Thursday, November 6, 2014

6/11/2014: Ifo Survey of Business Climate & Expectations: Euro Area


CES Ifo published their Economic Sentiment Indicators for Euro Area for Q4 2014, showing marked slowdown in the economy on the basis of both current conditions and market expectations 6 months forward.

Here are the details.

Economic Climate Indicator overall has fallen from 118.9 in Q3 2014 to 102.3 in Q4 2014.  This is the lowest reading since Q3 2013 when the index stood at exactly the same level of 102.3.

Present Situation sub-index fell from 128.7 in Q3 2014 to 106.3 in Q4 2014, marking the lowest reading since Q4 2013 when it stood at exactly the same level as in Q4 2014.

Six months forward Expectations sub-index fell from 113.1 in Q3 2014 to 100.0 in Q4 2014, the lowest reading since Q3 2013.

The gap between expectations and present conditions worsened to 94.1 (a reading below 100 means that there is expected deterioration in underlying conditions over the next 6 months compared to current conditions).

The index overall has underestimated the downward momentum in previous quarter.

Chart to illustrate:


As shown above, the European Commission survey of Business Sentiment posted a slight improvement at the end of October, reflected in the Q4 figure to-date. However, we do not have actual projections for full Q4 2014 yet.

6/11/2014: BRIC PMIs: Heading for a Recession...


BRIC PMIs are out for October, signalling sharp drop-off in economic activity across the EMs. Here is the updated data:

Manufacturing:

  • Brazil Manufacturing PMIs slipped deeper into contraction territory for the second consecutive month, dropping from 49.3 in September to 49.1 in October. 3mo average is now at 49.5 compared to 3mo average through July at 49.0. Year on year, 3mo average is down 0.7 points.
  • Russia Manufacturing PMI slipped from 50.4 in September to 50.3 in October, also signalling a slowdown in growth, but not an outright contraction as in the case of Brazil.
  • China Manufacturing PMI improved to 50.4 in October from 50.2 in September. 3mo average through October is now at 50.3, up slightly on 50.0 on 3mo period through July 2014 and almost unchanged on year ago (50.4).
  • India Manufacturing PMI improved from 51.0 in September to 51.6 in October, with 3mo average through October at 51.7, slightly below 51.8 3mo average through July. Year on year 3mo average through October is up very strongly 2.4 points (from 49.2 in August-October 2013).

Overall, Manufacturing activity across BRICs remains highly subdued with India being the only country posting a weak, but positive trend from Q2 2013 on.

Services:

  • Brazil Services PMIs fell sharply into contraction territory, from 51.2 in September to 48.2 in October. 3mo average is now at 49.5 compared to 3mo average through July at 50.6. Year on year, 3mo average is down 1.4 points. This means both sides of Brazil's economy are now in contraction, first time this happened since August 2013.
  • Russia Services PMI contracted sharply from 50.5 in September to 47.4 in October, also posting an outright contraction as in the case of Brazil. 3mo MA is now at 49.4 which is a shallower contraction signal than 48.1 3mo average through July. A year ago, 3mo average was running at 51.9.
  • China Services PMI posted a slowdown in growth to 52.9 in October from 53.5 in September. 3mo average through October is now at 53.5, up on 51.3 for the 3mo period through July 2014 and higher than 52.6 reading a year ago.
  • India Services PMI deteriorated from 51.6 in September to 50.0 in October, with 3mo average through October at 50.7, below 51.3 3mo average through July. Year on year 3mo average through October is up very strongly (from 46.4 in August-October 2013).



Overall: Services activity deteriorated in all BRIC economies, while Manufacturing performance deteriorated in two economies and improved in 2 other.

Summary of both PMIs changes is here:


Using a simple total of two PMIs, we can trace overall trends in the BRIC economies (without weighting these by lagged services v manufacturing shares). The dynamics are striking:


Overall economic conditions across the BRIC economies deteriorated in October compared to September, with Russia leading with a sharp downturn. Downward trend in the BRIC economies has now been in place since January 2013, with Russian economy leading in this dynamic from October 2012.

Note: you can read more detailed analysis of Russian PMIs here: http://trueeconomics.blogspot.ie/2014/11/6112014-russia-pmis-signalling-poor.html

6/11/2014: Russia PMIs: Signalling a Poor Start to Q4


Russia's PMI indices out for October 2014 signal further deterioration in growth conditions at the start of Q4.


  • Manufacturing PMI barely remained above 50.0 line posting a reading of 50.3 in October, down from the already statistically insignificant 50.4 in September. 3mo MA is now at 50.6, still better than 3mo MA through July (49.7) and 3mo MA through October 2013 (50.2), but all of this is down August reading (51.0). The index is trending well below historical average of 51.8. As a reminder, Manufacturing sector has been posting weak PMIs since around March 2013, with sub-50 readings from November 2013 through June 2014.
  • Services PMI fell sharply in October to 47.4 (signalling a sharp contraction) from 50.5 in September. 3mo MA through October is now at 49.4, which signals slower decline in output in the sector than 3mo MA through July (48.5), and stands contrasted by the robust expansion in 3mo through October 2013 (51.9). The index is well below the historical average of 55.7.
  • Composite PMI has fallen below 50.0 line for the first time after 4 consecutive monthly readings above 50.0. October reading is at 49.1, down from 50.9 in September. 3mo MA is at 50.4 against previous 3mo MA at 49.5 and 52.0 a year ago.
Chart below illustrates:

As sanctions against banks and corporates bite, Russian companies are aggressively deleveraging out of foreign-listed and intermediated debt. This is cutting back investment and lending activities across both Manufacturing and Services sides of the economy. The October figures are not reflective of the aggressive hikes in interest rates passed through by the Central Bank of Russia (+1.5% to 9%), so we can expect even further deterioration in activity in November. It now appears that, as expected, Q4 2014 will post negative growth in the economy.

Wednesday, November 5, 2014

5/11/2014: Ireland Manufacturing & Services PMIs: October 2014


With Ireland's Services and Manufacturing PMIs out for October, it is time to update the data set.  As usual, let us start with headline figures:

  • Services PMI reading fell slightly to 61.5 in October from 62.5 in September. 3mo average through October is now at 62.1 which is slightly ahead of 3mo average through July 2014 (61.9). Year on year, 3mo average through October is up 2.6%.
  • All of the above a comfortably 'growth signals' for Services sectors.
  • Manufacturing PMI strengthened from 55.7 in September to 56.6 in October. 3mo average through October is now 1t 56.5 which is up on 55.2 for the 3mo average through July 2014 and is up 3.3% y/y.
  • All of the above suggest strong expansion in Manufacturing, contributing to overall economic growth.
Chart below shows deviations in both indices from 50.0 (so positive readings signal economic activity expansion in the sector). 


Next, consider October readings y/y and on 2012 across both sectors:


The above clearly shows that over the last 12-15 months Irish economy has experienced positive contributions to overall economic growth from both sectors: Services and Manufacturing, with the rates of growth now significantly in excess of historical averages and being led more by Manufacturing than Services ('Current" reading is firmly above the trend line). This can be a positive signal when it comes to employment expectations, assuming growth is concentrated more in the sectors relatively free from rampant tax optimisation by the MNCs (aka outside pharma).

Tuesday, November 4, 2014

4/11/2014: Prosperity Index 2014: Ireland's Reforms Failing to Produce Strong Socio-Economic Results


Today, Prosperity.com (http://www.prosperity.com/#!/) are publishing the 2014 Legatum Prosperity Index which offers cross-countries' comparable data on how economic, social and governance conditions define socio-economic prosperity around the world.

According to the index methodology, "traditionally, a nation’s prosperity has been based solely on macroeconomic indicators such as a country’s income, represented either by GDP or by average income per person (GDP per capita). However, most people would agree that prosperity is more than just the accumulation of material wealth, it is also the joy of everyday life and the prospect of being able to build an even better life in the future. The Prosperity Index is distinctive in that it is the only global measurement of prosperity based on both income and wellbeing."

This post covers my analysis of the Legatum data for Ireland compared to our European peers, covering two peer groups:

  • Advanced and highly competitive small open economies within the euro area, including Austria, Belgium, Netherlands, Luxembourg and Slovak Republic (SOE EA) and
  • Advanced and highly competitive small open economies outside the euro area, including Switzerland, Denmark, Iceland and Norway (SOE ex-EA).
  • Both peer groups are represented by the simple average ranks achieved in 2012-2014 period.


Overall, 2014 Prosperity Index ranks Ireland as 12th most prosperous nation in the world and 8th in the European region (combining 40 countries). This means that Irish rankings remained unchanged on 2013 levels both globally and within Europe. Over 2013-2014, Ireland's rankings deteriorated by 2 place worldwide.

This is an impressive ranking for Ireland placing us 5 ranks ahead of other small open economies in the euro area countries, SOE (EA), but lagging the average ranking of the ex-euro area small open economies (SOE ex-euro) by 7 places. Significantly, while similarly to Ireland's average ranking for SOE (EA) economies has deteriorated over 2012-2014, the average ranking of SOE ex-Euro group has improved. The gap between Ireland's rank in 2014 and the average rank for non-euro area SOE has widened to 7 points compared to 3 points in 2012 and 6 points in 2013.



Very similar dynamics in Ireland's performance are also evident in almost all of the eight sub-categories of the rankings.

While Irish global ranking in the economy sub-category improved from 33rd in 2013 to 29th this year, the latest ranking remains significantly worse than 2012 Index position (25th). For our peers within euro area, average rankings in 2012-2014 were 21st, 28th and 27th, respectively - a slightly better performance than Ireland's. Meanwhile, our peers' average rankings for SOE ex-euro area have consistently improved from 21st in 2012 to 17th in 2013 to 14th in 2014. Despite the officially-registered booming GDP and GNP growth, Ireland still lags behind both the advanced euro area small open economies average and ex-euro area economies average.

The gap between Ireland's rankings (2012-213 at 14th place, 2014 at 16th place worldwide) in Entrepreneurship and Opportunities sub-category and the performance of the ex-euro area SOE group (average rank of 5th in every year between 2012 and 2014) is getting wider. Significantly, after several years of talking up targeted entrepreneurship policies reforms, Ireland is showing deteriorating performance in this sub-index, with our world wide position falling from better than euro area average 14th place in 2013 to 16th (matching the exact average for the SOE euro area economies) in 2014.



Another area targeted by numerous structural policies in recent years is institutional and governance reforms. 2014 Legatum Prosperity Index ranks Ireland 14the in the world in quality of governance - with no change in the rank on 2012 and 2013 levels. Despite much of an effort to clean up and improve Irish institutional systems, our rankings show identical dynamics as that of our euro area peers. Meanwhile, our non-euro area peers' performance has improved from the average 9th rank in 2012 and 2013 to the average 7th rank in 2014. While slightly outperforming the SOE euro area average ranks (16th), Ireland's gap to non-euro area SOEs has widened from 5 places in 2012-2013 to 7 places in 2014.



In terms of core public services, such as health and education, the picture is more mixed. In education sub-category of the 2014 Legatum Prosperity Index, Ireland ranks respectable 8th, which represents an improvement on 2013 and 2012 positions (11th and 14th respectively). Here we outperform our euro are and non-euro area peers, although the gap in favour of Ireland to non-euro area peers group is closing, falling from 5 places in 2013 to 2 places in 2014 rankings. In contrast, in health services, Ireland's performance is rapidly deteriorating in absolute and relative terms. In 2012-2014, our euro area peers average rank stayed stable at 12th. Ditto for our non-euro area peers, whose average rank remains steady at the 9th place worldwide. Ireland's global rankings slipped significantly, from 11th place in 2013 to 15th in 2013 and 17th in 2014. If in 2012 we outperformed our euro area peers' average by 1 place, in 2014 Ireland showed an underperformance relative to this group of 8 ranks.


2014 Legatum Prosperity Index covers three sub-categories of social performance parameters: Personal Freedom, Social Capital, and Safety and Security. In all of these, with exception of Safety and Security sub-category, Ireland's performance has deteriorated over 2012-2014 horizon in absolute terms, and relative to non-euro area small open economies. On a positive side, our performance relative to the euro area peers remains robust.



While Legatum Prosperity Index rankings are not comparable across 2009-2011 and 2012-2014 years, actual index scores offer some indication of our performance in absolute terms in 2014 period compared to 2009-2011. Chart below shows changes in the index and sub-categories in 2014 compared to peak performance in 2009-2011.


All sub-scores that form the overall Prosperity Index are showing poorer performance in 2014 compared to their peak performance in 2009-2011 period. Index scores are reflective of country own performance, as opposed to country ranks which show relative performance compared to other countries covered in the surveys. As the chart above clearly indicates, in all sub-categories of the Legatum Prosperity Index, Ireland performs poorer today than in 2009-2011. Aside from the economic performance deterioration, Ireland's scores suffered significant declines in health, personal freedom, governance and education - all areas targeted by public sector reforms enacted by the current Coalition.

To summarise: while overall rankings for Ireland present a rather positive picture of our socio-economic institutions and environment compared to other euro area small open economies, two major concerns warrant significant attention of our policymakers:

  1. Ireland remains relative under performer compared the non-euro area small open economies with our gap to this peer group average ranks and scores widening in 2014 compared to 2013 and 2012.
  2. Ireland's reforms are not appearing to yield positive returns compared to 2009-2011 performance across all sub-categories of the index.

Reforms, including structural reforms, enacted from 2012 to-date have broadly failed to significantly alter the our socio-economic competitiveness compared to our core peers.

Saturday, November 1, 2014

1/11/2014: Expresso on Russian Ruble


My comment from earlier this week on Russian Ruble fate for Portugal's Expresso:
http://expresso.sapo.pt/rublo-afunda-se-face-ao-euro=f895605

In basic terms - there is too much ignoring of the underlying structural weaknesses in the Russian economy (in my view accounting for roughly 1/2 of Ruble devaluation) and too much focus on the shorter-term effects of the geopolitical crisis in Ukraine.

1/11/2014: IAE Raises Concerns with Irish Energy Policy Framework


Here is an interesting study published by the Irish Academy of Engineering in response to the Government Green Paper on energy: http://www.iae.ie/publications/publication/iae-response-to-green-paper-on-energy/.

To put matters into context IAE notes elsewhere that:

  • Since 2007 energy prices in Ireland have risen by 29% in real terms compared with an  average rise of 20% in OECD countries.
  • Between 2010 and 2013 Ireland’s electricity and gas prices rose between 5% and 15% more than the EU-28 average.
  • Household electricity prices have increased by approximately 30% in the last 3 years.
  • Household electricity prices in the Republic are 33% higher than in the UK. Industrial electricity prices are ca 12% higher than the UK and the EU-28 average (ex VAT)

According to IAE, at least in part, the above price distortions are accounted for by the wind generation policies.

Summarising the above document, IAE said that "Continuing with the existing policy and related conditions is likely to have adverse economic consequences. Commitments entered into in 2007 relating to the amount of renewable generation on the Republic’s electricity system ...could lead to the addition during the next decade of more than 3,000MW of Windpower onto a system that has already excess capacity.  Approximately 1,000MW of existing gas or coal fired power plants would be displaced with the following consequences:

  • At current price differentials it would add €200 million to the annual cost of electricity.
  • It would involve additional capital expenditure of between €1 - €2 billion to integrate this level of Windpower into the grid. (The entire Exchequer capital program for 2014 is €3.3 billion)."

I am not an energy or environmental economist to make an in-depth observations on technology and its economic efficiency, but it is clear that Irish energy policies to-date

  1. Have been actively focused on renewables generation at the expense of consumers; and
  2. Resulted in one of the most expensive energy generation and supply systems in the advanced world.
All of which suggests that our continued pursuit of increasing wind generation investments should be put to a rigorous and public scrutiny.

1/11/2014: Few Signs of Fiscal Reforms in Europe


My article on Euro area Government debt levels - the lack of any moderation in thereof - is out: http://www.compasscayman.com/cfr/2014/10/31/Few-signs-of-fiscal-reform/

Friday, October 31, 2014

31/10/2014: Eurocoin Falls Again in October


Meanwhile, in the vastly-repaired, improvingly-coordinated, enhancely-harmonised Euro area, leading growth indicator, Eurocoin (published by Banca d'Italia and CEPR) posted another (4th consecutive monthly decline in October, falling from massively anaemic 0.13 in September to even more anaemic 0.08 in October.


The projected underlying GDP growth rate is now back at zero, having posted a 'recovery' to 0.1% in Q3 2014.

And the ECB is now even more stuck in the proverbial dark corner of near-deflation, zero growth and zero interest rates:


The drivers to the downside?

Industrial production is down across all Big 4 economies:

Business Confidence is down everywhere, save in Spain:

Consumer surveys down in performance terms everywhere and below zero on balance in France and Italy:

With stock markets performance markedly deteriorating, this means the only previous consistent support for 'growth forecasts' is also gone:

And the 'exports-led' recovery is just... err... shall we say 'fizzled out'?

But keep reminding yourselves, this is a 'European Century'...