17/6/15: European Policy Uncertainty: May 2015

The latest reading for the European Policy Uncertainty Index (measuring economic policy uncertainty as reflected in the media sources) has continued to trend within the range of the crisis period averages in April-May 2015. This range has been now sustained since September 2014 when the index reversed local decline to below-average levels over the sub-period of March 2014 - August 2014.

Over time, we continue to trend within the post-crisis regime associated with above-historical average levels of policy uncertainty. The trend toward uncertainty decline in the post-crisis period has now slowed down and showing signs of potential reversal despite the media overwhelmingly tending toward a positive news reporting selection bias.

16/6/15: Indigenous Sectors and Exports: Ireland's Conundrum

In response to my comment on Irish exports of goods data through April, one analyst suggested that things are not as bleak, citing expansion of industrial production in Traditional sectors as a sign of real economy improvements (as opposed to accounting economy of our MNCs-led tax optimisation exports).

No doubt, the comment is correct. Things are not so bleak as Traditional sectors shrinking. In fact, they have been growing and with them, there has been some growth in indigenous exports too.

Here is the latest quarterly data on industrial production separating Modern sectors (MNCs-dominated) and Traditional sectors (which also include a large segment of MNCs, for example in food and beverages).

Yes, Traditional sectors have expanded. Which is good news. But they expanded at a rate of 20.4% over 12 quarters, while tax optimising Modern sectors expanded at a rate of 78.6% over 8 quarters. Good news is not too great, it turns out.

But what about more recent data? I prefer quarterly series for they provide a bit less short run volatility. But as you might ask, here are comparatives:

• In Q1 2015, Modern Sectors output by volume rose 39.4% y/y while Traditional Sectors output rose 10.1% y/y. That's almost 4 times slower rate of growth for the Traditional Sectors.
• In April 2015, Modern Sectors output rose more reasonable 7% y/y (and shrunk 1.1% m/m), while Traditional Sectors output rose 11.3% y/y (and grew 4.7% m/m). That made April 2015 the first month since December 2014 that this happened.
• But what exactly did happen in April to drive Traditional Sectors output up faster than Modern Sectors output? Modern sector includes the following industrial sectors: NACE 20.00 - 21.20 Chemicals and pharmaceuticals: up only 7% in April y/y,  NACE 26.00 - 27.90 Computer, electronic, optical and electrical equipment was up 44.8% in April y/y; NACE 18.20 Reproduction of recorded media up 34.8% y/y in April y/y; and NACE 32.50 Medical and dental instruments and supplies which goes into "Machinery and equipment, not elsewhere classified" reporting line - up 54.8% y/y. So I am slightly puzzled how did Modern Sector manage to post 7% growth when all components of the sector are growing at 7% or higher. The answer is, of course, in the CSO not fully reporting exact components of what is included in the Modern Sectors. 
• On Traditional Sectors side, the biggest gaining sub-sector was "Other Food Products" at 13.2% y/y. Which means that the fastest growing Traditional sub-sector was growing slower than all but one Modern Sector sub-sectors. 

Let's set aside monthly figures, and focus on less volatile quarterly production to recap: in 1Q 2015: there is some growth in the Traditional sectors, but that growth is vastly below the 'miracle' growth recorded in Modern sectors...

16/6/15: Sinn on ECJ's OMT Ruling

Hans Werner Sinn on ECJ ruling concerning OMT:

Not always to agree with, but he's got a point there... Which makes for an interesting debate: is a promise / threat of an action equivalent to an action? In markets - which are based on expectations, as much as physical changes - this just might be so. In which case ECJ shows little ability to understand the market, even if it has great ability to understand the law.

16/6/15: Russian FDI Flows in 2014

Per data reported by BOFIT, FDI inflows into Russia fell below 2009 crisis period in 2014. Average 2007-20013 inflows stood at USD55 billion, falling to USD37 billion in 2009. In 2014, FDI inflows totalled only USD21 billion. As expected, net FDI inflows became negative in 2H 2014.

FDI outflows totalled USD56 billion in 2014, in line with the average for 2007-2013 period and relatively steady over all four quarters of 2014.

In a reversal to pre-2013 period, Cyprus was once again the largest destination for outflows of FDI from Russia and (alongside the Bahamas) the largest source for inflows of FDI into Russia - reflective of ongoing flows of funds within Russian enterprises that use off-shore centres for reinvestment of domestic earnings and debt financing. Surprisingly, as BOFIT reports, "Russian FDI flows doubled to the United States and quadrupled to Switzerland". The surprising bit, of course, was not Switzerland…

16/615: Expresso on Ireland's Repayment of IMF Loans

My comment on Ireland's early repayment of IMF loans for Portugal's Expresso, 13/06/2015 ECONOMIA page 11

16/6/15: Russian Economy in a Chart: It's Structural...

Russian's economy problem is not crises-linked volatility. Instead, it is structural:

16/615: Building & Construction Ireland: Something's Up, Something's Down

So allegedly construction workers are now being bid out of Poland back into Ireland, the cranes are rising everywhere.

Nama is on track to deliver thousands of new homes, and commercial property markets are booming, primed for new development (see http://www.irishtimes.com/business/commercial-property/nama-set-to-dispose-of-ready-to-go-housing-sites-around-dublin-1.2234668)

Indices of construction activity are up in value, officially, q/q and y/y, while volume of activity is up y/y.

PMIs are signalling massive increases in building.

But the latest Building Information Index shows that the value of construction projects launched in 1Q 2015 was down EUR333 million or -20% on 1Q 2014, declining to EUR1.359 billion. In five out of seven escorts covered by the report there have been declines in activity, led by residential building sector that posted a decline of EUR174 million to EUR600 million in 1Q 2015. Good news, applications for new build are up 42% y/y in terms of value (including price and cost effects). Not surprisingly (down to price and development costs inflation), residential sector value of new applications is up 91%, while commercial is up 59%.

As they say, if we ain't building more and better, at least we are building more expensively...

16/6/15: Irish Exports & Trade Balance: April 2015

This year, we had some pretty darn bizarre stats coming out of the Irish data on exports of goods. April was no exception.

Take a look at the numbers:

• On a seasonally unadjusted basis, Irish imports of goods stood at EUR4,699.2 million in April 2015, up 9.35% y/y having previously posted a rise of 15.88% y/y in March. Over the last 3 months through April 2015, imports are up 12.57% y/y. Which sounds like a lot. But...
• Irish exports of goods have risen to EUR9,813 million in April 2015, up 30.08% y/y having previously posted an increase of 20.10% y/y in March. Over 3 months through April 2015, exports of goods were up cumulatively 22.4% y/y. April 2015 saw the highest monthly volume of exports of goods from Ireland on record.
• Irish trade surplus for goods trade only shot up 62.33% y/y in April to EUR4,484.1 million - the third highest monthly surplus on record. In March, trade surplus was up 27.60% y/y and over the 3mo through April 2015, trade surplus rose 38.2% y/y.

Charts to illustrate:

These numbers are simply not reflective of real economic activity in Ireland and are so heavily polluted by tax optimisation schemes and correlated exchange rates effects, there is little point of talking any more about our 'exporting' economy.

The CSO breaks down (or attempts to explain) some of the farce as follows: "The main driver behind the April 2015 increase was the increase in the exports of Medical and pharmaceutical products of €1,056 million (+63%) to €2,727 million. The exports of Organic chemicals also increased by €560 million (+40%) in April." On an unadjusted basis: "During April 2015 imports of Chemicals and related products increased by €234 million (+25%) to €1,179 million and imports of Miscellaneous manufactured articles increased by €137 million (+28%) to €628 million. Imports of Machinery specialised for particular industries also increased in April by 86% to €225 million." 

You have to laugh here: having created no new serious additional production capacity of any note over the last 12 months, we have rises in output to the tune of 25%-plus. If this wasn't a miracle economy of MNCs, we would be world-beating, record-holding economy for productivity growth, richer than Switzerland and Norway, combined. But do keep in mind, employment in pharma sector has been effectively stagnant for years, just as output of the sector is booming at exponential rates.

15/6/15: CBR Cuts Rates to 11.5% in Hope of Lifting Sagging Investment

Central Bank of Russia cut policy rate to 11.5% today from 12.5%, undershooting markets expectation for a 150bps cut to 11.0%. The move was expected and relatively modest cut this time around suggests more heavy cuts in 2H 2015. In part, this reflects relatively sharp decline in growth in April: having contracted modest 1.9% in 1Q 2015, Russian GDP fell at an annual rate of 4.2% in April. Another incentive for CBR to lower rates is the Ruble, which posted surprising comeback in early 2015, putting new pressure on the federal budget. CBR bough USD3.6 billion in May, in an attempt to keep Ruble lower.

Rate cut is a welcome move, but in current environment it also shows just how little room for manoeuvre the monetary policy has. Russian banks are deleveraging. Loans outstanding in the corporate and household sectors have fallen in 1Q 2015. The trend continued in April: SME loans share of total corporate loans fell from 22% in April 2014 to 18% in April 2015. In January-April 2015, corporate lending outstanding was up nominally 17% in ruble terms compared to the same period 2014. Inflation run at around 15.8%, which means that in real terms, corporate loans remained basically flat. Household loans grew by 4% y/y in ruble terms. Which means in real term, level of outstanding loans to households fell. As usual, roughly 1/3 of all corporate loans were denominated in foreign currency.

The rate cut will also help with non-performing loans. Stock of NPLs in the corporate sector rose by roughly 30% y/y in the first four months of 2015 to 6% of the total stock of corporate loans. Household credit NPLs stood at 7%. Both rates of NPLs are relatively benign, by Western standards, but the growth rate in NPLs is worrying. Lower cost of carrying these loans will help alleviate some of the pressures.

Overall, Russian investment remains a major bottleneck for the economy. Chart below shows Russian Investment as percentage of GDP, compared to both the Emerging Asia economies and Emerging Europe economies. This clearly highlights the dire state of Russian investment over 2000-2013, and a significant decline in investment from 2014 on, including the IMF forecasts for 2015-2020 period.

15/6/15: Next Step: Cyprus.

Next stop for Greece:
http://www.ecb.europa.eu/press/pr/date/2013/html/pr130321.en.html
... or in simple terms: Cyprus.

Anyone surprised by Draghi not mentioning any of this anywhere today, shouldn't be. Il Capo does not do the work of Soldati... But Dr. Draghi did say he thinks ELA underwrites solvent banks... presumably in an insolvent state... which, of course, makes banks insolvent too.

How? In two steps: Step 1 - banks hold 'insolvent' state bonds. As long as they do, the state remains 'solvent' but once the state becomes insolvent, banks go too. Step 2 - Greek banks have tax offsets. Once the state goes, so do the offsets and banks.

Source: Raoul Ruparel ‏@RaoulRuparel

15/6/15: Long Run Oil Price Chart

Quite a wonkishly fascinating chart (I love long time series, even if much of them are imaginary numbers): via http://uk.businessinsider.com/oil-is-cheaper-than-it-was-in-the-1860s-2015-6?r=US we have oil prices from 1860s on, though, sadly, not updated to most current, which is just around 1970s decade average.

Draw conclusions at your own peril. I chance to say: post 1900 price trend is all steady, until Governments mess up (the 1970s crisis - Governments-led, the 2000s lift-off - also Governments-led). So here you have it... boring commodity that is occasionally over-politicised into a bizarre beast.

15/6/15: Euro Area Labour Productivity: It's Low and Lagging

Euro area's problem in one chart? Might sound like a bit of an over-simplification, but here is a summary of labour productivity index simply constructed as real GDP per employee:

The chart shows several facts:

1. Euro area labour productivity is currently low, despite massive uplift in unemployment (which should have increased output per employee more substantially).
2. Euro area labour productivity has grown faster than that in the U.S. in the period of 1986-1995, but has been growing at a slower rate for some twenty years now.
3. Post-2010, euro area productivity has been lagging all groups of advanced economies.

Now, remember, no one talks as much about carrying out labour markets reforms as euro area leadership. In a way, this might be warranted, given poor performance, but in a way it also might suggest that the reforms are not working. After all, since the start of the Great Recession, allegedly, we had plenty of these reforms, and we had a 'productivity-enhancing' rise in unemployment, reduction in labour force and wages moderations galore. And productivity is not really expanding much. Secular stagnation, anyone?