8/4/15: Ruble's Gains Are Convincing, But Risks Remain

Three charts:

Russian car sales

Source: @moved_average 

Down 42.5% y/y in March (estimated 43% decline).

Ruble v Dollar is going up and up:

Source: @Schuldensuehner 

Ruble v Euro is also up and up...

Source: @Schuldensuehner 


Linking all three? The myth of Ruble liquidity squeeze (e.g. here and here). Reality: sharp drop in imports, slight improvement in oil prices (and more importantly stabilisation of the trend to the upside) and improving conditions in the domestic banking sector are all driving ruble value up.

Another strong contributing factor is timing of external debt redemptions:

Source: https://www.tradingfloor.com/posts/pop-goes-the-rouble-4296859

These are now past their 2015 peaks.

All positive, but uncertainty remains and is still extremely high, so I would not be surprised if ruble starts posting some losses in and around the end of Q2.

8/4/15: Irish Quarterly PMIs: Services, Manufacturing & Construction

Given we now have data for PMIs for Ireland (via Markit and Investec) through March (see analysis of Manufacturing PMI here and Services PMI here), let's update quarterly PMI averages and compute my own 'composite' indicator based on 3 core sectors: Manufacturing, Construction and Services. Note: Construction sector PMIs are computed on the basis of january-February data as there are lags of 2 weeks in reporting these by Markit.

Manufacturing PMI for Q1 2015 stood at 56.5, down from 56.6 in Q4 2014. Thus, Q/Q the PMI is down 0.18%. In Q4 2014 Manufacturing PMI was up 0.77% Q/Q. So we have a slowdown in growth, but growth nonetheless.  The same holds for yearly comparatives. Q1 2015 was up 5.1% y/y, after posting 5.5% growth in Q4 2014 and 8.2% growth in Q3 2014. The series are trending above 50.0 for the 7th quarter in a row.

Services PMI fell from 61.9 in Q4 2014 to 61.6 in Q1 2015, down 0.5% Q/Q, having posted a decline of 0.3% q/q in Q4 2014. Yearly growth rates also slowed down: in Q3 2014 y/y growth in Services PMI was 5.8%, this fell to 3.7% in Q4 2014 and to 2.8% in Q1 2015. Still, we now have 17 consecutive quarters of growth in Services as recorded by PMIs in excess of 50.0.

Construction PMI (based on 2 months of data for 2015) is currently standing at 54.6, down from 63.8 in Q4 2014. This is a marked reversal in the q/q growth rates from 3.2% in Q4 2014 to -14.5% in Q1 2015, though we need to see March data to make any conclusions on this. Yearly growth rates are falling off the cliff too: in Q3 2014 Construction PMI rose 21.3% y/y, which declined to 8.5% growth in Q4 2014 and to estimated -5.3% contraction in Q1 2015. Again, as with Manufacturing, we do have continued 7 quarters of above 50 readings in the series, so the slowdown is in the rate of growth, not an outright contraction in activity.

As the chart above shows, Composite Index (computed by myself based on sectoral weights in the National Accounts) has posted a relatively sharp decline, driven primarily by the Construction PMI reading. As of today (absent March data for Construction PMI) the composite indicator is reading at 59.0, down from 60.7 in Q4 2014. This is the lowest reading in four quarters, so y/y the index is still up 1.4%, although the rate of growth in the index has fallen from 4.2% recorded in a year through Q4 2014 and 6.7% growth posted in Q3 2014. Nonetheless, the index continues to trend above 50 for the 17th quarter in a row.

7/4/15: IMF: Ninth Time is Gonna be Lucky in Ukraine

It is perhaps revealing that the IMF is being forced to defend its Ukraine package 2.0 only a month after it was unveiled. And even do so without providing any explicit risk assessments. Here is the latest on the Fund efforts on this front. Lipton's full speech is here: http://www.imf.org/external/np/speeches/2015/040715.htm

Of note two things:

1. This is an 9th lending programme by the Fund to Ukraine, with 8 previous ones being... err... not exactly successful.
2. The current programme is based on (see details here: http://www.imf.org/external/pubs/ft/scr/2015/cr1569.pdf) assumed 2015 real GDP contraction of 5.5%, growth of 2% in 2016, 3.5% in 2017 and 4% every year thereafter through 2020.  And below is the table of forecasts from the Central Bank of Ukraine (NBU) showing 2015 forecast for -7.5% growth and 2016 forecast for 3% growth. It also shows that NBU estimates y/y growth in Q4 2014 to have been -14.8% and Q1 2015 growth to be -15%. And that -7.5% growth in 2015 will require positive growth in Q4 2015 and a relatively modest contraction in Q3 2015.

All of which suggests that the Fund leading 'assumption' on growth might be a touch optimistic. And that makes its leading 'target' for debt/GDP ratio of 94% at year end 2015 to be a touch unrealistic. Just as the Funds' all previous leading assumptions and targets that the IMF set in all previous lending arrangements with Ukraine.

But, as the Good Director might say, this time it is different...

7/4/15: IMF WEO on Global Investment Slump: Part 2: It's Demand, Not Supply ..

IMF released Chapter 4 of the April 2015 World Economic Outlook update. The chapter covers the issue of lagging growth in private investment (http://www.imf.org/external/pubs/ft/weo/2015/01/pdf/c4.pdf).

IMF findings focus on 5 questions:

1. "Is there a global slump in private investment?"
2. "Is the sharp slump in advanced economy private investment due just to weakness in housing, or is it broader?"
3. "How much of the slump in business investment reflects weakness in economic activity?"
4. "Which businesses have cut back more on investment? What does this imply about which channels—beyond output—have been relevant in explaining weak investment?"
5. "Is there a disconnect between financial markets and firms’ investment decisions?"

I covered chapter’s main findings for questions 1-2 in the earlier post here: http://trueeconomics.blogspot.ie/2015/04/7415-imf-weo-on-global-investment-slump.html

Now, onto the remaining questions and the core conclusions:

Q3: "The overall weakness in economic activity since the crisis appears to be the primary restraint on business investment in the advanced economies. In surveys, businesses often cite low demand as the dominant factor. Historical precedent indicates that business investment has deviated little, if at all, from what could be expected given the weakness in economic activity in recent years. …Although the proximate cause of lower firm investment appears to be weak economic activity, this itself is due to many factors. And it is worth acknowledging that, as explained in Chapter 3 [of the WEO], a large share of the output loss compared with pre-crisis trends can now be seen as permanent."

Here's a handy chart showing as much:

Figure 4.6. Real Business Investment and Output Relative to Forecasts: Historical Recessions versus Global Financial Crisis (Percent deviation from forecasts in the year of recession, unless noted otherwise; years on x-axis, unless noted otherwise)

Q4: "Beyond weak economic activity, there is some evidence that financial constraints and policy uncertainty play an independent role in retarding investment in some economies, including euro area economies with high borrowing spreads during the 2010–11 sovereign debt crisis. …In particular, firms in sectors that rely more on external funds, such as pharmaceuticals, have seen a larger fall in investment than other firms since the crisis. This finding is consistent with the view that a weak financial system and weak firm balance sheets have constrained investment. Regarding the effect of uncertainty, firms whose stock prices typically respond more to measures of aggregate uncertainty have cut back more on investment in recent years, even after the role of weak sales is accounted for."

Here is an interesting set of charts documenting that financial and policy factors played more significant role in depressing investment in the euro area 'peripheral' states:

Figure 4.10. Selected Euro Area Economies: Accelerator Model—Role of Financial Constraints and Policy Uncertainty (Log index).

Note: in Ireland's case, financial constraints (quality of firms' balance sheets) is the only explanatory factor beyond demand side of the economy for investment collapse in 2013-present, as uncertainty (blue line) strongly diverged from the actual investment dynamics.


Q5: "Finally, regarding the apparent disconnect between buoyant stock market performance and relatively restrained investment growth in some economies, the chapter finds that this too is not unusual. In line with much existing research, it finds that the relationship between market valuations and business investment is positive but weak. Nevertheless, there is some evidence that stock market performance is a leading indicator of future investment, implying that if stock markets remain buoyant, business investment could pick up."

Conclusions

• So IMF finds no need for any systemic the supply-side adjustments on capital/credit side.
• It finds no imbalances in the capital markets and finds that demand is the main driver for collapse in investment. 

Where is the need for more 'integration' of the capital markets that the EU is pushing forward as the main tool for addressing low investment levels? Where is the need for more bank credit to support investment? Ah, right, nowhere to be seen…

Meanwhile, the IMF does note the role of debt overhang (legacy debts) in corporate sector as one of the drivers for the current investment slump. "Although this chapter does not further investigate the separate roles of weak firm balance sheets and impaired credit supply, a growing number of studies do so and suggest that both channels have been relevant." In particular, "For example, Kalemli-Ozcan, Laeven, and Moreno (forthcoming) investigate the separate roles of weak corporate balance sheets, corporate debt overhang, and weak bank balance sheets in hindering investment in Europe in recent years using a firm-level data set on small and medium-sized enterprises in which each firm is matched to its bank. They find that all three of these factors have inhibited investment in small firms but that corporate debt overhang (defined by the long-term debt-to-earnings ratio) has been the most
important."

Thus, once again, how likely is it that low cost and abundant credit supply unleashed onto SMEs - as our policymakers in Ireland and the EU are dreaming day after day - will be able to repair investment collapse? Err… not likely.

7/4/15: IMF WEO on Global Investment Slump: Part 1: It's Private Sector Issue..

IMF released Chapter 4 of the April 2015 World Economic Outlook update. The chapter covers the issue of lagging growth in private investment.

Titled "PRIVATE INVESTMENT: WHAT’S THE HOLDUP?", IMF paper starts with a simple, yet revealing summary:
"Private fixed investment in advanced economies contracted sharply during the global financial crisis, and there has been little recovery since. Investment has generally slowed more gradually in the rest of the world. Although housing investment fell especially sharply during the crisis, business investment accounts for the bulk of the slump, and the overriding factor holding it back has been the overall weakness of economic activity. In some countries, other contributing factors include financial constraints and policy uncertainty. These findings suggest that addressing the general weakness in economic activity is crucial for restoring growth in private investment."

So the key message is simple: investment contraction is not driven primarily by the failures of the financial system, but rather by the weak growth - a structural, systemic slowdown in growth. Full text available here: http://www.imf.org/external/pubs/ft/weo/2015/01/pdf/c4.pdf

Let's take a closer look at IMF findings that focus on 5 questions:

1. "Is there a global slump in private investment?"
2. "Is the sharp slump in advanced economy private investment due just to weakness in housing, or is it broader?"
3. "How much of the slump in business investment reflects weakness in economic activity?"
4. "Which businesses have cut back more on investment? What does this imply about which channels—beyond output—have been relevant in explaining weak investment?"
5. "Is there a disconnect between financial markets and firms’ investment decisions?"

The chapter’s main findings are as follows (in this post, I will cover questions 1-2 with remaining questions addressed in the follow up post):


Q1: "The sharp contraction in private investment during the crisis, and the subsequent weak recovery, have primarily been a phenomenon of the advanced economies." Across advanced economies, "private investment has declined by an average of 25 percent since the crisis compared with pre-crisis forecasts, and there has been little recovery. In contrast, private investment in emerging market and developing economies has gradually slowed in recent years, following a boom in the early to mid-2000s."

Figure 4.1. Real Private Investment (Log index, 1990 = 0)

Q2: "The investment slump in the advanced economies has been broad based. Though the contraction has been sharpest in the private residential (housing) sector, nonresidential (business) investment—which is a much larger share of total investment—accounts for the bulk (more than two-thirds) of the slump. There is little sign of recovery toward pre-crisis investment trends in either sector."

Figure 4.2. Real Private Investment, 2008–14 (Average percent deviation from pre-crisis forecasts)

Spot Ireland in this…

And per broad spread of contraction, see next:

Figure 4.3. Categories of Real Fixed Investment (Log index, 1990 = 0)

But here's an interesting chart breaking down investment contraction by public v private investment sources:

Figure 4.4. Decomposition of the Investment Slump, 2008–14 (Average percent deviation from spring 2007 forecasts)

This, sort of, flies in the face of those arguing that Government investment should be the driver for growth, as it shows that public investment contraction had at most a mild negative impact on some euro area states (Ireland is included in the above under "Selected euro area").


Next post will cover Questions 3-5 and provide top-level conclusions.

7/4/15: BRIC PMIs via Markit

, it is commonly said, is the highest form of ... 

And so Markit now releases a 'summary' of BRIC PMIs... not quite in a full release, but...

Useful... and you can read more in-depth analysis of BRIC Services PMIs here: http://trueeconomics.blogspot.ie/2015/04/6415-bric-services-pmis-overall.html and on Manufacturing PMIs here: http://trueeconomics.blogspot.ie/2015/04/2415-bric-manufacturing-pmi-march-marks.html

Ah, the perils of doing analysis in the age when the big boys follow... As always, thanks to Markit for publishing at least few remaining headline numbers of PMIs.

7/4/15: Irish Services PMI: March 2015

Irish Services PMI was published by Markit/Investec today.

March Services PMI stood at 60.9, down from 61.4 in February, marking the third consecutive month of m/m declines from the local high of 62.6 in December 2014. Current reading is the lowest in 12 consecutive months.

Still at 60.9, the index is signaling robust growth in the sector. More importantly, 3mo average is at 61.6 for Q1 2015, which is marginally weaker than 61.9 average for Q4 2014 and well above Q1 2013 reading of 54.2 and Q1 2014 reading of 59.9.

March marks the first time since January when both Manufacturing and Services PMIs declined. Last time this happened before January 2015 was in May 2014, so twin decline is a rather rare event. This said, both indices remained well above their post-crisis averages in March, although over the last 12 months, Manufacturing averaged 56.2 (which means March reading out-performed the average at 56.8) against Services 12 mo average of 61.9 (which means that March reading under-performed the average at 60.9).

Broadly-speaking, we are seeing reduction in the rate of growth in both Manufacturing and Services, albeit from very high levels.

More detailed quarterly analysis to follow, so stay tuned.

7/4/15: Another Quango for Ireland to Undo Ineffectiveness of a Host of Quangos

Only in Ireland... the Government that has:

• One office of the Financial Services Ombudsman,
• One office of the Financial Regulator,
• One office of Consumer Protection in the Central Bank,
• One office of the Consumer Protection Agency,
• One Insolvency Services

the same Government that has promised, upon election, to cut the number of quangos in Ireland is now seeking to establish a new quango to deal with the failure of all of the above quangos with the issue of banks veto in personal insolvency deals.

And it gets more absurd - the only reason the entire problem arises is... the Government decision to grant the banks full and asymmetric veto power in the insolvency deals.

You cannot make this up. Really...

Details: http://www.independent.ie/irish-news/politics/new-watchdog-to-put-pressure-on-banks-that-veto-debt-deals-31122855.html

And a reminder of the days gone (source: @rkavanagh09)

Oh, yeah, baby, Bold Reformists!

6/4/15: BRIC Services PMIs & Overall Activity in Q1 2015

BRIC Services PMIs (published by Markit) are finally out, with the last two countries instalments today, so time to look at the Q1 2015 data. And from the top level view, things are not encouraging:

• Brazil Services PMI slipped from 52.3 in February (a 14-months high that was a huge upside surprise) to a 70-months low of 47.9 in March - a massive fall. On a quarterly basis, things are not as bad, but that is all down to February reading. 3mo average for Q1 is at 49.5 - still contractionary/zero growth, compared to 49.3 Q4 1024 average and against weak growth recorded in Q1 2014 (50.5 average). In last 8 months, Brazil managed to post only two months of Services PMIs above 50, with only one month reading being statistically significantly above 50.0. In short, we now have a sign of deepening slowdown in the economy, based on both Manufacturing and Services surveys.
• Russia Services PMI was predictably weak at 46.1 in March, although a gain on totally abysmal 41.3 reading in February. 3mo average through Q1 2015 is at 43.8 and this is well below already contractionary 47.1 average through Q4 2-14. Q1 2014 registered a weak contraction/static growth of 49.6. March reading was the strongest in 5 months, but overall Services side of the Russian economy has posted below 50 survey readings continuously over 6 months now. This, coupled with another (4th monthly) below 50 reading in Manufacturing suggests that there is an ongoing significant recession in the economy and that this has accelerated in Q1 2015 compared to Q4 2014.
• China Services PMI remained in relatively moderate growth territory in March (at 52.3 against 52.0 in February) and 3mo average for Q1 2015 is at 52.0, weaker than Q4 2014 average of 53.2, but up on Q1 2014 average of 51.2. China never posted below 50 PMI in Services before , so we are left tracking relative weaknesses in positive growth signals here. Weak improvement in Services survey is offset, in China's case, by strong deterioration in Manufacturing index which fell below 50 in March.
• India Services PMI was somewhat weaker in March 2015 at 53.0 compared to February 53.9 reading. Still, this marks the second highest reading in 9 months. India's Services PMI average for Q1 2015 is at 53.1 - a major improvement on 51.3 average through Q4 2014 and a big gain y/y - in Q1 2014, Services PMI was averaging only 48.2. March marked 11th month of above 50 readings for Indian Services surveys. India is the only BRIC country that managed to post m/m growth (above 50 readings) across both sectors: Manufacturing and Services.

Chart below shows Services surveys dynamics:

Table below summarises changes in Manufacturing and Services PMIs:

Pooling together Services and Manufacturing surveys data, chart below shows the overall BRIC trend in growth. March came in with a slowdown of overall economic activity across the block of the largest emerging markets economies and this slowdown took place in the already weak growth environment. While the series remain on an upward trend established from the local low attained in July 2013, this trend is no longer convincing and since June 2014, there has been a pronounced downward sub-trend. This does not bode well for the global economy.

6/4/15: Greece Blinks... Again...

0 Yanis : Christine 3

Next round starts with the fallout in Athens tomorrow... 

5/4/15: Russian Offshore Capital Amnesty Law Proposal

Last week, Russian Duma received the government bill on amnesty for illegal expatriation of capital for private individuals.

• The bill will require those applying for amnesty to fully declare their offshore assets. 
• Upon declaration, that has to filled before the end of 2015, there will be no penalty for unauthorised expatriation. 
• The claimant is entitled, under the proposed law, to full confidentiality and do not have to disclose the sources of their assets held abroad. 
• The only liability that does arise under the proposal is the one relating to back taxes. In some cases, assets held abroad are subject to tax in Russia. 
• When that is the case, claimants will be required to settle any unpaid or underpaid tax obligations that arise from their ownership of the asset.
• The bill does not specify the full set of procedures for settling tax liabilities.

Illegal expatriation arises, for private citizens (excluding public and government officials, and elected representatives who are covered by more substantial restrictions on ownership and declaration of overseas assets), primarily from the restriction on expatriation of funds.

Some earlier versions of the bill required imposition of automatic fines on expatriated capital (this version was presented to the Government, but rejected in favour of a more liberal version), as well as a requirement to repatriate all foreign assets. The latter requirement was dropped in both versions considered by the Government and is not in the draft sent to Duma for consideration.

In the cases where foreign assets assets have been accumulated in the tax havens for the purpose of tax evasion, these assets will have to be repatriated. More on the current proposal here: http://www.bloomberg.com/news/articles/2015-03-26/russia-sets-terms-for-capital-amnesty-to-correct-past-mistakes-

At this stage, the new proposal does not cover assets acquired through illegal means, only assets expatriated for tax purposes. The new bill was developed in close cooperation with the intergovernmental Financial Action Task Force (FATF) on money laundering and other financial crimes, but FATF is not quite happy with the draft legislation. The reason for FATF objections is the lack of disclosure and information sharing. This is a serious matter, as failure to comply with FATF regulations can get Russia blacklisted. Russian Government is promising a separate bill to cover assets accumulated through money laundering and other criminal activities, but it remains unclear if this system of presenting separate pieces of legislation on several different, but potentially connected types of assets will satisfy the FATF. See more on this here: http://www.themoscowtimes.com/business/article/putin-s-capital-amnesty-could-put-russia-on-money-laundering-blacklist/514470.html.

Russian role within the FATF has been actively positive in recent years. However, Western sanctions during 2014 have led to some serious conflicts within the FATF, prompted primarily by the US delegation to the organisation that has clearly been using FATF as a vehicle for exerting geopolitical pressure on Russia (see http://www.reuters.com/article/2014/05/05/us-ukraine-crisis-moneylaundering-idUSBREA440RR20140505).

Question is: from the global perspective, is the new draft law a good thing or a bad thing?

Globally-allocated Russian capital, held by private individuals, can be divided into 3 (unequal in volume) types:

• Type 1 - the unknown quantum of assets acquired using illicit gains from activities in Russia, and illegally shifted out of Russian. This bit is not covered by the new legislation, but Russian Government has already said it plans to introduce a separate piece of legislation to cover these assets, and it has promised that it will fully comply with FATF.
• Type 2 - the unknown quantum of assets, probably similar to that covered by Part 1 and, together with Type 1 accounting for more than 2/3rds of all Russian-owned assets held abroad, has been expatriated to minimise tax exposures. Some of it legally, some illegally. This bit is covered by the proposed bill. As I understand it, Russian authorities can make a determination if some of the assets declared under Type 2 really relate to Type 1. If they do, Russian can notify FATF, but if they don't, Russian does not have to notify FATF.
• Type 3 - smaller share of Russian assets abroad is perfectly legal and is not covered by the proposed law. To-date, FATF had no complaints with Russia on these assets. 

Since 2002, Russia is deemed as compliant with FATF regulations. Under the current state of our knowledge about Russian assets held abroad, FATF has no systemic complaint against Russia. The new law will not reduce this level of compliance and will not undermine information available to FATF. It may even increase it, and the follow up law for dealing with Type 1 assets promises to increase it even further. So what is the point for threatening Russia with non-compliance and black-listing today? What is the basis for such a threat?

As non-specialist on FATF, I would welcome all informed comments on this issue from the readers.

5/4/15: Irish Whiskey vs Scotch 2013-2014 data

Irish whiskey resurgence in recent years (here) has been a welcome development, in terms of offers and brands expansions, and in terms of exports growth. Between 2009-2014, average annual rate of growth in Irish whiskey exports stood at 9.86% pa.

However, owing to decades of under-development and the state policies of the past, Irish whiskey remains a poor cousin (in global sales terms) to Scotch. Over 2002-2013, Scotch posted an impressive exports growth of 7.0% pa on average, beating Irish growth over the same period. And it did so from a much higher base. Here are the comparatives:

In simple terms, Scotch exports are 3.8 times the size of all exports by the Irish drinks sector and almost 13 times the size of our exports of whiskey. All along, our state agencies and policymakers continue to measure success in volumes of sales, rather than in value. As the result, we are missing the boat in the high end, high value-added markets, going instead for the tradition market for Irish whiskey: mixer market.

Good news: with multiple new distilleries coming into production in the last 3-5 years, we are starting to see a promise of this trend being reversed, with some producers embracing quality over quantity approach. Bad news: it takes 12 years, plus, to mature premium whiskey. More bad news: Irish domestic markets for inputs into distillery: from barley to malt to electricity are either expensive (we rank third most expensive country for electricity supply to enterprises) or not available due to CAP-incentivised standardisation (lack of specialist barley is dire in Ireland, according to several smaller distillers I spoke to recently).

Update: Here is an interesting set of results from an international whiskey/whisky competition: http://uk.businessinsider.com/best-whiskeys-from-the-san-francisco-world-spirits-competition-2015-4?r=US# Note that Ireland features 3 brands (all independents) against massive dominance of Scotch.