is worse, not better, by €109-896 million depending on whether we consider windfall differences in temporary revenues from banks.

Fact 2: On comparable basis, stripping out one-off measures and temporary allocations, Irish Exchequer deficit is worse in the first 8 months of 2012 than it was in 2011.

4/9/2012: Six Key Facts About Irish Government Spending: August 2012

In the previous post I looked at the receipts side of the Exchequer returns for January-August 2012. Now, let's take a quick tour through the expenditure side.

In January-August 2012, the Government total Net Voted Expenditure stood at €29,593 million or €244 million (0.8%) above the same period of 2011. In other words, the Government is spending more in 2012 than it spent in 2011 on the expenditure side that it actually controls. In July 2012, the overrun was €138 million or 0.5%.

Fact 1: things are getting worse month on month, not better, on the spending side

Fact 2: things are getting worse year on year, not better, on the spending side

Current Net Voted Expenditure rose €444 million (+1.8%) y/y in January-July 2012 compared to same period of 2011. In August, this figure went up to €659 million (+2.4%).

Fact 3: the core driver for rising Government spending is Current Expenditure, and the increases in spending in this area are getting worse, not better, with time. 

On the total expenditure side, the Government is now exceeding its target for 2012 (these are revised targets published in May, so the overruns are compared for just 4 months running) by 1.1%, and on current expenditure side these overruns are at 1.6%. In July 2012 the same figures were +0.8% and +1.3% respectively.

Fact 4: even by revised targets the Government is already behind its set objectives, just 4 months into running and the set-back is accelerating month to month.

In July 2012, five departments exceeded their targets on current expenditure side, including (as expected) Health (+1.0%) and Social Protection (+4.4%). In August 2012, six departments were in breach of their targets on current spending, with Health performance deteriorating (+1.5%) while Social Protection performance showing shallower miss on target (+4.2%).

Fact 5: More departments are slipping into underperformance relative to target in August than in July.

In August, five departments posted increases y/y in Current Net Voted Expenditure, in July there were seven departments in the same position.

Fact 6: year on year cuts in spending in smaller departments are not sufficient to offset increases in spending in larger departments. 

Capital expenditure has fallen €415 million (down 20.9%) y/y and is now €120 million (7.1%) below the target. In an ironic twist, these 'savings' will be totally undone through the Government capital expenditure boost once privatization process gets underway. 

However, annual estimates assume 13.4% or €562 million reduction in capital spending. With 74% of thse already delivered on, it is hard to see how the Government can extract more savings from this side of the balancesheet to plug the widening gap on the current expenditure side.

To summarise, therefore, the Irish Government continues to increase, not decrease the overall Exchequer expenditure year on year and is now behind its own targets. 

Neither the receipts side of the fiscal equation, nor the expenditure side are holding.

4/9/2012: The Fog of Exchequer Receipts: August 2012

The Exchequer receipts and expenditure figures are out for August and the circus of media rehashing that way and this way the Department of Finance press releases is on full blast.

From the way you'd read it in the media outlets, tax receipts are up, targets are met, deficit is down, spending is down. The problem is that the bunch of one-off measures conceals the truth to such an extent that no real comparison is any longer feasible for year on year figures. The circus has painted the Government finances figures so thickly in a rainbow of banks recaps, shares sales receipts, tax reclassifications, tax receipts delays and re-bookings etc that the Government can say pretty much whatever it wants about its fiscal performance until, that is, the final annual figures are in. Even then, the charade with promo note in March will still have material influence on the figures, as will tax reclassifications and delayed tax receipts booking.

With this in mind, let's try and make some sense out of the latest Exchequer receipts results, first (expenditure and balance in later posts).

Take total tax receipts for January-August 2012. The official outrun is €22.076bn which is 1.7% ahead of target set in the Budget 2012. Alas, monthly receipts of €1.763bn is 7.1% short of target. In July 2012, monthly tax receipts were 0.2% below target. So:
Point 1: As a warning flag: revenues are now running increasingly below target levels.

Year on year tax receipts were down 1.7% in July on a monthly basis and were up 9% on aggregate January-July basis. Year-on-year receipts were down 5.7% in August on a monthly basis, and were up 7.7% on January-August aggregate basis.
Point 2: As another warning flag: tax receipts are now running for two months under last year's and this is even before we adjust for 2011-2012 reclassifications and delayed bookings of some receipts.

Now, the Department of Finance states in the footnote to its tax receipts analysis that: "Adjusting for delayed corporation tax receipts from December 2011 and the techncial [sic] reclassification of an element of PRSI income to income tax this year, aggregate tax revenues are an estimated 5.2% year-on-year at end-August, coproration [sic] tax is up 6.7% and income tax is up just under 10%". What does it mean? this means that by Department estimates, the two factors account for roughly €511 million in combined bookings into 2012 that are not comparable to 2011 figures.

Subtracting €511 million our of the total cumulated receipts implies tax receipts for January-August 2012 of €21.565bn which would be 0.7% below the Budget 2012 target. Thus,
Point 3: Tax receipts, on comparable basis, are running at below target, not ahead of it, albeit the difference is still materially small.

Here's what else is interesting, however, at the end of June the Department provided an estimate for the above adjustments of ca €472 million, at the of July it was €467 million and now at €511 million. Even allowing for rounding differences on percentages reported this looks rather strange to me.

On non-tax revenues:

• In 2011 the Government collected €233 million from selling its shares in Bank of Ireland. This year - nil booked on that. Which largely accounts for the capital revenues being down from €1,036 million in 2011 to €813 million in 2012.
• Again on the capital receipts side, total EU contributions to Ireland in January-August 2012 stood at €68.401 million against €43.671 million a year ago.
• Total non-tax revenue on the current line of the balancesheet is €2.403 billion in January-August 2012 and this is up 49.4% on the same period in 2011.
• Of the increase registered in 2012 compared to 2011, €487 million came from increases in clawbacks from the banks and Central Bank of Ireland remitted profits. In other words, that was roughly half a billion euros that could have gone to writing down mortgages, but instead went to the Government. €302 million more came from the Interest on Contingent Capital Notes, which is the fancy phrase to say it too came from the banks. Thus, all in, current non-tax revenues increases of €794.1 million were almost fully accounted for by the increases of €789 million in the state clawbacks out of the insolvent and semi-solvent banks that the state largely owns.

Point 4: Unless you believe that the banks conjure money out of thin air, any celebration of non-tax receipts improvements in January-August 2012 compared to 2011 is a celebration of Pyrrhic victory of the Exchequer witch craft inside our (as banks customers and mortgage holders) pockets.

Now, let's add all receipts together:

• Total Exchequer receipts in January-August 2012 stood at €25.937bn against €23.146bn in 2011. 
• The 'rise' in total Exchequer receipts of €2,791 million in 8 months of 2012 compared to the same period in 2011 includes €511 million in tax adjustments (re-labeling) and carry over from 2011, plus €789 million in new revenues clawed out of the banks. In addition, €645.7 million is booked on receipts side via the Sinking Fund transfer (which is netted out by increased expenditure).
• So far, over the 8 months of 2012, the actual net increase in total (tax, non-tax current and non-tax capital) receipts is ca €845 million, or 3.7%.

Point 5: Disregarding expenditure effects (to be discussed later), Irish Exchequer has managed to hike its policy-controlled receipts by 3.7% y/y over the January-August period. Better than nothing, but a massive cry from the headline figure of 7.7% increase in total tax receipts and 12% rise in total receipts.

4/9/2012: H1 2012 Trade in Goods & busted expectations

At first I resisted (rather successfully) for a number of days from blogging about the trade in goods stats for June released on August 16th. Aside from the already rather apparent pharma patent cliff and resulting collapse of exports to the US, there is little to be blogged about here. Well, may be on some BRICs data, but that will come later, when I am to update bilateral trade with Russia stats.

Then, playing with the numbers I ended up with the following two charts showing trade stats for H1 2012:

As dynamics show in the chart above, Ireland's goods exports are... err... static in H1 2012 compared to H1 2011 - down 1.69% y/y compared to H1 2011 and this comes against a rise in exports of 5.91% y/y in H1 2011 (compared to H1 2010). The exports-led recovery has meant that in H1 2008 exports are up just 3.62% on H1 2008 and are down 0.58% on H1 2007. Recovery? What recovery?

Of course, over the same period of time, imports fell 3.14% on H1 2011 (after rising 9.25% y/y in H1 2011 compared to H1 2010), and in H1 2012 imports stood at 20.09% below their H1 2008 and down 23.20% on their H1 2007 levels.

Which means that our exports-led recovery is currently running as follows: imports are down substantially more than exports (which is accounted for primarily by the collapse in domestic demand and investment activities), while exports are running only slightly behind their pre-crisis levels.

Thus, trade balance was up 0.05% y/y in H1 2012, while it is up 58.49% on H1 2008 and 51.48% on H1 2007. The body that is the Irish economy is producing  pint of surplus blood by draining 5 pints and re-injecting 4 pints back. Hardly a prescription for curing the sick according to modern medicine approach.

But that alone is not what keeping me focused on the numbers. Instead, it is the hilarity of our captains' expectations when it comes to the proposition that 'exports will rescue us'. Many years ago, in the days when the crisis was just only starting to roar its head, I said clearly and loudly: exports are hugely important, but they alone will not be sufficient to lift us out of this mess. Back then, I had Brugel Institute folks arguing with me that current account surpluses will ensure that ireland's debt levels are sustainable. Not sure if they changed their tune, but here's what the Government analysis was based on, put against the reality.

In the chart below, I took 3 sets of Government own forecasts for growth in exports for 2009-2012, extracted from Budget 2010, 2011 and 2012. I then combined these assumptions into 3 scenarios: Max refers to maximum forecast for specific year projected by the Department of Finance, Min references the lowest forecast number, and the Average references the unweighted average of all forecasts available for each specific year. I applied these to exports statistics as reported for 2009 and plotteed alongside actual outrun:

Current H1 2012 outrun for exports is €449 million lower than the worst case scenarios built into the Budgets 2010-2012 by the Governments. It is also €4,399 million behind the highest forecasts.

Put differently, the outcome for H1 2012 is worse than the darkest prediction delivered by the Department for Finance.

Of course, the exercise only refers to goods exports and must be caveated by the fact that our services exports might take up the slack. So no panic, yet. And a further caveat should be added to reflect the fact that the above is not our exporters fault, as we are clearly suffering from the tightness in global trade. On the minus side, there's a caveat that the pharma patent cliff has been visible for years and that the Government has claimed that they are capable of addressing this.

Sleepless nights should not be caused by the latest stats, yet. But if things remain of this path, they will come.

4/9/2012: Imagining the banks costs

Excellent info-graphic on the cost of Ireland's banks rescue to the economy via Stephen Donnelly (TD, Independent):

And the link to the original.

3/9/2012: Ireland's Manufacturing PMI for August

Today's release of the NCB Manufacturing PMI data for Ireland for August 2012 came in with both a positive and a negative surprises. The positive side of the news is that the headline index did not dip below 50 (contraction territory) but stayed at 50.9 in August, down on 53.9 in July, but above 49.7 in August 2011. In other words, the rate of Manufacturing sector growth has slowed down markedly, but remained positive in August.

The slowdown is significant, however, with current reading (50.9) not statistically distinguishable from zero growth level of 50.0, against statistically significant expansion recored in July.

Here is core stats summary:

• Headline seasonally adjusted PMI is now running at below 3mo MA (52.6), and 6mo MA (51.8). However, thanks to July reading, Q3-to-date average is at 52.4 (statistically above 50.0) and well ahead of 51.5 in Q2 and 49.8 in Q1. 
• August marked the 6th consecutive month of above 50 readings.
• New Orders sub-index also fell in August from 55.8 in July to 51.8 in August. Again, August reading was not statistically significantly different from 50.0. 3mo MA is now at 53.7 and 6mo MA is at 52.7. Q3 to-date average is 53.8 and this is well ahead of Q2 2012 average of 52.0 and Q1 2012 average of 49.9.
• New Export Orders sub-index also posted moderation in growth from July 56.7 to August 53.4, although 53.4 remains a solid signal of expansion. August now marks 6th consecutive month of the sub-index above 50 readings. 3mo MA is at 54.2 and close to 6mo MA of 54.0. Q3 2012 average to-date is at brisque 55.1 against Q2 2012 average of 52.8 and Q1 average of 51.9. 
• One has to keep in mind that the above performance puts Irish manufacturing sector activity well ahead of the euro zone peers and our exporting performance well above the entire EU member states' performance.

Chart to illustrate:

Output sub-index confirmed the above trends, slipping from 54 in July to 51 in August. Again, expansion is not significantly different from zero, but still good to see the index staying above 50 in level terms. 3mo MA is at 53.2 and 6mo MA at 52.0. Quarter to quarter changes are: Q1 2012 average of 50.2, Q2 2012 average of 51.4 and Q3 2012 average of 52.4.

Chart below snapshots core series trends over shorter horizon:

Chart below shows time series for other sub-indices.

Quick synopsis of changes in prices and employment. As usual, I will be doing more detailed analysis of profitability and employment after we have Services PMI data as well, so stay tuned:

• Output prices have continued decline, albeit at slower pace than in July, while input prices returned to rapid inflation (56.8 in August from 47.8 in July).
• 3mo MA for input prices is now at 51.4 against 48.6 3moMA for output prices. 
• This points to shrinking profit margins. However, the pace of margins contraction is now slower than in Q1 and Q2.

• Manufacturing sector employment posted another (6th consecutive monthly) expansion in August, though the rate of growth in employment has moderated from 53.1 in July to 51.1 in June. Q3 average-to-date is at 52.1 which is down on 54.4 for Q2. 

So overall, the data coming out in August is a mixed bag. Comparative to the euro area peers, manufacturing in Ireland is doing as well as can be hoped for. Alas, the rates of economic growth we require to sustain our debt deleveraging are hardly benchmarkable against our peers. And on that side, things are not encouraging. 

Let's wait for Services data next...

3/9/2012: Euro Area PMIs for August

I will be blogging on Irish Manufacturing PMI for August 2012 later today (the headline numbers are encouragingly positive, albeit growth rate has slowed down markedly on July), but here's the summary of Euro area PMIs and growth dynamics from Pictet:

The two charts are confirming the dynamics presented here on the foot of eurocoin leading indicator for growth.

2/9/2012: Gun, no bullets, a charging bear

Via an excellent recent post on the SoberLook, here's a chart showing a Central Bank with no ammunition left to fire at the charging bear:

The chart plots the rapid rise of monetary base in Japan courtesy of BOJ.

And as to the portrait of the bear (via same post):

The above plots Japan's GDP y/y changes. Here's the point - in 20 years between 1995 and 2014 there will be not a single 5 year period in which Japan did not have a recession. Not a single one.

Now, recall that 'we will do everything necessary to rescue euro and, believe me, it will be enough' statement from Mr Draghi... BOJ needless to say tried the same... it has been working marvels for Japan's economy, albeit the yen is still there.

31/8/2012: Eurocoin for August 2012

Euro area leading growth indicator from Banca d'Italia and CEPR has posted eleventh consecutive monthly contraction in August, reaching -0.33 from -0.24 in July. This marks the worst reading for eurocoin since July 2009. 2008-2009 average was -0.31, so the current reading is worse than average for the first wave of the crisis.

A year ago, the indicator stood at +0.22, implying a growth swing of 2.1-2.3% annual.

3moMA indicator is now at -0.25, annual expected rate of decline is at -1.3%.

Charts to illustrate:

31/8/2012: Net, gross, gloss - FDI in Ireland 2011

So CSO headlines today that Irish Net Direct Investment Position improved to €48 billion at the end of 2011. which is fine, until you read actual numbers. Here is the synopsis from CSO itself (emphasis is mine):

"Irish stocks of direct investment abroad fell by €12bn from an end-2010 position of €254.5bn to €242.5bn at the end of 2011. ...The decline between the end of 2010 and end of 2011 was mainly due to a fall in investment of €26bn in enterprises located in Central American Offshore countries. European based enterprises partially offset this decline."

Hence, Factor 1 - explaining most of the €7.2 billion in net position change is drop in investment schemes used by Irish resident companies to wash-off tax liabilities.

Next: "The level of total foreign direct investment into Ireland also fell between the end of 2010 and the end of 2011. The decrease was €19.2bn [massively in excess of net contraction in outward investment from Ireland] giving an end-2011 position of €194.5bn. The main contributors were decreases of €18bn from US and €10bn from Central America partially offset by increased investment of almost €20bn from European countries."

Hence, Factor 2 - FDI into Ireland has actually dropped, gross, by 9% year on year (please keep in mind, irish Government has cited increased FDI into Ireland as one core 'success' metric).


"Comparing the net end-year positions Ireland’s net FDI increased from €40.8bn at the end of 2010 to €48bn at end-2011."

I know I am supposed to be cheerful about the headline CSO produced, but...

31/8/2012: Poor newsflow for Friday

Clearly confidence-instilling newsflow from the euro area today:

"Euro area annual inflation is expected to be 2.6% in August 2012 according to a flash estimate issued by  Eurostat, the statistical office of the European Union. It was 2.4% in July."

ECB is expected to downgrade EZ growth forecasts once again, per this report.

"The euro area (EA17) seasonally-adjusted unemployment rate was 11.3% in July 2012, stable compared with June. It was 10.1% in July 2011. The EU27 unemployment rate was 10.4% in July 2012, also stable compared with June. It was 9.6% in July 2011." So the contagion to EU10 from EA17 is now feeding through.

And a scarier chart on youth unemployment via ZeroHedge:

And two charts to remind you where we are heading:

All of which is pretty much summarized in another blog post on euro area growth, here.

31/8/2012: James Hamilton on oil prices

An insightful (as always) and economically significant points raised in this interview (via OilPrice.com) by Prof. James Hamilton (UCSD and Econbrowser) on oil prices and demand/supply drivers:

• Why we shouldn't get too excited with the shale revolution
• The "Real" cause of high oil prices
• The incredible opportunity presented by natural gas
• Why long term oil prices will creep upwards
• The geopolitical hotspots that could cause an oil price spike
• Why sanctions could cause Iran to lash out
• Why speculators and oil companies are not to blame for high oil prices.
• Changes we can expect to see under a Romney Administration
• Why Short term oil price forecasts are worthless
• Peak oil & Daniel Yergin 

Certainly a worthy read.