15/11/2012: Dutch Debt Crisis and a Tripple-dip Recession?

With Eurostat publishing today preliminary estimates for Euro area GDP for Q3 2012, the Netherlands have moved firmly into the view as the country with substantial pressure on its economy.

Take a look at the core numbers:

• In Q3 2012, the Dutch economy contracted 1.1% q/q - the sharpest quarterly contraction in all fo the EU27
• This contraction follows 0.1% growth in Q2 and Q1 2012 and a contraction of 0.7% in Q4 2011
• In other words, in q/q terms, the Netherlands are now heading for a tripple-dip recession.
• In year on year terms, things are bleaker still: Q4 2011 say annual contraction of 0.4%, which was followed by a 1.0% drop in Q1 2012, 0.4% decline in Q2 2012 and now 1.4% decline in Q3 2012.

The problem the country faces, despite having a AAA-rated government debt and relatively minor issues on the fiscal side, is the debt overhang in the household sector. As charts below show, the Netherlands has the second highest gross debt/GDP ratio in the EU27 and the highest in the euro area. The debt overhang in the household sector is getting worse, not better, during the current crisis.

Gross debt to GDP ratio on households side has the same (directionally, but potentially more severe in magnitude) effect on future growth as the Government debt. Based on the OECD and IMF data:

And here are some comparatives from Goldman Sachs Research, highlighting the Netherlands plight:

 Note: HP change refers to House Prices change

All of which makes the Netherlands a 'sick man' of Europe and helps explain why the Dutch Government is rightly concerned with the costs of underwriting peripheral economies 'rescue' using its own money...

15/11/2012: The impossibility of Greek 2020 targets

Euromoney headlines today with an article on the impossibility of 120% debt/GDP ratio target for Greece (link here). It so happens that few days ago, I crunched through my own estimates on Greek debt holdings and dynamics. The below is based on data from:

• Goldman Sachs Research (debt allocations)
• IMF WEO
• My own scenario 2 for growth shock

Here are the institutions holding Greek debt: 

Using IMF scenario (best case scenario, based on current 2013-2017 growth projections and 2018-2020 growth at 2017 growth rate of 4.586% nominal - representing the highest annual rate projected by the IMF for 2012-2017) and my own adverse scenario (assuming growth of 2.84% on average annually in 2014-2020 as opposed to the IMF assumed average growth of 3.59% on average), the table below shows summary of forecasts for 2020 debt outrun under:

1. Status quo - implying 2020 outrun of 137% debt/GDP ratio in the case of IMF own projections and 148.5% debt/GDP ratio in my scenario 2;
2. Case of imposing 75% haircut on ECB-held Greek Government debt (a writedown of €33.52bn) resulting in IMF-consistent scenario estimate of 123.2% debt/GDP ratio in 2020 and 134.1% debt/GDP ratio under my adverse growth scenario 2;
3. Case of imposing - in addition to a 75% writedown of ECB-held debt - a writedown of 25% of EFSF-held Greek debt, delivering savings / cuts to the debt of €62.74bn - and yielding 2020 Government debt/GDP ratio of 111.2% in the case of IMF projections for growth (scenario 1) and 121.4% in the case of my scenario 2.

Thus, the bottom line is: unless 

1. IMF projections for 2.84% average growth in 2014-2017, plus my assumption that in 2017-2020 Greek economy were to growth at the 2017 IMF-projected 4.59% hold, a 75% haircut on ECB-held Greek Government debt will not be enough to get Greek Government debt/GDP ratio anywhere close to 120%.
2. To ensure probabilistically likely delivery on 2020 target of 120% debt/GDP ratio, Greece requires much more than a writedown of 75% of its ECB-held liabilities, but will most likely require some sort of action on EFSF side as well.

13/11/2012: Irish CPI v Euro Area: September 2012

In the previous post I covered overall dynamics of Irish consumer prices in October. Now, let's take a quick look at comparatives across the euro area. These are reported by the CSO with one month lag, so all we have is September 2012 year on year changes in prices. For comparative reasons, I also put y/y changes in prices for January 2012. The chart below shows the difference between Irish inflation and euro area overall inflation, with positive numbers signifying by how much Irish CPI changes in specific category exceeds euro area overall CPI changes for that category. Negative numbers show by how much euro area CPI changes exceeds Irish CPI changes.

Of notable trends/patterns:

• Irish overall consumer price inflation HICP (2.4% annual in September 2012) was below that for the EA17 (2.6%) and below EU27 (2.7%).
• Ireland also posted lower inflation in September in Food and-alcoholic beverages, clothing and footware, Furnishings, household equipment and maintenance, Health, Recreation and culture, and Restaurants and hotels.
• Ireland posted identical (to EA17) inflation in Alcoholic beverages & tobacco.
• Ireland's inflation was in excess of that for the EA17 in Housing, water, electricty, gas & other fuels, Transport, Communications, education (by a massive 9.3 percentage points) and Miscellaneous goods & services.
• Higher inflation rates in Ireland have accelerated in September, compared to January in only two categories: Housing, water, electricity, gas and other fuels, and Education.

In annual terms, Ireland is now in inflation territory since August 2010, with the peak rate of 3.11% in April 2011 and the current rate running at 1.20% - a modest inflationary environment, which means that our nominal GNP, were it to post 0% real growth is expanding at the rate closer to 1% nominally - a massive under-shooting of the rate of nominal growth required to deflate our debt pile.

13/11/2012: Consumer Prices in Ireland: October 2012

Consumer price index for October 2012, Ireland released last week chows broad continuation of the previously established trends, namely above-average inflation in state-controlled sectors, albeit the overall rate of the state-sanctioned rip-off of consumers is now moderating relative to previous months.

Overall CPI index dipped to 101.5 (2011 base year) in October compared to 101.6 in September, representing a mom change of -0.1% and y/y rise of 1.20%. 3mo average through October is at +0.36% rise on previous 3mo period and is up 1.60% y/y.

Charts below illustrate:

One thing is clear from the charts above: despite the economy still in trouble, cost of living in Ireland is now at the levels comparable with those attained in early 2008.

Looking at decomposition by broad category:

• Price index in Food & non-alcoholic beverages category rose from 100.6 in September to 101.0 in October. The index is now up 1% y/y and 3mo average through October 2012 is 0.7% above the same period average a year ago.
• Alcoholic beverages & tobacco prices index is slightly down from 103.7 in September 2012 to 103.5 in October 2012, but the index is still up 3.5% y/y and index 3mo average through October 2012 is up 3.57% on the same period a year ago. The index annual inflation was driven primarily by rises in price sof cigarettes (+6.9 y/y) and Other tobacco (+7.9% y/y)
• Clothing and footware sub-category index is up from 99.5 in September to 100.5 in October. The sub-index is now up 1.01% y/y and its 3mo average through October 2012 is 0.64% ahead of the 3mo average for the same period in 2011. Garments were the only sub-category of goods in this category that showed y/y inflation (+2%), with other sub-categories posting deflation.
• In Housing, water, electricity, gas and other fuels category, prices index rose from 96.8 in September to 98 in October, the index is up 1.24% m/m and is down 3.26% y/y. 3mo average through October is down 2.41% on a year ago. Mortgage interest posted a robust 18.1% decline y/y, but this decline is distributed unevenly with adjustable rate mortgages rising in cost, whiel tracker mortgages benefiting from ECB easy monetary policies. Meanwhile, largest y/y increases were recorded in Electricity (+8.7%), Gas (+9.3%) and Liquid fuels (+13.4%).
• Furnishings, Household equipment and routine maintenance sub-index is down marginally from 97.4 in September to 97.2 in October. The sub-index is down 2.70% y/y and its 3mo average through October is down 2.53% y/y. Nine out of eleven sub-categories of goods and services posted deflation y/y in October.
• Health prices index moderated from 100.4 to 100.2 m/m in October and is up only 0.3% y/y with 3mo average through October up 0.47% y/y. In Health, largest price increases in October in annual terms were in Other Medical Products (+2.9%) and Other medical and Paramedical Services (other than Doctors' fees) (+3.2%).
• Transport sub-index fell significantly from 109.3 in September to 106.3 in October (down 2.74% m/m). However, the sub-index is still up 5.77% y/y and 3mo average through October 2012 is now up 7.34% on the same period of 2011. In Transport, largest increases in prices, annually, were in Petrol (+12.4%), Diesel (+11.1%), Motor Tax (+10.8%), Bus Fares (+9.2%), passenger Transport by Sea and Inland Waterway (+5.4%) and Combined Passenger Transport (+6.2%).
• Communications prices sub-index moderated from 97.4 in September to 96.6 in October, down 3.40% y/y and down 2.67% y/y in terms of 3mo average through October. here, Postal services went up in price 1.5% y/y, while Telephone & telefax equipment and services were down in prices 3.6% y/y.
• Recreation and culture prices sub-index rose from 98.7 in September to 99.2 in October, with an annual inflation registering at 6.73%. 3mo average through October was up 8.63% y/y.
• Education costs rose at a monthly inflation of 4.6%, up 6.73 y/y in October to 104.6, while 3mo average through October 2012 was up 8.63% y/y. In education inflation was primarily diven by Secondary education (+2.5% y/y), Tertiary Education (+6.5%) and Education not definable by level (+6.6%).
• Restaurants and hotels price index  was at 01.6 in October, down from 10.2 in September but still up 0.99% y/y, same rate of inflation as 3mo average through October 2012.
• Miscellaneous goods and services sub-category price index rose from 104.2 in September to 105.2 in October and is up 5.62% y/y, with 3mo average through October 2012 up 5.40% on the same period a year ago. Here, health insurance costs were up 15.9% y/y and insurance connected with transport was up 4.7% y/y. Other services inflation run at 22.8% y/y in October.

 In terms of historical rates of inflation, charts below show current price indices for all main categories of goods and services relative to 1976 and 2007 readings.

12/11/2012: Quick reading list of late...

Some of my reading from today - worth checking out:

"Debunking Two Nate Silver Myths" from Scientopia.org lays our Bayesian foundations for Nat Silver's forecasting efforts. But in reality, the blog post deals with a deeper issue - the way we interpret predictive models.

"Mathematics, Marriage, and High explosives: Why There Is No Nobel Prize for Math" is a good short post on Shapley and Roth Nobel MP in Economics win, but the post repeats the myth (I am guilty of having told this one myself before) that is solidly debunked here.

A cool paper "The Collapse of the Soviet Union and the Productivity of American Mathematicians" - I recall the years of 1993-1997 when the UCLA maths department welcomed numerous faculty members from the former USSR and Eastern Block.

Foreign Policy superb article on the potential geo-political implications of the opening of the Arctic Passage: "Open Seas". The historical perspective absolutely brilliantly drawn.

NYTimes on "The science and art of listening" quote: "The difference between the sense of hearing and the skill of listening is attention" 

Aside from that - re-reading Vladimir Vonovich's "Moscow 2042" was a delight...

And I will be blogging on academic papers I read... so stay tuned.

11/11/2012: 4 interesting charts on investment portfolia compositions

four charts showing differences between the euro area and US portfolia compositions prior to the crisis, during the crisis and now (via Morgan Stanley):

Households:

 So for households, US portfolia are relatively balanced at near 50:50 split on risk and 'riskless' sides. equity ownership is low by historical standards, but that is probably offset by higher exposures to government bonds, corporate debt, government bonds and commodities as well as funds. Lower deposits holdings compared to euro area suggest lesser precautionary savings.

On euro area side, we have dramatic long-term decline in equities holdings and structural rise in deposits and cash. Precautionary savings motive is very pronounced.

Pension Funds:

Charts below show different pattern for equities holdings in these funds against household trends above:

Interestingly, Euro area households and pension funds are relatively similar in terms of longer trend of equities holdings, suggesting that either the objectives of both types of investors are convergent (retirement expectations and demographics weighing heavily on both) or structurally, equities markets in Europe are simply not attractive to both types of investors.

Much to speculate about here... especially behaviorally...

11/11/2012: Property prices bust 2008-2012

House prices changes peak-to-2009 then 2009-present:

Via Goldman Sachs.

With core driver - fundamentals:

Note Spain (my analysis): fundamentals-driven house prices are yet to travel down to below Irish markets drop... This, of course, is not a precise fully deterministic model (feed-back loops from unemployment to house prices are also going from house prices to unemployment), but it is clear that Spanish property is still 'overvalued' grossly relative to fundamentals.

And here's some other 'bad' news:

Taking the comparative above (again, my reading of the chart), a combination of fiscal direction and debt levels implies Irish house prices are still overvalued by up to 20% or so. Spanish ones - by about 10-15%...

Full note here.

Note: these are not my forecasts. I am only pointing out the direction that the above figures above imply in my view for the property markets.

10/11/2012: 'Special' case redux?

Just in case Angela Merkel reads EU Commission research... here's a chart summarizing the 'structural' adjustments to-date courtesy of JMP Research:

And the chart shows that 'special' Ireland:

• Delivered second largest drop in unit labour costs in the periphery (much of that, as in Greece's case and Spain due to massive spikes in unemployment)
• Produced 4th largest (or second lowest) improvement in current account dynamics and had 3rd highest increase in unemployment.

In other words, as with fiscal adjustments, our 'structural' gains are far from being 'special' or exemplary, but rather represent below average levels of achievement compared to other 'peripheral' economies.

And in case you need more, here's a bit on wages 'moderation' in Ireland:

The chart above shows pretty clearly that while Ireland claims to have achieved tremendous gains in labour costs competitiveness, in reality our gains are only spectacular if we forget the rapid inflation experienced in 2000-2009. Let's run some maths: between 2000 and 2012:

• Greek nominal labour costs relative to EU average fell 0.37%
• Irish rose 7.69%
• Portuguese fell 4.21%
• Spanish rose 6.4%
• Dutch rose 8.9%
• Italian rose 1.97%
• French rose 1% and
• German fell 16.36%

In other words, Ireland's labour costs still are up more than for any other peripheral state and, in fact, are only lower relative to the EU average against the Netherlands. Spot anything 'special' here?

10/11/2012: Dublin's Shame

This week saw perhaps the most important FT article on Ireland's crisis (link) titled Dublin's Shame, the article highlights the issue of grotesquely over-exaggerated pensions of Irish failed bankers. The point it touches upon - by itself - is not a minor one. But what is most important is the fact that FT takes a clearly only feasible ethical position on the issue and, put frankly, throws it in the face of not only the Irish banking establishment (on which the article focuses), but the Irish Government that is sheepishly incapable of any response to the issue that would have been congruent with the normal tenets of morality in any normal society.

"Public shaming may be the only recourse available to the government. Some argue that the pension funds should stop paying these executives, daring them to sue. Alternatively, Dublin could raise a levy on the richest pensions. But, however justified the resentment, either step would be wrong. Governments should not tear up contracts or tweak laws just to target a few. If the directors are to be penalised for their acts, this should happen in the civil courts."

Alas, public shaming is something our Government refuses to engage in, judging by the statement made this week on the issue by the AIB owner - Minister Noonan. And, sadly, in Ireland, there is not a chance the civil courts will see the face of the vast majority of the reckless, incompetent and entitlement-driven elites.

10/11/2012: GS on Fiscal Cliff

Earlier this week I posted few assorted analytical thoughts from various source on the US Fiscal Cliff and earlier today I posted on Goldman Sachs summary of 3 core global risks.

Here are four snapshots from Goldman Sachs on US key risks:

Fiscal cliff:

Tax hikes:

Debt ceiling:

Updated: Merrill Lynch note on US elections outcome is a superb read: here.

And Citi detailed forecasts out to 2020 from the 'cliff': here.

10/11/2012: Shorter-term divergence for Europe?

For what it is worth:

Shorter-term divergence again disfavors Europe... and even worse... UK:

10/11/2012: Age of Great Rotation?

Merrill Lynch calling the turn from the Age of Deleveraging to the Age of Great Rotation: "History shows that the beginning of every great bull market in equities (1920s, 1950s, and 1980s) has coincided with a major inflection point in the trend of long-term bond yields (see Chart 3)."

"If in 2013 jobs and credit validate Bernanke’s success in his “War against Deflation,” an era of rotation out of fixed income and into equities could begin."

That's a load of 'ifs' and 'cans'. In reality, there will be such a shift at some point in time. Only question is the following one: will the Age of Deleveraging (not called 'Great Deleveraging' by the ML, note) going to be so short-lived that by the end of 2013 Ben's cash printing will be sufficient to drive down real economic debt in the US down significantly enough to generate a new upswing in consumer credit (after all, there will be no US growth absent credit growth).

ML are pretty darn optimistic on this:
"The strong performance of US real estate, bank stocks, and distressed European assets this year suggests to us that a stealth rotation has actually begun. The fiscal cliff may temporarily derail the journey, but in our view the destination remains a favorable one for financial assets. Our core asset allocation is bullish equities and credit, bearish bonds and neutral commodities."

ML own view is a bit dented by the evidence in the chart above on the 1920s-1930s markets transitions relative to Treasury yields... Of course, as today, the 1920s-1930s period is precisely characterized by a long-term Great Deleveraging dynamics. Denying that the current state of the economy is characterized by potentially the same forces is a bit reminiscent of the Greenspan's 'over-exuberance' view.

Link to the ML research note: here.

10/11/2012: Three core risks: via Goldman Sachs

Neat summary from Goldman Sachs on 3 core risks:

10/11/2012: Euro area households feeling the pain?

Couple interesting charts from the Goldman Sachs research note on French consumption woes - link):

Euro area household disposable income is now under water in the Euro area steadily since 2008, which marks 5 years of sustained contraction. More interestingly, the chart shows abysmal performance of the RDI in Germany since roughly 2004.

The next chart maps gross savings rates for households - which are falling in the Euro area, just as disposable income is falling. Given the double dip recession, this suggests that tax hikes and cuts to income are now severe enough to knock households out of precautionary savings motive. And the latter would imply that households consumption is unlikely to rise even when income growth returns.

10/11/2012: Euro Area bonds supply - November 2012

Five weeks forward bonds supply calendar from Morgan Stanley:

And aggregates:

10/11/2012: Big Data made visible by UBank

Another interesting article: here. UBank in Australia has put some billion transactions records into public domain, allowing customers to run comparatives on spending patterns etc. (H/T to @moneyscience ).

"Users may input their gender, age range, income range, living situation, post code and whether they rent or own their home. The site uses that data to serve up average spending habits of people in that demographic, including detailed information on restaurants, housing costs and travel destinations. Users may also choose to input more detailed data to perform a “financial health check”, comparing their monthly shopping, utilities, housing and communication costs with “people like you” and the average Australian."

The idea is to make Big Data work for both clients and the bank - reducing the overall costs of risk pricing and in the long run helping the customers to lower their risk profiles and cash flow management. This has to be good for the bank and  for its clients. 

Next step would be for the bank to capture actual interactions within the database and correlate these to changes in spending patterns of customers (within the sample of those who engage with the system and outside the sample) to see what changes are generated.

This type of 'actioning' big data has been discussed at a recent round table on disruptive innovation in finance that I chaired in Dublin (here).

10/11/2012: What a laugh: Noonan backing out?

This fine article outlining the latest back-pedaling by the Government on the 'seismic deal' strategy for dealing with banks legacy debt carried by the taxpayers is full of priceless pearls of wisdom. Certainly worth reading, if only for a laugh.

8/11/2012: A quick look at the 'fiscal cliff'

So with US elections over and status quo confirmed as the preferred option by the American voters, it's time to look at the 'fiscal cliff'. Not my favourite reading at night, but... here are some factoids and opinions:

Pictet's 'rough estimate':

And Barclays summary of alternative scenario forecasts:

Their analysis prior to the elections:
"The Congressional Budget Office has noted9 that if the fiscal cliff hits, ie, the stipulations under the current law are not changed or pushed forward (referred to as a “punt”), the fiscal tightening could lead to economic conditions in 2013 that would probably be considered a recession, with real GDP declining 0.5%, a 2.5-2.7% swing from 2012 GDP. This scenario is not our base case; we see 2012 and 2013 GDP at roughly 2.2% and 2%, respectively, as we expect new legislation to address broader fiscal concerns in the context of near-term stability. That being said, we believe the chances of going of the fiscal cliff temporarily are higher if President Obama is elected ...This supports the view that near-term risk-off (ie, breakeven steepener) sentiment is more likely in a Democratic win. In any case, the ultimate outcomes under both administrations are likely to be similar."

And: "The final question relates to the approach each administration would take to put the US on a sustainable medium term fiscal path. Here again, there are two very different plans. That passed by the Republican House focuses heavily on spending cuts ($6trn vs. the CBO alternative scenario), while the president’s plan relies more on revenue increases. The House plan pushes debt/GDP down to 62% by 2022 but implies heavier fiscal tightening than the president’s budget, which takes debt/GDP to 76%".

Note that the US is likely to face much steeper impact of the fiscal cliff than other countries:

Source: Goldman Sachs Research

JP Morgan: 

" Overall, we now see cliff-related fis- cal issues subtracting about 1%-pt from growth next year, up from our prior assessment of 0.5%-pt. The table ... summarizes our expectations regarding fiscal cliff outcomes. ...There are other important non-cliff fiscal issues, such as declining defense spending, which are not the topic of this note. (We estimate these non-cliff fiscal measures have subtracted about 1%-pt from growth relative to trend over the past year, and will sub- tract a similar amount in the coming year.)"

In contrast, here's the IMF view: "On the fiscal cliff in the United States, we believe that it must be avoided. It would entail a tightening of fiscal policy of roughly 4 percent of GDP and would plunge the American economy back into recession, with deleterious consequences for the rest of the world. You mentioned that fiscal adjustment has to happen in the U.S. to avoid a downgrade. Indeed, what we are advocating is a fiscal withdrawal, an adjustment of about 1 1/4 percent of GDP, which would entail that a number of the so-called Bush tax cuts could be prolonged, and that other measures that have helped support the economy can be prolonged too. But in the end, there would still be an adjustment, a reduction in cyclically adjusted terms of the fiscal deficit of 1 1/4 percent of GDP, and this puts the U.S. economy on track toward better public finances. What is much more important in all of this is that in the end there is a medium-term plan that is being developed that explains very clearly how the deficit is then brought down further over the next five years, and beyond, from the still high level that it would have next year."

Which is consistent with the IMF earlier Article IV assessment: "Ongoing political gridlock could block an agreement on near-term tax and spending policies. If all temporary tax provisions were to expire and the automatic spending cuts to take effect, the 2013 fiscal contraction would be very sizable
(over 4 percent of GDP). This “fiscal cliff” would reduce annual growth to around zero, and the economy would contract in early 2013. Even if the “fiscal cliff” were quickly unwound, the damage to the economy could be substantial, especially if consumers and businesses were faced with continued uncertainty about tax and spending policies. These strong negative growth effects would in part reflect the limited effectiveness of monetary policy at the zero interest rate bound. Some anticipatory effects from the cliff could be felt already in late 2012, with spending held back by policy uncertainty—subtracting perhaps ½ percent from (annualized) growth in the second half of 2012 according to the Congressional Budget Office (CBO)."

8/11/2012: World Bank Doing Business 2013 report

Last night I posted in the data from the World Bank Doing Business 2013 report (link here).

More from World Bank Doing Business Report for 2013:

In the above, SOEs are 21 advanced Small Open Economies that Ireland competes with.

The folowing things jump out:

1. Ireland scores very positively overall in the sub group, ranking the country at 4th best to do business in this group of peer economies. We perform well in Getting Credit (see caveat below), Protecting Investors (another caveat below), Paying Taxes (third caveat below), Resolving (business) insolvency, Starting a Business and enforcing Contracts. We perform poorly-to-horrendously in categories relating to market regulation (Dealing with Construction Permits, Getting Electricity Permits, and Registering Property) and poorly in core exports-linked category of Trading Across Borders.
2. According to the World Bank metric, Ireland ranks as 2nd in the group of Small Open Economies in Getting Credit (business)... unchanged 2006-2013. Let me get this straight: the country experiences wholesale collapse of its banking sector, so spectacular it makes the Government insolvent virtually overnight and is unprecedented in historical terms according to researchers like Carmen Reinhart, our private sector credit contracts dramatically and remains unavailable to SMEs and consumers, Irish banks are now the biggest mess in modern economic history... and World Bank thinks our 'Getting Credit' situation has not changed since 2006 when Ireland was at a height of credit boom?
3. According to the World Bank rankings, Ireland is a much better platform for carry trade and other speculative investment than it is for exporting. This should really, really, really be of some concern to Irish Government, no?
4. After more than 15 years of incessant talk about reforming our energy sector, Irish electricity market remains in the dark ages. As our competitors improve their own domestic energy supply systems, we are sliding in ranking.
5. Despite a wholesale collapse in property markets activity, building and registering property in Ireland still requires navigating a medieval level of bureaucracy. One would have thought that the Government can sort this out. Do note that the improvement (in 2013 rankings) in Registering Property rank is due to 2012 tax incentives passed in the Budget 2012 and expiring in 2013.

8/11/2012: OECD Internet economy outlook 2012: Part 5 Conclusions

By now, I have posted 4 different posts on the OECD Internet Economy Report 2012 and the implications arising from the OECD data for Ireland. The core points of these posts are:

1. Overall ICT-linked employment in Ireland is declining, not rising, as the share of total employment in 1995-2009, despite the fact that we have experienced a virtual collapse in the traditional sectors activity over the same period of time (Part 1 post);
2. Growth in ICT sector revenues has been below OECD average in Ireland during 2000-2011 period, in contrast to the claimed successes in attracting ICT sector FDI into the country and contradicting the Government claims that Ireland-based ICT suppliers are consistently enhancing the value-added activity here (Part 1 post);
3. In addition, growth rate in the sector revenues in Ireland at roughly half the OECD average rate of growth is coincident with unprecedented growth in expatriated profits by the MNCs and massive in scale tax optimization ongoing within the MNCs component of the ICT economy here. This suggests that actual real activity might be declining, not growing, in Ireland (Part 1 post);
4. ICT investment by asset-type and overall in 2010 in Ireland was exceptionally poor, ranking the country as the 5th from the bottom despite the Government claims that Ireland was the leading destination for attracting FDI in Europe (with FDI into Ireland dominated by ICT services)  (Part 1 post);
5. Business R&D investment in ICT-related areas in Ireland ranked the country in 10th place in the OECD in 2010, once again contrasting the claims by the Government that Ireland is an ICT investment hub  (Part 1 post);
6. Business use of the internet in 2011 sees Ireland ranked 5th from the bottom (Part 4 post) despite having access to a broadband connection above OECD average (Part 4 post);
7. We score rather poorly in terms of our broadband infrastructure quality, penetration (Part 2 post) and poorly (well below average) for broadband access in the most economically developed region of the country (Part 4 post);
8. More significantly, we score poorly in terms of the quality of our human capital when it coms to ICT-enabled economy: less than OECD average is the share of Irish residents who used internet for communicating in 2010; we have the third lowest percentage of internet users who created a web page in 2011; we score at the average in terms of individuals engaging in ordering or purchasing goods or services online in 2011; below OECD average in terms of use of banking services online and close to average use of internet for learning in 2010 (Part 2 post);
9. For the 'smart workforce' claimed, irish share of employed persons at work using an internet-connected computer ranks below EU15 average and Ireland sports average rates of growth in this metric for 2005-2011 period (Part 4 post);
10. Despite having above average proportion of schools with internet connection in 2009, we had well below average usage of these connections, suggesting that our education system is incapable of using modern tools of learning (Part 3 post);
11. Consequently to (9), we have below average percentage of individuals using the internet to obtain information from the public authorities websites in 2011 - the outcome that can be expected in a country where education system is incapable of using web-based platforms (Part 3 post);
12. Ireland scores fifth from the bottom in terms of internet users using P2P file sharing to exchange content in 2011 (Part 3 post);
13. Ireland scores average in internet use by the highest educated segment of its population, below average in internet use by medium-educated households and average in internet use by the low-education households (Part 3 post);
14. Irish businesses have close to average (OECD) percentage of businesses with a website (Part 4 post);
15. Less than EU15, EU27 and OECD average proportion of Irish companies share information electronically externally, and the same holds for companies using automatic data exchange to receive or send e-invoices in 2010-2011 (Part 4 post);
16. We rank 9th in the OECD in the total turnover of companies from e-commerce in 2011 (as % of total turnover) despite the fact that we are clearing huge volumes of transactions for ICT services MNC giants like google, linkedin, etc (Part 4 post);
17. We rank 10th in the OECD in terms of companies selling over the internet in 2011 (Part 4 post)

In brief, Ireland is not an ICT services and culture hub, but at best an average performer in the group of advanced economies.

Furthermore, per OECD data:

So Ireland scores 6th from the bottom in terms of share of ICT specialist users in the total economy back in 2010, with that share growing by lowest percentage of all countries save Greece and Portugal. The outcome is made more egregious to the Government claims of Ireland being a global ICT hub by the fact that between 1995 and 2010 Irish economy has been attracting massive inflows of FDI in the sector.

The OECD report is extremely disturbing in terms of the picture it paints of Irish internet-based economy and flies in the face of a number of traditional assertions about Ireland as the global ICT hub made by the Government, IDA and Enterprise Ireland, as well as our business lobby and quangoes.

8/11/2012: World Bank DB Report 2013: Ireland improves in headline ranking

World Bank Doing Business 2013 Indicators summary for Ireland:

Overall, Ireland's rank has improved in 2013 report compared to 2012 from 16th to 15th. The gains are as follows:

• Starting a Business rankings improved from 14th in 2012 to 10th in 2013 - a good result. The core driver, however, was not an absolute gain in scores in Ireland, but a decline in other countries rankings in this area. Thus, Number of Procedures required to start a business in Ireland remained at 4 - the same level as in every other reprot since 2004. Time (days) required to start business improved from 13 in 2007-2012 reports to 10 in 2013 report. Given there has been absolutely no new legislation or regulatory change, it is hard to explain how such a reduction was achieved. Cost as % of Income per Capita of starting business also declined from 0.4 (2011-2012 reports) to 0.3 in 2013 report. Paid-in Minimum Capital as % of income per capita has remained at zero (same as in every other report since 2004). Now, the problem is that Cost metric as used by the World Bank references GDP per capita and as such underestimates the actual cost of Starting a Business in Ireland by ca 25%. Raising the value to GNP benchmark implies a cost of 0.4%, not 0.3%, implying the ranking of 11, not 10, in 2013 table. This still represents a good achievement.
• Dealing with Construction Permits rankings for Ireland have deteriorated from 102 in the world in 2012 to 106 in the world in 2013. The deterioration occurred in Cost as % of Income Per Capita (rising from 616.9 in 2012 to 626.1 in 2013). The Number of Procedures and Time (days) metrics remained the same in 2011-2013 reports. Frankly, I have no idea what is meant by the cost of registering property at 626.1% of our income per capita.
• Getting Electricity rankings also deteriorated from 92nd in the world to 95th in the world, primarily due to Cost (as % of Income per Capita) rising from 91.1% to 94.2% between 2012 and 2013 reports. It takes on average 205 days for a new business to get an electricity connection in Ireland.
• Registering Property rankings have improved significantly in 2013 from a third-world level of 81st in 2012 report to a quasi-second world rankings of 53rd. The improvement is solely due to reduction in the cost of registering property as 5 of property value from 6.5% in 2012 to 2.5% in 2013 - a temporary measure reflecting property reliefs in Budget 2012.
• Getting Credit rankings deteriorated from 9th in 2012 report to 12th in 2013 report - the change that was driven solely by other countries improvements. Irish scores in all four categories combined in the rankings have not changed since 2005 report. Given realities of current credit environment in Ireland, the World Bank rankings in this area are basically irrelevant. The categories used in assessment are: Strength of Legal Rights, Depth of Credit Information, Public Registry Coverage and Private Bureau Coverage.
• Protecting Investors rankings for Ireland have remained at 6th in both 2012 and 2013 reports and there were no changes in the scores in any of the categories that comprise this sub-index.
• Paying Taxes rankings have slipped from 5th in 2012 to 6th in 2013 on foot of increased time required for completion (80 hours per year in 2013 report against 76 hours in all reports from 2006 through 2012). Effective profit tax entered by the World Bank for 2013 report stands at 11.9% for Ireland, while labour tax and contributions stood at 11.6% and other taxes at 2.9% combining to the total tax rate on profit of 26.4% (up on 2012 report at 26.3).
• Enforcing  Contracts rankings declined from 62nd in 2012 to 63rd in 2013 reports. On average it takes 650 days to enforce a contract in Ireland, same as in 2012, but up on 515 days registered in 2004-2011 reports.
• Trading Across Borders rankings for Ireland have deteriorated from less-than impressive 23rd in 2012 report to even more disturbing (for an open economy) 28th. The main source of deterioration was the rise of the exporting costs from USD1,109 per container to USD1,135. Given that worldwide costs of shipping came actually down in 2012, this suggests rising domestic costs.
• Resolving Insolvency rankings have improved in Ireland from 10th in 2012 report to 9th in 2013 report, primarily because the recovery rate has risen from 86.9 cents on the dollar to 87.5 cents on the dollar.

In summary, good to see an improvement in the headline ranking, but more detailed analysis shows that little is being done in terms of structural change to deliver sustained improvements in many categories.