Monday, June 30, 2014

30/6/2014: The Euro Plus Pact: Getting Causality Between Current Account and Competitiveness Backwards

Gabrisch, Hubert and Staehr, Karsten, new paper published by ECB and titled "The Euro Plus Pact: Cost Competitiveness and External Capital Flows in the EU Countries" (February 18, 2014, ECB Working Paper No. 1650. looks at the effectiveness of the Euro Plus Pact which was approved by 23 EU countries in March 2011 and came into force shortly afterwards.

Emphasis in bold in the quotes is mine.

"The Pact stipulates a range of quantitative targets meant to strengthen cost competitiveness with the aim of preventing the accumulation of external financial imbalances."

According to the authors: "The rationale behind the Euro Plus Pact is evident in its original name, the Competitiveness Pact, and also in its current subtitle: “Stronger economic policy coordination for competitiveness and convergence” (European Council 2011, p. 13)."

In virtual obsession of European policymakers with internal competitiveness expressed in terms of cost of labour and production, "Deteriorating cost or price competitiveness in individual countries is seen as a source of economic and financial instability. This view is directly stated in the conclusions from the European Council meeting at which the Euro Plus Pact was adopted (European Council 2011, p. 5): "The Euro Plus Pact […] will further strengthen the economic pillar of EMU and achieve a new quality of policy coordination, with the objective of improving competitiveness and thereby leading to a higher degree of convergence […].""

The authors use Granger causality tests and vector autoregressive models "to assess the short-term linkages between changes in the relative unit labour cost and changes in the current account balance. The sample consists of annual data for 27 EU countries for the period 1995-2012." This allows them to explore the direction and size of the short term linkages between cost or price competitiveness and external capital flows in the EU countries.

"The analyses are particularly pertinent given the adoption of the Euro Plus Pact… The underlying rationale is that deteriorating cost competitiveness is an important factor behind the accumulation of current account deficits and financial vulnerabilities." Thus, the "participating countries must take measures to improve their cost or price competitiveness and thereby reduce the likelihood of financial imbalances accumulating."

First, authors use Granger causality tests to determine "whether lagged values of one variable help explain the other variable when autocorrelation and country fixed effects are taken into account." The result is: lagged changes in the current account balance help explain changes in unit labour costs, while there is no effect in the opposite direction. The results hold for all 27 EU countries, for the EU15 countries and for 10 EU countries.

Second, vector autoregressive models confirmed "qualitative results are in all cases very similar to those of the Granger causality tests. …"

In other words, "changes in capital flows appear to affect cost competitiveness in the short term, while changes in competitiveness appear to have no effect on capital flows in the short term." This is important, as many policy analysts (e.g. Bruegel) and European policymakers (from Commission to national governments) routinely express the view that external imbalances are the result of poor competitiveness, especially in the periphery and especially in the context of driving the momentum of the financial crisis and the great Recession.

Here is what the authors have to say on this: "Increasing capital flows from the core to the periphery of Europe may partly explain the deteriorating cost competitiveness in many countries in Southern and Central and Eastern Europe as well as the improving cost competitiveness in many countries in Northern Europe [prior to the Crisis]. The reversal of these capital flows after the outbreak of the global financial crisis may lead to ensuring changes in cost competitiveness."

But more crucially, there seems to be no reverse direction of causality: pursuit of greater competitiveness does not seem to be a correct prescription for achieving external balances. "...the measures in the Euro Plus Pact to restrain the growth of unit labour costs may not affect the current account balance in the short term."

Now, wait, that is ECB research paper that says 'restraining growth in unit labour costs' (aka: improving competitiveness) may not do much for external balances… Hmm… did anyone hear that Euro Plus Pact tree fall?

And moving beyond the past: is anyone monitoring flows of 'capital' to the 'periphery' in the form of extremely depressed Government debt yields that are prevailing today? Cause you know, that competitiveness might be falling next time we look…

Sunday, June 29, 2014

29/6/2014: Tech & Science Migrants & Native Workers: US Evidence

Tech specialists and ICT specialists hired from abroad into countries like Ireland are seen, by the policymakers, as a necessary and sufficient evidence of growth in employment and domestic economic well-being. The reason for this is often found the argument that lack of local skills will result in higher labour costs and lower competitiveness of the sector and, thus, lead to outflow of ICT-linked FDI and reduced MNCs activity in the economy.

Part of this rationale is correct. Part is wrong. I recently posited, in my Sunday Times ex-column and in a WSJ op-ed, the thesis that in Ireland's case, tax optimisation by ICT MNCs is equivalent to a resource curse, whereby excessive amounts of financial resources flows into attracting and retaining skilled workers, resulting in underinvestment in other sectors of economy. Beyond this, the Government, grown accustomed to windfall revenues from the tax optimising MNCs has lower incentives to focus on developing indigenous and highly competitive specialisation.

Setting aside these more complex arguments, what is the effect of the skilled ICT and tech and R&D workers immigration on domestic economy?

Peri, Giovanni and Shih, Kevin Yang and Sparber, Chad, in their recent paper titled "Foreign Stem Workers and Native Wages and Employment in U.S. Cities" (May 2014, NBER Working Paper No. w20093) looked at the effects of the Scientists, Technology professionals, Engineers, and Mathematicians (STEM workers) immigration into the US. Per authors, STEM workers "are fundamental inputs in scientific innovation and technological adoption, the main drivers of productivity growth in the U.S."

In their paper, the authors attempt to "identify the effect of STEM worker growth on the wages and employment of college and non-college educated native workers in 219 U.S. cities from 1990 to 2010. In order to identify a supply-driven and heterogeneous increase in STEM workers across U.S. cities, we use the distribution of foreign-born STEM workers in 1980 and exploit the introduction and variation of the H-1B visa program granting entry to foreign-born college educated (mainly STEM) workers."

Key findings:

  • "We find that H-1B-driven increases in STEM workers in a city were associated with significant increases in wages paid to college educated natives." In other words, shortages of specialist skills (signified by intensity of inflow of STEM migrants) do bid up wages for similarly-educated (in degree attainment and also in skills similarities) natives. This agrees with my argument that far from driving down labour costs for skilled workers not just in STEM-related sectors, but across all educated workforce, STEM-targeted immigration is associated with higher labour costs. Often, this is seen as being driven by complementarity between STEM skills and related services professionals (legals, accounting, sales, marketing, etc). But is that the case of signalling value of their degrees going up in the market, or is it the case of their skills value going up? One way or the other, more STEM immigrants seems to do nothing to improve labour costs competitiveness.
  • "Wage increases for non-college educated natives are smaller but still significant." So wage inflation is not moderated by STEM migration, even if we control for skills. In other words, all sectors of city economy are facing rising costs in the presence of STEM immigration. This, of course, is not an argument of causality, but it is also not the evidence that would be consistent with an argument that STEM immigration induces gains in labour competitiveness.
  • "We do not find significant effects on employment." In other words, jobs creation is not what happens when you open up targeted skills-driven migration. And, by converse, it is not impacted by restricting it. Which begs a question: every month Irish ministers present jobs announcements by STEM-intensive ICT services companies as evidence of employment creation. Every time they do so, they omit consideration of what higher cost of skilled and unskilled workers is doing to the rest of the economy. Should they be concerned with the latter at least as much as with the former? The study evidence suggests they should.
  • "We also find that STEM workers increased housing rents for college graduates, which eroded part of their wage gains." Ah, can that be a reason why rents are inflating in Dublin, especially in the areas where STEM-equivalent skills are at the highest premium (IFSC and South Docklands corridor)? In summary, therefore, higher employment and immigration of STEM workers seems to be associated with higher costs of living for all workers. Is it correct to posit a question of spillovers or externalities that arise from greater share of new employment going to skilled ICT immigrants onto the long term residents of the country or city? If yes, then the logic suggests that there should be consideration of transfers from the immigrants under STEM programme to at least those natives and long term residents who do not gain in wages enough to compensate them for the rising cost of living.

Overall, authors conclude that "Together, these results imply a significant effect of foreign STEM on total factor productivity growth in the average US city between 1990 and 2010." Which is, of course, good. But it does not tell us if this TFP growth actually spreads across the entire economy or stays within STEM-intensive sectors. We do not know if TFP gains in STEM sectors are not offset by labour competitiveness losses in the rest of the host economy. And, crucially, it does not tell us if the above questions, posited in the bullet point comments, can be answered unambiguously in favour of more STEM-linked immigration.

29/6/2014: What a Difference a Year of ECB Activism Makes...

Mapping decline in CDS and implied probabilities of default for Euro area 'peripherals' over the last 12 months:

Largest declines: Greece, followed by Portugal, Spain, Italy and lastly Ireland. Timing of declines and divergent macrofundamentals of these countries suggest that drop in CDS has little to do with internal policies and performance of individual states - the 'periphery' is still being priced jointly. The decline in risk assessments of the 'peripherals' is primarily down to common policy, aka: the ECB.

On the other hand, if we are to distinguish within the 'peripherals', we can identify 3 sub-groups of countries:

  • Weakest and stand-alone: Greece
  • Mid-range weakness, also stand-alone: Portugal
  • Stronger 'peripherals': Ireland, Spain and Italy

29/6/2014: Mid-Summer CDS Dreams: Ukraine v Russia

One of these countries has a brand new Association Agreement with the EU... and a fresh probability of sovereign default of 41%... another one (with probability of default at 11.9%) does not...

In two years from June 2012 through June 2014, Ukraine's probability of default declined 1.47% as the country received massive injections of funds from the IMF, US and EU. Russia's probability of default fell 3.89% over the same time. For comparatives: Ukraine's June probability of default is running at around 41%, Serbia's at 17.6%. Ukraine is currently the worst rated sovereign (by CDS-based probability of default) of any state with an Association Agreement with EU.

29/6/2014: London Property Markets: A Safe Haven After All

A fascinatingly interesting study looking into London property markets from the point of view of safe haven properties. Badarinza, Cristian and Ramadorai, Tarun, "Preferred Habitats and Safe-Haven Effects: Evidence from the London Housing Market" (April 17, 2014, uses "a new cross-sectional approach, motivated by the insight that investors may have different "preferred habitats" within a broad asset class."

The study deploys this strategy "on large databases of historical housing transactions in London, finding that economic and political risk in Southern Europe, China, the Middle East, Russia, and South Asia helps explain price and volume dynamics in the London housing market over the past two decades. Safe-haven effects on the London housing market are long-lasting and significant, but temporary. The method also uncovers intriguing insights about cross-country variation in preferred habitats within London."

28/6/2014: Who are the Joneses?

Dahlin, Maria Björnsdotter and Kapteyn, Arie and Tassot, Caroline paper "Who are the Joneses?" (June 2014. CESR-Schaeffer Working Paper No. 2014-004. attempts to answer a very important question in economics of individual perceptions and referencing of own well-being relative to well-being of others. The study tackles an issue that forms the core of a number of macroeconomic models, but also of relevance to the active debate about relative poverty and relative incomes.

"A burgeoning literature investigates the extent to which self-reported well-being (or happiness) or satisfaction with income is negatively related to the income of others" or the Joneses. "In many of the empirical studies, the assumption is that the incomes that matter are those of other individuals or households in the same geographical area." In other words - physical proximity is of the matter.

"In an experiment conducted in the American Life Panel, we elicit the strength of comparison with different groups, including neighbors, individuals of similar age and coworkers."

Fascinating findings emerged:

  1. "Individuals are much more likely to compare their income to the incomes of their family and friends, their coworkers and people their age than to people living in the same street, town, in the US, or in the world." In other words, we reference our own well-being against well-being of those close to us socially and family-wise, not those who physically live near us, but are strangers to us. A relatively rich uncle may be inducing greater dissatisfaction onto us, than a filthy rich neighbour. In which case, were relative poverty be a concern, taxing family members on higher incomes is better than taxing everyone on higher incomes. Which, of course, would be an absurd policy.
  2. "…we find both at the zip code and at the PUMA geographic level that own income or rank in the local income distribution matter for happiness and satisfaction with income, but incomes in the same geographic region do not influence own happiness when controlling for own income."  
  3. "When asking respondents directly for how they rate the position of own and others’ income we find that higher estimates of neighbors’ income are negatively related with satisfaction with own income. Additionally, respondents who compare more intensively with their neighbors perceive the difference between their own income and that of their neighbors to be larger." So we do rate strangers' income relative to our own. Just not as much as we rate relatives' and friends' income relative to our own.
  4. "Using age-based reference groups instead of geography-based reference groups, we find a consistent negative effect of the log median income and the perceived income in an individuals’ age group". In other words, the Joneses that we 'benchmark' ourselves against are more likely to be those from similar/shared cohort, in this case - cohort by age. The old do not begrudge, as much, the young, but they do begrudge other old.

"Overall, these results indicate that comparisons with neighbors may not be the most important channel through which perception of others’ income impacts one’s own well-being."

In other words, relative benchmarking matters, but it strength varies with familial and social ties, and matters less in terms of proximity. As I noted, half-jokingly, above: a richer uncle induces more negative referencing even if he lives in a distant community, than a richer neighbour who flaunts her/his wealth in our face. 

Saturday, June 28, 2014

28/6/2014: Public Debt: It Really Is the Case of Beggar Thy Children…

In a new paper, researchers from Germany use "controlled laboratory experiment with and without overlapping generations to study the emergence of public debt."

The set up of the experiment is simple: "Public debt is chosen by popular vote, pays for public goods, and is repaid with general taxes."

The end result is asymmetric:

  • "With a single generation, public debt is accumulated prudently, never leading to over-indebtedness." In other words, if your generation is the one responsible for repaying debt, spending is prudent and debt accumulation is ex ante bounded by expected income.
  • However, "with multiple generations, public debt is accumulated rapidly as soon as the burden of debt and the risk of over-indebtedness can be shifted to future generations."

Crucially, "debt ceiling mechanisms do not mitigate the debt problem. With overlapping generations, political debt cycles emerge, oscillating with the age of the majority of voters." In other words, the idea that debt can be controlled by explicit limits is useless. So much is clear from the US debt ceiling system performance, as well as from the EU SGP experiences. And as much will be confirmed by the Fiscal Compact rules application in due time. Worse, absent levels constraints we are left with the Keynesian proviso that simply says: Be nice. Save when you can, send when you need. Oops... if the stick does not work, any hope the carrot will? I don't think so...

The paper was written by Fochmann, Martin and Sadrieh, Abdolkarim and Weimann, Joachim, and is titled "Understanding the Emergence of Public Debt" (May 24, 2014, CESifo Working Paper Series No. 4820.

28/6/2014: Exports and Pollution Intensity: Swedish Evidence

A new paper published by CESIfo attempts to understand what mechanisms lead to the empirically-observed negative relationship between harmful CO2 emissions by firms and firm's exports.

Forslid, Rikard and Okubo, Toshihiro and Ulltveit-Moe, Karen Helene paper titled "Why are Firms that Export Cleaner? International Trade and CO2 Emissions" (May 24, 2014, CESifo Working Paper Series No. 4817. "…develops a model of trade and CO2 emissions with heterogenous firms, where firms make abatement investments and thereby have an impact on their level of emissions."

Theoretical model "shows that investments in abatements are positively related to firm productivity and firm exports. Emission intensity is, however, negatively related to firms' productivity and exports. The basic reason for these results is that a larger production scale supports more investments in abatement and, in turn, lower emissions per output."

The authors then show that "the overall effect of trade is to reduce emissions. Trade weeds out some of the least productive and dirtiest firms thereby shifting production away from relatively dirty low productive local firms to more productive and cleaner exporters. The overall effect of trade is therefore to reduce emissions."

Lastly, the authors "test empirical implications of the model using unique Swedish firm-level data. The empirical results support our model."

28/6/2014: WLASze: Weekend Links on Arts, Sciences & zero economics

It has been some time since I did my WLASze (Weekend Links on Arts, Sciences and zero economics) last. The reason being somewhat strange state of mind as of late: less calm, less retrospection, more rushed work… the usual.

Here are couple interesting links that I cam across this week.

Via @PandaPolitics  : a complicated, but deadly cool info graphic mapping "a visual taxonomy of lives and literary greatness" of 20th Century 75 big-name writers. It is complex, it is poorly organised (not searchable, non-alphabetic ordering, etc) and it is academist, rather than visual, but it is wonderfully rich and worth exploring.

Another link is courtesy of the covering the story of a trio of Supermassive Black Holes discovered in a distant Galaxy.

And from the world of art: my favourite installation artists, duo of Ilya and Emilia Kabakov installation "The Strange City" at The Monumenta, Grand Palais, Paris. Review via

The site for the project is here:

A shot from the recent WLASze past: is a new installation Transarquitetonica by Henrique Oliveira an ambitious-beyond-ambition installation in Oliveira's traditional key

You can see a more comprehensive gallery here:

Finally, Manifesta 10 Biennial is opening up today in St. Petersburg and is worth following for any reports:

28/6/2014: Ukraine's Costly European Dream: BloombergView

In light of the celebrations in Ukraine and Brussels over the signing of the EU-Ukraine Association Agreement, here is an excellent op-ed from BloombergView on the topic:

28/6/2014: Irish Retail Sales: Q2 data to-date confirms fragile recovery

In the previous post I covered detailed analysis of Core Retail Sales data for May 2014: here. Now, a quick look at Q2 averages (for 2014 we have average over April and May) for the period from 2005 through latest.

Take a look at the chart plotting declines (as of April-May average) in retail sales activity compared to peak for Q2 data:

This data shows the following:

  1. The only two sub-categories of goods and services where retail sales indices in Value terms are in shallower decline than in Volume terms (in other words inflation is positive and feeding through to consumers) are: Automotive Fuel and Bars - in other words two sectors where prices for inputs are largely controlled/set by the state.
  2. No category has recovered pre-crisis levels of retail sales by both value and volume, while only one category (Food) recovered sales in volume, relative to pre-crisis activity.
This puts into perspective the extent to which the recovery we are experiencing so far is fragile. 

28/6/2014: Is S&P Behind the Curve on Portugal and Spain?

Euromoney Country Risk report is profiling S&P ratings on Portugal and Spain, with a comment from myself: here.

If you can't access the article, here is the article (click on each image to enlarge):

28/6/2014: Irish Retail Sales Activity: May 2014

There is a lot of hoopla about Irish retail sales stats released today by CSO. Irish and foreign media and even some analysts are quick to point to the headline numbers showing high rates of growth and some are going as far as describing Ireland's miraculous recovery. So what, really, is going on?

First of all, let's consider top level numbers: removing motor trades and fuel, Core Retail Sales:

  • In Value Index terms, things have improved, which is a positive - so far in the crisis, value of sales trended well flatter than volume of sales primarily due to deflation in the sector. This was good for consumers, but bad for businesses as profit margins shrunk and with them, employment declined too. In May 2014, value of retail sales index rose to 94.6, up 1.39% y/y. Good news for retailers. Even better news: 3mo MA through April 2014 is up 1.7% y/y and 6mo MA is up 1.4% y/y. All in, we are seeing some fragile gains here.
  • Also in Value index terms, this time around based on seasonally-adjusted data: month on month things are not so good: index is down 0.31% on April. So short-term, things are not better this time around. Not to panic, of course, as they are volatile and as trend remains up, albeit gently and unconvincingly so far (see first chart). We are bang-on on the trend now.

  • In Volume index terms, the index is under performing recent trend, but is still pointing up on average. Although m/m index is down 0.48%, year-on-year volume of sales is up 3.33%.
  • 3mo MA through May 2014 compared to 3mo MA through February 2014 is up 3.7%, stronger than Value index, implying potentially lower margins. Year on year 3mo MA is up 3.33% a notch slower than 3.36% 6mo MA on previous 6mo MA.

My Retail Sector Activity Index (RSAI) capturing simultaneously Value and Volume Indices, plus Consumer Confidence, reported by the ESRI has moderated from 111.0 in April 2014 to 110.6 in May 2014. Year on year, the RSAI is up strongly, from 101.4 back in May 2013, but on shorter-run horizon, the index is just about at the levels set in February-March 2014.

Top conclusions: All of the above are good readings, suggesting that while deflationary pressures remain a challenge, core retail sales have been improving. In previous months' posts, I noted that in my view, we are now on an upward trend in terms of Volume and at the start of a more cautious upward trend in Value terms. May data confirms this, as does the chart below showing current y/y growth compared to pre-crisis historical averages.

April 2014 reading for Volume touched just above the pre-crisis average growth rate (not the levels), this moderated back in May. Value index growth rates remain disappointingly below those recorded before the Great Recession.

In terms of levels, Value index (3mo average through May 2014) is currently 41% lower than historical peak levels and 13.8% below pre-crisis average. Volume index is 37.5% below its historical peak and 8.6% down on pre-crisis average.

Friday, June 27, 2014

27/6/2014: Eurocoin: Euro Area Growth in Q2 ahead of Q1

CEPR and Banca d'Italia released their latest Eurocoin forecast for the euro area economy today. Here are the details:

  • In May 2014, Eurocoin posted its first decline in 11 months, falling from 0.39 in April to 0.31. Still April-May 2014 forecast for GDP growth based on Eurocoin stood at 0.35% q/q, faster than any quarter since Q1 2011. 
  • The Eurocoin remained unchanged in June 2014, implying the overall average rate of growth of around 0.34%, a moderation on April-May forecast.
  • Error-adjusted forecast range for growth is between 0.17% and 0.5%.

Per Banca d'Italia: "The deterioration in business confidence was counterbalanced by the positive contribution from the improved conditions in the financial markets and the pick-up in industrial activity."

Couple of charts to illustrate:

Thursday, June 26, 2014

26/6/2014: Explaining the Gender Gap in Entrepreneurship

A new paper by Caliendo, Marco and Fossen, Frank M. and Kritikos, Alexander and Wetter, Miriam, titled "The Gender Gap in Entrepreneurship: Not Just a Matter of Personality" (May 23, 2014: CESifo Working Paper Series No. 4803 tackles a very important and highly sensitive issue of gender gap in entrepreneurship.

The authors ask "Why do entrepreneurship rates differ so markedly by gender?"

The paper uses data from a large, representative German household panel, covering 2000-2009 period, to "investigate to what extent personality traits, human capital, and the employment history influence the start-up decision and can explain the gender gap in entrepreneurship."

"In contrast to previous research the main advantage of our data set is that it contains not only information on the socio-demographic background of the respondents, but also on a broad set of personality constructs that elicit the Big Five traits and several specific personality characteristics."

Note: Big Five Factor Model of personality (McCrae and Costa, 2008) "describes the personality by the factors openness to experience, conscientiousness, extraversion, agreeableness, and neuroticism (or, reversely, emotional stability)."

Per authors, "To the best of our knowledge information on the Big Five approach has not been used to assess the gender gap in entrepreneurship. We are the first to simultaneously analyse the effects of the Big Five factors, risk aversion, locus of control, and the ability to trust others ..., as well as of a variety of variables controlling for human capital, employment status, and other socio-demographic factors on the gender specific decision to enter self-employment."

The findings are very far-reaching and substantially in dispute with commonly held views:

  1. "Applying a decomposition analysis, we observe that the higher risk aversion among women explains a large share of the entrepreneurial gender gap."
  2. "We also find an education effect contributing to the gender difference." More specifically: "On average, working aged women in Germany are still less educated than men and are, therefore, less inclined to start a business."
  3. "Thirdly, the current employment state has a strong effect into the opposite direction: If the share of women in wage employment were as high as the male share, holding everything else constant, their entry rate into self-employment would be much smaller."
  4. "…we show that personality traits help explain the gender gap in nuanced ways. While specific characteristics, in particular risk attitudes, are able to explain a substantial amount of the gender gap, the overall influence of the Big Five personality constructs point to the opposite direction. This means that if women were endowed with the same scores in the Big Five as men, the gap would be even larger."

Overall: "the explained gap is therefore negative meaning that if women exhibited in all observable variables the same parameter values as men, the entry rate of women would be even smaller than actually observed."

26/6/2014: You Might Need a Hubble to Spot That Bubble

In my analysis yesterday (here) I argued that Dublin residential property prices are simply showing signs of reversion to trend, not 'bubble' dynamics. Since then, numerous reports in the media produced opposite conclusions, with headlines forcibly putting forward an argument for 'bubble' formation in Dublin property markets.

Over long run, sustainable property prices appreciation should track closely inflation in the economy. So far is pretty much clear. While arbitrary, starting points for trend estimation for Dublin property should start from pre-bubble period of 1999-2001. This is also pretty clear.

So let us apply Consumer Price Index-measured inflation to Dublin residential property price indices and see where the trend is against current reading. The following chart, based on annual series 2000-2013 and May 2014 for current reading illustrates this exercise:

Here's a pesky problem for 'bubble'-maniacs out there:

  1. If property prices expanded at the rate of inflation from 2000 on, current Dublin property prices index should read around 91.2.
  2. If property prices expanded at the ECB policy-consistent inflation target of 2%, the index should read around 89.4
  3. Current CSO index reading is 72.2
So we are somewhere 25-26% below 'sustainable' levels of house prices, if these are measured by inflation-linked price appreciation, or 24% below ECB-targeted rate of inflation.

You do need quite a powerful telescope to spot the bubble in Dublin markets from here. Which, of course, should not be read as 'there is no bubble', just as 'we can't yet tell anything about bubble being formed'.

26/6/2014: Ifo on Global Economic Conditions

Ifo Forecast 4 German economy: GDP +2.0% in 2014 (prev 1.9%); +2.2% in 2015. Unit labour costs 1.6% & 2.3%. Exports: 4.6% & 6.2%.

"As in 2013, the upturn is driven by domestic demand. Growth in equipment investment will accelerate due to high capacity utilisation rates, necessitating investments in replacements and expansion. Construction investment will also continue to rise significantly, driven by a reluctance to invest abroad and low interest rates. Private consumption is expected to increase at a similar pace as real disposable income levels. Export growth will accelerate thanks to an improvement in the world economy. Imports, however, will grow at an even faster rate due to the strong expansion of domestic demand."

On world economic situation:
"Thanks to developments in the advanced economies, growth in the world economy has picked up slightly since summer 2013. The economic recovery in the USA, Great Britain and Japan gained momentum, while the euro area emerged from a recession that lasted almost two years. Although the emerging economies continued to post higher growth rates than advanced countries, the economic expansion in the former remained relatively weak by historical standards, and has slowed down even further since summer 2013 in some areas."

"…The pace of global economic expansion will pick up moderately over the forecast horizon, primarily driven by the advanced economies.

  • The US economy will gain impetus, boosted by an improvement in the asset position of households and companies, further brightening in the labour and real-estate markets, and expansive monetary policy. 
  • Economic developments in the euro area will remain plagued by complex structural problems that are still present in several member states and will take some time to solve. The recovery in aggregate economic activity will temporarily stabilise, despite the continued existence of major differences between member states. 
  • Growth in the German economy, in particular, will far outstrip the euro area average for the forecasting period, while economic momentum in France and Italy will be relatively weak. 
  • The situation in the crisis-afflicted countries of Ireland, Portugal and Spain is expected to be somewhat more positive, although the economic situation remains fragile. 
  • Greece is still waiting for an economic recovery, but several years of recession may come to an end in 2015."

"All in all, aggregate world economic production will rise by 2.9% this year and 3.3% next year."

Emerging markets: 

  • "The pace of expansion in emerging economies will barely pick up in the forecasting period. Although they will benefit from the economic upturn in key advanced economies, the gradual rise in long term interest rates in the  US will, at the same time, result in a steady deterioration of financing conditions for emerging economies. Nevertheless, aggregate economic production in emerging economies will grow at over twice the rate as in their advanced counterparts." 
  • "Russia is the only country that is expected to experience an economic downturn this year."

"One of the main risks for the world economy remains the fragile situation in the euro area. Despite the reform measures recently introduced by several member states, the adjustment process is far from complete. As a consequence, many of these countries remain far too expensive to be competitive. As in the past three years, crises could erupt at any time."

Wednesday, June 25, 2014

25/62014: IMF on Corporate Tax Spillovers: Ireland one of top names

IMF just published a watershed document on Corporate Taxation - relating to the tax avoidance and aggressive tax optimisation - and its effects on emerging and developed economies. Ireland features prominently in the report.

Here's what it is about.

A new IMF Policy Paper, titled "SPILLOVERS IN INTERNATIONAL CORPORATE TAXATION" considers "the nature, significance and policy implications of spillovers in international corporate taxation—the effects of one country’s rules and practices on others."

Emphasis, throughout is mine (in italics and bold).

The paper develops further the concerns about potentially harmful spillovers from corporate tax regimes in countries with regimes permitting more aggressive tax optimisation onto other economies, in line with concerns expressed by G7, G20 and the OECD and developed under the OECD framework project on Base Erosion and Profit shifting (BEPS).

I wrote about this some time ago and covered it extensively on the blog and in the media. Here are couple of top-line links on the BEPS issues relating to Ireland and other EU countries:

  1. Link to my Cayman Financial Review paper on corporate taxation issues in Ireland:
  2. My CNBC interview on Apple case: see third link here
  3. My WallStreet Journal op-ed on Apple case:

The IMF paper starts by arguing that tax spillovers can matter for macroeconomic performance, as "…there is considerable evidence that taxation powerfully affects the behavior of multinational enterprises. New results reported here confirm that spillover effects on corporate tax bases and rates are significant and sizable. They reflect not just tax impacts on real decisions but, and apparently no less strongly, tax avoidance."

Per IMF, globally, "The institutional framework for addressing international tax spillovers is weak. As the strength and pervasiveness of tax spillovers become increasingly apparent, the case for an inclusive and less piecemeal approach to international tax cooperation grows."

In other words, prepare for a greater push toward closing loopholes and harmful practices that so far have been the cornerstone of the Irish corporate tax policy conveniently obscured by the benign headline rate.

In fact, Ireland is at the forefront of the problems identified in the IMF paper and it is also at the forefront of the table of countries that will lose should aggressive tax optimisation be curbed.

In relation to problem countries, we feature prominently as an economy heavily dependent on FDI and tax optimisation (surprise, surprise):

Here's what the IMF have to say about the above evidence: "One set of questions concerns whether international corporate tax spillovers matter for macroeconomic performance. For capital movements, at least, it seems clear that they do. Table 1, showing characteristics of the ten countries with the highest FDI stocks relative to GDP, suggests that patterns of FDI are impossible to understand without reference to tax considerations (though these of course are not the only explanation). And the point is significant not only for some individual countries (accounting for a stock of FDI extremely high relative to their GDP) but globally (with relatively small countries accounting for a very large share of global FDI). The potential economic implications of international tax spillovers thus go well beyond tax revenue, with wider implications for the broader level and distribution of welfare across nations."

On pervasiveness of corporate income tax (CIT) optimisation in the overall host economy, IMF defines ‘CIT-efficiency’ in country A as the ratio of actual CIT revenue in this country to the reference level of CIT revenue, with the latter computed as the standard CIT rate multiplied by a reference tax base… To the extent that the reference CIT base is larger than the actual ‘implicit’ CIT base [CIT-efficiency measure] will be less than unity; and the further [CIT-efficiency measure] lies below unity, the less effective is the CIT in raising revenue relative to the benchmark."

Per IMF: "Variations in [‘CIT-efficiency’ metrics across countries and time] might reflect behavioral responses that affect GOS [gross operating surplus] and the implicit CIT base in different ways. One obvious candidate is profit shifting, the incentives for which are determined by differences in statutory CIT rates: if a country has a relatively high CIT rate, outward profit shifting will likely cause an erosion of the tax base, without a corresponding reduction in GOS. Conversely, for a country with a relatively low CIT rate, inward profit shifting will tend to expand the implicit base."

Key here is that "…profit shifting would be expected to induce a negative correlation between [‘CIT-efficiency’ metric] and [Corporate Tax Rate]." In other words, to spot profit shifting into the country from abroad, we need to have low corporate tax rate and very high CIT efficiency at the same time…

And guess who's at the top of the global bottom-feeding food chain here?

CHART: Mean CIT Efficiency, 2001–2012

Note: CIT efficiency for Cyprus is 213 percent.

Just look who is second in the world in terms of mean CIT efficiency (we know we are at the top of the world distribution when it comes to low corporation tax rate)… So remember: per IMF, high CIT efficiency combined with low tax rate = a signal that profit shifting is taking place into the economy.

IMF usefully decomposes tax shifting effects for the case of US MNCs as follows.

"The calculations begin with the net incomes of U.S. parents and Majority Owned Foreign Affiliates (MOFAs) by country of affiliate, taken from Bureau of Economic Affairs data… These are adjusted by the average effective corporate income tax rate in the respective country to obtain estimates of taxable income. The average effective tax rate for global taxable income is weighted according to countries’ GDP. Country shares of U.S. MNEs’ sales, assets, compensation of employees and number of employees are obtained from the same tables, adding totals for U.S. parents and MOFAs in all countries. Shares of each apportionment key are applied to global taxable income to derive changes in taxable income."

Here is the main kicker: "Appendix Table 8 shows the country-specific estimates… Broadly, a country gains from FA [global reforms in tax if tax were to accrue in the country where the company bases its activity that generates taxable income] on the basis of some factor if its share in the global total of that factor exceeds its share in the net income of US MNEs. That Italy, for instance, gains under all factors reflects the very low share of US MNEs net income reported there: about 0.16 percent. Whether that reflects inherently low profitability or particularly aggressive outward profit shifting cannot be determined from these data."

In other words, broadly speaking, positive values in the table below are when countries will benefit from tax shifting being shut down, and negative are where the countries will lose from such reforms. Alternatively - positive values show the effective losses incurred by the country from tax shifting. Negative values represent the gains to the country from acting as a tax shifting platform.

CHART: Appendix Table 8. Reallocation of Taxable Income from Alternative Factors, U.S. MNEs Percent of change

Ireland features prominently in this table as a country with:

  • the fourth highest benefit from tax shifting in terms of sales activity booked
  • first highest in terms of assets booked, 
  • third highest in terms of compensation and employment. 

Crucially, we are in line with such tax-transparent jurisdictions as Bermuda and Luxembourg, ahead of the Netherlands and well ahead of Singapore and Switzerland.

But keep repeating to yourselves, we are not a tax haven… not a tax haven…

25/6/2014: Irish Residential Property Prices: May 2014

CSO published Residential Property Price Index today for May 2014. Lots of various headlines reporting double digit gains in property prices and lauding general recovery in the market, as usual.

Let make some sense of the data as we have it:

Point 1: National house prices: Index was at 70.1 in April 2014 and this rose to 71.7 in May 2014. April reading was just a notch above 70.0 in December 2013. In other words, for all annual gains, we were just about back to the level prices were in December last year. In May, this rose above December 2013 levels, and closer to September-October 2011 average.

I would not call this a 'recovery', yet, especially since we have drawn another 'u' around December 2013-April 2014.

That said, relative to peak prices are down 45.1% and are up 11.9% on crisis period low. Cumulated gain over last 24 months is only 9.47% which equates to annual average growth in the 'recovery' period of just 4.63%. Again, given the depth of decline from the peak, this is not a 'bubble'-type recovery.

3mo moving average was down through April 2014 at -0.23% compared to 3mo period through January 2014, but in May this moved into positive territory of +0.86% compared to 3mo average through February 2014.

Current national prices are 26.9% below Nama valuations (inclusive of LTEV and risk cushion) so for Nama to return profit on average acquired loan it will need ca 27.4% rise from here on. At current running 24 months growth rate, that will require roughly 6 years.

Point 2: National property prices ex-Dublin: the index reading is at 68.2 barely up on 68 in March 2014. Compared to crisis trough, the index is now only 3.2% up. Cumulated rate of growth over 24 moths through April 2014 is negative at -1.02%. 3mo MA through May 2014 is 1.02% below 3mo MA through February 2014. In other words, nationally (excluding Dublin) things are not getting better.

Point 3: Dublin properties, despite all the talk about 'new bubble' and 'boom' are only now in line with those nationally (chart above shows this much). In other words, Dublin 'boom' is a correction for much steeper decline in Dublin properties relative to the rest of the country.

Point 4: Dublin all properties index is now at 72.2 in May, which is up on 69.3 in April 2014, and is the highest reading since February 2011.

Relative to peak, Dublin properties are still down 46.3% although they are now 26% above the crisis trough. Cumulated gain in Dublin over 24 months through May 2014 is 23.6% which equates to roughly 11.2% annual rise - robust and clearly signalling recovery, in contrast to ex-Dublin markets.

But, 3mo MA through April 2014 was % below 3mo MA through January 2014, while 3mo AM through May 2014 is 2.66% up on 3mo MA through February 2014, which shows some volatility in the index and can be a sign of the rally regaining some momentum or seasonal effects combining with some improved economic news or simply volatility taking hold of the recent data. Simple answer - we have no idea what is going on.

Crucially, as chart above shows, apartments segment of Dublin market is showing weaker growth over the last 6 months than houses segment. This is surprising, given rapid rises in rents and reported shortages of accommodation.

So here you have it: for all the hoopla about 'mini-bubble' etc, things are still very much shaky:
  • Growth in Dublin is strong, but so far consistent with the market catch up with more conservative price declines to trough in the rest of the country. 
  • Meanwhile, outside Dublin, things are solidly dead.

Tuesday, June 24, 2014

24/6/2014: Planning Permissions in Ireland: the 'Recovery' is Still Worse than the 1980s Crisis

There are many drivers for planning permissions applications in Ireland, including traditional ones (economic fundamentals, demand, credit supply availability etc) and idiosyncratic (changes in planning regime etc). Not to comment on either of these, here are the latest stats (through Q1 2014) on the subject.

Q1 2014 registered an uplift in total number of planning permissions granted, which rose y/y by 17.0%. This sounds like a large number, except the problem is - it comes off such a low base that Q1 2013 actually was an absolute historical low for planning permissions for any quarter since Q1 1975. In real terms, as the chart below clearly shows, since Q1 2011 through Q1 2014, maximum number of planning permissions granted barely reaches previous historical low in Q1 1988. That's right: the worst of the 1970s-1980s is the best of 2011-present range. In fact, Q1 2014 'improved' activity in terms of planning permissions is 11.7% lower (that's right - lower) than 1975-1999 lowest point.

Dwellings permissions are currently sitting 38.9% below their absolute low of 1975-1999 period, although these did rise 3.36% year on year.

In terms of total square meters relating to permissions granted, things are no better. Year-on-year volume of permission granted by square meters is down 20% for all applications. From Q1 2011 through Q1 2014, total square meters of permissions granted have been trending basically in line with the lowest levels reached in the 1980s.

I am not sure if anyone can tell with any degree of confidence as to what the effect of new regulatory regimes is on these numbers, but one thing is very clear - the recovery is not to be seen anywhere in the above numbers, yet. Despite some reports in the media and from the industry suggesting that things are getting better and better.

24/6/2014: US Productivity Slowdown: It's Structural & Nasty

"Productivity and Potential Output Before, During, and After the Great Recession" a new paper by John Fernald (NBER Working Paper No. 20248, June 2014) looks at the U.S. labor and total-factor productivity growth slowdown prior to the Great Recession in the context of the slowdown "located in industries that produce information technology (IT) or that use IT intensively, consistent with a return to normal productivity growth after nearly a decade of exceptional IT-fueled gains". In a sense, the paper reinforces the point of view that I postulated in my TEDx talk last year dealing with the 'end' of the Age of Tech (here:

Fernald opens the paper with a set of two quotes. One brilliantly describes the core question we face:
"When we look back at the 1990s, from the perspective of say 2010,…[w]e may conceivably conclude…that, at the turn of the millennium, the American economy was experiencing a once-in-a-century acceleration of innovation….Alternatively, that 2010 retrospective might well conclude that a good deal of what we are currently experiencing was just one of the many euphoric speculative bubbles that have dotted human history." Federal Reserve Chairman Alan Greenspan (2000)

Fernald argues that "The past two decades have seen the rise and fall of exceptional U.S. productivity growth. This paper argues that labor and total-factor-productivity (TFP) growth slowed prior to the Great Recession. It marked a retreat from the exceptional, but temporary, information-technology (IT)-fueled pace from the mid-1990s to the early 2000s. This retreat implies slower output growth going forward as well as a narrower output gap than recently estimated by the Congressional Budget Office (CBO, 2014a)."

Figure 1 from the paper illustrates how the mid-1990s surge in productivity growth indeed ended prior to the Great Recession. The rise in labor-productivity growth, shown by the height of the bars, came after several decades of slower growth. But, notes Fernald, "in the decade ending in 2013:Q4, growth has returned close to its 1973-95 pace. The figure shows that the slower pace of growth in both labor productivity and TFP was similar in the four years prior to the onset of the Great Recession as in the six years since."

And things have been bad since. Labour productivity growth (slope of liner trend below) is now on par with what we have been witnessing in 1973-1995, and shallower than in 1995-2003. But the trend is still close to actual performance, which signals little potential for any appreciable acceleration:

Beyond labour productivity, things are even messier. Charts below plot the Great Recession against other recessions in terms of productivity, output and labour utilisation:

Notes: For each plot, quarter 0 is the NBER business-cycle peak which, for the Great Recession,
corresponds to 2007:Q4. The shaded regions show the range of previous recessions since 1953. Local
means are removed from all growth rates prior to cumulating, using a biweight kernel with bandwidth of 48 quarters. Source is Fernald (2014).

All of the above show the cyclical disaster that is the current Great Recession, but crucially, they show poor recent performance in Labour Productivity, exceptionally poor performance in Hours of Labour used, disastrous performance in Total Factor Productivity… in other words - historically problematic trends relating to productivity, labour utilisation and tech-related productivity in the current recession compared to all previous recessions.

But more worrying is that, as Fernald notes: "That the slowdown predated the Great Recession rules out causal stories from the recession itself. …The evidence here complements Kahn and Rich’s (2013) finding in a regime-switching model that, by early 2005—i.e., well before the Great Recession—the probability reached nearly unity that the economy was in a low-growth regime."

So what's behind all of this slowing productivity growth? "A natural hypothesis is that the slowdown was the flip side of the mid-1990s speedup. Considerable evidence… links the TFP speedup to the exceptional contribution of IT—computers, communications equipment, software, and the Internet. IT has had a broad-based and pervasive effect through its role as a general purpose technology (GPT) that fosters complementary innovations, such as business reorganization. Industry TFP data provide evidence in favor of the IT hypothesis versus alternatives. Notably, the euphoric, “bubble” sectors of housing, finance, and natural resources do not explain the slowdown. Rather, the slowdown is in the remaining ¾ of the economy, and is concentrated in industries that produce IT or that use IT intensively. IT users saw a sizeable bulge in TFP growth in the early 2000s, even as IT spending itself slowed. That pattern is consistent with the view that benefiting from IT takes substantial intangible organizational investments that, with a lag, raise measured productivity. By the mid-2000s, the low-hanging fruit of IT had been plucked."

This a hugely far-reaching paper with two related implied conclusions:

  1. Prepare for structurally slower growth period in the US (and global) economy as the last catalyst for growth - tech - appears to have been exhausted; and
  2. The Age of Tech is now in the part of the cycle where returns to innovation and technology are falling, while returns to financial assets overlaying tech sector are still going strong. The classic bubble scenario is being formed once again, as always on foot of disconnection between the real economic returns to the assets and asset valuations. This bubble will have to deflate.

24/6/2014: ECR Ukraine Risk Assessment

Ukraine keeps diving deeper and deeper into the economic crisis territory (via ECR):

So per above, the country is now in the lowest ranking tier in terms of risks. And it is significantly underperforming its peers:

Risks scores composition is abysmal on Political and Economic Assessments (none have much to do directly with the external threats and all are already pricing in any positives from the latest Presidential elections):

Monday, June 23, 2014

23/6/2014: Euro Area Investment Funds Stats: April 2014

ECB has released April 2014 data on Investment Funds flows in the Euro Area. The release is available here:

From the top-line:

  1. In April, the amount outstanding of shares/units issued by euro area investment funds (ex-money market funds) was €68 billion higher than in March 2014.
  2. In terms of the breakdown by investment policy, the annual growth rate of shares/units issued by bond funds was 4.0% in April 2014. Transactions in shares/units issued by bond funds amounted to €15 billion in April 2014. The annual growth rate and monthly transactions of equity funds were 7.3% and €21 billion respectively in April 2014. For mixed funds, the corresponding figures were 9.1% and €13 billion.
  3. The kicker is in comparing growth rates in April 2013 against growth rates in April 2014. These are shown in the chart below:

The basic point is that growth is slower (transactions on buy side are smaller) and this is true for all funds, except Equity Funds. This change comes on foot of February-March 2014 when transactions were larger than in the same period of 2013.

So we have alleged economic recovery associated with slower growth in investment funds activity. Not a reason to worry, yet, but certainly a reason to ask if the recovery has been already priced in by the markets?..

Saturday, June 21, 2014

21/6/2014: IMF 'Waived' Sustainability Requirement in Lending to Euro Area Countries

IMF paper, published yesterday now fully admits that the Fund has 'waived' its own core requirements for lending under the core programmes in euro area 'periphery'. More importantly, the criteria for lending that was violated by the Fund is… the requirement that "public debt be judged as sustainable with "high probability”" under new lending programme.

Quoting from the IMF report: "In the sovereign debt crises of the 1980s, concerted financial support from the private sector was a standard feature of Fund-supported programs, most of which were within the normal access limits. By contrast, the spate of capital account crises that began in the mid 1990s occurred at a time when the creditor base had become much more diffuse, and the Fund’s strategy sought instead to entice a resumption of private flows through programs involving large-scale Fund and other official resources. While this strategy worked well in some circumstances, it failed to play its catalytic role in cases where, amongst other factors, the member's debt sustainability prospects were uncertain." 

Thus, the Fund clearly recognised that probabilistically, extended lending can only work where there is some confidence that the borrower debts post-lending by the IMF, are sustainable. In other words, the Fund agreed that there is the need for more extensive lending (in some cases), but that such lending should, by itself, not push beyond sustainability levels of debt. Were it to do so, the Fund would have required restructuring of the sovereign debt to reduce levels to within sustainability bounds.

This is how this 'bounded' lending beyond normal constraints was supposed to work: "In response to this varied experience, and to ensure effective use of its resources, the Fund concluded that decisions to grant access above normal limits should henceforth be guided by defined criteria. These were established in the 2002 Exceptional Access Policy, [EAP] which included a requirement that public debt be judged as sustainable with "high probability.” The framework applied initially only in capital account cases, but in 2009 became applicable to all exceptional access decisions."

Now, fast forward to the Fund entanglement in euro area debt/default politics: "When Greece requested exceptional access in May 2010, the policy would have required deep debt reduction to reach the high probability threshold for debt sustainability. Fearing that such an operation would be highly disruptive in the circumstances prevailing at the time, the Fund decided to create an exemption to the high probability requirement for cases where there was a high risk of international systemic spillovers—an exemption that has since been invoked repeatedly in programs for Greece, Portugal, and Ireland."

Elaborating on this, the paper states: "An important rigidity of the EAP came to the fore when Greece requested financial support in early 2010. When “significant uncertainties” surrounding the sustainability assessment prevented staff from affirming that debt was sustainable with high probability, the existing EAP framework would call for a debt reduction operation to deliver such high probability as a condition for the provision of exceptional access. In the case of Greece, where the high probability requirement was not met, however, there were fears that an upfront debt restructuring would have potentially systemic adverse consequences on the euro area. Given the inflexibility of the EAP, and the crisis at hand, the Fund decided to create an exemption to the requirement for achieving debt sustainability with a high probability when there was a “high risk of international systemic spillovers”. Since then, the systemic exemption has been invoked 34 times by end-May, 2014 in the three EA programs for Greece, Portugal, and Ireland."

Note that the systemic exemption has been invoked 34 times in just four years, in all cases in relation to euro 'periphery'. That is a lot of 'we can't confirm sustainability of debt levels post-programme, so we won't look there' invocations. More significantly, did anyone notice these invocations in IMF country reports that repeatedly assured us, since 2010 on, that things are sustainable in these countries?

Conclusion: the Fund now fully admits that its lending to Greece, Portugal and Ireland:
1) Required (under previous conditions) deep restructuring of sovereign debt; and
2) Was carried out in excess of the already stretched sustainability bounds.
The Fund loaded more debt onto these economies than could have been deemed sustainable even by its already stretched standards of 2002 EAP.

Friday, June 20, 2014

20/6/2014: Household Disposable Income: Great Recession 2007-2011

Excellently spotted by @stephenkinsella - a chart from The Economist blog mapping changes in disposable incomes across a set of advanced economies over 2007-2011 period:

Link to the post:

As I mentioned on Twitter, good news "Ireland is not Greece"... kind of...

20/6/2014: Some recent media links for TrueEconomics

Few recent media links citing TrueEconomics or/and myself:

  1. Finfacts on Mortgages Arrears in Ireland: Delighted to see my analysis cited by Finfacts.
  2. CityAM citing TrueEconomics post on duration of US unemployment:
  3. TechInsider citing from my CNBC interview on EU Commission investigation of Apple Inc tax practices in Ireland: video of my interview is also linked at the bottom of the post.
  4. The Washington Times cites from TrueEconomics post on Russia-China gas deal: the original post referenced is here:
No links to mainstream Irish media.

Thursday, June 19, 2014

19/6/2014: Biggest Brands: 2000-2013

A fascinating look at evolution over time of most powerful brands (via Bloomberg):

Click to enlarge

Amazing decline of Nokia and Intel, and rise of Google and Apple, stability of IBM and weakening of Microsoft, the steady rise against adverse publicity of McDonald's, vanishing of AT&T and wild ride of Disney... and so on.

19/6/2014: Nominal Consumption in Ireland: 6 years of uninterrupted declines

As I blogged yesterday, Eurostat released data on individual consumption and GDP per capita for EU28 for 2013. There are different metrics for measuring income and spending per capita and I blogged on the Actual Individual Consumption and GDP per capita indices relative to EU28 yesterday here.

Updating the database for the other metric: Nominal Expenditure per Inhabitant, Actual Individual Consumption in Euro terms, here are the results:

Over recent years, Ireland sustained significant declines in consumption spending per person living in the country. How severe were these declines? Compared to pre-crisis average (2003-2007) our consumption was down 2.8% in 2013. This is the second most severe impact of a recession on households' consumption after Greece.

As the result of this decline, our ranking has deteriorated as well. In 2008, Ireland's consumption per capita ranked third in the EU28. In 2013 and 2013 we ranked 11th. If in 2007 Ireland's households' consumption exceeded that of the EU15 average by more than 31%, in 2013 this declined to only 5%.

Lastly, in raw numbers terms, our consumption expenditure per inhabitant in 2013 stood at EUR21,565 - below that of any other advanced euro area economy, save the 'peripherals'.

At its peak in 2007, our consumption expenditure per inhabitant was EUR24,978. More ominously - and in line with the dynamics in Domestic Demand reflected in our National Accounts - Irish individual consumption has now declined in nominal terms in every year starting from 2008, although the rate of decline y/y dropped to 0.19% in 2013, against decline of 0.32% in 2012, 0.48% in 2011, 2.9% in 2010, 9.9% in 2009 and 0.35% in 2008.

Remember: we have booming consumer confidence, claims of improving retail sales (not much of evidence of such) and generally positive outlook on the economy… and yet, consumption (aka demand) is declining, year after year after year for six years straight... uninterrupted.

Wednesday, June 18, 2014

18/6/2014: IMF's Growth Forecasts for Ireland: Consistently More Bearish

This the fifth and last post on IMF's assessment of Irish economy released today.

In previous posts, I covered IMF's assessment of Irish banks (here), Irish banks prospects with respect to the ECB stress tests (here), Irish households' balance sheets (here) and growth projections (here).

This time around, lets take a look at IMF's past and present forecasts for growth. These are presented as charts, plotting evolution of growth forecasts from June 2011 through June 2014.

First, IMF's GDP growth forecasts. You can see the deterioration of outlook year on year into 2014 for all three forecast years. IMF claims that things will finally improve in 2015 when GDP growth is forecast at 2.4%. But last year, the Fund forecast 2014 growth (not 2015) at 2.2% and in 2012 the Fund expected 2014 growth to be 2.6% and so on. 

In simple terms, Fund's forecast published in June 2011 saw Irish real GDP growing by a cumulative 9.8% in 2014-2016. A year ago in June 2013 that same forecast fell to 7.8%, and today's forecast is down to 6.74%. Some material difference, disregarding the fact that GDP levels from which the above growth rate have been computed are already lower than assumed back in 2011 or 2013.

Next: Domestic Demand (a combination of private and public consumption, and public and private investment):

The upgraded forecast for 2014 compared to the Fund predictions published a year ago is a welcome sign. But at 1.1% y/y growth this is hardly consistent with anything more than a stagnation. However, after 2014, the Fund is still projecting ver-lower rates of growth compared to its previous forecasts. In June 2011, the Fund projected 2014-2016 cumulative growth in Domestic Demand to be 7.3%. In June 2013 that same projection was 4.9% and this time around it shrunk to 4.2%.

Next up: exports growth:

Again, things are going South: in June 2013 the forecast for 2014 growth rate in exports was 3.5%. In June 2014 it is down to 2.5%. Back in June 2011, IMF predicted that over 2014-2016 Irish exports will rise 15.4%, this June the prediction is 10.5%.

What all of this means in actual cash terms? Here are projections for Nominal GDP: 

So in nominal terms, IMF was projecting 2014 GDP to be at EUR165.5bn back in June 2011, at EUR171bn in June 2012, at EUR173.4bn in June 2013 and the Fund's latest projection for 2014 nominal GDP is…  EUR167.7bn. Now, note: growth rates in 2015-2016 discussed at the top of this post come on these levels, so we have lower growth off the lower base. Unimpressive as they are, GDP growth rates are even made worse by the continuous decrease in the base off which they are computed.

And to top it all up, over 2014-2016, IMF expected Irish GDP to total EUR542.9 billion back in June 2013. 12 months later that forecast is down to EUR520.9 billion - down EUR22 billion over 3 years. Puts things into perspective, really, no?

However, IMF also provides us (since 2012) with handy forecasts for GNP growth. These are summarised here:

And you get the picture by now: things are getting worse and worse and worse in the minds of the Fund forecasters.

So while the media might celebrate the fact that IMF produced relatively benign outlook for 2014-2016 in its latest assessment of our economy, keep in mind: their projection used to be for the economy to reach EUR188.7 billion by 2016 when they did this exercise 12 months ago, today the expect that number to be EUR179.5 billion. That's 4.5 years of austerity at EUR2 billion that is being planned for 2015…

18/6/2014: IMF on Irish Economic Growth: Sunshine is Still Awaiting the Future

Per IMF: "Growth is expected to firm to about 2.5  percent from 2015, with a gradual rotation to domestic demand despite little support from credit initially. Risks appear broadly balanced in the near term, but are tilted to the downside over the medium term, in part owing to risks to reviving financial intermediation which is important for sustaining job rich domestic demand growth."

Ah, the dreams… Firstly, actual IMF projection is for growth ow 2.4% not 2.5% in 2015. That 2.5% based on Fund own forecast will only arrive in 2016, not 2015. Secondly, per IMF previous forecasts (see next post), that 2.5% growth was supposed to hit us in 2015 (based on December 2013 forecast), reach 2.7% in 2015 based on June 2013 forecast and reach 2.5% in 2014 based on June 2012 forecast… so that 2.5% growth is, as before, still a mirage on the horizon...

"Strong domestic indicators and an improving external environment support staff projections for real GDP growth of 1.7 percent in 2014. Recent World Economic Outlook projections put growth of Ireland’s trading partners at 2 percent, driving export growth of 2.5 percent." Oops… but a tar ago the Fund said in 2014 we shall have 3.5% exports expansion… In fact, the fund downgraded Irish exports growth from 3.7% in 2015 to 3.6% between December 2013 and today's forecasts.

"Final domestic demand is expected to expand by 1.1 percent, led by investment, with significant upside potential given the investment surge in the second half of 2013. A modest ó percent increase in private consumption reflects rising incomes driven by job creation and improving consumer confidence. Public consumption will remain a drag on domestic demand as public sector wage costs continue to decline under the Haddington Road agreement." Wait… so consumption and domestic investment are booming. And IMF is moving forecast for 2014 for final domestic demand from 0.4% in December 2013 to 1.1% now. But materially, IMF forecast did not change that much: it was 1% for 2014 in June 2013, 1.1% in June 2012 and 1.4% in May 2011. And this is against a shallower GDP base since then! In other words, growth is improving forward because it disappointed in the past...


Neat summary of risks around recovery: "prospects appear broadly balanced in 2014–15 but tilted to the downside over the medium term. Staff’s growth projections lie at the bottom end of the forecast range for 2014, and near the median for 2015, with sources of upside to both exports and domestic demand. Key risks include:

  • External demand. Ireland’s openness (exports at about 110 percent of GDP) makes it vulnerable to trading partner growth, such as a scenario of protracted slow global growth, or if escalating geopolitical tensions were to notably affect EU growth.
  • Financial market conditions. The substantial spread tightening despite high public and private debts faces some risk of reversal, perhaps linked to a surge in global financial market volatility. Although the direct fiscal impact would be modest owing to long debt maturities, adverse confidence effects would likely slow domestic demand.
  • Low inflation. Ongoing low inflation in the euro area would lower inflation in Ireland, slowing declines in debt ratios and dragging on domestic demand in the medium term.
  • Bank repair shortfalls. As firms’ internal financing capacity is drawn down, sustaining domestic demand recovery will depend increasingly on a revival of sound lending, where substantial work remains ahead to resolve high NPLs to underpin banks’ lending capacity."
Surprisingly, IMF lists no risks relating to households or SMEs, despite pointing at these in relation to the banks. Which implies that the Fund sees no difficulty arising in the households and SMEs sectors from banks aggressively pursuing bad debts, but it sees risk of this to the banks. I am, frankly, puzzled.

You can see the virtual flat-lining of Irish economy in 2012-2013 here:

Next post: IMF growth projections: a trip through the years...