Saturday, May 31, 2014

31/5/2014: One Chart of the Week, 5 charts of the last 5 years

If you see one chart this weekend, make it count. Here's a contender:

The above shows US GDP growth starting with the end of each recession from 1954 through the last one (where all growth indices are set at 100). And guess what: this time is different. Despite massive, un-parallel, unprecedented monetary expansion and QE, the current recession and recovery signal both - the sharpest decline from the pre-crisis peak and the shallowest recovery from the crisis trough. 

To confirm this - see the historical deviations from the potential GDP:

And this is not just about GDP. Here are changes in employment:

And unemployment:

These charts come from (except for the first one)

And the famous chart from the CalculatedRisk blog tracking percentage of jobs losses:

That's right... all of this 'wealth creation' in the financial markets is hardly about the real economy... Which means that one day, either fundamentals will have to catch up with financial markets valuations (by growth vastly outstripping capital gains), or financial markets will have to scale down the cliff back to fundamentals (by financial markets correcting massively to the downside). Or both... Which one is the 'soft landing'? You guess...

31/5/2014: Twitter: Promoting Isolation, Ideological Segregation and All Things Good to Your Political Engagement

A very interesting study looking at comparatives of media and news use via twitter (social media) and traditional media (print, radio and TV). The paper, titled "Are Social Media more Social than Media? Measuring Ideological Homophily and Segregation on Twitter" (May 2014_ by YOSH HALBERSTAM and BRIAN KNIGHT is available here:

Some highlights:

Per authors, "Social media represent a rapidly growing source of information for citizens around the world. In this paper, we measure the degree of ideological homophily and segregation on social media."

The reason this is salient is that there has been a "tremendous rise in social media during the past decade, with 60 percent of American adults and over 20 percent of worldwide population currently using social networking sites (Rainie et al., 2012)…. Indeed, this phenomenal growth in social media engagement in the U.S. and around the world has transformed the nature of political discourse. Two thirds of American social media users—or 39 percent of all American adults—have engaged in some form of civic or political activity using social media, and 22 percent of registered U.S. voters used social media to let others know how they voted in the 2012 elections."

Per authors, "Three key features of social media distinguish it from other forms of media and social interactions." These are:

  • "…social media allow users to not only consume information but also to produce information." It is worth noting that social media can also reproduce information produced on social media, as well as that produced by traditional media.
  • "…the information to which users are exposed depends upon self-chosen links among users." In other words, social media produced and distributed information can be self-selection biased. The extent of this selection is more limited in the case of traditional media, where individual biases of consumers can be reinforced by selecting specific programmes/channels/publications, but beyond that, the content received by consumers is the one selected for them by someone else - journalists, editors.
  • "…information on social media travels more rapidly and broadly than in other forms of social interactions. …[social media network model] leads to a substantially broader reach and more rapid spread of information than other forms of social interactions."

As authors put it: "Given these three distinguishing features, the rapid growth of social media has the potential to effect a structural change in the way individuals engage with one another and the degree to which such communications are segregated along ideological lines."

To examine this possibility, the authors construct "a network of links between politically-engaged Twitter users. For this purpose, we selected Twitter users who followed at least one Twitter account associated with a candidate for the U.S. House during the 2012 election period. Among this population of over 2.2 million users, we identify roughly 90 million links, which form the network." Based on political party followed, users were assigned ideological identifiers.

Two key findings of the paper are as follows:

  1. "…we find that the network we constructed shares important features with face-to-face interactions. Most importantly, both settings tend to exhibit a significant degree of homophily, with links more likely to develop between individuals with similar ideological preferences." In other words, we do show strong selection biases in networks we form. Doh!..
  2. "…when computing the degree of ideological segregation and comparing it to ideological segregation in other settings, we find that Twitter is much more segregated than traditional media, such as television and radio, and is more in-line with ideological segregation in face-to-face interactions, such as among friends and co-workers." Worse: we not only form biased networks, we also create selection-biased interactions and generate selection-biased chains and flows of content. Doh! Redux...

Conclusion: "Taken together, our results suggest that social media may be a force for increasing isolation and ideological segregation in society."

Wait… so we act on the social media base to create networks that are closer to friends networks… and this leads to… isolation?.. Well, my eye, I would have thought this would be the opposite…

But top conclusion makes sense:  "The issue of ideological segregation is important when providing such information. Exposure to diverse viewpoints in a society helps to ensure that information is disseminated with little friction across a large number of people. When a community is polarized and is divided into factions, by contrast, information may spread unevenly and may miss intended targets. Our results suggest that social media are highly segregated along ideological lines and thus emphasize these potential problems associated with the flow of information in segregated networks."

The problem, of course is: Can the selection bias be ameliorated? Can people be 'incentivised' to engage with ideological opposites? In my view - yes. This can be achieved most likely by educating people about systems of thought, logic, structures of knowledge, information. The thing is: in social networks, such education is both more feasible (volume of information delivered and speed are both higher) and probably more productive (because there is inherent trust in one's own network that is stronger than in detached media networks. Peers generate stronger bonds than preachers...

The paper has some fascinating data illustration of media biases, though - worth looking at in the appendix.

Friday, May 30, 2014

30/5/2014: Detailed Analysis of Retail Sales for Ireland: April 2014

In the previous post on Retail Sales data, I covered Q2 comparatives across the years ( As promised, here is April data taken on a monthly frequency.

There are several very interesting developments in terms of core retail sales data released earlier this week by CSO. Stay patient as I cover it.

Firstly, from the top level:

  • Current 3mo average for Retail Sales by Value index is at 96.7, which is below 96.9 average for the 3mo period through January 2014. Bad news. However, a ray of sunshine: Value Index did rise on seasonally-adjusted basis to 97.3 in April compared to 95.9 in March.
  • Current 3mo average for Retail Sales by Volume index is at 102.5, which is virtually unchanged on 102.4 average for the 3mo period through January 2014. Neither bad not good news. However, another ray of sunshine: Volume Index did rise on seasonally-adjusted basis to 103.3 in April compared to 101.7 in March.
  • Meanwhile, Consumer Confidence index reported by ESRI averaged 85.3 in 3 months though April 2014, which is blisteringly higher than 78.5 reading recorded across 3 months through January 2014. Bad news: on shorter 3mo average basis, Consumer Confidence continues to go boisterously where actual retail sales are not daring to move.
Chart to illustrate:

Notice the following from the chart above:

  1. Bottoming out on trend in Consumer Confidence took place around Q1 2011. Bottoming out in Volume Index of Retail Sales took place around Q2-Q3 2012. Bottoming out in Value Index of Retail Sales is yet to be established, though it appears that it might have happened around Q4 2013. Thus, Consumer Confidence can at best be a weak indicator for changes in Volume and counter-predictor to changes in Value of Retail Sales
  2. Consumer Confidence is rising much faster, over sustained period of time, than Volume of Retail Sales which itself is outpacing Value of Retail Sales. In other words, even massive and sustained reductions in the retail sector margins are not being able to explain in full the boisterous dynamics in Consumer Confidence.
Now onto my own Retail Sector Activity Index (RSAI), which is a weighted average of 3mo MAs for Volume and Value of Retail Sales Indices and Consumer Confidence:

Couple of things worth noting:

  1. RSAI shows, finally, a breakaway from the flat trend that held the sector down between 2009 and much of 2013. This is good news. The RSAI is now at 111.0 up on 110.6 in March 2014 and on 3mo MA basis it is up from 107.7 over 3 months through January 2014 to 110.7 currently.
  2. RSAI in most recent two months has been visibly slowing down in the rate of growth, despite massive rises in Consumer Confidence. This can signal some weakness coming down the road. Or it might signal temporary slowdown (remember, this is seasonally-adjusted data).
Lastly, let's revisit correlations between various indices. Three tables below summarise:

Core takeaways from the above tables:
  • Consumer Confidence Index (CCI) has now moved into correlation range with Volume of sales that is similar to the one observed prior to the crisis: 0.757 vs 0.741 and this correlation is no longer negative. This confirms what I said above in the analysis of the first chart. And this is potentially good news, as it suggests firming up of the upward trend in the Volume of sales.
  • Consumer Confidence Index remains weakly correlated with Value of Sales (0.393) as compared to pre-crisis (0.720), but it is now also positive as opposed to crisis period readings. This means, as I said above, that it is probably too early to call growth trend in Value series, but it is now time to watch the series closely for confirmation of denial of such trend.
  • Much of the RSAI index performance is skewed by the CCI presence in the series computation. Still, the index tracks much better the Value and Volume activity in the Retail Sector than the CCI.

30/5/2014: IMF: We are Failing, but We Soldier On… at Your Expense...

IMF press release from today [my comments in italics]:

"The Executive Board of the International Monetary Fund (IMF) today completed the fifth review of Greece’s performance under an economic program supported by an Extended Fund Facility (EFF) arrangement. The completion of this review enables the disbursement of SDR 3.01 billion (about €3.41 billion, or US$4.64 billion), which would bring total disbursements under the arrangement to SDR 10.22 billion (about €11.58 billion, or US$15.75 billion).

In completing the review, the Executive Board approved a waiver of nonobservance of the performance criterion on domestic arrears, given the corrective actions taken. In light of the delays in program implementation, the Board also approved the authorities’ request for rephasing three disbursements evenly over the remaining reviews in 2014. [In other words, Greece failed to deliver on programme commitments on time. IMF response - just shift the goal posts. Behind the scenes, of course, we all know that Greece is routinely failing to deliver on the Programme and that delivering on said Programme is actually not exactly what Greece needs to restore its economy to growth and its society to health. IMF knows the same, but being a committed 'European' the Fund can't openly say the same in full voice. So instead of admitting the failure of the Programme, it pushes off targets and alters time frames.]

...Following the Executive Board discussion, Mr. Naoyuki Shinohara, Deputy Managing Director and Acting Chair, stated:

“The Greek authorities have made significant progress in consolidating the fiscal position and rebalancing the economy. The primary fiscal position is in surplus ahead of schedule, and Greece has gone from having the weakest to the strongest cyclically-adjusted primary fiscal balance in the euro area in just four years. However, several challenges remain to be overcome before stabilization is deemed complete and Greece is back on a sustainable, balanced growth path. [We know what 'surplus' Greece delivered in 2013. IMF knows this too. Still, soldier on… nothing to admit here.]

“Additional fiscal adjustment is necessary to ensure debt sustainability, through durable, high-quality measures, while strengthening the social safety net. It is essential that the authorities continue to improve tax collection, combat evasion, and strengthen expenditure control. Public administration reforms need to be accelerated. The authorities are taking remedial actions to clear domestic arrears and expedite privatization. [Alas, even the IMF has to face the facts. The Fund does so in a Monty Pythonesque way by calling for more adjustments. After successful adjustments imagineered above, more adjustments still needed… It is as IMF is playing a role of doctor who, having sawed off one leg of the patient is now claiming operation success because the other leg has to go too…]

“Despite significant wage adjustment, export performance remains comparatively weak. The redoubling of efforts to liberalize product and service markets is therefore welcome. Further measures are necessary to remove regulatory barriers to competition in key sectors and to reform investment licensing. The authorities are committed to revitalizing labor market reforms and improving the business climate. [No one can accuse the Fund of ever once having exported anything, save research papers and policy proposals. Having no understanding of business, the IMF thinks that if/once Greece cuts prices/costs sufficiently enough and 'liberalises markets' the entire world will start glamouring for Greek-made exports. What markets does Greece need to liberalise to improve export performance? Exports require goods and services that someone in the world wants. Name sectors of Greek economy that can export that are currently not exporting.]

“Addressing the very high level of nonperforming loans remains an important priority. While there is no acute stability risk, it is critical for the economic recovery that banks be adequately capitalized upfront to recognize losses on the basis of realistic assumptions about loan recovery. Efforts are being made to recapitalize the banking system and set aside the buffer of the Hellenic Financial Stability Fund to deal with contingencies that may arise during the program. The private debt resolution framework should also be strengthened expeditiously. [Efforts to recapitalize Greek banks have been ongoing for a good part of 3.5 years now. Does IMF have any idea when these efforts might bear some fruit? Or is this too a fungible time line?]

“Public debt is projected to remain high well into the next decade, despite a targeted high primary surplus. The assurances of Greece’s European partners are welcome that they will consider further measures and assistance, if necessary, to reduce debt to substantially below 110 percent of GDP by 2022, conditional on Greece’s full implementation of the program,” Mr. Shinohara stated. [Key point is this: Greece needs debt restructuring that will have to be concentrated on public lenders. Aka: ECB and European 'partners'. We are in 2014 now - four years into witnessing staunch denial from the ECB and European partners of the need for such measures. Keep shifting the targets, IMF. It is about the only route to saving face in this mess left to the Fund.]

The entire Greek programme analysis by the IMF now firmly resembles a one-handed resignation that a second rate tennis player starts to display at the end of the second set, having lost the first one and going on to 6:0 loss for the second round.

30/5/2014: That State-Sanctioned Inflation Tax...

There is much to be analysed in the Irish Retail Sales figures for January-April 2014, updated by the CSO this week. And I intend to do so on this pages at a later time.

But one thing jumps out: taking data for Q2 2014 to-date (in other words, looking at April performance), and comparing this against all previous Q2 data (monthly averages for April-June) gives a bit of a shocker:

Per chart above, since the onset of the crisis (from the peak) through today, both values of retail sales and volumes of retail sales have declined. With exception of food, these declines have been pretty sharp and despite some improvements in recent months, they remain sharp.

But, in all cases, across all broad categories of goods traded, retail sales have fallen more by value than by volume. This means that retailers have been selling less in terms of actual volumes of goods, but are receiving even less in terms of revenues for these goods sold. Of course this means two things:

  1. There is on-going deflation in those sectors where value declines are steeper than volume declines; and more importantly
  2. There are lower margins (and lower investment and hiring) in the segments where (1) takes place.
Yet, two segments of goods stand out from this picture: Bars and Automotive Fuel. In both, value of sales declined less than volume. In other words, less is being charged for these goods, but even less is being supplied. That is a signifier of rising cost of provision of same goods at retail level - or in plain terms - real, actual inflation. Now, both sub-categories are witnessing two sub-trends:
  1. Inputs costs in both are not rising at any appreciable rate (fuel inflation relating to oil prices is relatively low over time considered, and drink industry is seeing lower factory gate prices, not higher);
  2. Taxes on both are rising, at various stages of supply chain.
In other words, the chart above shows that in Irish economy, the inflation tax is being forced through heavily taxed sectors where the State extracts the lion's share of final cost of goods supplied to consumers.

The above also puts under serious questions the bars industry lobby claims that there is a need for high level minimum pricing on alcohol. Their sector, it appears, has been hit by a drop in demand and not by a drop in prices. In fact, if anything, ceteris paribus, their sector might benefit from lower prices - charging punters 7 quid per pint of domestic beer is not a good way to improve your sales, you know...

Thursday, May 29, 2014

29/5/2014: Earnings in Ireland: Something's Fishy in that Murky Water?..

Average weekly hours and earnings were released by CSO this week, covering Q1 2014 data. Remember, these are delivered in the context of reportedly growing employment and accelerating economic activity, right?

Ok, top-line observations: y/y average weekly earnings are down 0.4% or EUR2.66/week (EUR138.32 per annum, assuming paid holidays and not adjusting for working hours etc, but you get the point: in 2013 a person earning average weekly earnings level of salary would have had EUR2,346 per month in disposable after-tax income, in 2014 they have EUR2,341 per month).

Worse than that, the decline in weekly earnings was driven by a drop in average hourly earnings (down 0.5% y/y) against flat hours worked (31.2 hours/week on average). In other words, we are creating jobs in tens of thousands, but seemingly there is no pressure on hours worked and there is downward pressure on hourly earnings.

Were these changes down to cuts in bonuses, perhaps?

Well, no: excluding irregular earnings, average hourly earnings fell 0.6% y/y. So if you work in a job where bonuses are not present, congratulations, the economic recovery is biting into your earnings even more. It is worth noting that this trend is not uniform in the economy: private sector hourly earnings rose 0.6% but public sector earnings fell 2.5% year on year. And steepest increases in earnings took place in enterprises with less than 50 employees (+2.3% y/y), while steepest declines took place in enterprises with 50-250 employees (-2.9% y/y). Large enterprises saw average hourly earnings excluding irregular earnings fall 1.6%.

So short term falls in earnings are down to public sector and larger enterprises...

Of course, earnings can be volatile even y/y, so here is a handy comparative for earnings changes on Q1 2010:

Per CSO: "Across the economic sectors average weekly earnings increased in 7 of the 13 sectors in the year to Q1 2014, with the largest percentage increase in the Construction sector (+10.2%) from €639.35 to €704.41.  The largest percentage sectoral decrease in weekly earnings was recorded in the Education sector (-2.7%) from €814.12 to €792.03. Between Q1 2010 and Q1 2014 average weekly earnings across individual sectors show changes ranging between -6.3% for the Education sector from €845.59 to €792.03 and +13.6% for the Information and communication sector from €915.94 to €1,040.10"

Still, Public Admin & Defence are down just 0.1% on Q1 2010... shrinking Industry is doing swimmingly, as does Finance & Insurance & Real Estate...

On last bit: average working hours were unchanged y/y in private sector, but up 2.3% in public sector. Which is worrisome - rising employment in private sector should lift hours ahead of numbers employed, by all possible logic, since hiring more workers is costlier than letting those employed work longer hours for the same or even higher pay. Still, hours are static y/y, and are up by only 0.1 hour on Q1 2010... Puzzling... Worse: working hours are unchanged y/y and down on Q1 2010 for smaller firms, where wages pressures seem to be highest.

This simply does not gel well with the numbers of tens of thousands of new employees, unless, of course, new employees are working fewer and fewer hours...

Saturday, May 24, 2014

24/5/2014: UofL Student Wins Worldwide Alltech Young Scientist Competition

Some excellent news from the Irish knowledge 'economy' (society, really) front:

Gillian Johnson, from the University of Limerick, was the winner of the undergraduate competition run by Alltech Young Scientist Program. Johnson’s research work focused on comparative genomic identification and characterisation of a novel β-defensin gene cluster in the equine genome.

Gillian won in the field of more than 8,500 participants, representing the future generation of animal, human and plant health scientists from around the world.

In the graduate category, winner was Lei Wang, originally from China and currently completing her PhD studies in the United States with the University of West Virginia. Wang’s research work focused on novel functional roles of oocyte-specific nuclear transporter (Kpna7) in relation to developmental competency of rainbow trout oocyte and early embryo.

To participate in the program, students wrote a scientific paper that focused on an aspect of animal health and feed technology. The first phase of the program included a competition within each competing country, followed by a zone competition. The winners of each zone moved on to a regional phase and the regional winners competed in the global phase.

The Alltech Young Scientist Program is currently taking applicants for its 2015 competition. To enter, visit

Friday, May 23, 2014

22/5/2014: Labor Mobility within Currency Unions & some Implications for Ireland

A very interesting theoretical paper "Labor Mobility within Currency Unions " by Emmanuel Farhi and Iván Werning, April 2014 ( looks at "the effects of labor mobility within a currency union suffering from nominal rigidities."

The departing point for the paper is Mundell (1961) famous dictum that labor mobility must be a precondition for optimal currency areas. In support of this dictum, the U.S. "enjoys relatively high mobility and has proven to be a successful currency union. Mobility is arguably much lower within the Eurozone, which sunk into trouble scarcely ten years after its inauguration." Of course, despite the shallower extent of mobility in Europe, EU policymakers repeatedly cite free mobility regime for labour within the EU as a major cornerstone of the EU and, thus, by corollary - to the functioning or the promise of functioning of the euro zone.

Despite all the intuition behind Mundell's proposition, there is little formal research connecting mobility with macroeconomic adjustments in a currency union setting.

Farhi and Werning "set up a currency union model featuring nominal rigidities and incorporate labor mobility across the different regions (or countries) that compose the currency union." The paper tackles "…two related questions. First, does mobility help stabilize macroeconomic conditions across regions in a union? Second, is equilibrium mobility socially optimal?"

The study does not quite confirm Mundell's proposition, but its findings "…are consistent with a potential important role for mobility. Workers migrating away from depressed regions naturally benefit from the option to pick up and go somewhere better. The interesting and less obvious question is whether their exodus also helps those that stay behind. That is, whether it aids in the macroeconomic adjustment of regions. A major insight of our analysis is that the answer to this question is subtle because workers leaving a region depart not only with their labor, but also with their purchasing power."

This leads to a divergent set of outcomes depending on the source of the original shock to the economy. If the demand shock comes from internal (region-specific) shock (like, for example, in the case of Ireland where property crash led to massive disruptions in domestic demand and where domestic demand continued to shrink every year since 2008, uninterrupted), the authors find that "…migration may not help regional macroeconomic adjustment." How so? "…we provide a benchmark case where migration has no effect on the per-capita allocations across regions. For this benchmark, the entire demand shortfall in depressed regions is internal, located within the non-tradable sector [again, think Irish construction, property and retail sectors, and associated banking sector bust]. When workers migrate out of a depressed region local labor supply is reduced, but so is the demand non-traded goods, which, in turn, lowers the demand for labor. The two effects cancel, leaving the situation for stayers unchanged."

In contrast, "…when external demand is also at the root of the problem, migration out of depressed regions may produce a positive spillover for stayers." This, of course, applies to economies like Portugal and Cyprus, where external shocks are the main drivers for the crisis. When depressed regions also suffer from external demand shortfalls, "…migration out of depressed regions may help improve the region’s macroeconomic outcome. For example, at the opposite end of the spectrum, suppose regions only produce traded goods and that there is no home bias in the demand for these goods. The demand for each region’s product is then determined entirely by external demand at the union level, and internal demand plays no special role. In this case, migration out of a depressed region improves the outcome of stayers by increasing their employment, income and consumption."

On a positive side, from Ireland's point of view: "…the degree of economic openness (how much regions trade with one another) turns out to be a key parameter. Openness was proposed by McKinnon (1963) as another precondition for an optimal currency area." Except, of course, as we in Ireland are fully aware, openness can be real (e.g. Swiss exporting indigenous output that is matched by the MNCs exporting out of Switzerland) and accounting (e.g. Irish exports of ICT services or phrama).

Lastly, it is worth noting that the paper does not consider rigidities beyond those present in the pricing mechanisms. Thus, for example, labour laws are not included and neither are hiring practices or promotional practices that can severely skew flows of labour.

23/5/2014: Another 'Big Deal' of the Russian Week

Thought the Russian gas deal with China was a 'biggy'... at USD400-440 billion valuation (over 30 years) it is. And here are some of the details:

Welcome to the big numbers week for Russia. Today, Lukoil and Total announced a new deal for developing Bazhnov Shale Oil Field:

The field (dating to Jurassic deposits) was discovered 45 years ago back in 1968 by an accident, the field is currently being developed by a number of companies, including a partnership between Rosneft and ExxonMobil, and Salym Petroleum - a JV between Shell and Gazprom Neft.

So far, reported recoverable reserves are officially booked at 3.5 billion barrels (500 million metric tonnes). Official estimates are for daily yields of 1-2 million barrels per day by the end of this decade. For comparative, US North Dakota aims to reach production levels of 1.2 million barrels per day by 2015 - this is the largest US shale oil play at this time. Its biggest field - Bakken - is small comapred to Bazhenov (see here one older report: and an FT report on same:

Overall estimates put Bazhenov reserves at between 20 billion barrels and 950 billion -1 trillion barrels, which runs into recoverable equivalents of up to 160-170 billion barrels. Merill Lynch 2013 assessment estimated reserves at 75 billion barrels (recoverable , EIU estimates from 2013 show Bazhenov recoverable reserves at between 3.7 and 14.8 billion barrels of light crude. At mid-point (excluding outlandishly large 160bn estimate), this implies some 40 billion barrels worth around USD3.3 trillion at past decade averages. Which puts into perspective that USD440 billion gas deal.

At the upper end of this estimate, Bazhnov field pushes to 4 times Saudi Arabia's oil reserves or roughly 30 years of world supply at current demand levels. This is why IEA considers Bazhenov field as the world's largest source of shale. Of course, Russia is already producing more oil than Saudi Arabia with daily production of 10.3 million barrels per day and Russian most productive fields - those of West Siberia, like Salym group, are declining, with production dropping at an average of 2% annually.

Here's the map of Russia's main oil producing regions:

Bazhenov covers roughly 1/3rd of the West Siberian basin (

But back to the Russia-China gas deal... there is huge legacy infrastructure network linking Europe with Western Siberian basin, and virtually no networks linking it to the Asia-Pacific. With the gas agreement signed this week, this is about to start changing. Which means that the gas deal will promise to wire shale oil and gas reserves of the entire Siberia into the massive AP markets, providing two key deliverables for Russia:

  1. Diversification of demand, linking more closely pricing in the Western European markets (stagnant of economic growth and demographic expansion) to that of dynamic AP. Russia wins in this scenario big time, as it will no longer be held hostage to the declining macroeconomic fortunes of the EU.
  2. Head-on competition with North America (where LNG and oil shipments will have to go via sea transport as opposed to pipe in Russian case).
Europe also wins, as the second point above will help contain energy price inflation in the EU as North Sea production declines in decades ahead.

The point that is being missed on the Russia-China deal by many analysts is that, politics aside, Russia will benefit from a massive shifting of economic activity East - to the regions rich in resources and starving of infrastructure to develop them. With this shift, Russian social development also will gain - the sparsely populated expanses of Eastern Siberia can do with the population growth that can happen on foot of large and sustained capex uplift. 

23/5/2014: An Icy Gust from the IBRC's Promo Notes Past...

So Irish Central Bank pre-sold EUR350 million worth of 'Anglo' bonds that were due to be sold under its minimum commitment to sell EUR500 million worth of bonds in 2014. Except it pre-sold them back in 2013... Here is the original Bloomberg report on the matter:

Why is this important?

Remember, the EUR25 billion worth of 'Anglo' Government bonds held by the Central Bank after the February 2013 'deal' or swap of Promissory Notes for bonds carries with it a commitment to sell minimum required volume of bonds annually to the market.

Here's Minister Noonan on this:

Also, remember, the bonds held on Central Bank balancesheet accrue interest payments from the Government that the Central Bank subsequently 'returns' as divided to the state (having taken its 'cost' margin out to pay for necessary things, like, new HQs building etc).

Once the bonds are sold, however, the interest is paid to their private sector holders.

It is likely that the yield on Government bonds sold was somewhere around 3%, which means that Irish taxpayers just spent EUR10.5 million in interest payments that were, put mildly, unnecessary. We were not required to sell these bonds in 2013 and could have waited until 2014 to do so.

Let's put this into proper perspective: EUR35 million was pledged by the Government this month to help resolve homelessness crisis. Laughably small amount, but still - a necessary gesture from the cash-strapped state. This could have been EUR45 million (or more) should the Central Bank not engage in bonds activism.

So why did Professor Honohan go to the markets to sell the bonds back in 2013? The reason is simple: ECB was never too happy with the 'deal' that pushed Ireland dangerously close to using Central Bank to fund the state (IBRC). Accelerating sales of bonds pro forma accelerates Central Bank exit from such an arrangement.

Alas, happy or not, ECB hardly can do anything about unwinding the 'deal' in practice without doing some serious damage to the euro system. That said, we might see Frankfurt ramping up pressure on CBI to accelerate future sales, once the banks stress tests are fully out of the way - in, say, 2015. That will once again bring to our attention the simple fact that the mess that was IBRC did not go away.

Keep in mind that the Government own estimates of the impact of the promo notes deal on government deficits over the short term was the total 'savings' of EUR2,025 million in 2014-2015. Doubling the rate of disposals from current will see this reduced by EUR30 million in two years.

More problems are ahead relating to the interest rates. The bonds are floating rate notes, with yield tied to  6 months euribor reset every six months.

The problem is that whilst euribor was running at 0.372% back in February 2013, nowadays it is at 0.410% - a difference of 0.038%, which, over EUR25 billion quantum implies annual interest costs increases of some EUR95 million. Most of this is going to be rebated back to the Government via the Central Bank, but with any acceleration in the sales of bonds, this is also going to get eroded.

All in, we are already running below EUR2 billion 2014-2015 'savings' assessed on the Promo Notes deal, and counting...

Thursday, May 22, 2014

22/5/2014: Irish Domestic Energy Prices

As you all know, I have been covering the state of affairs when it comes to the state-sanctioned inflation here in Ireland for some time - including in the pages of my now defunct column at the Sunday Times.

Here is the article from the Irish Independent on energy price inflation in Ireland, comparative to the EU:

And the original EU data:

Still believe in the benevolence of the State? Or that Irish Government should be running gas & oil resources of this country? Really?

22/5/2014: Poverty in the US Cities: Regional Comparatives

Bloomberg published a fascinating list of 50 US cities with biggest exposure to poverty amongst their populations. The full list is available here:

Just to make exercise a little different, I grouped them into four main regions. One would expect the results to show South to have highest poverty exposures, the West showing relatively benign poverty, but due to high ethnic diversity and significant presence of minorities, somewhat higher poverty exposure than, say North-East... alas, here are the numbers in full glory.

Ranking in descending order: West shows lowest poverty exposures, followed by the South excluding Florida (different composition of population by age and ethnicity), and so on, until Mid-West comes out the worst, but only as long as we include the State of Michigan (Detroit and Flit being numbers 1 and 2 worst off cities when it comes to poverty).

22/5/2014: Happy Times Roll: Irish Manufacturing Producer Prices

Deflation keeps hammering Irish Manufacturing sector:

Per CSO: year on year, factory gate prices fell 2.7% in April 2014, compared with a decrease of 3.1% in the year to March 2014, including

  • a decrease of 3.1% in the price index for export sales (subject to potential effects of currency fluctuations) and 
  • a decrease of 0.6% in respect of the price index for home sales.

Nothing to worry about, folks, this economy is gaining strength and momentum all of the time... PMIs booming and producers confidence is rising (if you ask IBEC).

22/5/2014: Paging Super Mario: Cleanup in the German Isle

Remember the OMT - the ballistic missile Super Mario fired in the direction of the markets to calm the hell out of them and dramatically lower the bond yields for the countries saddled with the likes of the FG/LP/Troika coalitions (known colloquially as 'peripherals')?

Well, those pesky Germans never really liked the idea and as we all know (past history is a good indicator) when Germans don't like something, it is for a long... long... long time...

Wednesday, May 21, 2014

21/5/2014: Ireland Ranks 14th in Economic Connectedness

McKinsey Global Institute Global Connectedness Index was published in April this year, scoring countries connectedness index and overall flows based on data through 2012.

Rank of participation by flow as measured by flow intensity and share of world total.

Couple of things to notice: Ireland's position is strong at 14th rank, but it is not as strong as one would have expected. And certainly would not be anywhere near the 14th rank were we to consider Ireland's indigenous enterprises, as opposed to MNCs.

Another point: Ireland's strengths are in only one segment: services flows. Which are, of course, skewed very heavily by a handful of MNCs trading out of ICT services and IFSC. In fact, we rank below Russia in Data and Communications flows, despite being a global hub for ICT services MNCs.

Scarier bit: we rank below virtually all our direct competitors in the global markets.

21/5/2014: Few Slides Covering Russian Banks

Few slides from my bigger and newer Russia Deck - these covering Russian banks:

 In the above, note the nonperforming loans... Ugly does not even begin to describe Ukrainian situation. Russia's NPLs, however, are benign by comparative to rest of the FSU...

 Summary as is in both above and below...

21/5/2014: That Medicated Happiness in the Club Med...

"France’s love of anti-depressants, sleeping pills and other prescription medication has reached new heights according to figures showing one in three adults in the country use some form of psychotropic drug. A study by France’s National Drug Safety Agency (ANSM) found that 32 percent of French people used such medications in 2013, either on a regular or occasional basis, French daily Le Parisien reported Tuesday." This was reported in here.

There's more: "Another study released this week, carried out by Ipsos on behalf of the French Hospital Federation, found that 84 percent of patients polled said that doctors often hand out unnecessary prescriptions." And "a study by carried out by the company Celtipharm, also cited by Le Parisien, found that 230,000 French people were risking their health each month by mixing psychotropic drugs with other, non-compatible medication."

A cross-nations comparative shows trends for anti-depressant drug use across Europe for the period 1980-2009:

Interestingly, Mediterranean countries fared really poorly in the above study: Greece, Italy and Spain all recorded above average rises in the use of anti-depressants, with big increases from the mid-1990s on.

21/5/2014: Irish Credit Supply to Cash Ratios are Heading South, Still

Irish Central Bank and Government departments have been pushing hard to convert Irish economy into cashless, electronic accounting data storehouse, where everything gets counted and taxed (at least in theory).

Meanwhile, in Ireland's real economy, cash remains the king as the only metric of money supply still expanding in the deleveraging hell gripping the financial system:

To remind you: in Q4 2013, Irish private households' deposits fell to their lowest point since March 2009 (note, this makes them the lowest since around Q3 2005 as current figures reflect addition of the Credit Unions deposits to the dataset (they were not counted in until January 2009).

That's right... let's do away with cash so Irish banks deposits get another superficial (accounting) boost and few million worth of tax euros flows into the state coffers. Happy times all around... we know Irish households are getting richer and richer by day...

21/5/2014: Russia-China Gas Deal

Russia and China signed bilateral gas deal to supply 38bcm of Russian gas per annum, with an option of expanding shipments to 61bcm. The deal covers 30 years of supply. Full valuations and prices are not yet known, but the deal at 38bcm/annum x 30 years was originally valued at USD440 billion.

Here are the best reports on the deal so far (to be updated):

Update: zerohedge covers price details here:

WSJ on the deal: pointing to heating up competition in Asia-Pacific energy markets and Russia's play coming ahead of Canadian exports flows. This, in part, explains why Russia agreed on a deal pricing gas at just above USD350 bcm whereas Russia previously looked for a price closer to USD400 bcm. As you can see from the second chart below, over the years while the deal with China was in negotiations stages, gas price inflation fell significantly, reducing room for price upside in the deal.

The deal is of huge importance to Russia.

Russian economy is only weakly-dependent on gas prices, Government deficits are somewhat more closely linked to these. See more here: and in the slide below:

The reason for this is that Russian economy is not as dependent on exports (gas accounts for ca 60% of these on goods side):

And in the long run, there is spending and income channel feed through from gas prices (and exports) to domestic demand:

It is worth noting that China-delivery price of Russian gas can be lower than European delivery for two reasons:

  1. Internally contained transit costs
  2. Lower risk of disruptions (remember that Ukraine routinely pushed Russian gas shipments to the brink by either threatening to or actually syphoning gas designated for Western European deliveries for domestic use) and non-payment (settlements are likely to be in Chinese yuan, rather than in the USD and with this, there is no risk of non-payment, as in the case of Ukraine). See: for more.
Also, gas for China will be coming from newer fields, which are located closer to the Chinese border and, although more expensive in production, are not competing with Western Europe-focused Western Siberian fields.

Finally, new pipeline holds promise bringing exploration and production further East from existent centres of production.

All across - this should be a very good deal for Russia and China. The core threat here is to the US exports of LNG to Asia-Pacific, where US producers are collecting huge margins, compared to European markets. But this threat is still some years (if not decades) off from becoming a significant pressure point.

Tuesday, May 20, 2014

20/5/2014: Irish Credit Supply to Non-Financial, Non-Property Sectors

We keep hearing about banks lending to enterprises and the recovery in the banking sector in general. And we keep watching credit supply in the economy shrinking and shrinking and shrinking. The reality, of course, is simple: our banking system continues to deleverage and alongside, our companies continue to deleverage. This means that legacy debts relating to property investments and development are being washed off the books. Which, of course, accounts for property-related credit. But…

Take a look at this chart, plotting credit advanced to Irish private sector enterprises.

The property deleveraging story is in solid orange. And not surprisingly, it is still heading down. With all the fabled foreign and domestic property buyers reportedly killing each other on their hunts for bricks and mortar assets in Ireland, there is less and less and less credit available for the sector. In part, some of this decline is now being replaced by foreign funding (lending and equity, including private equity). But the credit story is still the same: property related lending is down 6% y/y in Q4 2013 (latest for which we have data).

Deleveraging in financial sector is also there - the sector credit lines have shrunk 15% y/y in Q4 2013.

But what on earth is happening in the 'healthy' (allegedly) sectors of the economy - those ex-Property and ex-Financial Intermediation? Here, total credit is down 4% y/y in Q4 2013.

In fact, from Q2 2009 onward, Irish financial system registered not a single quarter of y/y increases in credit supply to non-financial and non-property enterprises in Ireland. That's right: credit did not go up even in a single quarter. Worse, between Q4 2011 and Q4 2013, average annual rate of decline in credit to real economy was -4.0% which is exactly the same as in Q4 2013. In other words, even in terms of growth rates, there is no improvement. 

20/5/2014: Q1 2014 Gold Demand Report

Q1 2014 Gold demand report is out today. Highlights are:

  1. Jewellery demand grew 3% year-on-year to reach 571 tonnes, the largest Q1 volume since 2005, as consumers responded positively to lower average gold prices. Geographically, demand was wide-spread; however it was China that posted the largest volume increase, rising by 18 tonnes from Q1 2013.
  2. Shifts in the components of investment cancel out: net investment demand little changed, down 2%. Q1 investment demand of 282 tonnes was just 6 tonnes below Q1 2013. Bar and coin demand was down 39% from last year's elevated levels, while outflows from ETFs slowed to a virtual halt compared with outflows of 177 tonnes in Q1 last year.
  3. All segments of technology saw a 4% decline in the first quarter, resulting in overall demand for the sector of 99 tonnes. The fall was primarily driven by continuing substitution to cheaper alternatives as manufacturers remained under pressure to reduce costs.
  4. First quarter demand from central banks once again topped the 100 tonnes level, reaching 122 tonnes, and marked the 13th consecutive quarter of net purchases. The desire to diversify holdings in an uncertain global environment continues to underpin this source of demand.
  5. The supply of gold in Q1 2014 saw a marginal year-on-year increase of 1%. Increased mine production was offset by a fall in recycled gold coming onto the market, leading to a total supply figure of 1,048 tonnes.
  6. Total demand was down at 1,074.5 tonnes in Q1 2014 compared to 1,077.2 tonnes in Q1 2013

Summary chart:

Report is here.

Compared to 5 year averages:

  • Jewellery demand was up at 570.7 tonnes against 5 year average of 512.0 tonnes
  • Technology demand was down at 99.0 tonnes against 5 year average of 108.3 tonnes
  • Total Investment demand was down at 282.3 tonnes against 5 year average of 367.6 tonnes. Of this, Bar & Coin demand was down to 282.5 tonnes relative to 5 year average of 338.2 tonnes; ETFs and similar products demand was net -0.2 tonnes compared to 5 year average of +29.5 tonnes
  • Central Banks net purchases demand was up at 122.4 tonnes against 5 year average of 72.7 tonnes
  • Overall demand was up at 1,074.5 tonnes against 5 year average of 1,060.5 tonnes

Top 10 official reserves:

Monday, May 19, 2014

17/5/2014: Debt, Equity & Global Financial Assets Stocks

An amazing chart via McKinsey and BIS showing the distribution of financial assets by class and overall stocks of financial assets. These are covering the period through Q3 2013.

What we can learn from this?

  1. Stock of financial assets might seem absurdly high compared to overall economic activity, but it is not that much out of line with longer term growth trends. Between 2000 and 2014 the world GDP is expected to grow from USD32,731.439 billion to USD76,776.008 billion, a rise of 135%. Over 2000-2013, stock of financial assets rose at least 124%.
  2. However, in composition terms, the assets are geared toward debt and especially sovereign debt. Public Debt securities are up in volumes 243% - almost double the rate of economic growth. Financial institutions bonds are up 144% - faster than economic growth. Private non-financial sectors debt is up from USD43 trillion to USD 91 trillion - a rise of 112%. Total debt is up from USD73 trillion to USD178 trillion or 144% so within debt group of assets, public debt is off the charts in growth terms.

There is much deleveraging that took place in the global economy over the recent years. All of it was painful. But there is no way current levels of debt, globally, can be sustained. 

Sunday, May 18, 2014

18/5/2014: Global Gambling: Ireland of Saints & Scholars

A chart summarising some interesting stats on global gambling addiction…

Ireland in a 'proud' seventh position... and just like our 'aspirational' brethren in Finland, heavily into online gambling - a form of a-social entertainment that is pure addiction...

17/5/2014: That costly alphabet soup behind the European Banking Union

Two main building blocks of the Single Resolution Mechanism for future banks bailouts in the EU involve Deposit Guarantee Scheme Directive (DGSD) and the Bank
Recovery and Resolution Directive (BRRD). The issue at hand is funding the future bailouts.

The EU Member States are required to establish two types of financing arrangements:

  • BRRD sets up the Resolution Fund to cover bank failure resolution. This will be used after 8% of losses gets covered by the bail-in of depositors and some funders.
  • DGS covers deposits up to EUR100,000 in the case of a bank failure. 

There are several issues with both funds. For example, DSG funds (national level) will have to run parallel with the EU-wide Eurozone Single Resolution Fund (until the DSG pillar is integrated at a much later date into EBU). This implies serious duplication of costs over time and creation of the 'temporary'  but long-term national bureaucracy / administration which will be hard to unwind later.

By 2016, EA18 euro area members will have national DSG running parallel to EU18-wide single resolution runs (SRM) which cannot be merged together absent (potentially) a treaty revision, not EA-18 EU members will have national DSG and national resolution fund, which can be merged together.

What is worse is that national contributions to DSG cannot count toward national contributions to the resolution fund (SRM or in the case of non-EA18, to national resolution funds). This means that total national banking system-funded contributions to both funds will be 0.8% of covered deposits for DSG, plus 1% for SRM = minimum of 1.8% of covered deposits. Ask yourselves the simple question: given that banking in majority of the EU states is oligopolistic with high (and increasing) concentrated market power, who will pay these costs? Why, of course the real sector - depositors and non-financial, non-government borrowers.

It is worth noting that the 1.0% contribution to the resolution fund will cover not just covered deposits, but actually is a function of liabilities. In other words, it will be much larger proportion of covered deposits than 1%.

That is a hefty cost of the EBU and this cost will be carried by the real economy, not by financialised one. The taxpayers might get off the hook (somewhat - see here: but the taxpayers who are also customers of the banks will be hit upfront. And who wins? Bureaucrats and administrators who will get few thousands new jobs across the EU to manage duplicate funds, collections and accounts. The more things change… as Europeans usually say…

Saturday, May 17, 2014

17/5/2014: Are Markets Punishing Russia?.. or the Emerging Markets?

An interesting analysis from the BBVA Research on capital flows to EMs… while much can be discussed, one thing is of interest from my point of view (not covered by the BBVA): Russian inflows.

We've heard about alleged markets punishment and investors flight from Russia. And there has been some for sure. Except, the theory that this flight is tied to naughty kremlin behaviour in Ukraine is a little… how shall we put it… a stretch may be?

Ok, let's look at how net capital flows look in the EMs: 

Emerging markets are some 14% below trend - big outflows starting with non-Ukraine Fed tapering:

So Asia is even worse off than the general EMs... And Asia is Ukraine-free and Fed-tied.

Yes, Russia is down… 24% below trend by estimates of the BBVA

And guess what: decline started in the same 'tapering-on' period and well before Ukraine and accelerated similarly to the rest of EMs. 

And worse… look at what happened in Brazil:

Brazil's 'troubles with Ukraine' started earlier on than rest of EMs, but accelerate with Fed tapering.

Heard of Indonesia? It seems also to be in a conflict with Ukraine:

So how about that thesis alleging that Russia is being punished for Ukraine crisis by those investors? 

17/5/2014: Long-term unemployment: Sticky & Alarming

Things are pretty bad on the long-term unemployment front in Ireland. I covered this earlier here: and here:

But another look shows some truly dire comparatives.

Take long-term unemployed as proportion of all unemployed - you get two insights:

  1. The proportion is rising. In Q3 2013 it was 58.4% and in Q4 2013 it rose to 61.4%. That's right, more than 6 out of 10 unemployed have been jobless more than a year, continuously. We do not know those who have been jobless more than 6 months (the cut-off point beyond which some research starts showing long-term deterioration in skills and aptitude).
  2. The proportion is sticky in the long run - it has been above 50% since Q3 2010 and above 56% since Q4 2010. Un-yielding. 

The second bit relates to the proportion of long-term recipients of LR supports - this too yields two conclusions:

  1. It is rising as well: up from 45.4% in Q4 2013 to 45.8% in Q1 2014.
  2. And it is on a rising trend over time.

But here's a damning thingy: all this long-term unemployment sustains our 'productivity' gains and competitiveness 'improvements':

17/5/2014: Central Bank Annual Report 2013: Not Much to Report, Much to Promote

This is an unedited version of my Sunday Times article from May 4, 2014.

This week, the Irish Central Bank published its annual report for 2013.

In the opening statement, Governor Patrick Honohan said: "The Bank’s key priorities included the ongoing repair of the banking system and achieving progress in the delivery of sustainable solutions for distressed borrowers. Significant progress was achieved on these fronts, though many tasks still remain to be completed."

This was not a great moment to stake such a claim.

In recent days, the state-controlled Ptsb, announced a substantial hike in variable rate charges on mortgages. Bank of Ireland, faced criticism for using a 'blunt force approach' with distressed borrowers.

Central Bank data, highlighted in the annual report, shows that in 2013 lending to non-financial corporations in Ireland posted its steepest year on year decline since the start of the crisis, down 6 percent. Credit to households fell at the second fastest annual rate, down 4.1 percent on 2012. Mortgages arrears, including the IBRC mortgages sold to the external investment funds, as percentage of all house loans outstanding, were virtually unchanged year on year at the end of 2013.

Reading through the Central Bank own financial accounts also reveals some significant insights into the inner workings of our financial system and its watchdog.

In the last three years, Irish Exchequer reliance on income from the Dame Street has gone up exponentially. In 2009-2013, the Central Bank paid EUR4.73 billion in total dividends to the State. Of this, 50 percent came from its operations in 2012-2013. This makes the CBI the largest net contributor to the State coffers of all public and semi-state organisations.

The bulk of the Central Bank earnings come from interest on assets it holds. Last year marked the second year of declines in this income. Back in 2010, the Central Bank collected EUR3.67 billion worth of interest. As the scope of the emergency lending to Irish banks fell, the interest income also declined, reaching EUR2.6 billion in 2012 and EUR2.02 billion in 2013.

Central Bank’s highest-paying assets today cover Irish Government Floating Rate Notes, NAMA bonds, and a Irish 2025 bond. All in, the money paid by the Government and NAMA to the Central Bank is being recycled back to the Exchequer at a hefty cost margin.

In a sign of continued improvement in the Irish banks funding situation, marginal refinancing operations and long-term refinancing operations (MROs and LTROs), representing lending to credit institutions from the Eurosystem fell to EUR39.1 billion in 2013, down from EUR70.9 billion in 2012. At their peak in 2010, these lines of credit amounted to EUR132 billion.

Central Bank’s staff-related expenses rose from EUR106.3mln in 2012 to over EUR121.4mln in 2013. These increases were down primarily to salaries, allowances and pensions, as staff numbers employed stayed relatively unchanged between 2011 and 2013. Per employee staff expenses are now up 15 percent on 2012 levels.

Other operating expenses were up from EUR57.5 million to EUR70.3 million. The largest hikes incurred were in Professional fees, which rose by a quarter to EUR27.1 million. Only in 2011, at the height of banks’ recapitalisation, did the Central Bank manage to spend more on external consultants. So far, the banking crisis has been a bonanza for the Central Bank advisers who were paid EUR98.3 million in fees since 2009.

In return for the rise in expenses, the Bank marginally expanded some of its enforcement and supervisory functions. There was a rise in prudential supervision activity, but a decline in authorisations and revocations of regulated entities. The number of investigations also fell, from 216 in 2012 to 184 in 2013. However, the Central Bank oversaw 1,004 regulatory actions taken in 2013, up on 2012, but down on 2011.

Overall, the Annual Report paints a picture of the Central Bank continuing to engage in active enforcement and supervision, amidst overall declining need for banking sector supports.

17/5/2014: ESRI on Education & Training in Ireland

ESRI released "Further Education and Training in Ireland: Past, Present and  Future" (

Lots of sharp and interesting findings, including:

  1. Provision within the sector appears to have grown and national policy does not appear to have played any central role in determining the level, distribution or composition of Irish FET provision. In other words it is free-for-all.
  2. As a result, there is a substantial amount of variation in terms of …the relative emphasis on meeting labour market needs and countering social exclusion across the sector. In other words, the programmes are not really delivering on skills shortages.
  3. A substantial proportion of provision within the FET sector does not lead to any formal accreditation.  The lack of accreditation is more typical in programmes with a strong community or social inclusion ethos. Which might not be a problem, if real skills are delivered. Alas, this is not the case.
  4. The distribution of major awards across field of study does not appear to reflect strongly the structure of the vocational labour market. This is evident in the fact that the majority of key stakeholders, interviewed for the study, feel that current FET provision is only aligned ‘to some extent’ with labour market needs.
  5. From an international perspective, compared to the German, Dutch and Australian systems, Irish FET is much more fragmented and is much less focused around vocational labour market demand.  In terms of its composition and focus, Irish FET sector bears close similarities to provision in Scotland.  
  6. Data provision on Irish FET is extremely poor by international standards.
  7. The reform of provision will require that SOLAS implement a funding model that ensures that poorly performing programmes are no longer financed, with available resources directed towards areas identified as being of significant value on the basis of emerging national or regional information.  

The irony of this is that ESRI report comes out some weeks after I wrote about the deficiencies in our training programmes in the Sunday Times and months after the OECD report covering the same.

You can read more on the topic of skills, unemployment and training here:

17/5/2014: Foreign Affairs on the rise of Ukrainian ultra-nationalism

These days, it is rare to see any seriously argued articles about the role of ultra-nationalism on the Kiev-side of the Ukrainian civil war (that's right - it is now a full-blown civil war). But here is a very good article on the subject published in highly reputable and usually highly critical of Russia Foreign Affairs

It is objective, in my view, and it is factual. It does not assert that ultra-nationalism has a broad support in public opinion, but it does show that it is gaining ground and is one of the stronger forces behind the political leadership in modern 'Western' Ukraine.

And further:

Read the whole article!

17/5/2014: Growth Forecasts: What Matters and What Doesn't

This is an unedited version of my Sunday Times article from April 20, 2014.

Nothing sums up frustrations of the policymakers and general public with economics as well as the famous quote from the US President, Harry S. Truman: “Give me a one-handed economist, all my economists say is ‘on the one hand …and on the other hand…”

Quips aside, human choices and activities - the fundamental forces driving all economics - are unpredictable and painfully complex to model and measure. But beyond behavioural intricacies, complex nature of modern economic systems implies that data we use in analysis is often rendered non-representative of the realities on the ground.

Take for example the concept of the national income. Economists define this as a sum of personal expenditure on consumer goods and services, net expenditure by Government on current goods and services, domestic fixed capital formation, changes in stocks and net exports of goods and services. Combined these form Gross Domestic Product or GDP. Adding Net Factor Income from the Rest of the World (profits and dividends flowing from foreign destinations into Ireland, less payments of similar outflows from Ireland) gives us Gross National Product or GNP.

All of this seems rather straightforward when it comes to an average country analysis. By and large the overall changes GDP and GNP are closely linked to other economic performance indicators, such as inflation, investment, employment and household incomes.

Alas, this is not the case for a tiny number of small open economies with significant share of international activities in their total output, such as Ireland. In such economies, both GDP and GNP can be severely skewed by tax optimisation and global rent-seeking strategies of multinational enterprises. Faced with large share of domestic accounts distorted by tax arbitrage, economists are left to deal with high degrees of uncertainty when forecasting national output and employment. Even past data becomes hard to interpret.

In recent months, various analysts published a wide range of forecasts and predictions for Irish economy for 2014-2015. Consider just three sources of such forecasts: Department of Finance, the ESRI and the IMF.

Budget 2014 projections, forming the basis of our fiscal policy predicted average annual real GDP growth of 2.15 percent, with underlying real GNP growth of 1.7 percent. These projections were based on the assumed annual growth of 1.5 percent in personal consumption, and 6.35 percent growth in investment. These projections were also in-line with IMF forecasts.

Around the same time, ESRI was forecasting GDP growth of 2.6 percent for 2014 and GNP growth of 2.7 percent, well ahead of the Department of Finance outlook. ESRI forecasts were much more skewed in favour of domestic investment and personal consumption.

Fast-forward six months to today. In its latest analysis, IMF lowered its forecast for our GDP growth to 1.7 percent for 2014, leaving unchanged their outlook for 2015. The Fund forecast for GNP growth remained unchanged for 2014 and was raised for 2015.

ESRI has shifted decidedly into even more optimistic territory. The Institute's latest predictions are for GDP expansion of 3.05 percent on average in 2014-2015. GNP growth forecast is now at 3.6 percent. ESRI's rosy projections are based on expectations of a massive 10 percent growth in investment, with private consumption expectations also ahead of previous projections.

Finally, this week, Department of Finance upgraded its own forecasts, lifting expected 2014-2015 growth to 2.4 percent for GDP and 2.5 percent for GNP. Domestic demand growth is now expected to average 2.4 percent through 2015, and investment growth is expected to run at a head-spinning rate of 13.9 percent.

Everyone, save the IMF, is getting increasingly bullish on Irish domestic economy, which, in return, spells good news for employment and household finances.

The problem is that all of these forecasts give little comfort to anyone seriously concerned with the impact of economic growth on the ground, in the real economy.

Even the ESRI now admits that we cannot forecast this economy with any degree of precision. More significantly, the Institute recognises that our GDP figures are no longer meaningful when it comes to measuring actual economic performance. Instead, the ESRI claims that GNP is a better gauge of the real state of the Irish economy.

In truth, the proverbial rabbit hole does not end there: Irish GNP itself is still heavily skewed by the very same distortions that render our GDP nearly useless.

The ongoing changes in our exports and imports composition are throwing thick fog of obscurity over our net exports, which account for 22.6 percent of our GDP and 26.7 percent of our GNP – not a small share.

Since 2012, expiration of international patents in the pharmaceutical sector, triggered billions in lost exports revenues and shrinking trade surplus. In colloquial terms, Irish economy is now running weak on expired Viagra.

Just how much the patent cliff depresses our GDP and GNP is a mater of dispute, but we do know that pharma accounts for about one quarter of our total exports and one eighth of the gross value added in economy despite employing very few workers here. The patent cliff was responsible for a massive 1.25 percent drop in our labour productivity across the entire economy last year. But, as ESRI analysis previously shown, the overall effect of patents expirations on our GDP (and by corollary on GNP) is extremely sensitive to the assumptions relating to where pharma companies book their final profits. Profits booked in Ireland yield significant adverse impact. Profits channeled through Ireland to offshore destinations have negligible impact.

Which brings us to the second force contributing to rendering both GDP and GNP growth largely irrelevant as measures of our economic wellbeing.

Based on data through Q4 2013, since the bottom of the Great Recession in 2010, our net exports of goods and services rose EUR10.6 billion, driven by EUR14.4 billion in new exports of services offset by the decline of EUR3.05 billion in exports of goods. Ireland’s exports-led recovery was associated with a massive shift toward ICT exports.

Much of this trade was associated with little real activity on the ground.

Consider for example tax revenues. In 2010-2013, for each euro in added net exports, the Exchequer revenues increased by less than 3.3 cents. Back in 2000-2002 period the same relationship was more than six times higher. Of course back then both the MNCs and domestic companies were in rude health or on steroids of cheap credit and patents protection, depending on how a two-handed economist might look at the numbers. Still, the core composition of our exports was more directly connected to real production and value creation taking place in this country.

This can be directly witnessed by looking at other metrics of current activity, such as Purchasing Manager Indices published by Markit and Investec Ireland. Since Q1 2010, both Services and Manufacturing PMIs have been consistently signaling a booming economy. Meanwhile, GDP posted an average annual rate of growth of just 0.22 percent. Employment in industry ex-construction is down 21 percent on pre-crisis peak, employment in professional, scientific and technical activities is down 4.3 percent and employment in information and communication sector is down 1.1 percent.

The new crop of multinational corporations driving growth of GDP and GNP in Ireland is much more aggressive at tax optimisation than their predecessors. Which means that they also tend to use fewer domestic resources to deliver real value added on the ground.

All of which suggests that gauging true extent of economic growth in Ireland is no longer a simple matter of looking at either GDP or GNP figures. Instead, we are left with other aggregate measures of the real economy, such as: non-agricultural employment and the final domestic demand – a sum of private and public consumption and gross fixed capital formation.

By the latter metric, this economy has managed to deliver 6 consecutive years of uninterrupted annual declines in activity. In 2013, inflation-adjusted domestic demand fell by some EUR366 million on previous year. Cumulated losses since 2008 now stand at EUR32 billion or almost 20 percent of our GDP. Good news is that the rate of declines has been de-accelerating every year since 2009. And in H2 2013 demand rose 1.75 percent year on year. Bad news is that in real terms, our final domestic demand is currently running at the levels just above those recorded in 2003. In other words, we are now into the eleventh year of the ‘lost decade’.  At H2 2013 rate of growth, it will take Ireland until 2026-2027 to regain pre-crisis levels of domestic economic activity.

Meanwhile, employment figures are painting a slightly more optimistic picture, albeit these figures too are not free of methodological problems. In Q4 2013, non-agricultural employment in Ireland stood at 1,793,000, with H2 figures on average up 1.91 percent or 33,550 on the same period of 2012. To-date, non-agricultural employment numbers are down 13 percent or 266,550 on pre-crisis levels. However, when one considers total population changes in Ireland since the onset of the crisis, the ratio of non-agricultural employment to total population is currently at 39 percent, which is the level below those recorded in Q4 2000.

To the chagrin of the Irish policymakers and general public, our economy is, like an average economist, two-handed. On the one hand, our employment and total demand figures show an economy anemically bouncing close to the bottom. On the other hand, a handful of MNCs are pushing our GDP and GNP stats up with profits from their operations in far flung places retired here. Harry Truman really had it easy compared to Enda Kenny.


The latest data from the Central Bank covering retail interest rates confirms two key trends previously highlighted in this column.

The first one is the rising cost of borrowing compared to the underlying European Central Bank policy rate. In January-February 2014, average retail rates on new loans for house purchases were priced 3.32 percent higher than the ECB rate. A year ago the same margin was 2.89 percent. For non-financial corporations, average margin rose from 4.58 percent to 5.03 percent for loans under EUR1 million, and from 2.42 percent to 3.1 percent for new loans over EUR1 million. Lending margins over the ECB rate in January-February 2014, averaged two to three times the margins charged in the same period of 2007 at the peak of credit bubble.

The second trend relates to the spread between rates paid by the banks on deposits and interest charged on loans. Since October 2011, Irish households consistently faced deposit rates that are by some 2 percentage points lower than the average annual cost of new loans for house purchases. In January-February 2014 this gap widened by some 0.27 percent compared to the same period of 2013. The spread is now running at double the rate recorded at the peak of the pre-crisis credit boom. The same holds for interest rates differential between loans and deposits for non-financial corporations which is now at the second largest levels since January 2003 when the data reporting started.

In short, credit today is historically more expensive, while deposits are cheaper. Irish banking sector continues to extract emergency rents out of the real economy with no easing in sight.