16/1/2013: Some charts on US unemployment: Financial Crises v Recessions

Two absolutely fascinating charts showing just how different is the current Great Recession from the previous recessions and how the financial crises disruptions are much longer lasting structural in nature when it comes to unemployment than traditional recessions.

(Source: http://oregoneconomicanalysis.wordpress.com/2012/09/24/checking-in-on-financial-crises-recoveries/ )

First, financial crises:

And now, run-of-the-mill recessions:

And financial crises duration in terms of unemployment levels:

The above charts should really be a wake up call to the European 'leaders' still pretending that the recovery is only a matter of short time stroll through deficits reductions.

Here is a link to an excellent presentation (from April 2012, albeit) by the US Treasury on the crisis responses to-date, showing the complexity and the sheer magnitude of these responses. To anyone familiar with the EU response to the crisis - these amount at best to 1/10th of the scale/scope of the US responses.

Here's a telling comparative:

It is also telling to read the level of realism in the US Treasury's presentation as to the problems remaining in the economy that is virtually unparalleled with the reports from the EU and some National Governments (e.g. Ireland).

15/1/2013: ARRA - some evidence of a US welfare trap

A very interesting paper by Casey Mulligan of UofChicago on the effects of the American Reinvestment and Recovery Act (ARRA) - the act that underpinned early stage stimulus to the US economy and extended unemployment benefits.

In the paper, Mulligan estimates "distributions of marginal labor income tax rates for unemployed household heads and spouses …for three benefit and tax rule scenarios:

1. Actual rules under the ARRA, 
2. "Rules as they would have been if they had not been changed since 2007" (in other words 'no ARRA' scenario), and 
3. "Rules as they might have been with a bigger fiscal stimulus."

Conclusion: "About three million unemployed, with a variety of tax situations, had more disposable income while unemployed than they would have by accepting a job that paid 80-100 percent of their previous one. The number would have been less than one million under 2007 rules, and about eight million under a bigger stimulus."

Thus, per Mulligan, "Tax obligations and foregone unemployment insurance about equally erode the rewards from retaining a job, or starting a new one."

Source: Mulligan, Casey B., The Arra: Some Unpleasant Welfare Arithmetic (December 2012). NBER Working Paper No. w18591. Available at SSRN: http://ssrn.com/abstract=2186320

15/1/2013: Some data and ideas on Russian economy

Russian economy quick summary of some latest stats and some disconnected ideas:

• Q3 2012 real GDP +2.9% y/y down from +4% in Q2 and +4.9% in Q1 2012.
• Expected Q4 2012 GDP growth +2.5%
• November 2012 GDP growth of +1.9% y/y inflation-adjusted
• Q1-Q3 2012 GDP +3.5% y/y
• Q3 2012 consumption +5.1% y/y down from +6.9% in Q2
• Expected full year consumption growth +4% y/y.
• Consumer confidence down to lowest in 18 months (since Q2 2011) in Q4 2012 at -8, Q3 2012 reading was -6.
• Industrial production is up +1.9% y/y in November, manufacturing activity +4%, manufacturing PMI at lowest level in 14 months in December at 50.0
• Services PMI down to 56.1, from 57.1 in November
• Composite PMI at 54.1 - a 4 months low.

Inflation is still a major headache for the Central Bank Rossii, with the level above the target, despite being close to historical lows:

• Headline inflation at 6.6% in December against 6.1% y/y in 2011, making 2012 the second best year in terms of inflation in over 20 years.
• Food inflation is 4.4% for 2012, tobacco up 21.2%. 6% crops failure due to drought in 2012 is taking the blame. Non-food inflation was 5.6% and services inflation at 5.4%.
• Meat and poultry led food inflation (+8.3%), brad and eggs prices up 6.2%.
• Alcoholic beverages prices were up 10.1%

Some consumption trends - food:

• 2012 per capita food consumption (local currency) = +8.7%; forecast compound annual growth rate (CAGR) to 2016 = +10.2%
• 2012 beer volume sales = +2.8%; forecast CAGR to 2016 = +2.9%
• 2012 mass grocery retail sales (local currency) = +24.4%; forecast CAGR to 2016 = +28%

All good news for Irish exporters as food represents a strong component of our exports to Russia (see latest data here).

Central Bank raised inflation target for 2013 from 2012-set 4.5-5.5% for 2013 to 5-6% set on December 29th. 2012 target set in December 2011 was 5-6% range.

Capital outflows remain a problem in 2012:

• 2012 capital outflow stood at $56.8bn - the fourth highest yearly outflow since collapse of the USSR, with $9.4 billion outflows in Q4 2012, up on Q3 outflows of $7.6bn and Q2 outflows of $6.4bn, but down on massive $33.3bn outflows in Q1 2012.
• Net outflows were now recorded every year since 2007.
• Banks recorded an inflow of $23.6bn in 2012, in part pushed up by privatization of Sberbank ($5.2bn)
• Net outflows in non-banking sectors of economy amounted to $80.4bn in 2012.

I do expect moderating capital outflows from Russia in 2013 and still expect strong capex in Russia. Ruble valuations are likely to remain strong despite the Central Bank interventions. At any rate, the CB is likely to moderate interventions in the currency markets as it moves to inflation targeting by 2015 from current FX targets.

On the net, I am still bullish long-term on Russian Government (and corporate) bonds:

• Recent decisions to open rubles-denominated bonds sales to foreign investors via Euroclear Bank and Clearstream International will continue pushing yields down. Renaissance Capital estimated recently that OFZs (ruble-denominated state bonds) yields can fall 50-80bps in 2013
• In 2012, OFZs returned 1.12% against 0.38% for Brazil, 1.36% for India and 0.03% for China.

15/1/2013: Risk Taking Up, Cash Down

In contrast to CFA members cautious optimism (see here), markets bullishness is hitting historical highs:

via @Pawelmorski

And understandably, cash is not the King (see second chart here).

15/1/2013: Ireland-Russia Bilateral Trade: Jan-Oct 2012 data

Some good data on Irish bilateral trade in goods with Russia. A graph and a table to summarise:

Details in CSO release here.

Very robust rise in exports (+17.6% y/y in Jan-Oct 2012) and in trade surplus (+24.6% y/y). Balance in favour of Irish indigenous sectors, with food & drink sector exports exceeding those of medical devices and pharma and chemicals.

15/1/2013: CFA Survey 2013: cautious optimism, equities exuberance?

CFA Institute annual survey of economic conditions was published yesterday and here are some core snapshots (full study available here):

Expectations change in favor of economic expansion:

 Interestingly, continued stronger optimism in EMEA as opposed to APAC, weaker optimism in APAC than in AMER, and EMEA as the core driver for growth expected. Another interesting point, although consistent with path dependency, is continued stronger growth expectations for Advanced economies as opposed to the Developing ones.

Euro area crisis continuation is the largest source of overall risk to global capital markets, at 37%, followed by concerns over economic conditions. CFA Members were divided on their expectations concerning the euro area crisis, with 23% expecting crisis easing, 35% expecting worsening and 42% expecting crisis conditions to remain at the levels of 2012. In other words, 77% expect no improvement in the euro area. An interesting snapshot into both path dependency of forecasts and anchoring of expectations is that most optimistic responses came from worst hit countries: Spain (53% expecting improvement) and Italy (46%), as well as from two countries least impacted: France (43%) and Germany (43%). Least optimistic countries are all outside the euro area: Russia (45%), UAE (41%), the US and Singapore (both at 39%) and S. Africa (38%).

Optimism about local economy expansion went up, slightly, from 42% in 2012 to 45% in 2013.

 The following chart plots the % of members indicating the biggest risk to their own local market in 2013.

And on Asset Class performance, equity seems to be king, as I predicted some time ago on foot of the long term decline in debt and liquidity over-supply globally:

Overall, 50% of respondents expect equities to provide highest total expected return, up on 41% in 2012. Asia Pacific region led in equities outperformance expectations (41% in 2012 on 30% in 2012). Cash saw a significant drop in expectations.

No major surprises then: the balance is between continued and ameliorating crisis, plus liquidity surplus sloshing into equities. The former is yet to play out, the latter has already begun.

14/1/2013: Irish Savings Rates - Q3 2012

Data for Irish Savings rates for Q3 2012 has been released by the CSO (see release here). Instead of rephrasing the release, lets take a look at the underlying data (link to data is provided on page 1 of the release).

First off: household savings and consumption expenditures, seasonally-adjusted:

Per chart above (all in current market prices, so no inflation adjustment, but seasonally-adjusted)

• Disposable income rose in Q3 2012 to EUR23,002 million - up EUR486mln (+2.16%) q/q after expanding EUR385mln (+1.74%) in Q2 2012. This is good news. Year-on-year, income is up EUR1,158mln (+5.30%) and this follows up on EUR823mln increase y/y in Q2 2012 (+3.79%).
• Historical comparatives for total disposable income are also looking good. Average income since Q1 2008 was EUR22,984mln, so we are close to that in the latest figures. We are also ahead 2010 average (EUR22,198mln), 2011 average (EUR21,693mln), but below 2008 average (EUR25,061mln) and 2009 average (EUR23,310mln).
• Final consumption expenditure in Q3 2012 stood at EUR19,319mln up EUR64mln (+0.33%) q/q partially reversing decline of -EUR77mln (-0.40%) q/q in Q2 2012. Year-on-year, consumption spending was up EUR217mln in Q3 2012 (+1.14%) after posting a y/y decline of -EUR165mln (-0.85%) in Q2 2012.
• In longer range averages terms, latest consumption reading is just about at the average level for 2012 (EUR19,302mln), slightly below 2011 average of EUR19,362, and below 2008 average (EUR22,264mln), 2009 average (EUR19,836mln) and 2010 average (EUR19,532mln).
• Gross household savings stood at EUR3,684mln in Q3 2012, up EUR423mln (+12.97%) q/q and this follows EUR463mln rise (+16.55%) in Q2 2012. Year-on-year, household savings rose EUR942mln (+34.35%) in Q3 2012 after posting a EUR988mln (+43.47%) y/y rise in Q2 2012/
• So far, Q1-Q3 2012 average savings run at EUR3,248mln - ahead of all annual averages, save for 2009 when they reached EUR3,475mln.

Saving ratios:

• As the result of the above, the household savings ratio (ratio of gross savings to total disposable income) rose from 14.48% in Q2 2012 to 16.02% in Q3 2012. This represents an increase of 1.53ppt q/q (following a 1.84% rise q/q in Q2) and a y/y rise of 3.46ppt (down from the y/y rise of 4.00% in Q2 2012).
• Longer-term comparatives suggest the return of strong precautionary savings motive (as shown in the chart below). More specifically, adjusting for growth variation in Irish GDP, longer-term savings ratio consistent with economic recovery for Ireland should be in the range of 8.6-11.9%. We are now well above that range. More significantly, even taking shorter period deleveraging pressures in 2008-present crisis, the savings ratio averages at around 14.10%, lower than the current 16.02%. 2012 average savings ratio through Q3 is 14.38% against 2008-2011 average of 11.9%. By all metrics, Q3 2012 looks like a return of the precautionary savings motive for households.

However attractive it might appear to make an argument that savings ratio is too high amongst Irish households, one must consider the fact that our households are:

1. Under immense pressures to deleverage out of extremely high debt ratios (an objective consistent with banks stabilisation objective of the Government and with Troika concerns about debt levels, as well as with the goal of restarting household investment cycle)
2. Household savings = banks deposits and I doubt there is out there a single Irish politician brave enough to suggest we need less of the latter
3. Current act as the main driver for supporting gross national savings from complete and total collapse. Do recall that national savings = national (domestic) investment (ex-FDI). And do recall that in Ireland, SMEs are funded by domestic savings (at least equity, non-debt funding component). Which means that were we to have meaningful investment activity here, we need to encourage and support, not discourage and tax, savings.

On this note, let's take a look at seasonally unadjusted data for aggregate savings in the economy:

The chart above shows clearly that:

• Total savings in the economy declined to EUR7,320mln in Q3 2012 (down EUR559mln or 7.09%) q/q, but rose EUR1,747mln (+31.35%) y/y. In Q2 2012 there was an annual rise of 28.71% or +EUR2,199mln.
• Excluding financial corporations, the real economy's savings fell EUR452mln (-8.05%) q/q in Q3 2012, but a re currently up EUR1,851mln (+55.84%) y/y, against Q2 2012 annual rise of EUR910mln (+19.3%).
• The chart above shows that once we exclude financial corporations, savings actually are running much closer to long-term trend and that the trend is moving up, toward rising savings once again. This upward trend was established around Q1-Q2 2011 and as we shall see shortly is not necessarily signalling a major departure from the long-term established trends (se chart below).

The decomposition of savings into sectors shows that:

• Household savings rose modestly q/q in Q3 2012 (absent seasonal adjustment) and are up significantly y/y (+26.6% in Q3 2012), although that rise was well-matched by 26.0% increase in Q2 2012.
• General Government continued to dis-save (accumulate debt) in Q3 2012, shrinking national savings by EUR2,331mln (more than 9 times the rate of dissaving, as the rate of saving in the households). Year on year, the Government has managed to post EUR423 increase in dissaving (+17.2%).
• Financial Corporations also showed dis-saving in Q3 2012 or EUR107mln compared to Q2 2012 and EUR104mln (4.6%) compared to Q3 2011.
• Non-Financial Corporations posted savings of EUR4,930mln in Q3 2012, up EUR1,606mln (+48.3%) on Q2 2012 and up EUR1,215mln (+32.7%) on Q3 2011. 
• Thus, savings increase in Non-Financial Corporations outpaced savings increase amongst the Households by the factor of almost 6 in quarterly terms and by 1.2 in annual terms. If the Irish Government (and some analysts) are concerned with high savings rates, they are better off targeting companies accounts not household ones. But I doubt they are likely to start calling for a savings tax on MNCs.

Two charts below show long-term trends in savings components by sector. I reproduce two charts to show best-fit models and comparable models.

The charts above very clearly show that since about mid-2005, long term trend in Government savings diverged from those for Non-Financial Corporations and Households. Specifically, National savings became positively dependent on Households and real Companies and negatively impacted by the Government. In other words, current high Household savings rates are a saving grace for the economy that suffers from extreme pressures of Government deleveraging.

The third chart above clearly shows that Households contribution to total savings in the economy counter-moved with Government contributions, supporting the overall savings activity. In fact, correlation between Government savings and Household Savings averaged remarkable -0.91 in the period 2002-present and statistically-indistinguishable -0.89 since Q3 2006 through present. Over the same period of time, correlation between Government savings and Non-Financial Corporations savings runs at slightly lower -0.88 historically and -0.86 since Q3 2006.

14/1/2013: Irish Construction PMI - December 2012

The latest stats for Construction Sector PMI for Ireland are out (link here) and the data is not encouraging. At 43.0, the rate of decline in the sector activity was slightly down in December 2012, compared to November and October 42.6 readings. In fact, the rate of decline was the lowest since May 2012 when the index reading was 46.3. However, despite this, Construction sector activity continued to show uninterrupted contraction for 41 months in a row (the records available to me only go back to August 2009).

Overall sector PMI is currently below12mo MA of 43.84 (2011 average was 44.42, ahead of the 2012 average). PMI in December was ahead of 3mo MA of 42.73, but not statistically significantly so, and ahead of 6mo MA of 42.17.

As shown above, rate of decline has moderated in all 3 core components of the overall index:

• In Housing sub-sector, index finished 2012 on 45.8, an improvement m/m from 44.2 in November and better than 3mo MA (44.47), 6mo MA (42.82) and 12mo MA (42.49).
• In Commercial sub-sector, index ended December at 41.3 - a gain on 39.8 in November, but below 3mo MA (41.73), below 6mo MA (42.65) and below 12mo MA (45.16)
• In Civil Engineering, index rose to 35.2 (still massively below 50 line that would mark zero growth) from 31.1 in November. The index is ahead of 3mo MA (32.33), ahead of 6mo MA (33.42) and below 12mo MA (36.86).

Correlations between different index components are shown below:

Overall, Construction Sector activity is still contracting, albeit contraction rate has moderated somewhat. In December 2011, the index stood at 49.9 (virtually zero growth signal), while in December 2012 it was at 43.0 (clear contraction). Housing subsector registered the only monthly expansion at 52.3 (since 2009) in December 2011, contrasted by an outright decline of 45.8 in December 2012. Commercial subsector activity showed nearly zero growth at 49.8 in December 2011 against an outright and deep contraction of 41.3 in December 2012. And Civil Engineering posted a substantial contraction reading of 37.7 in December 2011, more than matched by an even deeper contraction of 35.2 in December 2012.

13/1/2013: Some good 'news' for Irish Unit Labor Costs

Some good news for a change - on Unit Labour Cost side. You can map data for yourself on OECD page here. But here are some snapshots:

13/1/2013: Decoupling: US v Euro Area 2011-2060

Another interesting chart that speaks volumes about the topic I have been highlighting now since ca 2002-2003. The topic is the concept of 'decoupling' from growth momentum. Back prior to the crisis, European media loved the theory of China (or Emerging Economies, etc) displacing the US as the core drivers of global growth and, ultimately, as the centre of global economic power. At the same time, Brussels 'leaders' were keen stressing the theory of the European Century - the 21st century as the period of revival of Europe.

My reply to that was, and still is, that while the US share of global output is shrinking against rising EMs and BRICS share (S for South Africa) and while this trend is likely to continue into the future, it is the EU (more significantly, the euro area) that is dropping out of the global story by outpacing the decline of the US relative predominance. Much of this born out in the IMF projections. And here is a nice and concise OECD graphic for that:

So between 2011 and 2060 (yes, I know - time horizon very vast and thus forecasts very tentative), the US share of global GDP is expected to drop significantly: from 23% to 16% - a decline of under 38.5%. In the same period, euro area share is expected to shrink from 17% to 9% - a decline of just under 47.1%. Of course, Japan's importance to the global economy is likely to fall even more - by over 57.1%.

All in, the 'decoupling' (and I don't really like this term, because it implies removal of the OECD economies activity out of global activity, which is not happening) will take US, EA17 and Japan share of global output from 47% in 2011 to 28% in 2060 according to the OECD projections. 42.1% of this decline will be accounted for by the EA17, 36.8% by the US and 21.1% by Japan.

I don't think the 21st Century is shaping up to be the Age of the Euro...

13/1/2013: OECD charts the Great Recession

A nice chart from the OECD's latest Economic Outlook ppt presentation comparing recoveries in previous recessions with the current one:

Notice that the 1970s recession looks more like a U-shaped in terms of recovery trajectory, while the 1980s recession shows long-lasting rotated J-shape. Current one is at L-shape so far. Also, note that the 1980s recession did not recover the pre-recession peak activity levels before the subsequent recession hit.

Now, do give some contemplation to the current recession, together with the OECD forecasts for two scenarios: baseline (main forecast) and the scenario of continued euro area crisis:

This pretty well shows the tear-away speed of the US recovery expected in 2013-2014, compared to the euro area and Japan, as well as to the OECD overall. It also shows the degree of the US economy (forecast) resilience vis the euro area crisis.

12/1/2013: House Prices Valuations via The Economist

An interesting table from The Economist (link) on house prices in select countries (H/T to @greentak ):

Note, obviously, Ireland. Not the bits on changes in prices, but the -1% under-valuation on rents side and -5% under-valuation on disposable income side. This is interesting because, in my opinion, the prices currently are in a 'bounce-along-the-bottom' pattern.

Here are some points of thought:

• Usually, house prices over-correct, overshooting the longer-term equilibrium levels. This implies that if we are currently close to the bottoming-out of prices (I am not saying we are), then there is a fundamentals-driven upside of small proportion. 1-5% might be a reasonable range.
• Another feature is the gap in 'under-valuation' between rents-implied and incomes-implied. We have no idea what disposable income The Economist has in mind (GNI? earnings? etc - and these are non-trivial), but we do know they have 'per person' metric. Per person of working age? or children counted in as well? Setting these and other issues aside, the gap between the two is, roughly, reflected in probably two main factors: supply of rentable accommodation relative to demand (which is keeping rents lower, relative to income) and distribution of income (with more potential renters in lower income brackets, while more existent homeowners in higher, implying that renters can't convert into purchasers, while feasible purchasers have no need to go into the market). In other words, the gap is very wide and is significant, in my view, of the tenuous nature of income-based price assessments.
• The 1-5% undervaluation today, on the slope as steep (-49.4% since 2007) is highly unlikely to be the range of reasonable overshooting of the longer-term prices. In other words, if past experiences are a guide, Irish house prices can easily fall another 10% or more even if we consider the above table-listed drivers alone.

Now, as per arguments that these under-valuations are going to drive the market up, just look at Germany. According to The Economist, German house prices have an upside of 17% both on rental valuations and income valuations bases. Good luck, if you expect that to materialise. 

In short, I am not so sure the above table is meaningful in any sense. Nice to see that someone out there thinks Irish housing markets are undervalued, but I am still to be convinced that this is (a) real, and (b) likely to lead to sustained values increases. 

If you are keen to look at some interactive charts on the above data, go here.

And if you are keen on checking out one crazy property market... look here:

12/1/2013: Banks lending to private sector - Nov 2012

For much of the discussion about "Ireland is not [insert a euro 'peripheral' country name here]", here are comparatives in terms of banks lending to private sector in November. Predictably and as mentioned earlier on the blog, our lending is still contracting. On the 'positive' side, it is contracting less in Greece, Spain and Portugal for non-financial corporates, and less than in Greece, but more than in Spain and Portugal for households.

For the sake of my own physical and mental health, I am not going to give you a judgement of what this means. Draw your own conclusions.

Note: I just realised I forgot to link to the source on this.

11/1/2013: Greek Tax Revenues: Bad to Worse aka 2009-2012

And if scary charts from Ireland are not enough for you when it comes to Friday Horror Pics diet, here's one from Greece, via Fabrizio Goria ( @FGoria ):

So things went from poor in 2009 to bad in 2012... but, hey, the worst is over for the euro...

10/1/2013: Heritage Foundation IEF 2013: Ireland

Heritage Foundation issued their annual Index of Economic Freedom.

Here is summary of results for Ireland and you can explore data and comparatives yourself here.

And some charts for regional peer group leaders (Switzerland and Ireland):

 And overall score comparatives:

As usual, my methodological criticism of this analysis is that it relies on GDP, not GNP, which means we get artificially inflated readings on all variables involving National Income. The analysis also omits consideration of indirect taxation burden.

Much of the weakness in individual methodologies can be glimpsed by using heat maps (here) which throw some bizarre results. But do have fun and explore...

8/1/2013: Unemployment in Europe: The Ugly

Euro area unemployment figures for November are out and the ugly, truly abysmally ugly reality of the EA17 economic conditions can no longer be hidden from view:

Per chart above, seven out of EU27 states have overall unemployment rates above 14%. A year ago, there were 5. 19 states had higher unemployment in November 2012 than in November 2011, 2 had identical rate and 6 have seen unemployment levels decline.

Just under 1/4 of all young people in the labour force in EA17 are now unemployed. This doesn't include: students held over in studies beyond their optimal studies duration by the prospect of not having a job, life-long young unemployed, emigrants and 'one-year visa-holders', and in some countries, this also excludes those who are 'engaged' in state training programmes.

In Greece, the rate is at 57.5% and in Spain it is 56.5%. In five out of 27 states, more than 1/3 of all youths in the labour force are now unemployed.

In Ireland - Europe's poster-boy for 'austerity' and recovery - the rate of youth unemployment (and recall that Ireland has the youngest population in the EA17) is now running at 29.7% (down from 30.5% y/y), the 7th highest rate in EU27.

In the 'Social Welfare' haven of Europe, 24.4% of younger people are unemployed. In the US the rate is 15.6%. Virtually every economy - save Germany - has unemployment rates for younger workers in excess of where they were at Euro introduction point.