Showing posts with label exports-led recovery. Show all posts
Showing posts with label exports-led recovery. Show all posts

Monday, March 23, 2015

23/3/15: German Exports-led Recovery and Two BRICs


Because exports-led recovery is the only thing, besides hopium, that sustains the euro area (although there are some rumblings on the horizon of awakening consumers and even corporate investment), here are two charts worth considering:

First up, German exports to China:
Source: @FGoria

Self-explanatory. Next: German exports to Russia:

 Source: @FGoria

Self-explanatory.

Why we need QE? Because even though it is too late to drink water once kidneys have failed, it is patently no more feasible to drink schnapps.

Monday, February 16, 2015

16/2/15: Current Account, Growth and 'Exports-led Recovery': 1999-2014


There is one European economic policy/theory fetishism that stresses the importance of external balance in 'underpinning sustainable' growth. The theory works the following way: countries with external imbalances (e.g. current account deficits) need to enact 'reforms' that would put their economies onto a path of external surpluses. More commonly, this is known as achieving an 'exports-led recovery'.

Set aside the Cartesian logic suggesting that if someone runs a current account surplus, someone else must run a current account deficit. Or in other words, if someone achieves 'sustainable' growth, someone else must be running an 'unsustainable' one.

Look at the actual historical relationship between current account position and growth in income per capita, measured in real (inflation-adjusted terms).

Take the sample of all advanced economies (34 in total, excluding those that we do not have full data for: San Marino and Malta). Take total growth achieved in GDP per capita from the end of 1999 through 2014. And set this against the average current account surplus/deficit achieved over the same period of time.

Chart below illustrates:

Note: there is no point, given the sample size, to deal with non-linear relationship here.

Per chart above, there is, statistically-speaking no relationship between two metrics. Multi-annual growth GDP per capita (in real terms) has basically zero (+0.019) correlation with multi-annual average current account balance. The coefficient of determination is a miserly 0.00036.

Now, cut off the 'outliers' - four countries with lowest GDP per capita: Estonia, Latvia, Slovak Republic and Slovenia. Chart below shows new relationship:


Per chart above, there is a very tenuous relationship between multi-annual growth GDP per capita (in real terms) and multi-annual average current account balance, highlighted by a rather weak, but positive correlation of +0.41 between two metrics. The coefficient of determination is around 0.17, which is relatively low for the longer-term averages relationship across the periods that capture both - a slowdown in growth in the 2002, a boom-time performance for both the advanced economies and the global economy during the 2000s and the global crises since 2008.

I tested the same relationship for GDP per capita adjusted for Purchasing Power Parity and the results were exactly identical. Furthermore, removing the three Asia-Pacific growth centres: Taiwan, Korea and Singapore from the sample leads to a complete breakdown of the stronger relationship attained by excluding the Eastern European outliers, with coefficient of determination falling to ca 0.05. Removing these three economies from the sample with Eastern European outliers present results in a negative (but statistically insignificant) relationship between the current account dynamics and growth.

Lastly, it is worth noting that the sample is most likely biased due to policy direction: during economic slowdowns and in poorer performing European economies in general, there is a strong policy bias to actively pursue exports-led growth strategies, while in non-euro area economies this is further reinforced by the pressure to devalue domestic currencies. Which, of course, suggests that the above correlation links are over-stating the true extent of the current account links to growth.

The conclusion from this exercise is simple: there is only a weak evidence to support the idea that for highly advanced economies, rebalancing their economic growth over the longer term toward persistent current account surpluses is associated with sustainable economic growth. And if we are to consider a simple fact that many euro area 'peripheral' economies (e.g. Greece, Cyprus, Portugal and Spain, as well as Slovenia) require higher upfront investments in physical and human capital to deliver future growth, the proposition of desirability of an 'exports-led' recovery model comes into serious questioning.

Wednesday, October 1, 2014

1/10/2014: That Exports-Led Recovery... in Germany


And a Scary Chart of the Day prize goes to @IanTalley who produced this gem:

That's right, Germany is now officially producing more stuff that its people can't afford than China...

But its a good thing, for it means that people in countries like Italy, Spain, Greece, Portugal, Cyprus etc who owe Germany money can buy more stuff from Germany they can't quite afford either, except for the credit supplied from Germany funded by the credit they take from Germany... Confused? Try confused.edu for some academic analysis... or just look at KfW bank latest foray into Ireland (apparently it took months of planning to get us to this absurdity http://www.independent.ie/business/irish/kfw-deal-to-fund-irish-firms-was-months-in-the-planning-29896868.html).

Saturday, April 5, 2014

5/4/2014: Is Russian Trade Performance Really That Weak?


Here is another look at trade performance by various countries, this time based on BBVA synthetic index.

First: components of the index (darker colours mark stronger connectedness between trade and domestic economy):


Last: summary of the synthetic index rankings:


So core lesson here is that Russian economy performs right bang in the middle, set between UK and Australia… not bad. But when we look into the underlying drivers for this performance, technology is a weak driver, value retention by primary materials exporters is a major positive driver, specialisation patterns are nowhere to be seen and relevance to the economy is overall much weaker than we could have expected…

5/4/2014: Mystery of exports-growth interconnections


An interesting piece of research from BBVA Research (April 2014) titled "The multifaceted world of exports: How to differentiate between export-driven strategies" dealing, in part, with explicit links between trade and growth across a large sample of countries (Ireland, unfortunately is not included, presumably because our exports are so massively dominated by the transfer pricing by the MNCs that even investment banks don't want to touch our data).

So one very important issue considered in the paper is the overall relevance of exports.

In summary: "Small and medium-sized East Asian economies lead on trade openness among emerging countries, while China outperforms in terms of the domestic connection of exports (i.e. related production generated by other industries). Latin American economies are below average in terms of openness, with Mexico additionally showing a very limited connectivity of trade, which is also the case of Indonesia. Poland outperforms in Emerging Europe as a more open exporter than Turkey and with better domestic connections than Russia."

Chart below summarises: (Fig 5)


Noteworthy feature of this chart is that with strong input from financial services, the UK is virtually indistinguishable from Russia and Canada. The curse of the City seems to be as bad as the curse of oil.

Couple other interesting takeaways:

1) Manufacturers tend to show more close links between exports and value added to the domestic economy (confirming my analysis from the PMIs for Ireland): "Domestic value-added in exports represents around 50% in manufactured goods, while this ratio is much higher for other activities, in which domestic natural resources, intermediation and labour intensity play a very important role. Among emerging economies, East Asian countries lag significantly behind in aggregate value-retention, while some commodity producers import a high share of final goods, which eventually drain the value-added generated at home due to the lack of manufacturing industries."

Chart below summarises: (Fig 8)

2) Diversification is a requirement for smaller open economies: "Product concentration is high for commodity exporters, as well as for specialised manufacturers, while China is the only emerging country with the global capacity to fix market conditions (not only from the supply side but also from the demand side). Saudi Arabia has that ability too for one very important sector: oil. In the case of small economies, for which world market power is much more limited, diversification is the remaining option for shelter from external turbulence."

I wrote about de-diversification of Irish trade that has been on-going with the switch in growth drivers from manufacturing toward ICT exports. But this is of far lesser concern or extent that what BBVA are noting for commodities-based economies. In some ways, we can even think of enhanced diversification happening in Ireland as pharma sector dominance is being eroded. Thus, the only concern in terms of future development is just how much concentration of trade will take place on foot of ongoing expansion of ICT services. For now, this is less of a structural problem than of the short term issue relating to distortions to our GDP and GNP.

3) Apparent technological content is not enough for success: This is a major kicker from our domestic point of view, as most of recent growth in our external trade came from expansion of technologically-intensive sectors. "Many emerging manufacturing countries have a significant share of exports with technological content rated as medium or high. However, none of them has a genuine surplus, as the majority of economies either also import a significant share of these products or just copy the technology or play an assembly role. On the other hand, India records a surplus in tech trade, with exports mainly comprising computer services."

Chart below summarises: (Fig 11)


Thursday, September 5, 2013

5/9/2013: Services PMI: August 2013

With a delay (due to extenuating circumstances) - here's my analysis of dynamics of the Services PMI for August for Ireland.

Yesterday's reading on Services PMI was spectacular by all measures:


  • Headline  index rose to 61.6 in August 2013, the highest reading since February 2007 and 19th highest reading in history of the index.
  • August reading marked the third consecutive month of index reaching statistically significant levels of growth.
  • 12mo MA is now at expansionary 55.6, 6mo MA at 55.7 and 3mo MA at 58.0. These readings should signal a break in the third recessionary dip we have experienced.
  • Current 3mo MA is solidly ahead of 3mo MA through May (53.4) and is ahead of same averages for 2012, 2011 and 2010.
The most critical bit, however, is that this is the first time now that the PMI has breached the levels consistent with the pre-crisis activity. This is not to say we are heading for 4.4-4.6% annual GDP growth, but it is significant nonetheless. 



All-in - very solid expansion, very solid reading and starting from actually high levels of activity to begin with.

We do not have - courtesy of Investec and Markit deciding to cut back the information they release to us, mere mortals - the actual composition details or the breakdown by sector. However, per Markit release, most of the growth is accounted for by booming IFSC. The overall Services PMI is very significantly skewed in the direction of MNCs (as I showed on a number of occasions).

Sunday, July 7, 2013

7/7/2013: Services PMI for Ireland: June 2013


Necessity is a mother of all inventions. Necessity of recent commands that those of us who care to do an in-depth analysis of Irish data have to scale back analysis of the PMIs. The reason for this is that Investec and Markit are no longer publishing in a general release any relevant data concerning the PMIs components. In the case of Services PMIs, Markit went even farther:

All that is left for any non-profit analysts like myself is to take the few numbers still being reported on an ad hoc basis, and make most of them. Sad to see years of data & analysis models going to waste because Markit & Investec don't really understand how to work with new media and independent analysts.


Here is the updated trends analysis for Services Sectors PMI (my earlier post on Manufacturing PMIs is here):

  • 12mo MA for the series stands at 54.0, which is statistically indifferent from 54.9 recorded in June 2013. 
  • June 2013 reading is statistically significantly above 50.0, so no denying it, the sector is expanding.
  • 3mo MA currently and 54.3, which is also statistically significantly different from 50.0, and is virtually unchanged on 54.2 3mo MA through March 2013.
  • The 3mo MA through June 2013 (or Q2 2013 average) is ahead of same period 2012 (50.3), 2011 (51.0) and 2010 (52.9). All pointing in the good direction, then.

Charts below illustrate the trends:



Chart above shows that, despite the robust growth, we are in a secular slowdown in underlying growth when it comes to Services sectors. In pre-crisis period, average PMI ranged 7.6 points above 50.0, which was consistent with roughly GDP growth of 4.4-4.6 percent per annum. Since the 'recovery on-set, average PMI is above 50.0 by 1.9 points, which is not statistically significantly distinct from zero growth in the sector. it is also consistent with average GDP growth of ca 1.2-1.5% per annum.

Now, keep in mind: these are Services, heavily dominated by exports-driven ICT and Financial Services - in other words, this is the sector of the economy where the 'exports-led recovery' story has been the rosiest since the 'official' end of the crisis.

Stay tuned for my combined series analysis for Manufacturing and Services PMI.

Friday, June 28, 2013

28/6/2013: Exports-led recovery: Q1 2013

I covered the headline numbers and trends for the GDP and GNP in previous two posts: here and here. Now, onto some more detailed analysis.

Remember, from the very beginning of the crisis, Irish and Troika leaders have been incessantly talking about the 'exports-led recovery'. Position on this blog concerning this thesis consistently remained that:

  1. Exports growth is great, but
  2. Exports growth is unlikely to be sufficient to lift the entire economy, and
  3. Exports growth projections were unrealistic, while
  4. Exports re-orientation toward services, away from goods was less conducive to delivering real growth in the economy.
Q1 2013 data continues to confirm my analysis.

In Q1 2013, based on real valuations (expressed in constant market prices),
  • Exports of Goods & Services shrunk 6.47% q/q and fell 4.09% y/y. This compares to +1.19% q/q growth in Q4 2012 and +1.28% expansion y/y. Compared to Q1 2011, when the current coalition took over the reigns in the Leinster House, total exports of goods and services are down 0.88% in real, inflation-adjusted terms. Troika sustainability projections envisioned growth of over 6% over the same period of time.
  • Imports of Goods and Services showed pretty much the same dynamics as exports in both Q4 2012 and Q1 2013, but owing to sharper contractions in 2011-2012 these are now down 4.34% compared to Q1 2011.
  • Exports of Goods fell in Q1 2013 by 3.83% q/q and 9.37% y/y, while there were declines of 2.68% q/q and 2.33% y/y in Q4 2012.
  • Exports of Services were down 8.75% q/q but up 1.27% y/y in Q1 2013, and these were up 4.77% q/q and 4.63% y/y in Q4 2012.


  • Trade Balance in Goods and Services fell 4.96% q/q and was down 3.63% y/y in Q1 2013, with Q4 2012 respective changes at -15.91% q/q and +0.98% y/y. Compared to Q1 2011, trade balance is up 15.91%
  • Trade Balance in Goods was down 6.63% q/q in Q4 2012 and this deteriorated to -10.73% growth in Q1 2013. Y/y, trade balance in goods contracted 0.05% in Q4 2012 and shrunk 10.59% in Q1 2013. On Q1 2011, trade balance in goods is down 14.04%.
  • Trade Balance in Services fell from EUR1,130mln in Q3 2012 to EUR132mln in Q4 2012 before improving to EUR601mln in Q1 2013. In Q1 2012 the balance stood at EUR28 million.


Friday, April 26, 2013

26/4/2013: Exports-led Recovery Mythology

An excellent blogpost on the UK failure to drive 'exports-led recovery': http://blogs.telegraph.co.uk/finance/jeremywarner/100024274/the-killing-of-britains-economic-salvation-an-export-led-recovery/

And it has a handy chart:

What's telling about the chart? Recall that every country in Europe is angling to get that 'exports-led recovery' going, including Ireland. which raises two questions

  1. As commonly asked: who will be importing all these exports from Europe? Traditional answer is: China or Asia, but the problem is - save for some luxury goods, China and Asia can manufacture all that Europe can export.
  2. What about Ireland? Well, see the chart above: apparently, our exports-led recovery is more robust than just two countries in the sample: the UK and Denmark.
Oh, and a note: Japan has been having an 'exports-led recovery' at record rates, and it is still nowhere near any real recovery.


Sunday, April 21, 2013

21/4/2014: Exports-led recovery? Not that promising so far...

Regular readers of this blog know that since the beginning of the crisis, I have been sceptical about the Government-pushed proposition that exports led recovery can be sufficient to lift Ireland out of the current crises-induced stagnation.

Over the recent years I have put forward a number of arguments as to why this proposition is faulty, including:

  1. A weakening link between our GDP, GNP and national income,
  2. A worrisome demographic trend that is structurally leading to lower labour markets participation, alongside the renewed emigration,
  3. Structural weaknesses in the economy left ravaged by some 15 years if not more of bubbles-driven growth,
  4. Taxation and state policy structures that favor old modes of economic development and which are incompatible with high value-added entrepreneurship, employment creation and growth, 
  5. Substitution away from more real economy-linked goods exports in favor of the superficially inflated exports of services in the ICT and international financial services sectors, etc
But the dynamics of our exports are also not encouraging. 

Here's a summary of some trends in Irish exports since 1930s, all expressed in relation to nominal value of merchandise trade (omitting effects of inflation). Based on 5-year cumulative trade volumes (summing up annual trade volumes over 5 year periods):
  • Irish exports grew 147.8% in 1980-1984 and 86.7% in 1985-1989 - during the 1980s recession. This did not lift Irish economy out of the crisis, then.
  • Irish exports grew 56.3% in 1990-1994 period and 56.4% in 1995-1999 period. Thus, slower  rate of growth in exports during the 1990s than in the 1980s accompanied growth in the 1990s. This hardly presents a strong case for an 'exports-led recovery'.
  • Irish exports expanded cumulatively 148.0% in 2000-2004, before shrinking by 0.4% in 2005-2009 period and is expected to grow at 4.6% cumulatively in 2010-2014 (using 2010-2012 data available to project trend to 2014). 
The last point above presents a problem for the Government thesis on exports-led recovery: the rates of growth in merchandise exports currently expected to prevail over 2010-2014 period are nowhere near either the 1980s crisis-period rates of growth or 1990s Celtic Tiger period rates of growth.

Ok, but what about trade surplus? Recall, trade surplus feeds directly into current account which, some believe almost religious, is the only thing that matters in determining the economy's ability to recover from debt-linked crises. Again, here are the facts:
  • During the 1980-1984 Ireland run trade deficit that on a cumulative basis amounted to EUR5,969mln. This gave way to a cumulated surplus of EUR8,938mln in 1985-1989 period. So attaining a relatively strong trade surplus did not lift Irish economy from the crisis of the 1980s.
  • In Celtic Tiger era, during 1990-1994 period, cumulated surpluses rose at a robust rate of 155.7% on previous 5 year period, and this increase was followed by a further improvement of 113.9% in 1995-1999 period. 
  • During Celtic Garfield stage, in 2000-2004 period Irish trade surplus increased by a cumulative 245.4%. However, in 2005-2009 period trade surplus shrunk 10.9% cumulatively on previous 5 years. Based on data through 2012, projected cumulated growth in trade surplus (recall, this is merchandise trade only) grew by 43.6%.
Again, trade surplus growth is strong, currently, but it is nowhere near being as strong as in the 1990s. Worse, current rate of growth in trade surplus is well below the rate of growth attained in the 1980s.

Charts to illustrate:


Oh, and do note in the above chart the inverse relationship between the ratio of merchandise exports to imports (that kept rising during the Celtic Tiger and Garfield periods as per trend) and the downward trend in exports growth. 

Thursday, September 20, 2012

20/9/2012: 'Flat growth' and the shrinking Irish economy


Ok, folks... the latest batch of news from CSO and the official 'Green Jerseys' reaction to same would have made a fine candiate for a Nobel literature prize, were they published in a single tome with a heading Literature of Absurd on it...

We have our routine 'Housing market has bottomed out' shrills from the property pushers in the media - despite the fact that property prices continue to fall. We also have the metronome-like 'Unemployment has stabilized' tale, a chapter of gargantuan efforts to avoid mentioning the fact that fewer and fewer people actually work in Ireland, earning living and paying taxes.

Today we have a new pearl: 'Irish economy is growing once again, albeit slowly'.

Complete porkies, if you ask me. Here's the plain and simple reality of what's going on:

In constant market prices terms, Irish GDP based on constant factor cost (in other words, the real activity in the economy carried out by MNCs and domestic enterprises, net of taxes, gross of subsidies) grew 2.3% (+€819 mln) q/q in Q2 2012. Alas, as usual, q/q growth is... err... mostly meaningless. Instead, y/y comparative shows this metric shrinking €300mln (-0.8%).

What's the dynamic here? Oh, not good, either. In Q2 2011, y/y real GDP (constant factor basis) grew 3.21% y/y. In this quarter it shrunk 0.8% y/y... a negative growth swing of 4 percentage points!

Now, adding taxes (net of subsidies) to the above figure produces official real GDP (GDP expressed in constant prices terms). This stood at €40.327 billion in Q2 2012 up €744 mln on Q1 2012 (+1.9% q/q) but down 1.1% (-€442mln) y/y. Now, wait, folks... so official GDP is down y/y. Not up.

What's the dynamics of this change? Oh, well, in Q2 2011 official real GDP was up 2.86% on same period in 2010, so Irish economic growth has overall deteriorated in Q2 2012 compared to same period a year ago by a whooping 3.9 percentage points.

Next step is for us to subtract from our real GDP outflows of payments abroad (net of inflows of income from abroad) - the so-called Net Factor Income From the Rest of the World adjustment. Bear with me here. It is important.

In Q2 2012 we, as economy, have managed to send out €7.219 billion in factor payments abroad, net of what we received from abroad. Sounds a lot? Not really - this is down on €8.397bn in Q1 2012 (which added €1,178mln to our GNP) and it is down €1,385 mln on Q2 2011 (which adds same amount to our GNP compared to Q2 2011 levels).

What the above means? Here's the punchline to reality: as the result of €744mln increase in our GDP and a €1,178mln decrease in our payments abroad, our GNP officially expanded by €1.922bn in Q2 2012 q/q. Meanwhile, due to a contraction in real GDP of €442mln offset by reduction in outflows of income abroad of €1,385mln, our GNP rose €943mln (+2.9%) y/y in Q2 2012.

Thus, real economic activity in Ireland fell, y/y in Q2 2012, but because the MNCs have decided to expatriate less income out of Ireland in Q2 2012, our GNP actually rose.

Why would MNCs decide not to expatriate much of profits? For a number of reasons:

  1. Lack of capital investment around the world means corporates have no incentive to move profits out of Ireland outside the immediate objective of boosting reported profits at home;
  2. Booming equity markets in the US mean that there is no immediate pressure for US MNCs operating here to ship retained profits out of Ireland's tax heaven;
  3. Fall-off in pharma exports from Ireland also took a bite out of the retained profits here.
Any of these have any tangible effect on our real economy? Not really. Actually - none whatsoever. 

In real economic terms, Irish economy shrunk in Q2 2012 by 1.1% (real GDP terms) y/y and that is it, folks. 

One more note. In seasonally adjusted, constant prices terms:
  • Personal Consumption of Goods & Services has hit absolute record low in Q2 2012 of €19,598mln for any quarter since Q1 2007.
  • Net Expenditure by Central and Local Government on Current Goods and Services has hit an absolute low of €5,934mln in Q2 2012 for the entire period since Q1 2007.
  • Gross Domestic Fixed Capital Formation has hit a record low of €3,427mln
  • Exports of Goods and Services have posted a contraction on Q1 2012 but are up €1 billion on Q2 2011
  • Imports of Goods and Services have posted a q/q contraction of €1.7bn and are now at a historical low for any Q2 period of 2007-present period
  • Total domestic demand is now at the absolute lowest point for any quarter since Q1 2007 and is down €1.6bn on Q1 2012 and €1.9 billion on Q2 2011.
This is not flat growth, folks. This is shrinking real economy.

Note: I will post updated charts later tonight. Stay tuned.

Thursday, June 7, 2012

7/6/2012: Irish Services PMI - May 2012


­­In the previous post (link here) I covered manufacturing PMI, showing a slight lift up in the growth rate from 50.1 in April (stagnant economy reading) to 51.2 in May (sluggish, but growth). More importantly, the 3mo average for March-May 2012 stood at 50.9 (weak expansion) compared to 48.9 average for December 2011-February 2012 (contraction).

Today’s Services PMI paints a weak picture in the other 48% of the private sectors economy in Ireland.

Headline Services PMI fell to 48.9 (contraction) in May from 52.2 in April. This marked the first month of sub-50 reading since January 2012. 12mo MA is at 51.2 and 3mo MA is at 51.1 in line with 12mo MA, slightly below 51.7 average for 2011.


This suggests that 5 months in 2012, growth conditions remain challenging. January-May 2012 average reading is 51.0, which, if sustained through 2012 will imply Services sectors growth of close to, but worse than a 2.15% real contraction in Services in 2011. Not exactly what I would call good news.

Of course, there are loads of various caveats to the above analysis, so don’t take it as some sort of a forecast.

New Business sub-index deteriorated from 52.7 in April to 49.6 in May, posting first usb-50 reading since January 2012. 12mo MA for the sub-index is now at 50.1, in effect implying that new business activity has been stagnant over the last 12 months. 3mo average is at 51.5 and the previous 3mo average was 50.2, some improvement on December-February period is still present. Good news, current 3mo average is ahead of same period averages for 2010 and 2011.



In line with broader indices, employment sub-index has fallen to 49.1 – returning to sub-50 level after March and April departures from the trend. Thus, 12mo MA for employment sub-index is now at 48.0 firmly signaling contraction in jobs in the sector. 3mo MA is at 50.3 owing to 51.9 spike in March, while previous 3mo average is 46.6. Current 3mo average and May level reading are both below the 3mo average for the same periods in 2011. 

Meanwhile, the giddy happiness signalled by the Services sector Confidence indicator bubbled up from 64.1 in April 2012 to 64.3 in May. The indicator runs on a silly scale well off the 50=neutral stance. Give you an example, in 2010, the indicator averaged around 66.7 and in 2011 it averaged 64.8. In both years, Irish Services sectors were, ahem… in a recession.


Output prices continued to fall, with the rate of decline accelerating to 44.4 from 44.9 between April and May. 3mo average through May is now at 45.4 and the previous 3mo average is 45.7. This marks continuation of below-50 readings in output prices since July 2008. Meanwhile, input costs rose at a faster pace (51.4) in May than in April (51.0), with 3mo average through May at 52.5, against previous 3mo average of 54.3.

Predictably, profitability was shot, again. Profitability sub-index fell to 45.8 in May from 47.5 in April.

More on profitability and employment in the following posts as usual.




Tuesday, April 3, 2012

3/4/2012: Sunday Times 1/4/2012 - Deep Reforms, not Exports-led Recovery, are needed


This is an unedited version of my Sunday Times article from 1/4/2012.


After four years of the crisis, there are four empirical regularities to be learned from Ireland’s economic performance. The first one is that the idea of internal devaluation, aka prices and wages deflation, as the only mechanism to attain debt deleveraging, is not working. The second is that the conventional hypothesis of a V-shaped recovery from the structural crisis, manifested in economic growth collapse, debt overhang and assets bust, is a false one. The third fact is that Troika confidence in our ability to meet ‘targets’ has little to do with the real economic performance. And the fourth is that exports-led recovery is a pipe dream for an economy in which exports growth is driven by FDI.

Restoring growth requires structural change that can facilitate private companies and entrepreneurs search for new catalysts for investment and consumption, jobs creation and exports.

For anyone with any capacity to comprehend economic reality, Quarterly National Accounts (QNA) results for Q4 2011, showing the second consecutive quarterly contraction in GDP and GNP, should have come as no surprise. In these very pages, months ago I stated that all real indicators – Purchasing Managers indices, retail sales, consumer and producer prices, property prices, industrial turnover figures, banking sector activity, and even our external trade statistics – point South. Yet, the Government continues to believe in Troika reports and statistical aberrations produced by superficial policy and methodological changes.

The longer-range facts about Ireland’s ‘successes’ in managing the crisis, revealed by the QNA, are outright horrifying. In real (inflation-adjusted) terms, in 2011, every sector of Irish economy remains below the pre-crisis peak levels. Agriculture, forestry and fishing is down almost 22%, Industry is down 3%, Distribution, Transport and Communications down 17%, Public Administration and Defence down 6%, Other Services (accounting for over half of our GDP) are down 8%. In Q4 2011, Personal Consumption was 12% below Q4 2007 levels, Gross Domestic Fixed Capital Formation was 57% down on 2007. The only positive side to Irish economic performance compared to pre-crisis levels was Exports of goods and services, which were just 1.2% ahead of Q4 2007 level.

Meanwhile, factor income outflows out of Ireland – profits transfers by the MNCs – were up 19% relative to pre-crisis levels. Despite a rise of 0.7% year on year, Irish GDP expressed in constant prices is still 9.5% below 2007 levels. Our GNP, having contracted 2.53% year on year in 2011, is down an incredible 14.3% on the peak. All in, Irish economy has already lost nine years of growth in this crisis, once inflation is controlled for.

We are now three years into an exports boom and the recovery remains wanting. Here’s why. Between 2007 and 2011 exports of goods rose €2.5 billion or just 3%, while imports of goods fell 31.3% - a decline of €19.6 billion. Over the same period, exports of services rose €5 billion, while imports of services increased €5.5 billion. All in, rising exports of goods and services accounted for just 35% of the increase in Ireland’s trade surplus. Almost two thirds of our trade surplus gains since 2007 are accounted for by collapse in imports. Taken on its own, the dramatic fall-off in imports of goods amounts to 91% of the total change in trade surplus in Ireland.

Both the Government and the Troika should be seriously concerned. Taken in combination with accelerating profits transfers out of Ireland by the MNCs, these numbers mean that Irish economy is struggling with mountains of private and public debts that exports cannot deflate.

Remember all the noises made by the external and domestic experts about Ireland’s current account surpluses being the driver of our debt sustainability? Last week, the CSO also published our balance of payments statistics for 2011. In 2010, Irish current account surplus stood at a relatively minor €761 million. In 2011, current account surplus fell to €127 million. If the entire current account surplus were to be diverted to Government debt repayments, it will take Ireland 579 years to bring our debt to GDP ratio to the Fiscal Pact bound of 60%.

The immediate lesson for Ireland is that we need serious changes in the economic fundamentals and we need them fast.

First, Ireland needs debt restructuring. We must shed banks-related debts off the households and the Exchequer. In doing this, we need drastic restructuring of the banking sector. Simultaneously, an equally dramatic reform of taxation and spending systems is required to put more incentives and resources into human capital formation and investment. Income tax hikes must be reversed, replaced by a tax on fixed and less productive capital – particularly land. All land, including agricultural. Entrepreneurship-retarding USC system must be altered into a functional unemployment insurance system.

Policy supports should shift on breaking the systemic barriers to domestic firms exporting and restructuring dysfunctional internal services markets that are holding companies back. Public procurement changes and markets reforms in core services – energy, water, transport, public administration, etc – must focus on prioritising facilitation of inward and domestic investment, entrepreneurship and jobs creation.

Delivery of health services must be separated from payment for these services, with Government providing the latter for those who cannot afford their own insurance. Private for-profit and non-profit sector should take over delivery of services. Exports-focused private innovation, such as for example International Health Services Centre proposal for remote medicine and ICT-related R&D, should be prioritized.

In education, we need a system of competing universities, colleges and secondary education providers. A combination of open tuition fees plus merit and needs-based grants for domestic students will help. We should incentivise US universities to locate their European campuses here, and shift more of the revenue generation in the third level onto exports. In the secondary education, we need vouchers that will encourage schools competition for students. In post-tertiary education we need to incentivise MNCs to develop their own corporate training programmes and services here.

This will simultaneously expand our skills-intensive exports and provide for better linkages between formal education and, sectoral and business training – something the current system is incapable of delivering.

One core metric we have been sliding on is sector-specific skills. This fact is best illustrated by what is defined as internationally traded services sector, but more broadly incorporates ICT services, creative industries and associated support services.

Eurostat survey of computer skills in the EU27 published this week, ranked Ireland tenth in the EU in terms of the percentage of computing graduates amongst all tertiary graduates. Both, amongst the 16-24 years olds and across the entire adult population we score below the average for the old Euro Area member states in all sub-categories of computer literacy. Only 13% of Irish 16-24 year olds have ever written a computer programme – against 21% Euro area average. Over all survey criteria, taking in the data for 16-24 year old age group, Ireland ranks fourth from the bottom just ahead of Romania, Bulgaria and Italy in terms of our ICT-related skills.

Not surprisingly, at last week’s Digital Ireland Forum 2012 the two core complaints of the new media and ICT services sector leaders were: lack of skills training domestically and draconian restrictions placed on companies ability to import key skills from abroad.

The Irish economy and our society are screaming for real change, not compliance with Troika targets and ego-stoking back-slapping ministerial foreign trips.






Box-out:

On the foot of my last week’s questions concerning the role of securitizations and covered bonds issuance by the Irish banks in restricting banks’ ability to control the loans assets they hold on their balancesheets, this week’s move by Moody’s Investors Services to downgrade the ratings of RMBS (Residential Mortgage-Backed Securities) notes issued by two of the largest securities pools in the country come as an additional warning. On March 26th, Moody’s reduced ratings on RMBS notes issued by Emerald Mortgages and Kildare Securities on the back of “continued rapid deterioration of the transactions, Moody’s outlook for Irish RMBS sector; and credit quality of key parties to the transactions [re: Irish banks] as well as structural features in place such as amount of available credit enhancement.” The last bit of this statement directly references the concerns with over-collateralization raised in my last week’s note. Although Moody’s do not highlight explicitly the issue of declining pools of collateral further available to shore up security of the asset pools used to back RMBS notes, the language of the note is crystal clear – Irish banks are at risk of running out of assets that can be pledged as collateral. This, of course, perfectly correlates with the lack of suitable collateral for LTRO-2 borrowings from the ECB by the Irish banks, other than the Bank of Ireland last month. As rated by Moody’s, half of the covered RMBS notes were downgraded to ‘very high credit risk’ or below and all the rest, excluding just one, were deemed to deteriorate to ‘high credit risk’ status. Surprisingly, the Central Bank’s Macro-Financial Review published this week makes no mention of either the RMBS, covered bonds or the impact of securitization vehicles on banks’ balance sheets. See no evil, hear no evil?