Wednesday, October 1, 2014

1/10/2014: Irish Manufacturing PMI: September


Irish Manufacturing PMI released by Investec/Markit today signalled de-acceleration of growth in September.

  • Headline Manufacturing PMI declined from 57.3 in August to 55.7 in September. The reading is still ahead of July 55.4 and remains statistically significant above 50.

September correction does not represent a shift in the trend, which remains solidly up:

  • 12mo MA is at 54.7 and September reading is ahead of that. Current 3mo MA is at 56.1 and well ahed of previous 3mo MA of 55.5. 3mo MA through September is solidly ahead of the same period readings in 2010-2013.
Investec release provides some comments on the underlying series sub-trends, but I am not inclined to entertain what is not backed by reported numbers.

On the balance, it appears that Manufacturing sector retain core strengths and that expansion continues. This marks thirteenth consecutive month of PMI readings above 50 (statistically significant) and 16th consecutive month of PMI reading above 50 (notional).

Tuesday, September 30, 2014

30/9/2014: Have Irish Retail Sales 'regained growth momentum' in August?


Yesterday, CSO released latest data on Retail Sales in Ireland for August 2014, prompting some media reports that the data is showing the "retail recovery gaining momentum".

Here is the actual data for core retail sales (ex-motors):

  • Value of retail sales rose 0.1% m/m in August, down from 0.2% growth in July. This implies loss of the momentum in value of sales, not a gain.
  • Volume of retail sales rose 0.29% m/m in August, up on -0.1 loss in July, implying regaining of the momentum m/m in volume of sales.
  • Value of retail sales rose 2.22% y/y in August after posting 1.22% gain in July, implying some improved momentum y/y.
  • Volume of retail sales rose 3.64% y/y in August after posting a rise of 3.21% in July, again implying some improved momentum y/y.
  • 3mo average through August 2014 rose 1.9% for value of sales compared to the same period a year ago and 3.6% for volume of sales. Both rates of growth were lower than those recorded for the 3mo period through May 2014, representing a slowdown in the momentum, not a gain.
All of the above evidence suggests that retail sales are bouncing along the established trend and are not consistent with a claim that there has been sustained gains in retail recovery in August. Charts below illustrate this conclusion:


Chart above shows that Volume of retail sales index is trending along with established long-term trend. A gain in momentum would imply the index pushing steeper up relative to trend. Value of sales index is now running at a flatter upward momentum than long term trend implies. This supports the view that retail sales recovery has lost recovery momentum (but did not lose recovery overall) in Value terms and is running at zero change to the momentum (which is still positive) in Volume terms.



The conclusion above is confirmed by looking at /y/y growth rates in both series: since April 2014 jump in retail sales, both Volume and Value growth rates have fallen. Value growth has continued to trend down after May and Volume growth trended down from June.

Once again, we have positive growth in the series, but the momentum in this growth is either zero or negative, certainly not positive.

Monday, September 29, 2014

29/9/2014: Russian Economy Briefing for IRBA

Earlier today I gave a brief presentation on the topic of the Recent Developments in Russian Economy. Here are my speaking notes:


Economic growth in Russia was running at +0.8% y/y in Q2 2014 versus 0.9% y/y in Q1 2014.

At the same time, GDP shrank 0.2% y/y in July 2014 and 0% y/y in August 2014.

Taken against the consensus forecast for growth at 0.5% for the full year 2014, this suggests geo-political risks-induced slowdown in the economy of some 0.3-0.4% to-date.

Russia's economic outlook for 2014 and 2015-2015 continues to trend down, driven by two core factors:
  1. Geopolitical risks of the Ukrainian conflict, and
  2. Structural weaknesses in the economy.

The first factor is responsible for the expected actual output growth falling below down-trending potential output growth in 2014 and 2015.

The second factor is driving down potential output growth in 2015-2016 and beyond.


How dramatic were the growth forecasts revisions so far?

Take IMF: IMF is about to publish its October World Economic Outlook forecasts revisions.

In October 2013, IMF forecast real GDP growth in Russia to run at 3.0% in 2014, 3.5% in 2015 and 3.5% in 2016. So 3.5% average over 2015-2016.

In April 2014, IMF forecasts were running at 1.33% in 2014, 2.3% in 2015 and 2.5% in 2016, respectively. 2015-2016 average of 2.4% down 1.1 ppt on previous.

We have no forecasts for October, yet, but consider IMF's 'twin' organisation, the World Bank. The WB expect growth of around 0.5% pa on average over 2014-2016, broken down into 0.5% in 2014, 0.3% in 2015 and 0.4% in 2016. Average growth of just 0.35% in 2015-2016 down massive 3.15 ppt on a year ago!

Russian Government official forecasts are for growth of 0.5% in 2014, 1.2% in 2015 and 2% in 2016, so average 2015-2016 growth of 1.6% or 1.25 ppt above World Bank forecasts.

Taken against CIS growth rates, the official sector revisions suggest that about 1/2 of the total downside in growth expectations is down to Ukrainian crisis and the rest are structural.

Based on World Bank forecasts, slowdown in domestic investment and consumption will be the main drag on the structural side of growth.

Private sector analysts forecasts are even worse than those from the IMF and the World Bank. For example, Danske forecast for GDP growth is -0.3% in 2014, -1.9% in 2015 and +0.5% in 2016. These are driven by expected private consumption growth going from 1.2% in 2014 to -2.2% in 2015 and rising to +2.2% in 2016, Fixed investment falling 3.7% in 2014, 3% in 2015 and growing by only 0.3% in 2016.

Morgan Stanley cut its 2014 forecast for Russian economy from +0.8% growth to -1.5% recession earlier this month.

BOFIT forecast estimates growth of 0% in 2014, +0.5% in 2015 and +1.7% in 2016, or an average rate of growth of 1.1% in 2015-2016. These are more in line with official forecasts and are less gloomy than World Bank outlook and Danske outlook. I tend to err on their side, although my expectation is that 2015 growth will be above 0.5% and 2016 will be slightly shy of 1.7%, but the average of 1-1.1% for 2015-2016 looks about right, assuming no major rapid changes to the Ukrainian situation.

All in, there is huge uncertainty as to what we can expect from the Russian economy in 2015-2016.


The slowdown in investment is driven by a number of factors, such as:
  1. Capital outflows and high interest rates (in part related to the Ukrainian crisis, but also linked to stubbornly high inflation and the Central Bank move to free floating ruble). Policy interest rates currently stand at 8% and are expected to rise to 8.5% by the end of 2014-beginning of 2015. Currently, EUR/RUB exchange rate is at 50.22 and 12month forward contracts imply the rate of 53.65, while USD/Ruble rate is at 38.8 currently and 12 months forward markets pricing implies the rate of 41.18. Much of this is down to the expected revaluation of the dollar and the strong euro vis-a-vis majority of the emerging markets currencies. But some is down to expected structural weaknesses in the Russian economy. Weaker ruble implying higher cost of imported capital goods and technology.
  2. Weaknesses in the banking sector (exacerbated by the impact on the banks' access to global funding markets arising from Western sanctions) relate to continued sector consolidations (Central Bank has shut down more banks in 2014 so far than in 2010-2011 combined) and sector deleveraging (with credit supply growth falling dramatically over the last 12 months).
  3. Tight fiscal policy: Russia's draft federal budget approved by the cabinet on September 18, upholds the budget rule adopted in 2012 that says the deficit may not exceed 1% of GDP. Spending composition changed to allow higher allocations to defence and national security, as well as to boost certain sectors of the economy. Much of the spending in the latter will go to building new production or expand existing capacity to substitute for imports, especially in the defence and agriculture sectors. The measures are part of Russia’s new emphasis on economic self-sufficiency. New funding was allocated also to Crimea and the Far East region development, and to large infrastructure projects such as Moscow’s new ring road. Per BOFIT: “The government sees giant state-funded infrastructure projects as a way to revive economic growth”. But big infrastructure investments are not identical in terms of their future productive capacity as business investment in new technology and capital goods. As Brazil example shows, infrastructure uplifts based on public funding are virtually one-shot game when it comes to funding growth.


On the budgetary policy side:
  • The Government refrained from new tax hikes and shelved the proposal for sales-tax. VAT remained unchanged at 18%. This is a major net positive for domestic demand.
  • Another positive on domestic demand side, but presenting new risks on long term macroeconomic sustainability front, the new budget includes decision to raise revenue by transferring federal budget pensions contributions for 2015 into general budget, same as in 2014. Under 2002 pensions reform, Russian pension system moved from pure pay-as-you-go system to partially funded system. Under the 2002 reformed system, a share of pensions contributions collected by the federal authorities went to fund current pensions obligations, while the balance was invested in long-term instruments to help fund future pensions provisions. Since 2014 and now into 2015, the second part of contributions will be diverted to general budget.

As mentioned above, Russia is moving toward a greater degree of economic self-sufficiency in two key areas: defense industry and agriculture. While the former is likely to be a drag on general investment, the latter presents opportunities for Irish exporters and is likely to lead to some economic grains in Russia.

Russian agriculture is in a desperate need of investment. I wrote about this on my blog http://trueeconomics.blogspot.ie/2014/09/892014-russias-agrifood-sector-in-need.html on September 8th - a post that I shared with you on the IRBA Linkedin page. To summarise my findings, modernisation of Russian agriculture and food sectors will require annual investments in the region of USD10.7-11.7 billion per annum. Agriculture Ministry requested a 50% increase in annual farm subsidies from EUR4.2 billion in 2014 to EUR6.3 billion in 2015.

These investments will have to cover:
  • -       Agricultural production, especially in dairy, fisheries, beef and fruit and vegetables sectors, including staples, like potatoes;
  • Supply Chain Management and Logistics, especially in storage and transportation relating to fruit and vegetables sectors;
  • Food processing sectors, especially relating to dairy and fishing sub-sectors.

Increasing Russia’s agricultural output will take significant time, somewhere across 2-6 years, depending on a sector (http://trueeconomicslr.blogspot.ie/2014/08/2782014-russian-economy-outlook.html).

We can expect significant uplift in investment support schemes in beef and poultry sectors, as well as in pork production. So far, draft 2015 Budget provides only 20% of the funds requested for this purpose. The hope is that the bumper crop of cereals this year is going to provide off-setting breathing space for investment: Russia expects grains harvest in 2014 to hit 104-106 million tons, just shy of the all-time record of 108 million tons achieved in 2008 and well above the 84 million tons average for the last 10 years.

Overall, most acute risks to the Russian economy are geopolitical, with sanctions escalation on September 12-18th resulting in more severe pressures on the banks for funding, as well as increased pressure on oil producers. So far, the sanctions war has been escalating despite the ceasefire in Ukraine holding and this suggests that we cannot expect lifting of the sanctions before the end of 2014 even under the most optimistic scenarios.

Credit supply from euro and dollar funding has fallen to zero for all Russian companies in July 2014.

The second immediate risk is that of declines in oil prices. Russian economy is more sensitive to changes in oil prices than to gas prices and the fact that oil is currently down some 16% on its June 2014 highs and is trading closer to USD95-96/bbl presents a major threat to the economy. Should oil prices fall below USD90/bbl, federal budget will require major tightening to keep the Government within targeted 1% deficit rule.

The third risk is to the investment side from the monetary policy: stubbornly rising and high CPI - currently running at around 7.9% against CBR and Government targets of 5.5-6%, and devaluation of the ruble, plus rapid outflows of capital from Russia - all are implying future potential tightening of interest rates policy. This, if it were to pass, will push even further down the already poor investment performance.

On the positive side, even with sanctions tightening, we are seeing some recovery in producer and consumer confidence, as signaled by PMIs and consumer surveys. But the recovery is fragile and uncertain in terms of future prospects. We need to see confirmation of the stronger PMIs trend in September figures, due to be released this week.

If we are to look at the demand side for exporters into Russian markets, things are tough. Russian imports have already fallen in 2014, driven by depreciation of the ruble more than by anything else. Imports declines contributed +6.5% to Russian GDP growth in 2009, but rebounded relatively strongly in 2010 and 2011, erasing the 2009 contraction. Imports shrinkage is likely to contribute some 1% to GDP growth in 2014, 0% to 2015 growth and -0.3% in 2015, so expected rebound to the current imports drop is likely to be less swift and longer-drawn out.

Surprisingly, imports slowdown and sanctions did not hurt, to-date, bilateral trade in goods between Russia and Ireland. In the first seven months of 2014, compared to the same period of 2013, Irish exports to Russia rose from EUR397 million to EUR509 million - an uplift of 28% y/y. Our trade balance in goods with Russia improved from a surplus of EUR301 million in January-July 2013 to a surplus of EUR353 million in January-July 2014. If in 2013 exports to Russia accounted for 3.67% of our goods exports ex-EU and USA, in 2014 so far it is accounting for 4.31% of our goods exports ex-EU and USA.

Keep in mind: in national accounts, net trade (trade balance) is what counts as additive to national income and GDP. In these terms, for the first 7 months of 2014, our surplus vis-a-vis Russia (at EUR353 million) is much more to our GDP and GNP than our trade deficit with China of EUR478 million.

While we do not have detailed breakdown of July trade flows, comparing H1 2014 against H1 2013, noticeable increases in Irish exports to Russia were recorded in:
  • Coffee, tea, cocoa, spices and manufactures thereof
  • Miscellaneous edible products and preparations
  • Essential oils; perfume materials; toilet and cleansing preps
  • Chemical materials and products nes
  • Photographic apparatus; optical goods; watches and clocks
  • Miscellaneous manufactured articles 

Noticeable decreases were recorded in:
  • Live animals
  • Meat and meat preparations
  • Metalliferous ores and metal scrap
  • Organic chemicals
  • Medical and pharmaceutical products
  • Office machines and automatic data processing machines

Opportunity space for Irish exporters in Russia remains wide open in areas not impacted by sanctions, e.g. outside immediate supply of some food and agricultural products. And new opportunities should open up in the areas relating to agricultural production, food processing, storage and transportation. In addition, there is renewed scope for investment in Russia in the above areas and in areas relating to technological innovation and modernisation in a wide range of sectors.

However, to facilitate this, it would be positive if Russian authorities were to accelerate policy efforts directed at attracting foreign investors into the country, especially in areas linked to investor protection and regulatory and tax facilitation. There is also a need for assuring investors that ruble valuations are going to become less erratic and the global rates divergence is not going to precipitate dramatic further drops in currency values. Key here is Euro/Ruble pair, rather than Dollar/Ruble one. Access to trade finance and insurance are also a major bottleneck.

While over the next 1-2 years we can expect more uncertainty and risks to materialise, including the risk of significant further devaluation of the ruble valuation, taking a longer-term horizon of 5-10 years, these factors are likely to be replaced by more positive growth momentum and improved returns on foreign investment.

Sunday, September 28, 2014

28/9/2014: Political Risks and MENA Equities Valuations


A quick and accessible writeup on our (still work-in-progress) paper on "Political Risks and Financial Markets: MENA perspective" that uses data from Euromoney Country Risk surveys: http://blog.learnsignal.com/2014/09/26/political-risk-financial-markets/


28/9/2014: Euro area banks deposits: no sign of significant improvements


Courtesy of @cigolo - a nice chart summing up trends in deposits in Euro area banks from 2009 through Q2 2014:


Italy and Slovenia are two countries that managed to raise the deposit levels in their banking system from Q1 2009. Portugal suffered a decline in deposits off the peak, but stayed above 2009 levels. In every other country sampled, deposits fell from 2009 levels. Note: Ireland too suffered a decline in deposits and in fact, once we control for the reclassifications in deposits, the decline has been more dramatic than the one depicted in the chart (see details here: http://trueeconomics.blogspot.ie/2014/09/2792014-growth-just-not-in-irish.html).

Since the Cypriot bailout, and the introduction of bail-in clause for depositors, Euro area banks deposits stayed basically flat in Italy (with slight decline in trend) and Greece, rose in Slovenia, posted a shallow increase in Portugal, declined in Ireland and Spain, collapsed further in Cyprus. While there was no immediately obvious common trend, deposits pre-Cypriot bailout trend was disrupted or failed to improve in Italy, Slovenia, Cyprus, Portugal, Ireland, Spain and Greece despite numerous efforts to shore up the fallout from the bail-ins under the new systems set up for the European Banking Union.

So much for reformed banking sectors, then. Remember that funding in European banks should be shifting toward more reliance on 'organic' sources, e.g. deposits, than on interbank lending. We are yet to see this happening on any appreciable scale across the 'peripheral' economies.

Saturday, September 27, 2014

27/9/2014: Growth... just not in Irish deposits...


Here's an interesting question: when economy grows, what happens with the household deposits? The right answer is: it depends on a couple of factors:

  1. How long has economy been growing: if we have growth over a month or two, one can safely assume that households are using up cash to cover their short term debts accumulated over the course of the downturn. Indeed, Irish debts have been shrinking, not growing over the downturn - on aggregate - and growth has been ongoing for a long time now, at least in official accounts.
  2. What type of growth we are seeing: if economy grows outside the household sector, e.g. via corporate profits that do not 'trickle down' into the real economy in higher wages, etc, then deposits will not follow growth, although this effect too should be short-lived.
So what happened so far with irish households? Here's a chart:


Since Q1 2011, when the current Government came to office and promptly declared yet another economic turnaround miracle, Irish household deposits are down EUR2.08 billion or 2.23%. Worse, household deposits have been running at a flat trend since mid-2011. 

Total private sector (excluding financial firms) deposits are currently only EUR1.289 billion ahead of Q1 2011 average - a miserly increase of just 1.13%. Given Irish firms and households are still pretty much abstaining from investing in the economy, this shows the current recovery to be almost entirely concentrated in the sectors that ship profits out of Ireland with the balance of domestic growth being fully consumed by the debt servicing and repayments. 

Ah, and do note that any talk about 'rising deposits' in Irish banks that we occasionally hear from our politicians is down to one thing: inclusion of the credit unions' deposits into Central Bank statistics. As shown above, absent that, deposits still remain near crisis-period lows: household deposits today are only 1.1% above their crisis period lows, while non-financial corporates deposits are 1.22% above their crisis period lows. And as of July 2014, Irish household deposits fell in 3 months in a row. Just as growth 'accelerated'. 

Friday, September 26, 2014

26/9/2014: BBC covering Irish Fintech sector


BBC cover of Irish fintech sector successes: http://www.bbc.com/news/business-29365484 with comments from a number of people, including myself.

Related: my speech at the Enterprise Ireland annual conference this week: http://trueeconomics.blogspot.ie/2014/09/2392014-ei-conference-domestically.html

26/9/2014: Some recent links on tax inversions


Some interesting recent articles on tax inversions and Irish role as a tax-conduit to tax havens:

US Treasury new rules tightening tax inversions: http://www.treasury.gov/press-center/press-releases/Pages/jl2645.aspx

And Irish reaction to these: http://businessetc.thejournal.ie/us-tax-inversions-ireland-1685263-Sep2014/?utm_source=twitter_self and here: http://www.irishtimes.com/business/economy/us-launches-crackdown-on-overseas-tax-avoidance-1.1938583

While markets broader impact here: http://www.reuters.com/article/2014/09/23/us-usa-tax-inversion-idUSKCN0HI1WK20140923?feedType=RSS&feedName=topNews&utm_source=twitter

Here is a more detailed discussion of the net impact of the new rules, mentioning so-called 'Levin solution' http://fortune.com/2014/09/24/the-treasurys-chicken-soup-take-on-tax-inversions/

And an earlier article from Arthur Cox solicitors on the benefits of inversions into Ireland and associated restrictions: http://www.arthurcox.com/wp-content/uploads/2014/07/April2014_SpotlightOn.pdf Hilariously, the above quotes: "Ireland is a popular country for inversions because of its favorable tax regime and extensive tax treaty network."

And an official response from Ireland to US tightening is 'not our problem': http://www.irishtimes.com/business/economy/kenny-defends-us-firms-irish-presence-1.1939192#.VCKA645RJ3A.twitter

You can track previous articles and posts on Ireland's role in global tax optimisation by searching this blog for "corporate tax". 


26/9/2014: FT on Land Value Taxes

26/9/2014: 'Cartoon Economics'? You bet...


Priceless is the best way to describe financial instrumentation antics of Irish Government.

The IMF loan early 'repayment' is really a re-financing. It has its good sides and no one argues it shouldn't be done (see here: http://trueeconomics.blogspot.ie/2014/09/992014-imf-loans-deal-can-be-win-win.html) but 'repayment' this is not.

Still more of the bizarre machinations were publicised today in an Irish Times piece: http://www.irishtimes.com/business/economy/move-on-anglo-debt-set-to-boost-exchequer-earnings-1.1942119#.VCUUnz_O6bw.twitter. The idea is that those Anglo/INBS/IBRC 'shut down' bonds that are being held in the Central Bank (with interest on them payable to the CB and thus recycled back to the State, implying zero cost financing of the bonds) can be sold at a rate faster than that required by the original schedule. Which, of course, means two things:

  1. Selling these bonds today is likely to generate a capital gains return to the Exchequer, as Irish bonds are currently trading at lower yields than when issued, which means that the Government can sell these bonds and pocket the price difference over par.
  2. But,... the proverbial but, once sold, the bonds ill be paying declared coupon (interest payments) of Euribor + 263 bps to their new holders, and not to the Central Bank. Which means that new interest payments will be an addition to the already hefty interest bill of the Government. What used to be 'free funding' prior to sale will become 'Euribor+263bps' funding after. 
There is an added caveat to all of this. If the Government spends the capital gains on anything other than reduction of debt, interest costs under above pricing become net costs. In effect, we will be funding a quick-fix-drug addiction with a credit card.

Back in 2013, after the Promo Notes deal, myself and others have cautioned as to the risks associated with accelerated sales of bonds. And now this risk is upon us. And beyond all of this looms the largest question of them all: These bonds were issued to cover Irish Government liability to the ECB (Eurosystem) arising from the nationalisation of Anglo and INBS (not nationalisation, per se, but from our state assuming all liabilities of the two failed banks and refusing to burn their bondholders). So, as we all know, Ireland 'took one on the chin' for Europe. 

A symmetric response from the ECB would have been to allow us hold these bonds in perpetuity, so no repayments need to be made at all. Instead, we created these bonds with an intent of selling every year a bit of this debt into the markets to generate cash to close the liability to the ECB (in other words, to raise money to burn money to appease ECB balancesheet exercise). This 'burning' of money means two things:
  1. ECB gets accounting 'cancelation' of liability which has zero material impact on the Eurosystem regardless of whether it remains open or is closed; and
  2. Irish taxpayers have to fund the debt sold - which means more real pain and suffering for taxpayers and people of Ireland.
With the new move, we are going to accelerate (1) and (2) above and the Irish Times is cheerleading this?! 

The Irish Times misses all of the above points in its article. But one man doesn't: Diarmuid O'Flynn:


As he said, this is 'cartoon economics'...

26/9/2014: Those Fabled Euro Area Structural Reforms: Greece, Spain, Portugal & Italy

EU Commission has published some interesting research on structural reforms in Italy, Spain, Portugal and Greece (strangely, no Ireland or Cyprus).

The full paper is available here: http://ec.europa.eu/economy_finance/publications/european_economy/2014/pdf/ee5_en.pdf

But here is an interesting set of charts, showing the effect of the said 'reforms' on the economies of these 'peripheral' states.

First chart shows employment growth against productivity growth in 2001-2008 and 2008-2013:

Above clearly shows that in two 'peripheral' countries covered, namely Portugal and Spain, productivity (as measured by value added per hour worked) rose during the crisis period, while the same fell in Greece and Italy. Productivity growth accelerated over the crisis period in Portugal and Spain and de-accelerated in Italy and literally fell off the cliff in Greece. And in all four economies, hours worked collapsed.

This all means two things:

  • Firstly, jobs destruction failed to sustain growth in productivity in Italy and Greece (in other words, the two economies suffered jobs losses dispersed across all sectors of activity), while jobs destruction did sustain improved productivity for the remaining active workforce in Spain and Portugal (where jobs destruction was more concentrated in several domestic sectors, such as retail and construction). 
  • Secondly, given that all four economies developed broadly similar 'structural reforms' packages, albeit with varying degree of implementation, the above suggests that the said reforms had zero-to-negative effect on economic performance in Italy and Greece, and potentially positive effect in Spain and Portugal. This is basically equivalent to saying that reforms overall effectiveness is not anchored in the structure of reforms, but is rather being driven by something else, something more idiosyncratic. Or, alternatively, that the reforms had no discernible effect whatsoever and instead nature of jobs destruction is driving differences in productivity growth.


The second chart shows annual trajectory in hours worked against productivity growth from 2008 through 2013.

Again, the above chart shows that in all four economies, relationship between productivity growth and employment is broadly negative. The diagonal line shows two segments of the chart: above the line, jobs destruction / creation effects are dominated by productivity growth effects. Below the line, the opposite takes place. So in a summary, the chart shows that the dominant driver in every economy as jobs destruction, not productivity growth. If structural reforms are of any significant help in driving productivity of workers, one would expect at least one of the economies to perform above the diagonal line. None do.

Quite surprisingly (or may be not) EU Commission offers an entirely opposite arguments on reforms efficacy. Even in the case of Greece - a country where both employment and productivity collapsed, the Commission paper argues that "Greece made a substantial adjustment in terms of employment while productivity stopped falling down". The folks in Commission believe that once the economy is completely exhausted on the downside, the lack of further declines is a sign of 'reforms-driven improvements'. This is about as crazy as cheering the fact that a lifeless body at the bottom of the empty pool is no longer falling.

Here is the Commission own guide to the above charts:


Do tell me which of the four countries locates in 'jobless growth' (early stage of reforms and structural changes working) area? Do note that other area of "Repositioning (growth less restructuring)" - which sounds exactly what it is: mindless demolition of jobs in hope that such a move can improve the remaining average. This is the best the 'periphery' has been able to achieve so far under the watchful eye of the EU Commission boffins.

26/9/2014: Eurocoin Signals Accelerating Fall in Economic Activity


Eurocoin, euro area leading growth indicator compiled by Banca d'Italia and CEPR has fallen again in September, indicating further slowdown in growth conditions:

  • In August 2014 Eurocoin indicator stood at 0.19. In September, the indicator fell to 0.13 - its lowest reading in 12 months.
  • Growth forecast consistent with current readings for Q3 2014 are in line with y/y euro area GDP growth of 0% (range between +0.1% and -0.1%).


As usual, updating my ECB Monetary Policy Dilemma chart:


The above shows the proverbial 'growth corner' for ECB: historically low interest rates and virtually zero growth signalled by the leading indicator.

Annualised growth rates are abysmal:


Per release: the latest decline reflects continued losses in consumer and business confidence, slowdown in exports and weakening of industrial production conditions. Those tracking my analysis for previous months would note that in the past Eurocoin was supported to the upside primarily by equity markets valuations. As predicted, these effects are now becoming exhausted and as the result we are witnessing rapid declines in the leading indicator.