11/8/15: Russian 2Q growth: beating forecasts on the wrong side

With apologies for a slight delay (I am actually away from work these weeks), here is a quick update on Russian 2Q 2015 GDP figures.

Those who read my musings on the Russian economy would recall that in recent months we have been seeing some signs of stabilisation in the economy performance, albeit I have been reluctant to call these signs a full turnaround as data required robustness confirmation and broadening of any improvements.

Good thing I stayed more cautious on the matter of calling a recovery. In 1Q 2015, Russian economy shrunk 2.2% y/y, surprising on the positive side the consensus expectation of a 3.7% drop. However, this time around, 2Q 2015 preliminary estimate for real GDP growth came in at 4.6%, worse than consensus forecast for 4.5%.

Now, 0.1 percentage points on expectation is not quite ugly, but -4.6% is ugly. Thus, in itself, the 2Q 2015 figure does not quite put under sever pressure the expected 3.4-3.6% annual contraction for 2015 as a whole, but it does put question marks around the thesis of Russian economy's recovery.

The contraction in 2Q takes us into July-August when oil prices have fallen even further and ruble devaluation pressures returned - both making it hard for the CBR to cut rates to support economy.

Noticeably, acceleration in the decline can be seen in q/q seasonally-adjusted figures. These are yet to be released, but Capital Economics shows estimates of 2.5% q/q decline in real GDP on seasonally adjusted basis, nearly double the rate of contraction (1.3% q/q) recorded in 1Q 2015.

The charts below show just how ugly 2Q 2015 figures are on a historical perspective:

 and over the shorter horizon:

Source: both: Capital Economics

As noted by Barclays, much of the deterioration in growth in 2Q was down to oil prices

 Source: @Schuldensuehner

Although in terms of pressures on growth, consumption component of the Domestic demand remains weak.

Source: @Schuldensuehner

The CBR policy rates are clearly weighing on the consumption and investment ability to rebound, with high policy rate (11%) compounding already tight funding markets for the banks, resulting in very high cost of credit.

We have no details on the GDP figure breakdown, yet, but Capital Economics suggested that based on 2Q headline figure, household expenditure fell at a rate similar to 1Q 2015 (-8.9%). Which implies that it was industrial production that drove growth figures further down in 2Q 2015.

The latter point is consistent with the evidence from Manufacturing PMIs in recent months:

So what's the top level conclusion from all of this? 2Q was ugly. Signs of stabilisation in the economy are still present, but robustness of these signals is now more under question than a week ago. In simple terms, we will need to see Q3 data posting closer to 0% change in GDP and beating 1Q 2015 reading, if we are to confirm expectation for growth recovery in 4Q 2015 - 1Q 2016. 

10/8/15: Europe: Where All Do What None Believe In

Here is Bloomberg report on the Finnish Government coalition position on the Greek Bailout 3.0 which, in simple terms, implies that at this stage, no one, save for Brussels and ESM, believes that the Greek Bailout can work. And yet everyone votes in favour of the bailout.

You can't make this up.

Per Bloomberg: "The Finns party, which in April became part of a ruling coalition for the first time, has no choice but to support a bailout since not doing so would cause the three-party government to collapse. That would only open the door for the left-wing opposition, Soini said."

Of course, as we all know, were the Left wing opposition to come to power in Finland, it too will vote for that which they think won't work. Promptly. Without kicking any fuss. Just as Syriza is doing now in Greece.

It no longer matters who, where and why is in power in Europe, as everyone - on political Left, Right and Centre - is hell-bent on doing that which none of them believe in. Except for the Middle Earth of EU 'institutions' who believe in nothing and hence have all the power to do precisely that which they believe in...

8/8/15: Transactions Costs v Quality of Banks' Collateral

In standard financial theory (and practice), presence of transactions costs has an impact on asset prices traded in the markets. A recent ECB Working Paper, titled "Collateral damage? micro-simulation of transaction cost shocks on the value of central bank collateral", by Rudolf Alvise Lennkh and Florian Walch (ECB Working Paper Series, No 1793 / May 2015: https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1793.en.pdf) "analyses how changes in transaction costs may affect the value of assets that banks use to collateralise borrowings in monetary policy operations."

The authors estimate the effect of a 10 basis point increase in transaction costs to be a decline of -0.30% in collateral value. Adjusting for the expected drop in the volume of trades for each asset (reduced liquidity), the decline in asset prices is shallower - at -0.07%. "We conclude that banks will on average suffer small collateral losses while selected institutions could face a considerably larger collateral decrease."

So far - benign?

The problem, of course, is in that second order effect. The authors look at 25% and 75% decreases in turnover of pledged collateral debt instruments (e.g. bonds pledged by the banks in repo operations). This second order effect reduces the loss of collateral value to -0.22% and -0.07%, for the two assumed turnover reductions scenarios, respectively. In other words, the lower the turnover rate of the pledged assets, the lesser is the impact of the transactions costs on collateral value.

Now, as the study notes, when collateral is held longer (turnover lower), liquidity in the markets is impacted. The longer the banks hold collateral assets off the markets and in the central banks' repo vaults, the lesser is market liquidity for traded collateral-eligible paper. Thus, the higher is the associated liquidity risk. Banks dump risk premium into the markets.

Cautiously, the ECB paper goes on: "The results underline that transaction costs in financial markets can be one among many factors contributing to the scarcity or decline of liquid, high quality collateral. …an upward transaction cost shock that occurs simultaneously with a market or regulation-induced shortage in collateral assets, and in particular high-quality collateral assets, could hamper the access of financial institutions to central bank liquidity. The central bank could [make] additional collateral eligible for monetary policy operations. As most of high-grade collateral is already central bank eligible, such a move could entail a shift to collateral assets with more inherent risk that would have to be compensated with appropriate haircuts. This in turn could increase asset encumbrance on banks’ balance sheets."

But there is another channel not considered in the paper: reduced turnover of collateral implies reduced supply of assets into securitisation pools, as well as into the OTC markets. Both effects are hard to estimate, but are likely to induce even higher risk premium into the markets for risky assets, pushing the above estimates of costs wider.

As an interesting aside, the table below summarises, by the end of 1Q 2014, one quarter of all collateral pledged into Eurosystem central banks repo operations was of low quality variety Non-marketable assets (in other words, assets with no immediate markets). This represents an increase in the share of low quality assets from 24.75% in 1Q 2012 to 24.96% in 1Q 2014. Medium-to-low quality stuff accounted for another 20 percent of the total.

Now, for all the esoteric debates about the ECB supplying liquidity, not providing solvency supports, one wonders just how much of a haircut would all of this proverbial 'assetage' gather were it to be collateralised into the markets to raise the said liquidity… for you know: if a bank is solvent, its assets would cover its liabilities, inclusive of haircuts, which means they are repoable… in which case, of course, there is no liquidity shortage to cover, unless markets were misfiring. The latter simply can't be the case in 2014 when the financial markets were hardly oversold.

6/8/15: IMF Assessment of Russian Banks & Financial Markets

Alongside the Article IV (covered in three posts all linked here: http://trueeconomics.blogspot.it/2015/08/3815-imf-on-russian-economy-private.html), the IMF also released a series of technical papers, including one on the state of health of the Russian financial markets.

Top-level conclusion: "using a comprehensive index of financial development, to identify potential bottlenecks", the study "…finds that Russia’s financial markets are relatively deep, accessible and efficient, but that financial institutions, in particular banks, have much to do to improve their efficiency and create further depth. Russia could potentially gain up to 1 percentage point in GDP growth on average over the medium-term from further deepening and efficiency improvements. Policies towards this outcome include reducing banking sector fragmentation through consolidation via increased supervision and tightening capital standards; strengthening the role of credit bureaus and collateral registries to reduce information asymmetries; and removal of interest rate rigidities to foster competition."

Specifically, one key bottleneck is the distribution of sources for finance: "Russian companies rely much less on external financing in general and on bank financing in particular, to finance investment compared to their peers in Eastern Europe and Central Asia or in their upper middle income group. Typically, internal resources, state funds and controlling entities are responsible for financing up to 80 percent of business investment. As a result, banks contribute only 6 percent of funding for business investment, with the bulk of investment financed from retained earnings."

Couple of charts

Now, one can agree with IMF on the need for Russian companies to tap more diversified investment channels, but one has to also observe two key risks inherent in this suggestion:

1. Debt levels overall are low in Russian economy, and much of these are accumulated in controlling entities relations with enterprises - in other words - linked to equity and direct investment. This is good, as this allows enterprises more flexibility and better management opportunities with respect to cash flow and business activity;
2. Low debt levels also allow for absorption of political shocks that we are witness gin today, arising from political shutting down of Russian companies access to Western funding markets. If Russia is to retain meaningful risk buffers, accessing external finance via bond markets and equity markets abroad saddles Russian entities with higher risk of external shocks.

So IMF can propose, but I seriously doubt Russian companies will be rushing to borrow at a breakneck speed any time soon.

IMF uses a relatively new framework for assessment of the financial sector environment, the concept of financial development. "Financial development is defined as a combination of:

• Depth (size and liquidity of markets), 
• Access (ability of individuals to access financial services), and 
• Efficiency (ability of institutions to provide financial services at low cost and with sustainable revenues, and the level of activity of capital markets)."

So IMF main conclusion is quite surprising for those not familiar with Russian markets: "Russia’s financial markets are relatively developed but financial institutions lag behind in terms of efficiency and depth."

"Russia’s FD index (0.58) is higher than the average EM (0.37) and slightly lower than the average BTICS (0.64), a group of countries composed of Brazil, Turkey, India, China, and South Africa. …Russia scores much higher than the comparator groups for FM developments [Financial Markets development] as it features higher degrees of access and efficiency in the operations of its financial markets. Although the depth of financial markets is slightly lower than BTICS countries, it remains much higher than the average EM."

Big bottleneck is in financial depth, where "…financial institutions in Russia are comparatively dominated by the banking system, with fewer to non-existent assets, in percent of GDP, in pension funds, mutual funds and insurance industry. Moreover, the banking system lacks depth with domestic credit at about 50 percent of GDP being the lowest in the BTICS group."

Why? "With some 850 banks operating, the Russian banking system is highly concentrated at the top, and fragmented at the bottom":

• "The top three banks (state-owned) accounted for more than 50 percent of total sector assets at year-end 2014 while the top 20 banks accounted for 75 percent of total sector assets."
• "Lending is highly concentrated among the top 10 bank groups making about 850 banks contribute only 15 percent of total lending."
• "…VTB Group alone with 16 percent share of lending accounts for a similar share as the 830 remaining banks."
• "Most of the banks are small and act as treasury accounts for local firms, operating in particular in mono-cities."

This "…undermines lending to companies and SMEs as their ability to both extend credit and diversify across companies is limited while lending to consumers is usually the dominant form of credit."

What is there to be done to get Russian banking and financial systems up to speed?

IMF benchmarks the potential scope of reforms against the absolute best scenario (not scenario consistent with other comparative economies), which makes things sound quite a bit optimistic, or unrealistic. The menu is predictable and relatively straightforward:

• Cut the number of banks without impacting degree of competition. Which is easy to say, hard to achieve, and at any rate, Russian authorities have been doing as much, albeit slowly, for a good part of almost 2 years now.
• Increase supervisory pressures to remove even more banks out of the active list (again, has been ongoing since 2013).
• Improve quality of collateral registries to lower the cost of collateralisation for SMEs. Which, in part, will also involve improving existent system of credit bureaus.
• Link deposit rates paid by the banks to the banks' deposit insurance cover. In other words, remove Central Bank restriction on deposit rates quoted by the banks, but replace it with a restriction capping ability of highly risky banks to raise uninsured deposits. Which sounds like a good idea, assuming deposit insurance scheme is fully funded and solvent. Which, in turn, assumes no systemic crisis.
• Privatise state banks. Which is strange. IMF also notes that "there is no urgent need in Russia for large scale privatization, especially in light of the fragmentary evidence that public banks in Russia are not less efficient than private ones." And the Fund stresses the importance of economies of scale in delivering improved banking sector efficiencies. Which begs a question: what is to be privatised? Large state-owned banks? If they are privatised with a break up, the system will suffer risks to the efficiency. If they are privatised as they are, the system will receive private dominant players in the market which, arguably, will be no different from the state-owned ones in any meaningful way.

As usual for IMF: neat pics, cool stats, a small pinch of useful proposals and a list of predictable ideas that make sense… only if you do not spot their faulty logic…

6/8/15: Irish Services Activity Index: June's Belated Sell-in-May

In previous post (link here) I covered Services PMI for Ireland for July.

To remind you: we are witnessing a massive boom (according to the PMI data) in Services, with overall sector activity readings at 108 and 109 months highs in June-July. In addition, based on quarterly averages, Services in Ireland should have been expanding at a break-neck speed non-stop from 2Q 2014 through 2Q 2015, with 2Q 2015 marking small acceleration in an already formidable speed on 1Q 2015. Effectively, over the last 3 quarters, PMIs have been signalling very high rate of growth in activity, with rate of growth being relatively stable over time.

Now, let's take a look at the latest quarterly data from CSO covering actual activity in the Services sector through June 2015.

Overall Services Sector activity index for 2Q 2015 rose 2.3% y/y, which is markedly down on 9.6% y/y growth recorded in 1Q 2015 and marks the slowest speed of Services sector expansion since 1Q 2014. This simply does not correspond to the PMI data readings. In fact, growth has been quite volatile over the last 5 quarters, and again, not consistent with the PMI signals.

As chart above indicates, Services sector growth fell sharply in 2Q 2015 falling below the period average (from 2Q 2014 on) and below the upper limit of statistical significance relative to the historical average rate. Contrary to the PMI signals, three out of six last quarters posted growth within historical averages and well below the period average when PMIs were hitting record highs.


Looking at the key sub-components of the index:

Domestic services sectors (Wholesale & Retail Trade, etc, Transportation & Storage, and Accommodation and Food, along with Administrative & Support services) posted an average rate of growth of 5.3% y/y in 2Q 2015, slower than both 4Q 2014 and 1Q 2015. Still, 2Q 2015 growth was the third fastest in 8 quarters. Over the last 6 months, domestic services managed to average expansion of 7.14% which is a major uptick on previous 6 months period when domestic services sub-sectors grew on average 5.40%.

Information and Communication services index posted a decline of 11.4% y/y in 2Q 2015, the first drop in the series since 4Q 2011 and the sharpest drop in the series on record. The sector is so skewed by activities of MNCs that not much can be determined out of these figures. Still, this drop brought past 6 months growth down to -1.8% against previous 6 months' growth of 6.5%.

In contrast to ICT sector, Professional, Scientific & Technical services sector posted a rise of 6.1% y/y in 2Q 2015, confirming yet again that there seems to be no serious correlation between activity in one side of our 'smart economy' and the other side of the same, despite endless droning on from our politicians and trade bodies about an alleged fabled link between the two sub-sectors through R&D and innovation.

It is worth noting that the sub-sector of Professional, Scientific & Technical services has been effectively whipped out by the crisis: over 2009, index of sub-sector activity averaged 118.88. This fell to 87.93 for the last four quarters - a decline of 26%. In a sense, our Professional, Scientific and Technical services 'did Greece', confirming yet again the deeply engrained culture of innovation and research in Irish economy. Of course, over the same period of time, Information and Communication services activity rose 35.1%. Go figure…

Despite all the issues highlighted above, the good news - as shown in the last chart - is that all three broadly-defined Services sectors have so-far been on a converging path prior to 2Q 2015 since roughly 1Q 2014 - as signalled by the compression of the period average lines. This, of course, reflects the belated return to growth in Professional, Scientific & Technical Services from 3Q 2014 on.

6/8/15: Irish Services PMI: July Mirage of Growth

Today, Markit released Services PMI for Ireland. Note: I have covered details of the Manufacturing PMI release link here.

On Services side, headline index reading in July was 63.4, which is marginally ahead of 63.3 registered in June. July reading was the highest in 109 months, after June posting the highest reading in 108 months.

Per Markit, "Panellists mainly linked the latest increase in activity to improving economic conditions." As I have shown in the past, the index is only now starting to re-couple with actual services activity indicators, suggesting that much of the PMI reading is biased by the specific, concentrated MNCs-led activity. Still, the PMI has now reached dizzying heights.

On another positive side, Services PMI boom is coinciding with Manufacturing PMI boom (also most likely driven by MNCs tax optimisation strategies):

But, as the next post details, real actual, CSO-measured activity in the Services sector was nowhere near all-time highs in growth in 1H 2015. In simple terms, PMI is telling us porkies, or PMI survey participants are telling Markit porkies, or both...

What is even more disturbing is that Manufacturing PMI figures are also in the territory of imagineering, where fair princesses and unicorns run through the fields of golden pansies with butterflies at their... ah, whatever... just take a look at the above chart and read this: http://trueeconomics.blogspot.it/2015/08/5815-irish-industrial-production-up.html.

5/8/15: BRIC Composite PMIs: July 2015

I covered BRIC economies' Manufacturing PMIs for July here: http://trueeconomics.blogspot.ie/2015/08/4815-bric-manufacturing-pmis-july-2015.html.

Now, let's take a look at Services PMIs and Composite.

• Brazil Services PMI fell from an extremely poor 39.9 in June 2015 to an abysmal 39.1 in July, reaching a joint historical low (total history for the series spans 101 months). July reading was so poor, 3mo average through last month fell to 40.5 against 3mo average through April 2015 at 48.3 and 3mo average through July 2014 at 50.7.
• Per Markit: "The downturn remained widespread across the services categories covered by the survey, with all of the sub-sectors registering substantial falls in business activity. The steepest contraction was at Hotels & Restaurants, followed by Transport & Storage. The level of new business in the service economy decreased for the fifth straight month in July. The pace of reduction was slightly faster than in the prior month, but nonetheless still less severe than in May (when new business fell at the quickest pace since April 2009). 
• Brazil's woeful Services PMI was compounded by a drop in Manufacturing (see summary of both below), driving official Brazil Composite PMI deep into contraction territory at 40.8 against already extremely low 41.0 in June. Overall, Composite index has hit the lowest point since March 2009.
• Overall: there is absolutely no doubt that both Services and Manufacturing are currently in a recession, with below 50 readings in both sectors present since March 2015

• Russia Services PMI strengthened from 49.5 in June to 51/6 in July marking the return to growth in the sector. On a 3mo average basis, July 2015 reading was at 51.3, well ahead of 3mo average through April 2015 (46) and 3mo average reading through July 2014 (48.5). 
• However, Russian Manufacturing PMI (see separate coverage here: http://trueeconomics.blogspot.ie/2015/08/3815-russia-manufacturing-pmi-july-2015.html).
• The respective Russian Composite Output Index improved to 50.9 in July, up from 49.5 in the preceding month. Per Markit: "Supporting the rise in overall activity for the service sector was a fourth consecutive month of increasing volumes of incoming new business. Moreover, the rate of growth accelerated to the highest recorded for twenty months amid reports that a more positive economic climate was driving demand for services upwards."
• More details on both Russia Composite PMI and Services PMI here: http://trueeconomics.blogspot.ie/2015/08/5815-russian-services-composite-pmis.html.
• Overall: these are some tentative early-stage signs of economic stabilisation and possibly recovery. Too early to call a new trend, however, and any talk of real recovery will require sustained rise in Manufacturing PMI above 51-51.5 mark.

• China Services PMI posted yet another above 50 reading (the Index never once dipped below 50.0 mark) rising strongly from 51.8 in June to 53.8 in July. This is the strongest reading in the Index since August 2014 and brings 3mo average through July 2015 to 53.0, up on 52.4 3mo average through April 2014 and on 51.3 3mo average through July 2014.
• Sub-50 reading in Manufacturing PMI reflective of further worsening in manufacturing downturn in the economy (ongoing since November 2014 with a brief interruption in February 2015) meant that China Composite PMI posted "only fractionally above the neutral 50.0 mark at 50.2, down from 50.6 in June, and pointed to the weakest rate of expansion in 14 months."
• Overall: China remains on slower growth path with Manufacturing under significant pressure. This trend is linked to the fortunes of global trade flows (more so than Services) and to weakening investment outlook for Chinese firms.

• India Services PMI rose to 50.8 in July, marking a very shallow recovery in the sector and breaking two months streak of sub-50 readings. July reading was up on 47.7 in June and on a 3mo average basis, figures through July 2015 are at 49.4 - signalling weak contraction against 3mo average through April 2015 at 53.1 and 3mo average through July 2014 at 52.3.
• Strong Manufacturing performance in PMI terms and weak, but above 50 reading in Services provided upside support for the Composite PMI. Per Markit: "After having fallen in the previous month, output across the combined manufacturing and service sectors in India rose during July. The seasonally adjusted Nikkei India Composite PMI Output Index climbed to 52.0 from 49.2 in June to signal a modest increase in activity. Growth has now been recorded in 14 of the past 15 months. The return to expansion was helped by a first rise in services activity in three months and an acceleration in the rate of manufacturing production growth."
• Overall: India regained its strong performance dynamic in July across both sectors, with relatively weaker performance in Services. Indian economy currently leads the BRIC group in terms of growth momentum as signalled by PMIs.

Summary of changes across both Manufacturing and Services PMIs is provided below:

And chart for Services PMIs illustrates: 

Overall, BRIC activity as contributor to global growth has improved, remains weak. In June, the BRIC group of economies was contracting and exerting downward pressure on global growth. However, in July, they made a positive contribution, albeit extremely shallow.

In recent months, it has become customary for BRIC economies analysts to suggest that Russia is the weakest component to BRIC activity. However, while this assertion was true through 1Q 2015, it is no longer holding since then:

This, however, is of little consolation to an economy in a recession.

5/8/15: Irish Industrial Production Up Spazillion Percent on Quazillion Widgets

Why is it pointless to cover Irish economic data? Because of this!

Let's put this into perspective: in a modern economy with lean manufacturing and real-time supply chains, increasing volume of production in manufacturing by 30% in just 12 months is not feasible. But in Ireland, not only it is feasible, it is a reflection of moderation in the rate of growth on 1Q 2015:

Anyone who interprets these numbers as anything other than coming from the Theatre of Absurd is simply wasting their time and skills.

5/8/15: Irish monthly Unemployment Rate remains stuck at 9.7%

CSO data on estimated unemployment (that used to be released with Live Register) shows estimated unemployment steady at 9.7% in July, for the third month in a row.

• Officially, there were 208,900 unemployed 15-74 year olds in Ireland in July 2015, up 300 on June 2015. 3mo average through July is at 208,833 against 3mo average through April 2015 at 211,833, an improvement of 3,000 on 3mo average basis. Compared to July 2011, there were 107,500 fewer officially unemployed in Ireland. Compared to July 2014, number of unemployed in Ireland fell 32,400.
• However, factoring in those participating in State-established Activation Programmes, number of unemployed in Ireland stood at 289,788 (estimated using lagged data for Activation Programmes participation) in July, down 77,658 on July 2011 and down 16,128 on July 2014.
• There were 37,600 younger unemployed in Ireland in July 2015 (15-24 year olds), up 700 on June 2015 and down 8,200 on July 2014. The number of younger unemployed declined 28,500 compared to July 2011. 3mo average number of younger unemployed through July 2015 was 37,233 against 40,300 average for the 3 months through April 2015. 

• Estimated unemployment rate for 15-74 year olds stood at 9.7% in July, unchanged on May and June, down on 9.8% in March and April. Unemployment rate is down 5 percentage points on July 2011 and 1.5 percentage points on July 2014. Last 4 months marked the slowest sequence of declines in unemployment rate since March 2014.
• Estimated unemployment rate for younger workers was 20.2% in July 2015 compared to 19.9% in June 2015. The unemployment rate declined 8.4 percentage points compared to July 2011 and was down 3.4 percentage points on July 2014.

The key point is the slowdown in the unemployment rate reductions. Over 2012, average monthly rate of reduction in unemployment was 0.083%,  this rose to 0.153% average over 2013 and 0.167% over 2014. So far, over 7 months of 2015 the average monthly rate of unemployment rate decline was 0.071%.

5/8/15: Russian Services & Composite PMIs: July 2015

Having covered Russian Manufacturing PMI for July here: http://trueeconomics.blogspot.ie/2015/08/3815-russia-manufacturing-pmi-july-2015.html, let's take a look at the today's Markit release of Services and Composite PMIs.

Services PMI rose to 51.6 in July compared to 49.5 in June, with new business activity reaching fastest growth in 20 months. On a 3mo average basis, sector performance through July was at 51.3 - showing a marginal rate of recovery, and a major improvement on 3mo average through April 2015 (at 46.0), as well as on 3mo average through July 2014 (48.5).

As chart above shows, Russian Services PMI posted above 50 readings in three out of last four months. However, by historical standards, this expansion is extremely weak.

Per Markit: "The Russian service sector returned to modest growth during July, with activity rising on the back of the strongest gain in new business for over a year-and-a-half. Still, excess capacity remained a problem, with companies again comfortably able to make inroads into their work outstanding despite cutting jobs for a seventeenth month in succession."

The decline in Manufacturing (see link above) meant that the Composite PMI for Russia was weaker than the Services PMI. Nonetheless, Composite PMI reached 50.9 in July, up on 49.5 in June. 3mo average through July is at 50.7 against 3mo average through April at 47.4 and 3mo average through July 2014 at 49.5. Just as with Services PMI, Composite PMI has now posted above 50 readings in three out of four last months.

The above suggests strengthening in the stabilisation and early recovery momentum in the Russian economy, albeit we need a rebound in Manufacturing to above 50.0 reading for a couple of months to confirm robustness of this development. While it does appear the Russian economy is now past the worst period of contraction, calling any recovery will require at least couple of more months of improvements in PMIs.

4/8/15: IMF Downgrades Ukraine Growth Outlook

IMF just published its Article IV consultation paper on Ukraine. Here are some key points (I am staying out of extensive commenting on these, but emphasis is added in the quotes).

Before we start, it is important to highlight that IMF notes significant breadth and depth of reforms already undertaken by the Ukrainian authorities, albeit warns about potential slippage in future reforms. Given the overall environment (geopolitical and domestic) in which these reforms are taking place, Ukrainian Government deserves a positive assessment of their work in a number of important areas.

"The 2015 baseline growth projection has been marked down to -9 percent (relative to -5.5 percent at the EFF approval), driven by a delayed pick up in industrial production, construction, and retail trade, and expectations of a weaker agricultural season." Note: this is a massive contraction compared to Programme projections.

"Domestic demand will be somewhat more constrained than anticipated earlier by tighter credit conditions and larger-than-expected decline in real incomes amid higher inflation."

"Growth is expected to start recovering in the second half of the year, supported by growing consumer and investor confidence, gradual rehabilitation of the banking system, and restoration of broken supply chains in metals, mining, and energy production. Later on, manufacturing should also start benefitting from the restored competitiveness of Ukraine’s exports. However, the recovery is expected to take hold only gradually through 2016. Medium-term growth projections remain unchanged." Note: you can see projections for following years in the table at the end of this post.

"The 2015 inflation has been revised upwards to 46 percent at end-2015, compared to
27 percent at program approval, driven by the faster-than-expected pass-through effects of the large exchange rate overshooting in March."

Note: again, this is a massive revision on programme-assumed inflation. Take together with the GDP revision above, it is hard to see how the IMF can continue arguing sustainability case for the programme at this stage, without hoping for massive recovery.

"Inflation is projected to recede quickly in 2016 to around 12 percent as the one-off effects subside and economic stabilization takes hold. Monthly core inflation rates are already well below 1 percent and expected to remain in such territory, as the negative output gap, subdued demand, and the stabilization of the exchange rate will put downward pressure on inflation."

Here's an interesting bit: Inflation 'one off' drivers include IMF-required adjustment in energy prices:

"The rapid pass-through of the large exchange rate depreciation in February and increases in regulated energy prices pushed inflation to 61 percent y-o-y in April. As the hryvnia recovered and stabilized in April–June, prices of some imported goods declined while increases in prices of non-tradables remained moderate. As a result, inflation in June moderated to 0.4 percent m-o-m, or 57½ percent y-o-y. The high y-o-y number masks the sharp disinflation that has already occurred: the seasonally adjusted annualized inflation in May–June 2015 fell to 13 percent."

But energy prices are yet to be fully inflated to their targets, so more is to come: "Gas and heating prices increases. Gas prices for households were increased by 285 percent on average, effective April 1. Heating prices were also increased by 67 percent, effective May 8. Despite these increases, gas and heating prices remain among the lowest in the region. The program aims to reach 75 percent of cost recovery gas and heating prices based on international prices by April 2016 and 100 percent by April 2017."

Which, of course, means there will be much more pain for ordinary Ukrainians, comes winter.

"The overall balance of payments remains broadly unchanged. The current account deficit is expected to widen to 1.7 percent of GDP in 2015, compared to 1.4 percent of GDP at program approval. Both exports and imports are projected to decline considerably this year, driven by (i) falling export prices and larger-than-expected loss of export capacity stemming from the conflict; and (ii) the weaker economy and steeper fall of energy consumption."

"Risks to the outlook remain exceptionally high. Risks to economic growth are predominantly on the downside reflecting (i) uncertainty about the duration and depth of the conflict in Eastern Ukraine; (ii) prolongation of the discussions on the debt operation (which could disrupt capital flows); and (iii) slippages in policy implementation. In addition, confidence could fail to revive due to these factors, or due to a more protracted bank resolution process. Higher-than-expected inflation—due to inflation expectations becoming more entrenched—could reduce domestic demand further. On the upside, an early resolution of the conflict could boost confidence and growth faster than projected."

"…Regarding program implementation, policy reversals, including regarding the flexible exchange rate policy and fiscal/energy price adjustment could lead to continuing balance of payments problems and raise repayment risks."

"Against significant headwinds, the authorities showed again their determination to stay the course of the program. ...However, although domestic support for a new Ukraine is strong, pressures from populist forces and vested interests are growing. Moreover, the local elections in the fall pose a risk that the reform momentum could fade."

Bad news on debt levels are:

Note: Public debt levels assume meeting IMF target for restructuring current debt. There is another dreamy feature to both graphs - as with all IMF programmes, debt peaks out in year one. Given past histories, however, the forecasts don;t quite turn to reality.

Another set of bad news: Non-performing Loans (NPLs) as % of total assets was bad in 2013 and getting massively worse now:

And a summary of macro performance indicators and projections:

4/8/15: Of Corporate Stash and Irish Cash

There are two things to notice in this Bloomberg chart:

Source: http://www.bloombergview.com/quicktake/profit-shifting-avoid-tax

First the obvious one: Our Not-a-Tax-Haven Ireland is in the company of Bermuda, Lux and Switzerland, alongside the equally Not-a-Tax-Haven Netherlands (that Double-Dutch Sandwich is an all-transparent arrangement to attract companies to Dutch quality workforce, only second to the best-in-class workforce of Ireland). That is trivial stuff, though.

Second (less trivial) is the quantum of profits domiciled in the likes of Ireland. It has been large and rising. And thus, if begs a question: What happens to Irish 'economic growth' when these profits are repatriated either for investment purposes abroad (e.g. in Asia Pacific or elsewhere) or on foot of any future tax amnesty in the US or both?

Answers to that question should be mailed to every Irish Minister so keen on confusing MNCs profits and Irish economic miracles.