Thursday, October 31, 2013

31/10/2013: I am sorry, but Retail Sales did not get any better in September, again...

With some lag, time to update Irish Retail Sales stats to September data. Instead of going over the usual details of the dynamics, let's take a broader look at what is happening in the sector:

Starting with a chart:

As above clearly shows, both the Value and the Volume of core retail sales are going nowhere - the series are bouncing along the bottom, switching direction almost on month basis. This suggests that

  1. Consumers are not going to the shops anymore than they absolutely need to; and
  2. Consumers are running out of money to spend on things they need to purchase, while retailers are running out of margins to cut prices.
Of course, you would also notice in the above chart the absolutely bonkers behaviour of Consumer Confidence indicator. And you are right: as chart below clearly highlights, the Consumer Confidence has completely detached itself from Retail Sector realities:

Timing the start of the crisis to late the start of 2009 (if we take the start at mid-2008 things are even uglier for the Consumer Confidence), we have:

  • Consumer confidence rising along an upward trend;
  • Retail Sales in Volume and Value falling along declining trend;
  • Consumer confidence being more volatile than Volume and Value indicators for Retail Sales
This implies that Consumers are claiming that which they do not practice. Why? I have no idea. Patriotic duty to be optimistic? By Consumer Confidence recent readings, we should observe retail sales activity around late 2006-2007 levels. Ooops... Value of Retail Sales is now below where they were back at the start of the series in 2005. Volume of Retail Sales is now around late 2005.

The same applies to more smooth 3mo MA series:

There are no statistically or economically meaningful links between 3mo MA for Consumer Confidence and either Value or Volume of Retail Sales. Worse, year on year, the disconnect between the series has grown wider for both, with the widening being steeper for Value index. Again, this potentially indicates that margins in the retail sales have been wiped out and that this is not enough to get consumers spending again.

Which raises one serious question: local authorities are planning to jack up their rates in 2014. How will retail businesses afford these when they are trading in the above conditions?

As you know, I run my own index of Retail Sector Activity - RSAI - and updating this to September shows the flatlining of the trend for Retail Sector activity overall. All in, we are now in 75 months-long period of declining or flat retail sales:

You can turn the numbers upside down and compute them sideways. You can listen to the Government spokespersons telling us about improving consumer confidence until the Halloween pyres consume the last tractor tyre. You can believe that we are in a turnaround.

And I wish I could do so alongside you... but the above figures are not showing this. Perhaps we can add 'not yet' to that statement to keep some hope alive.

31/10/2013: IBF data on Mortgages Approvals: September 2013

Having just covered data on Residential Property Prices here (, time to also update the data from the IBF on Irish mortgages approvals.

Excluding mortgages top-ups, lending for house purchases improved in September, with total of 1,544 new mortgages approved, up 10.4% y/y. Cumulative 3mo issuance of mortgages is now up 11.5% on previous quarter and 13.4% up y/y.

Average mortgage approved, however, stood at EUR174,302 in September, down 4.78% y/y. 3mo average mortgage approved was down 0.12% on previous quarter and down 3.69% y/y.

Year-to-date (Q1-Q3) cumulative number of mortgages approved rose 7.5% y/y while average mortgage approved by value fell 2.49%.

As the result of the above, total value of mortgages approved stood at EUR269 million in September, up 5.08% y/y. Q1-Q3 volume of mortgages approved rose 5.12% y on same period 2012.

So overall, reasonable gains, but off extremely low levels.

31/10/2013: Irish Residential Property Prices: September 2013

Updating the Residential Property Price Index data from CSO released earlier this week, here are the core highlights for September 2013:

  • All country RPPI rose to 68.2 in September from 67 in August, marking sixth consecutive month of rises The index is now up 3.65% y/y (in August it was up 2.76% y/y).
  • 3mo cumulated change in RPPI is 3.96% and 6mo cumulated change is 6.4%. 6mo average rise is 0.66%.
  • Nama valuations (with 10% cushion on LTEV uplift and risk sharing) are now 33.97% off the mark.
  • Relative to peak, index now stands at -47.74% and relative to absolute minimum it is at +6.4%.

For Houses RPPI:

  • Index rose to 71.0 in September from 69.8 in August and posted a 3.35% rise y/y.
  • 3mo cumulated gains are at 4.11% and 6mo cumulated gains are at 6.29%. Average over 6 months monthly increase is 0.69%.
  • Relative to peak, the index now stands at -46.21% and relative to absolute minimum it is at +6.29%.
  • September marked sixth consecutive month of rises in house prices.
For Apartments:

  • Index rose to 50.9 in September from 50.0 in August and posted a 8.53% rise y/y. 
  • 3mo cumulated gains are at 1.6% and 6mo cumulated gains are at 6.26%. Average over 6 months monthly decrease is -0.41%.
  • Relative to peak, the index now stands at -58.92% and relative to absolute minimum it is at +11.38%.
  • September marked second consecutive month of rises in apartments prices.

Dublin RPPI:

  • Index rose to 65.9 in September from 63.4 in August and posted a massive 12.27% rise y/y.
  • 3mo cumulated gains are at 9.47% and 6mo cumulated gains are at 12.07%. Average over 6 months monthly increase is 1.13%.
  • Relative to peak, the index now stands at -51.0% and relative to absolute minimum it is at +15.01%.
  • September marked sixth consecutive month of rises in Dublin property prices.

  • Twin convergence toward long-term equilibrium prices is now evident in Dublin markets (upward price pressures) and National ex-Dublin prices (downward pressures). 
  • The core question is when will Dublin prices overshoot their long-run trend and moderate again?
  • Another core question is what the fundamentals determined price levels are for Dublin and for the rest of the country?
  • I have no answers to the above questions and anyone who says they do is most likely talking porkies.
  • What I do know is that there are plenty of risks to the downside and headwinds working through the economy. These include: mortgages arrears, income effects of tax and charges changes in Budget 2014, banks rates on existent mortgages; and new mortgages supply and pricing. 
  • So far, my gut feeling is that we are still on a sustainable upward trend in Dublin and on moderating negative trend in the rest of the country. 

31/10/2013: Eurocoin: Weak Growth Remains Weak: October 2013

In the previous post ( I covered the latest unemployment and inflation stats for the Euro area in the context of economic growth conditions. Now, let's update the data for Euro area leading growth indicator, eurocoin:

Eurocoin rose in October 2013 to 0.20 from 0.12 in September, marking the second consecutive month of the indicator reading above zero. However, eurocoin failed to reach statistically significant levels once again. This implies that the recovery is weak, and subject to serious risks.

In line with the indicator increase, growth forecast also improved from 0.1% for Q3 2013 to 0.18% for the start of Q4 2013.

In relation to inflationary pressure, eurocoin is now signalling expansion that is not sustained by underlying domestic activities:

The above conjecture is supported by analysis of eurocoin core components, showing that the latest improvements came from equity markets indicators (as in September) and also from improved industrial production and exports. Industrial production gains were in turn driven primarily by Germany, while composite PMIs remained generally in the negative territory. Meanwhile, consumer sentiment deteriorated, including in Germany (though it stayed in the positive territory there). 

31/10/2013: NAIRU or NDRU? Euro Area Inflation Hits 0.7% in October

So Euro area unemployment rate remained stuck at 12.2% in September, same as in August 2013 and up on 11.6% in September 2012. 18,451,000 Euro area residents were unemployed back in September 2012 and this rose to 19,447,000 a year later. Meanwhile, in the US, unemployment rolls fell from 12,093,000 to 11,254,000 and the rate dipped from 7.8% to 7.2%.

With inflation (HICP) coming at 0.7% in October, so we are now no longer in the Non-Accelerating Inflation Rate of Unemployment (NAIRU) environment, but rather closing on what I would call a Near-Deflationary Rate of Unemployment (NDRU)... welcome to the madness of European econo-politics, where the Central Bank is powerless to do much to re-inflate the economy and fiscal authorities are powerless to restart growth, while households and companies struggle under the weights of debts.

Two charts:

Leading growth indicator Eurocoin (see more detailed analysis in the next blogpost) has improved somewhat in October, but monetary policy remains stuck in zero-bound, zero-power corner. And ditto for inflationary signals:

We are now at the lowest rate since November 2009 when it comes to HICP.

Good news, ECB can now easily move to 0.25% rate... but will it? Ask Angela...

Wednesday, October 30, 2013

30/10/2013: Desperate? Just Check Out Italy's Latest Thoughts on Bonds...

Just when you think they (the Governments) have run out of creative ways to load risks onto taxpayers in order to boost sales of debt to fund own empires... here comes Italy with new twist on financial engineering in sovereign debt space:

Desperate? You bet What will they think up next?..

H/T to @greentak

30/10/2013: Welcome, Dublin Web Summit... Here Two Questions to Think About...

On the first night of Dublin Web Summit 2013, here's my bit of thinking:

For executives and corporate leaders:
For policy makers: when will you stop pretending that you understand innovation?

Government after government around the world is harping on about 'innovation-driven growth' 'knowledge economy' and 'creative economy'. Government after government charges human capital - the main generator of value added activity in all of these economies - a 50%+ tax rate, so it can subsidise building & construction, property investments, roads and transport, farming and forestry, fishing and tourism - the parts of the economy that are anything but 'knowledge' or 'creative' or 'innovation-centric'. In fact, the subsidies are flowing to these sectors irrespective of whether their recipients in any way shape or form engage in or support knowledge generation or commercialisation, creativity deployment and embedding into their processes and outputs, or innovation-driven transformation of their sectors/firms/services or outputs.

Give a thought to the above two questions, folks, while inhaling the airs of the Web Summit. And keep remembering: you are in the city where human capital is being taxed at 55%+ to fund services not available to the holders of that human capital. And corporate capital is taxed at 0%-12.5%. Where the Government has just passed a new Budget hiking indirect taxes on human capital (amongst other) to fund subsidised home improvements for small builders.

Welcome to the Creative Knowledge Innovation Ireland... did you declare your human capital at the customs?..

Tuesday, October 29, 2013

29/10/2013: Employment & GVA: Impact of the Crisis on European Cities

Via BusinessInsider: Here's a chart showing the impact of the crisis on major cities:

Notice the position of Dublin as the second or third most adversely impacted city. And notice our position in terms of GVA (Gross Value Added) growth. We also represent the worst-impacted small city in the sample. Stripping out the positive effects of growth in MNCs-driven services exports and superficial transfer pricing boom delivered by the likes of Amazon, Google et al, we would be much closer to Athens in terms of overall impact.

Monday, October 28, 2013

28/10/2013: Back in the News: Double-Irish (non)Tax Haven

Starting the week on the right footing... Ireland's tax regime back in the news:

And note: this is not tax haven, although it is, according to the specialist behind it, going away... cause it is not a tax haven, of course...

You can track series of articles featuring Irish tax regime in international media starting from this link:

Sunday, October 27, 2013

27/10/2013: Irish CDS spreads: a reason to smile for a change...

It might be disheartening sometimes (often) to read the newsflow involving Irish economy. But occasionally, there are some really worthy decent news... Here's an example: 12 months difference in CDS spreads:

First Q3 2012:

Now, Q3 2013:

That's a huge change... even though we are still far from where we want to be, the change is impressive.

27/10/2013: Ireland v Iceland: Full Deck

Here's the deck for comparatives between Iceland and Ireland. You can click on every slide to enlarge. Enjoy!

27/10/2013: Financial Repression, Economic Suppression & Budget 2014

This is an unedited version of my Sunday Times article for October 20, 2013.

With fanfare of media appearances and fireworks of Dail statements, Budget 2014 was pushed off the dry dock and into the turbulent waters of reality. Full of political sparkle on the outside, overloaded with hidden taxes and charges and yet-to-be-fully-detailed painful cuts on the inside, it sailed off into the future. It will take at least 9-12 months from now to see what adjustments will have to be made in 2015 to compensate for the 'savings' on cuts delivered this week. It will take us longer to find out if the Budget 2014 will have a positive or negative effect on our ability to fund our deficits in the markets.

Yet, one thing is beyond the doubt: Budget 2014 was a significant gamble by the Government that could have done better by avoiding taking any gambles at all. Minister Noonan has decided to buy some political capital in the Budget. This capital came in the form of reduced rate of overall budgetary adjustment, compensated for by the hope-based increases in public sector efficiencies, plus some symbolic handouts to middle class families. Majority, such as the free GP visits for children under the age of 5, were poorly targeted and economically inefficient – extending scarce resources not to where they are needed most (such as, for example, long-term care provision or means-tested provision of health services) but to where political expediency leads. Many fail the core Budget objectives of making our fiscal policies more robust to adverse shocks that may occur in the near-term future.

In the end, Budget 2014 delivered virtually no real departures from the past Budgets. Predictably, there were no 'new' taxes. Instead the Budget put forward a list of new 'revenue raising measures'. The State will claw out of the banks EUR150 million in levies. Given that our banking sector is being reduced to a Three Pillars oligopoly, the levies will come straight from charging customers more for the same services. Pensions funds levy - a form of expropriation of private property - is to raise additional EUR135 million. This is a tax on present income, and in the case of pensions funds levy a tax on current wealth, plus a tax on future incomes foregone due to reduced levels of pensions funds. EUR140 million will be pumped out of the banks’ customers by taxing interest on savings. All in – financial sector will take a hit of EUR425 million on a full year basis, reducing its ability to lend, invest in the economy and to deal with mortgages distress. The measures will also weaken the quality of Irish banks' deposits base by reducing incentives to save. Carmen Reinhart and Kenneth Rogoff aptly termed such measures ‘financial repression’. De facto, we are bailing in ordinary banks customers and savers to pay for the past sins of the banks. Cyprus redux, anyone?

Cuts side of the Budget was also predictable. At the aggregate level, departmental expenditure as the share of GDP continues to run above 1990-2007 average. Instead of real cost reductions in Health we got some EUR250-300 million worth of new charges to be levied on services to insurance holders. And reduced insurance deductibility on the revenues side should do even more to reduce insurance coverage in the market. Net effect will most likely be falling transfers from private patients to public services, and higher demand for public health.

From businesses perspective, whatever the State added on one side of the budgetary equation, the state took out on the other. Thus, for all incentives for construction and building trade, overall capital spending by the Government in 2014 is projected to fall by some EUR100 million. As we stand, in 2013, capital spending by the Government barely covers amortization and depreciation of the total stock of public capital. Next year, things are going to get worse.

Much of the business stimulus schemes are geared toward supports for the property markets, including the incentives for foreign investors to put money into Irish REITs. Aside from the property-related measures, other business stimulus polices are either extensions of the already existent ones or more promise of doing something in the future. One example is the issue of Trade Finance supports. We are now five years into talking about the need to help smaller exporters with the cost of and access to trade insurance and credit.  Still, there is no tangible delivery on this.

However, the real question, left unanswered by Budget 2014 is: what's next for Ireland? The Government is rhetorically focused on our 'exit' from the Troika-led funding programme. This objective is a policy epicycle designed to ease public attention off the realities of bad domestic governance during the crisis. Exit from the bailout, financially, fiscally and economically, means a public recognition that Ireland has run out of funds we can borrow from the IMF and the EU. It also puts forward a commitment that, unlike Greece, we will not be asking for another bailout. Being not Greece does not make us Iceland, however, since Iceland repaid its bailout loans. In contrast, we will be carrying our debts to Troika for years to come.

The Government is promising that once we exit the bailout, we will regain our control over fiscal policies. This is a gross over-exaggeration. Having ratified the Fiscal Compact, Ireland is now subjected to heavy EU oversight as long as our fiscal performance falls short of the targets set in the treaty. It will be long time before we meet all of the conditions.

The scrutiny of our targets will increase, while our performance will remain under serious pressures arising from the crisis. Most recent IMF forecasts assume full EUR5.6 billion adjustments taken over 2014-2015 period, and economic growth averaging over 2.1 percent per annum (almost 6 times the average growth in 2012-2013 period). These forecasts imply that in 2014-2015 Ireland will still face the third highest cumulative deficits in the euro area ‘periphery’. And the debt levels of Irish state are set to continue rising. In 2013, the Department of Finance projects the level of Irish Government debt to be at EUR205.9 billion. By 2018 this is projected to rise to EUR211.6 billion.

And here's another kicker. The Fiscal Compact sets the target for long-term structural deficits (in other words deficits that would prevail were the economy running at its long run sustainable growth potential) at 0.5 percent of GDP. IMF projections out through 2018 put Irish structural deficits declining from 5.1 percent of potential GDP in 2013 to 2.0 percent in 2018. In other words, in 2018 Ireland is expected to be the worst performing 'peripheral' state in terms of structural deficits and operate well outside the criteria set in the Fiscal Compact.

Worse, comes December 15, we will lose a strong supporter of our efforts to restructure legacy banking debts and the only member of the Troika that promotes structurally more important economic and markets reforms.

On foot of our weak fiscal position, the politicisation of the Irish economy is already building up, driven primarily by our European partners and – until December 15 – resisted by the IMF.

The pressure is rising on Ireland's corporate taxation regime. The Government admitted as much by promising to close the loophole that allows some MNCs to nearly completely avoid paying Irish corporate taxes.

The pressure is also growing on blocking Ireland’s chances to restructure legacy banks debts. Germany, the ECB and the Eurogroup are angling to block Ireland's potential access to the European funds set up to deal with the future banking crises.

We are going into 2014 self-funding mode with all the costs of the bailout in place, including the Dvoika (Troika less one) oversight and substantial deficit and debt overhangs. It now appears that there will be no credit line to cover any increases in the cost of borrowing that might arise in the future. There will be no precautionary fund to cushion against any risk to market demand for Irish Government bonds. There will be no system in place to deal with any future banking problems or with the legacy debts should such arise. The ECB, the IMF and our forecasters are all warning us that we still face potentially significant downside risks to growth and banks stability. The IMF has been for months raising the issues of the SMEs insolvencies and poor quality of banks capital.

In other words, we are boxing ourselves into a high-risk game with little to show for this in terms of a positive return from our 'exit' from the bailout.

History suggests that prudence, not pride should be our guide. Back in 2010 we pre-borrowed aggressively in the markets prior to the state finances collapsing under the poorly structured banks bailouts. Now, we are gunning for the 'exit' without having secured any support from our 'partners' once again. The hope is that this time it will be different: the markets will lend us at decreasing costs, while growth lifts the entire domestic economy out of stagnation. This might not be an equivalent of playing Russian roulette, but it is certainly a game of chance with high stakes on the losses side and little tabled on the potential winnings side.

The latest OECD research on basic skills across the advanced economies puts to a serious test our claims to having a highly educated workforce. Ireland ranked eighth in terms of the proportion of younger adults with tertiary education. In terms of problem solving proficiency, both our college graduates and adults with only secondary education rank below their respective OECD averages. In problem solving in a technology-rich environment – a proxy for skills related to internationally-traded services, the sole driver of our economy today – Ireland ranks 18th in the OECD. Our younger workers score below their OECD peers in basic literacy and in numeracy. When it comes to introduction of new processes and technologies in the workplace Ireland is ranked between such premier divisions of the global innovation league as Cyprus and Belgium. Given our poor performance in digital economy-specific skills, exposed in October 2012 report by the OECD and covered in these pages before, it is high time for us to get serious about reforming our education and training systems.

Saturday, October 26, 2013

26/10/2013: Confidozac Failing to Cure Euro Area's Policy Risks

While the euro leaders are happily slipping into dream-like state of amnesia, engaging in esoteric discussions and debates about the US spying scandals, wasting summit time on chatter and fluffing of feathers, the region's trials are not going away.

Debt overhangs remain persistent in the public, non-financial corporate and households domains; incomes remain stagnant and declining in real terms; unemployment is sky-high; deficits are sky-high; lending is stuck in 'reverse' gear; depositors are getting taken for a ride by the banking system malfunctions; and so on... Aggregate levels of uncertainty/risk in the system are not abating back to the levels of pre-crisis bliss, no matter how much intensive Positiviagra, Hopium and Confidozac have been pumped into the airways...


Source: Scott Baker, Nicholas Bloom and Steven J. Davis at

Higher numbers above imply higher uncertainty. September is showing reversion to trend, up... Good news is that we are on downward trend. Bad news is that we've been in these 'false bottoms' before (Q3 2009 and Q4 2010-Q1 2011). Worse news is that the we are nowhere near the levels of uncertainty that we've reached at the peak of 2000s recession and bust, let alone the levels of 'normalcy'.

26/10/2013: Local Authorities Loans Arrears

While we know about the crisis in mortgages extended by the banks, we have very little information on the housing loans extended by the local authorities. These are not reported, nor published. The figures are hidden out of view of the public. Last week, Irish Independent made public the latest aggregate data on these. read the article here:

Aggregate numbers are horrific: of total 20,277 local authority loans, 6,275 are in arrears of at least 90 days. No data was provided on arrears under 90 days. In ordinary owner-occupier mortgages, 'only' 12.7% of accounts were in arrears 90 days or longer in Q2 2013.

Keep in mind, local authorities loans were supplied on the basis of exceptional discounting of prices on underlying properties, implying that local authorities can simply convert loans into rent schemes back and cover the interest costs of property carry... hopefully... unless...

It is extraordinary that there is no reporting of and accounting for the potential losses carried by the local government in Ireland.

26/10/2013: Europe's Structural Deficits & Ireland's Headache...

As you know, I prefer not to blog extensively on economics matters over the weekend. However, due to work time constraints this week, I have accumulated lots of interesting material that requires some catch up blogging... so here are some new posts on economics matters...

First up: an interesting chart summarising neatly the problem of Irish fiscal consolidations to-date and the reasons why we are not out of the woods yet.

The above plots structural deficits in the EU (in other words the deficits that would have prevailed if the economy was not in a cyclical recession or downturn), as estimated by the EU Commission. Less questionable are those deficits derived using the IMF methodology:

According to IMF estimates, Ireland's structural deficits are the fourth largest in the EU and are second highest amongst the 'peripheral' states.

For comparative, consider also the primary deficits (removing the cost of interest on government debt):

Ireland is the worst performer in 2013 in the EU (this might improve to the second worst given reclassification of EUR700 million in licenses sales from 2012 into 2013). Notice that Greece is already running primary surplus, while Italy is close to doing so.

The above clearly shows that the Exchequer in Ireland is far from achieving sustainable deficits trajectory and that any claims that Ireland is close to completing fiscal adjustment required to restore its public finances to health should be subject to serious reservations.

Friday, October 25, 2013

25/10/2013: WLASze Part 1: Weekend Links on Arts, Sciences and zero economics

This is the first WLASze: Weekend Links on Arts, Sciences and zero economics post of this weekend.


Beautiful series of landscape photography from around the world:
From sublimely still:

To overpoweringly dynamic:

Best bit, the above link also offers links to 2010, 2011 and 2012 competitions.

From modern photography where every detail is given its prominence in light, motion and depth, to the first photograph ever that depicted people:
Irony is - the traces of people were all erased by the length of exposure… all but two...

I recently wrote about 3D and 4D printing (see here: I even spoke about these two technologies as the signifies of the incoming change in global economic relations between core inputs of capital, labour and financial investment at a recent event… and now, art raced us all ahead of the reality:

Living material interacting with 3D printed structure to reinforce it… the boundless capacity for tech innovation meets the boundless capacity for creative narration. And loses to it…

While on the topic: see this article about the emerging future of architecture in the age of 3D printing… Will we print our homes of the future? Sure we will. Will they look like a spiders-infested cave of post-apocalyptic plastic universe that reverses Lego into a fly-like dimensionality of human existence?.. I hope not…

Spare me this 3-bed penthouse…

It might look cool in dramatic light (no - it does not) but semantically and aesthetically it is equivalent to Zaha Hadid's obsession with curvature sprawled over any space to bury any dimensional proportionality to the living space around it... sort of like the image below, only taken through the filters of design:

And think about the cleaning bills… or the cost of watches and jewellery lost in all these twigs and twists of the surfaces of the 3D-printed cob-web-building… Then there are family dinners, with kids… Yeeks!

Let's get back to the clean(er) world of science and thought… JPL imagery of Saturn: the colorized mosaic from NASA's Cassini mission shows an infrared view of the Saturn system, backlit by the sun, from July 19, 2013.

And for less dynamic imagery that is dead-cool: Saturn's satellite, the 'Death Star'(Moon) Mimas