Tuesday, December 31, 2013

31/12/2013: Debt and Growth: Consumption Crowding-Out Channel

Since the overhyped and outright hysterical 'controversy' over the Reinhart & Rogoff debt thesis blew up across the media earlier this year (I covered much of the controversy on the blog and in my columns, for example, here http://trueeconomics.blogspot.ie/2013/07/272013-village-june-2013-real-effects.html), it became - to put it mildly - unfashionable to reference the adverse effects of debt on growth and economy. Too bad, some economists seem to have missed that point.

A new study from the Korea Institute for International Economic Policy, titled "Nonlinear Effects of Government Debt on Private Consumption in OECD Countries" (see citation below) looked at "nonlinear effects of government debt on private consumption in 16 OECD countries. The estimated consumption function shows smooth regime switching depending on the debt-to-GDP ratio, and the threshold level of regime switching is found to be the ratio of 83.7 percent. The results reveal that a higher level of government debt crowds out private consumption to a greater extent, and that the degree of the crowding out effect has deteriorated since the global financial crisis."

Wait, there are thresholds here… 83.7% debt/GDP ratio - very close to the  S. Cecchetti, M. Mohanty and F. Zampolli thresholds (see http://trueeconomics.blogspot.ie/2011/09/26092011-irelands-debt-overhang.html). And there is the 'causal link' between debt and growth via crowding out of private consumption.

31/12/2013: Negative equity and entrepreneurship: new evidence

Since the beginning of the crisis, I have written about and presented on the topic of negative equity and its adverse effects on economy and society.

Some of the earlier links on this topic can be found here:

One significant adverse effect of negative equity relates to the impact it has (via investment constraints) on entrepreneurship: http://trueeconomics.blogspot.ie/2010/01/economics-15012010-negative-equity.html

This month, NBER published yet another study on the above topic, covering the issue of property values impact on collateral availability for entrepreneurial activities.

The study, "Housing Collateral and Entrepreneurship" (NBER Working Paper No. w19680) by Martin Schmalz, David Alexandre Spaer and David Thesmar "shows that collateral constraints restrict entrepreneurial activity. Our empirical strategy uses variations in local house prices as shocks to the value of collateral available to individuals owning a house and controls for local demand shocks by comparing entrepreneurial activity of homeowners and renters operating in the same region. We find that an increase in collateral value leads to a higher probability of becoming an entrepreneur."

What is novel to the study results and is also extremely important from economic policy point of view is that "Conditional on entry, entrepreneurs with access to more valuable collateral create larger firms and more value added, and are more likely to survive, even in the long run."

Now, keep in mind - Ireland's politicians and both the previous and current Government officials have been consistently claiming that negative equity only matters when households need to move from their current location to a new residence. In contrast, I have asserted from the start of the crisis that the adverse effects of negative equity are present not only in the context of households moving locations, but also for the households that are staying in their current location and that some of the effects are completely independent from the ability of the households to fund their current mortgages.

Link to the study: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2360948

Sunday, December 29, 2013

29/12/2013: WLASze: Weekend Links on Arts, Sciences and zero economics

This is the last 2013 WLASze: Weekend Links on Arts, Sciences and zero economics.

Last WLASze touched upon the festive season, quoting from Joseph Brodsky
"Emptiness. But the mere thought of that
brings forth lights as if out of nowhere.
Herod reigns but the stronger he is,
the more sure, the more certain the wonder."

Here's a retrospective reminder, incomplete and perhaps not multi-faceted enough, but still poignant, of that Emptiness and Herod interplay in our lives at the brutalist Berlin Wall:

Returning back to year-end themes of recalling 2013 before it fades away some 51 hours from now:
Two of my favourite discoveries of 2013 are:
1) Use of structural biology to generate a new vaccine against respiratory syncytial virus (RSV), and
2) Discovery of the evidence that "at least some cosmic rays come from exploding stars"

And on the theme of fading memories and scientific breakthroughs - here's one that ties the two together neatly...

As I suggested in relation to some other discoveries, this one will challenge more our ethics than our scientific minds...

But being one Dr Doom, I can't escape a 'bad news' story on science's front… well, sort-of-bad:
One satellite delay is not enough? How about a delay with a Space Lab?
At least Greenpeace won't need to protest in 'Russian' space...

From bad, to good: "The Desire for Freedom. Art in Europe since 1945" is a new exhibition at Museum of Contemporary Art Krakow that "explores the socio-political undercurrents of European art since 1945 through to the present day."

You can (and should) always rely on art to lift the spirits that science occasionally dents... though French art rarely does this nowadays...

I have been critical before about architectural (and commercial) exploits of natural space for a quick gratification of senses (and cash). Here is a counter-point:
Perhaps it is an anchoring bias in me (I love mountains more than any other place on earth) or the aesthetic desire for air and space, but I love this observation 'room' concept and execution.

And while on WorldlessTech page, here's another fantastic project - merging visual power of art to bring down the aesthetic refuge of poetry closer to people:
As Robert Lowell put it:
"The painter’s vision is not a lens,
it trembles to caress the light."

Or why not in full glory?

Those blessèd structures, plot and rhyme—
why are they no help to me now
I want to make
something imagined, not recalled?
I hear the noise of my own voice:
The painter’s vision is not a lens,
it trembles to caress the light.
But sometimes everything I write  
with the threadbare art of my eye
seems a snapshot,
lurid, rapid, garish, grouped,
heightened from life,
yet paralyzed by fact.
All’s misalliance.
Yet why not say what happened?
Pray for the grace of accuracy
Vermeer gave to the sun’s illumination
stealing like the tide across a map
to his girl solid with yearning.
We are poor passing facts,
warned by that to give
each figure in the photograph
his living name.

Reminds you of Russian Constructivists' efforts to achieve the same, except for the purpose of delivering an ethical message, not an aesthetic one…

Great retrospective of 2013 Year Review from Design-Milk: http://design-milk.com/2013-year-review-unframed/

One of the best photographers to come out of Ireland - superb Paul Gaffney - reviewed in the British Journal of Photography back in November: http://www.bjp-online.com/2013/11/we-make-the-path-by-walking-by-paul-gaffney-book-review/

Enormity of life abandoned by concrete of the road above… fragility of rebirth and power of determination? Artist's page here: http://www.paulgaffneyphotography.com/

And the Book I want this New Year is…

Xu Bing, Book From the Ground: Point to Point, Guangxi Normal University Press, 112pp
More on it here: http://languagelog.ldc.upenn.edu/nll/?p=4353 This is a book that promises to defy all conventions of language to reinforce the convention of semiotics (or proto-language, if you want)… it is an unconventional tome which features no words. Instead, book's content is formally derived from symbols, marks, doodles, etc. The narrative tells the story of “Mr Black” who is supposedly "a white-collar worker living in a modern metropolis". This is an attempt to bring communications outside the confines of language and I want to see if it delivers on the promise…

Alas, I suspect that by 'defying all conventions' of writing, it in a way returns us back to the fact that evolved written languages are alive today for a good reason... perhaps they need translation or learning, perhaps they are cumbersome in that, yet they do function to deliver the meaning, right? Try writing WLASze in something that looks like the above?..

Happy New Year to all! 

Remember what Auden said about Poetry in his New Year Letter?
“Poetry might be defined as the clear expression of mixed feelings.”
May we have both in 2014, but more of the former, whilst in the latter more of the better...

29/12/2013: Icelandic Model for Debt Crises Resolution?

A very comprehensive paper analysing the Icelandic approach to personal debt and corporate insolvency crises resolution:

Latest comparatives between Icelandic and Irish economic performance: http://trueeconomics.blogspot.ie/2013/10/27102013-ireland-v-iceland-full-deck.html

Saturday, December 28, 2013

28/12/2013: CIS Free Trade Zone Expands

Uzbekistan officially joined the CIS Free Trade Zone, which now includes:

  • Armenia
  • Belarus
  • Kazakhstan
  • Moldova
  • Russia
  • Ukraine
  • Uzbekistan
These cover 3.95% of total world GDP (adjusting for Purchasing Power Parity).

News post on the above here: http://en.ria.ru/business/20131228/186017027/Uzbekistan-Joins-CIS-Free-Trade-Zone.html

Kyrgyzstan and Tajikistan are signatories, but are yet to ratify the treaty (0.04% of world GDP (PPP-adjusted).

For comparative: Germany accounts for 3.72% of world GDP (PPP-adjusted), Italy and Spain jointly account for 3.68%.

Thursday, December 26, 2013

26/12/2013: Italy's Illegal Measure Takes a Shot at Corporate Tax Optimisation

Just when I thought we are safe from the 'Tax Haven Ireland' stories at least until the end of holidays, the latest instalment in the saga arrived… this time from Italy.

With this in mind, let's update the string of links covering the topic. You can follow earlier links from here: http://trueeconomics.blogspot.ie/2013/12/8122013-is-ireland-also-german-federal.html (see the bottom of the post).

I wrote before about Italy's plans to curb tax optimisation by web-based MNCs. Here's the latest announcement on the topic: http://www.bloomberg.com/news/2013-12-23/italy-approves-google-tax-on-internet-companies.html

So Italy now passed the 'Google Tax'. It aims to collect USD1.35 billion or EUR1 billion in tax revenues. The tax is utterly illegal under the EU rules.

The 1957 Treaty (of Rome) establishing a European Economic Community (EEC) Part 1, Art.3(c): “the abolition, as between Member States, of obstacles to freedom of movement for persons, services and capital”.
The Treaty (of Lisbon) on the Functioning of the European Union (TFEU): Art. 26 (2) “the internal market shall comprise an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured…"

The point, however, is that the Italian parliament measure is putting added pressure on  the OECD, the EU and the national governments to deal with the problem of aggressive tax optimisation practices of some MNCs.

26/12/2013: Strategy for Growth 2014-2020 - A Fruitcake of Policy?

This is an unedited version of my Sunday Times column from December 22, 2013.

It is a well-known fact that virtually all New Year’s resolutions are based on the commitments adopted and promptly abandoned in the years past. Our Government’s reforms wish lists are no exception. Like an out-of-shape beer guzzler struggling to get out of the pub, our State longs to get fit year after year. Most of the time, nothing comes of it: bombastic reforms announced or committed to quietly slip into oblivion. Smaller parts of resolutions take hold; bigger items get buried in working groups and advisory panels. Thus, over the last decade, we have seen promises of reforms across the domestic sectors, protected professions, pensions and health systems, quangos, social welfare, government funding, tax systems, and so on. Virtually none have been delivered so far.

This week’s Strategy for Growth: 2014-2020 is the latest in the series of Governments’ ‘New Year, New Me’ resolutions. It is a lengthy list of things that have already been promised before. With a sprinkling of fresh thinking added. All of it is based on a strange mixture of pragmatism in fiscal targets, resting on economic forecasts infused with an unfunded but modest optimism. Giddy exuberance in confidence concludes the arrangement: confidence that the reforms which proved un-surmountable under the Troika gaze will be feasible in over the next seven years. The entire exercise promises a lot of reforms, but delivers little when it comes to realistic costings and risk assessments of the promises made.

In brief, the new Strategy is a disappointingly old fruitcake: pretty on the outside, inedible on the inside and full of stale trimmings, held together by the boisterous dose of potent optimism.

On Monday, the National Competitiveness Council unveiled its own version of a roadmap to the proverbial growth curve. The 32-page document on the New Economy contained no less than 65 references to the building and construction sector and 39 instances of references to property sector. No other sector of the economy was accorded such attention.

In the footsteps of NCC, on Tuesday, the Government launched its own multi-annual post-Troika policies roadmap.

The core point of the glossy tome is that Ireland needs a combination of policies to get its economy moving again. No one could have suspected such a radical thought. Majority of the policies listed are of ‘do more of the same’ variety. Some are novel, and a handful would have been even daring, were it not for the nagging suspicion that they represent political non-starters.

The plan has three pillars. Pillar one: fiscal discipline to keep Government debt under control. Pillar two: repairing the credit supply system and the banks. Pillar three: create an economy based on innovation, productivity and exports, and… building and construction. If you find any of this new, you are probably a visitor from Mars.

The document fails to provide any risk analysis in relation to all three pillars. Instead, it fires off pretty specific and hard-set targets and forecasts. Normally, the forecasts reflect the impact of policies being produced. In the Strategy 2014-2020 normality is an inverted concept, so forecasts enable targets that justify proposals.

There are two scenarios considered: the baseline scenario (better described as boisterously optimistic) and the high growth scenario (best described as wildly optimistic). None are backed by an analysis of sources of growth projections. No adverse scenario mentioned.

For the purpose of comparison, based on IMF model, Irish GDP, adjusting for inflation is forecast to expand by less than 12.3 percent between the end of 2013 and the end of 2018. In contrast, Government latest plan projects GDP to grow by over 16.1 percent in the case of high growth scenario. Nominal GDP differences between the high-growth and baseline scenarios amount to just 0.1 percentage points on average per annum. In other words, the distance between boisterous and wild optimism in Government’s outlook for the next seven years of economic growth is negligible.

By 2020 we will regain jobs lost during the crisis. But unemployment will be 8.1 percent under the baseline scenario and 5.9 percent under high-growth projections. Both targets are above the pre-crisis levels of around 4.7 percent. Which means that the Grand Strategy envisions jobs creation to lag behind labour force growth. The only way this can be achieved is by lowering employment to labour force ratio. This, in turn, would require increasing labour force more than increasing employment. In other words, the numbers stack up only if we simultaneously reduce emigration and push people off welfare benefits and into the jobs markets, and do so at the rates in excess of the new jobs creation. How this can be delivered is a mystery, although the Strategy promises more reforms to address these.

We will also transition to a fully balanced budget by 2018, eliminating the need to borrow new funds. Of course, we will still be issuing new debt to roll over old debt that will be maturing. Government debt itself will decline to below 100 percent of GDP by 2019. Per IMF latest estimates released this week, our General Government deficit in 2017-2018 will average around 1.5 percent of GDP and Government debt will end 2018 at around 112.2 percent of GDP. By Governments baseline scenario, we will be running a deficit of 0.25 percent of GDP on average over 2017-2018 and our debt will fall to 104 percent of GDP by the end of 2018. Optimism abounds.

To make these achievements feasible, let alone sustainable, will require drastic reforms far beyond what is detailed in the strategy documents. Instead of detailing these, Strategy for Growth: 2014-2020 leaves the major reforms open to future policy designs by various working groups.

For example, the Government Strategy talks high about the need to ensure sustainability of pensions provision. In an Orwelian language of the Strategy, having expropriated private pension funds before, the Government is now congratulating itself on achieving positive enhancements of the pensions system.

Yet, we all know that the key problems with current pensions system in Ireland are two-fold. One: we have massive under-supply of defined contribution pensions plans in the private sector. Two: we have massive deficits in defined benefit schemes that are predominantly concentrated in the public sectors. The Strategy documents published this week simply ignore the former problem. With respect to the latter one, the Government plan amounts to hoping that the problem will go away over time. Overall, going forward, the magic bullets in the State dealing with the vast pensions crisis are exactly the same as before: higher retirement age, gradual closing of defined benefit schemes and more studies into “setting out … long-term plans in this area”.

Another complex of Augean Stables of economic policies left untouched, potentially due to the influence of Labour is the tax system. Current income and social security taxes de facto penalise anyone considering an entrepreneurial venture. The Strategy puts forward no income tax reforms proposals. The document brags about the ‘progressivity’ of our income tax system and promises to retain this feature of the tax codes. Unions will be happy. Entrepreneurs, self-employed, higher-skilled workers, innovators, professionals, younger and highly educated employees, and exporting sectors workers will remain unhappy.

The Strategy admits that “Traditionally in Ireland starting and growing a business is considered less attractive by many than working in larger employers.” It goes on to stake a bold policy claim “to find innovative ways to encourage an entrepreneurial spirit.”

Stripped of fancy verbiage, the ‘innovative ways’ amount to a call to educate us all, toddlers and pensioners alike, about the goodness of entrepreneurship, and develop unspecified policies to make business failure more acceptable. Given the shambolic nature of the personal insolvency regime reforms designed by the current Government, there is little hope the latter objective can be met.

For intellectual gravitas, key marketing and PR words were deployed in the Strategy, promising more assistance, subsidies and supports to entrepreneurs, and more “clusters”. The same Strategy also promised to cut the number of business innovation assistance schemes and streamline business development programmes.

Taken together, these changes suggest that the Irish entrepreneurship environment will remain firmly gripped by State bureaucracy and will continue churning out state-favoured enterprises with clientilist business models. The fact that the said platform of enterprise supports, having been in existence for some 12 years, has failed to deliver rapid growth of innovation-focused high value-added indigenous entrepreneurship to-date seems not to bother our policymakers.

Other elephants in the room – some spotted by the very same Government years ago, while in opposition – are mentioned and, predictably, left unchallenged. One example: the Strategy promises yet another Action Plan to “identify ways to use Government procurement in a strategic way to stimulate … innovative solutions.” Back in 2011, this Government has already promised to do the same.

Overall, the fruitcakes of economic policy planning by the Government and NCC both lack vision and details. The two documents do contain some good, realistic and tangible ideas, but, sadly, these are buried beneath an avalanche of unspecified promises and uncontested figures. Risks to implementation of these policies may outweigh incentives for reforms. Lack of realism in expectations may overshadow the potential impact of the proposals.

More fruitcake, anyone? There’s loads left…


In the latest report published this week, the European Banking Authority (EBA) analysed data from 64 banks with respect to their capital positions and the underlying Risk-Weighted Assets (RWA) holdings. Overall, capital position of the EU banking sector “continued to show a positive trend,” according to EBA, with Core Tier 1 capital holdings rising by EUR 80 billion. This, “combined with a reduction of more the EUR 800 billion of RWAs” means that the EU banks are building up risk buffers at the same time as pursuing continued deleveraging. The latter is the price for the former: higher capital ratios are good for banks’ ability to withstand shocks, deleveraging of assets is bad for credit supply to the real economy. On the net, however, as capital ratios rise, the system is being repaired so the price is worth paying. The improvements, however, were absent in one economy. Per EBA, Irish banks (Bank of Ireland, AIB and Permanent TSB) are unique in the EU in so far as they are experiencing simultaneous reduction in capital ratios and a decrease in Risk-Weighted Assets, which only partially offset the drop in capital. Put simply, Irish banks deleveraging is not fast enough to sustain current capital ratios: we are paying the price, but are not getting the benefits.

EBA chart (click to enlarge):

26/12/2013: Don't Bank on the Banking Union: Sunday Times, December 15

This is an unedited version of my Sunday Times column from December 15, 2013.

Over the last week, domestic news horizon was flooded by the warm sunshine of Ireland's exit from the Bailout. And, given the rest of the Euro area periphery performance to-date, the kindness of strangers was deserved.
Spain is also exiting a bailout, and the country is out of the recession, officially, like us. But it took a much smaller, banks-only, assistance package. And, being a ‘bad boy’ in the proverbial classroom, it talked back at the Troika and played some populist tunes of defiance. Portugal is out of the official recession, but the country is scheduled to exit its bailout only in mid-2014, having gone into it after Ireland. No glory for those coming second. Greece and Cyprus are at the bottom of the Depression canyon, with little change to their misery.

In short, Ireland deserves a pat on the back for not being the worst basket case of the already rotten lot. And for not rocking the boat. Irish Government talks tough at home, but it is largely clawless vis-à-vis the Troika. Our only moments of defiance in dealing with the bailout came whenever we were asked to implement reforms threatening powerful domestic interests, such as protected sectors and professions.

However, with all the celebratory speeches and toasts around, two matters are worth considering within the broader context of this week's events. The first one is the road travelled. The second is the road that awaits us ahead. Both will shape the risks we are likely to face in the medium-term future.

The road that led us to this week's events was an arduous one. Pressured by the twin and interconnected crises - the implosion of our banking sector and the collapse of our domestic economy - we fell into the bailout having burnt through tens of billions of State reserves and having exhausted our borrowing capacity. The crater left behind by the collapsing economy was deep: from 2008 through today, Irish GDP per capita shrunk 16.7 percent, making our recession second deepest in the euro area after Greece. This collapse would have been more benign were it not for the banking crisis. In the context of us exiting the bailout, the lesson to be learned is that the twin banking and growth crises require more resources than even a fiscally healthy state can afford. Today, unlike in 2008, we have no spare resources left to deal with the risk of the adverse twin growth and banking shocks.

Yet, forward outlook for Ireland suggests that such shocks are receding, but remain material.

Our economic recovery is still fragile and subject to adverse risks present domestically and abroad. On domestic side, growth in consumer demand and private investment is lacking. Deleveraging of households and businesses is still ongoing. Constrained credit supply is yet to be addressed. This process can take years, as the banks face shallower demand for loans from lower risk borrowers and sharply higher demand for loans from risky businesses. On top of this, banks are deleveraging their own balance sheets. In general, Irish companies are more dependent on banks credit than their euro area competitors. Absent credit growth, there will be no sustained growth in this economy. Meanwhile, structural reforms are years away from yielding tangible benefits. This is primarily due to the fact that we are yet to adopt such reforms, having spent the last five years in continued avoidance of the problems in the state-controlled and protected domestic sectors.

On the Government side, Budgets 2015 and 2016 will likely require additional, new revenue and cost containment measures. Post 2016, we will face the dilemma of compensating for the unwinding of the Haddington Road Agreement on wages inflation moderation in the public sector and hiring freezes.
To-date, Irish economy was kept afloat by the externally trading services exporters, or put in more simple terms - web-based multinationals. Manufacturing exports are now shrinking, although much of this shrinkage is driven by one sector: pharmaceuticals.

Meanwhile, the banking sector is still carrying big risks. Heavy problems of non-performing loans on legacy mortgages side, unsecured household credit and non-financial corporates are not about to disappear overnight. Even if banks comply with the Central Bank targets on mortgages arrears resolution, it will take at least 18-24 months for the full extent of losses to become visible. Working these losses off the balance sheets will take even longer.
Overall, even modest growth rates, set out in the budget and Troika projections for 2014-2018, cannot be taken for granted.

This week, the ongoing saga of the emerging European Banking Union made the twin risks to banks and growth ever-more important. The ECOFIN meetings are tasked with shaping the Bank Recovery and Resolution Directive, or BRRD. These made it clear that Europe is heading for a banking crisis resolution system based on a well-defined sequencing of measures. First, national resources will be used in the case of any banks' failures, including in systemic crises. These resources include: wiping out equity holders, and imposing partial losses on lenders and depositors. Thereafter, national funds can be used to cover the capital shortfalls and liquidity shortages. Only after these resources are exhausted will the EU funds kick in to cover the residual capital shortfalls. This insurance cover will not be in the form of debt-free cash. Instead, the funding is likely to involve lending to the Government and to the banks under a State guarantee.

When you run through the benchmark levels of capital shocks that could qualify a banking system for the euro-wide resolution funding under the BRRD, it becomes pretty clear that the mechanism is toothless. For example, in the case of our own crisis, haircuts on bondholders under the proposed rules could have saved us around EUR15-17 billion. In exchange, these savings would have required bailing in depositors with funds in excess of the state guarantee. It is unlikely that we could have secured any joint EU funding outside the Troika deal. Our debt levels would have been lower, but not because of the help from Europe.

This last point was made very clear to us by this week’s events. After all, our historically unprecedented crisis has now been 'successfully resolved' according to the EFSF statement, and as confirmed by the European and Irish officials. The 2008-2010 meltdown of the Irish financial system was dealt with without the need for the Banking Union or its Single Resolution Mechanism.

With a Banking Union or without, given the current state of the Exchequer balance sheet, the buck in the next crisis or in the next iteration of the current crisis will have to stop at the depositors bail-ins. In other words, banking union rhetoric aside, the only hope any banking system in Europe has at avoiding the fate of Cyprus is that the next crisis will not happen.

Second issue relates to the continued reliance across the euro area banks on government bonds as core asset underpinning the financial system. In brief, during the crisis, euro area banks have accumulated huge exposures to sovereign bonds. This allowed the Governments to dramatically reduce the cost of borrowing: the ECB pushed up bonds prices with lower interest rates and unlimited lending against these bonds as risk-free collateral.

The problem is that, unless the ECB is willing to run these liquidity supply schemes permanently, the free lunch is going to end one day. When this happens, the interest rates will rise. Two things will happen in response: value of the bonds will fall and yields on Government debt will rise. The banks will face declines in their assets values, while simultaneously struggling to replace cheap ECB funding with more expensive market funds.

Given that European Governments must roll over significant amounts of bonds over the next 10 years, these risks can pressure Government interest costs. Simple arithmetic says that a country with 122 percent debt/GDP ratio (call it Ireland) and debt financing cost of 4.1 percent per annum spends around 5 percent of its GDP every year on interest bills, inclusive of rolling over costs. If yield rises by a third, the cost of interest rises to closer to 6.6 percent of GDP. Now, suppose that the Government in this economy collects taxes and other receipts amounting to around 40 percent of GDP. This means that just to cover the increase in its interest bill without raising taxes or cutting spending, the Government will need nominal GDP growth of 3.9 percent per annum. That is the exact rate projected by the IMF for Ireland for 2014-2018. Should we fail to deliver on it, our debts will rise. Should interest rates rise by more than one-third from the current crisis-period lows, our debts will rise.

The point is that the dilemmas of our dysfunctional monetary policy and insufficient banking crisis resolution systems are not academic. Instead they are real. And so are the risks we face at the economy level and in the banking sector. Currently, European financial systems have been redrawn to contain financial exposures within national borders. The key signs of this are diverged bond yields across Europe, and wide interest rates differentials for loans to the real economy. In more simple terms, courtesy of dysfunctional policymaking during the crisis, Irish SMEs today pay higher interest rates on loans compared to, say, German SMEs of similar quality.

Banking Union should be a solution to this problem – re-launching credit flowing across the borders once again. It will not deliver on this as long as there are no fully-funded, secure and transparent plans for debt mutualisation across the European banking sector.


Recent data from the EU Commission shows that in 2011-2012, European institutions enacted 3,861 new business-related laws. Meanwhile, according to the World Bank, average cost of starting a business in Europe runs at EUR 2,285, against EUR 158 in Canada and EUR 664 in the US. Not surprisingly, under the burden of growing regulations and high costs, European rates of entrepreneurship, as measured by the proportion of start up firms in total number of registered companies, is falling year on year. This trend is present in the crisis-hit economies of the periphery and in the likes of Austria, Germany and Finland, who weathered the economic recession relatively well. The density of start-ups is rising in Australia, Canada, the US and across Asia-Pacific and Latin America. In 2014 rankings by the World Bank, the highest ranked euro area country, Finland, occupies 12th place in the world in terms of ease of doing business. Second highest ranked euro area economy is Ireland (15th). This completes the list of advanced euro area economies ranked in top 20 worldwide. Start ups and smaller enterprises play a pivotal role in creating jobs and developing skills base within a modern economy. The EU can do more good in combatting unemployment by addressing the problem of regulatory and cost burdens we impose on entrepreneurs and businesses than by pumping out more subsidies for jobs creation and training schemes.

26/12/2013: Ireland's Technical Recovery: Sunday Times, December 08

This is an unedited version of my Sunday Times column from December 08, 2013

In his address to the Rogers Commission investigating the explosion of the Space Shuttle Challenger, Nobel Prize-winning physicist, Richard Feynmann outlined the birds-eye view of the causal relationship between the man-made disasters and the politicised decision-making. Per Feynmann, "For a successful technology, reality must take precedence over public relations, for nature cannot be fooled".

The laws of reality apply to social sciences as well, independent of PR.  Recent events offer a good example. While lacking longer-term catalysts for growth, Irish economy did officially exit the recession in Q2 2013. Yet, the real GDP remained 1.2 percent below the levels attained in Q2 2012. Glass is half-full, says an optimist. Glass is half-empty, per pessimist. In reality, final domestic demand, representing a sum total of personal consumption of goods and services, net government expenditure on current goods and services, and gross fixed capital formation, fell in the first half of 2013 compared to the same period of 2012. This marked the fifth consecutive year of declines in domestic demand. Recession might have ended, but we were not getting any better. The only consolation to this was that the rate of half-annual declines in demand has been slowing down over the last four years.

Data since the beginning of the fourth quarter, however, has been more encouraging and, at the same time, even more confusing. However, as in physics, in economics every action generates an opposite and equal reaction: an economy battered by a recession sooner or later posts a technical recovery.

Thus, the reality of Irish economy today suggests two key trends. One: a build up of demand on consumer side has now reached critical mass. Two: jobs destruction has now run out of steam. Some real jobs creation has started to show through the fog of official statistics. With this in mind, let me make a short-term prediction. While in the long run we are still stuck in the age of Great Stagnation, over the next year we are likely to witness some robust spike in our domestic economic growth.

Consider the data. Based on National Accounts, during the period from January 2008 through June 2013, and adjusting for inflation, Irish households cumulated shortfall in consumption spending compared to pre-crisis trends from 2000 stood at around EUR1,600 per every person residing in Ireland. Over the same period of time, shortfall on fixed capital investment by Irish firms, households and the State amounted to EUR16,400 per capita. In other words, some EUR83 billion of domestic economic activity has been suppressed over the duration of the current crisis. Even if one tenth of this were to come back, Irish GDP will post a 6.75 percent expansion on 2012 levels.

And, at some point, come back it must. Durable goods consumption has been cut back down to the bone over the last five years, as were purchases of household equipment, furnishings and cars. Depreciation and amortisation of these items are cyclical processes and we can expect a significant uptick in demand some time soon. That said, volume of retail sales was still down 1.4 percent year on year in October, once we exclude motor trades, automotive fuel and bars sales.

At the same time, purchasing power of consumers is not increasing, despite some positive news on the labour market front. Deposits held by Irish households were down at the end of September some EUR1.22 billion compared to the same period a year ago. And they were down again in October. Credit to households is continuing to shrink: in 12 months through October 2013, total credit for house purchases was down 3.1 percent, while credit for consumption purposes fell 9.3 percent.

The good news is that we are now seeing some increases in total employment in the economy. As of Q3 2013, some 58,000 more people held a job in Ireland than a year ago. Excluding agricultural employment, jobs growth was more moderate 33,000. These are the signs of significant improvements in the jobs market. However, three quarters of new jobs created were in average-to-low earnings occupations.

On another positive, however, jobs are being created in the sectors that previously suffered significant declines in employment. Key examples here are: accommodation and food services and construction.

In contrast to the employment news, earnings data offers little to cheer about. Average weekly paid hours across the economy have stuck at the crisis low in Q2 and Q3 2013. Average weekly earnings are down 2.4 percent on last year. These pressures on households’ incomes are exacerbated by hikes in taxes and charges imposed in Budget 2014.

Overall, consumption reboot is still being held up by continuous decline in after-tax incomes.

However, pockets of growth in our polarised and paralysed economy are feeding through to the aggregate statistics. This process is aided by the fact that as the rest of the economy has flat-lined, isolated growth in specific sectors and geographical areas became the main driver for national aggregate statistics.

One example of this process is visible in the property markets, where a mini-boom in residential and commercial properties in parts of Dublin is driving restart of the markets in a handful of other cities, namely Cork and Galway. Dublin residential property prices are up 18 percent on crisis period trough. In commercial markets, 2013 is shaping up to be the best year for transactional activity since 2007. On foot of this, construction sector Purchasing Manager Index, published by the Ulster Bank, stayed above the expansion line in September and October.

Another example is continued expansion of ICT services and MNCs-dominated manufacturing sectors. This week's release by the Investec of the Purchasing Managers Indices for manufacturing and services showed that in November, both sectors continued to grow. The series are volatile, but the shorter-term trend since Q2 2013 is now clearly to the upside.

All of which begs a question: Are we about to witness a Celtic Tiger rebirth from the ashes of the Great Recession, or is this a recovery that simply compensates for a huge loss in economic activity sustained to-date?
My feeling is that we are entering the second scenario.

Firstly, Irish economy is not unique in showing the signs of recovery. Other peripheral euro area economies, such as Spain, Portugal and even Greece, are also starting to stir. And all of them follow the pattern of recovery similar to that which took place in Ireland: foreign investors are followed by domestic cash-rich buyers of assets; exports uplifts are slowly building up to support domestic activity.

Secondly, given the extent of economic losses during the Great Recession, we can expect a bounce and this bounce is likely to last us some time. As argued above, over the years of the crisis we have built up a massive backlog of consumer and investor demand for everything – from durable consumption goods to assets, including property. This build up can lead to a rush-into-the-market of consumers and investors in H1 2014.

However, beyond this bounce-back period, serious headwinds loom.
In particular, latest mortgages arrears figures suggest that banks are predominantly focusing on forced sales as the main tool for dealing with the problem. These forced sales are yet to hit the markets. The same data also shows that non-foreclosure solutions are far from being sustainable even in the short-term. Over the last 12 months, the percentage of mortgages that have been restructured and not in arrears remained basically unchanged.

Further into 2014, if wages and earnings continue to decline or stagnate, the next Budget will become an even harder pill to swallow than Budget 2014. This can translate into the renewed decline in investment and consumption in the economy.  Latest exchequer figures through November this year are encouraging on the receipts side, although the safety cushion relative to both 2012 and Budget profile is thin. Tax revenues for eleven months were only EUR214 million (or 0.6 percent) ahead of profile. One third of this ‘over-delivery’ is accounted for by November payments of 2014 property taxes. Meanwhile the expenditure side is also saddled with risks. According to the latest projections from the Department of Public Expenditure and Reform, Government’s total current spending in 2013 will stand at EUR 51.15 billion or EUR2.54 billion higher than in 2007.

In addition to addressing the above spending risks, budgets for 2015-2017 will also have to deal with squaring the circle on temporary public sector pay moderation savings. As these come to an end and as demands from the public sector trade unions rise once again, economy can find itself once again at a threat of renewed tax hikes.

On a greater scale, monetary policies around the world remain a major problem. In the euro area, money supply remains tight despite record low interest rates and unprecedented funding measures that injected over EUR1 trillion worth of funds into euro area banks in 2011-2012.  Irish banks might have received a clean bill of health this week, but they are not in the position to restart lending any time soon. In the US, Federal Reserve's tapering is on the agenda for 2014. If pursued aggressively, it can lead to a rise in the cost of borrowing world wide, potentially inducing a fall-off in the capital markets. For Ireland, this can spell a further reduction in investment as foreign investors continue exiting Irish Government bonds and shying away from Irish private sector assets.

For now, however, the above risks are still to materialise. Before they do, enjoy our technical recovery.

Note: the above article was publish well before the now-infamous The Economist piece calling Irish economic recovery 'a dead cat bounce'. My view, as expressed above is not that this is a 'dead cat bounce' but rather that it is a technical correction up, toward longer-term equilibrium trend. It is quite possible that the recovery will gain momentum and will turn out to be a full recovery, but it is not, in my view, a 'dead cat bounce' (or a recovery that is likely to turn to a renewed downside).


A recent research paper published by the Centre for Economic Policy Research studied interactions between large firms and SMEs in driving regional-level innovation in the US. As is well known, large firms generate spin-out ventures whenever innovations developed at the larger firm level are deemed unrelated to the firm's core activities. Thus, a concentration of larger firms activities in a region can be expected to increase the potential for small spin-outs formation. On the other hand, small firms generate demand for innovation, increasing spin-outs profitability and survival potential. The study finds that differences in innovation output across metropolitan regions of the US over 1975-2000 can be largely attributed to the co-existence of these effects. These findings offer us significant insights into the potential role for business partnerships between Irish SMEs and MNCs in driving innovation-focused growth. For one, the study shows that optimal innovation policies are dependent on the specific stage of innovation culture development in the economy. For example, an economy with a significant presence of larger firms, such as Ireland, should focus on policies designed to stimulate formation of new ventures and spin-outs instead of spending resources on attracting even more large firms. Last week, this column suggested using tax incentives for SMEs and MNCs to stimulate equity investment in entrepreneurial ventures and spin-out. The above evidence from the US suggests that we might want to give this a try.

Wednesday, December 25, 2013

25/12/2013: Eurocoin: Euro Area Growth Firmed Up in December

Merry Christmas to all!

Some good news from the euro area economy front on Christmas day: eurocoin - leading growth indicator for the euro area - posted another (6th consecutive month) improvement in December 2013, rising to 0.29 from 0.23 in November.

December reading marks the 4th consecutive month of the indicator above 0.0 (growth), although it remains in statistically insignificant range. This is the highest reading for the indicator since July 2011.

Latest forecast for Q4 2013 growth in euro area GDP, based on eurocoin, is 0.22-0.25%.

Chart below shows that 2013 marks the year of ECB policies starting to finally bear some fruit. The point here, of course, is that the ECB should have been much more aggressive earlier on - as this blog argued consistently since the beginning of the crisis.

However, the ECB policies are still not being able to generate the momentum strong enough to escape deflationary pressures. Chart below shows that over the last 24 months, monetary policy has failed to sustain moderate inflation and that overall policy trajectory is still driving euro area economy toward deflation.

But back to better news. Despite weaker industrial activity, eurocoin rise in December is based on broad improvements in the economy across household and business confidence.

Tuesday, December 24, 2013

24/12/2013: Christmas Eve WLASze: Weekend Links on Arts, Sciences and zero economics

This is Christmas Eve WLASze: Weekend Links on Arts, Sciences and zero economics…

For the evening we are in, here's timeless and epic Komar & Melamid project The Most Unwanted Music composed for DIA, NYC - a homage to… well… the Christmas Jingle starts at 8:35

A powerful visual of Christmas Eve around the world via The Wall Street Journal: http://online.wsj.com/news/articles/SB10001424052702304475004579278183520964564

And on to truly sublime - a Christmas Poem by my favourite poet of all times: Joseph Brodsky:

DECEMBER 24, 1971

When it’s Christmas we’re all of us magi.
At the grocers’ all slipping and pushing.
Where a tin of halvah, coffee-flavored,
is the cause of a human assault-wave
by a crowd heavy-laden with parcels:
each one his own king, his own camel.

Nylon bags, carrier bags, paper cones,
caps and neckties all twisted up sideways.
Reek of vodka and resin and cod,
orange mandarins, cinnamon, apples.
Floods of faces, no sign of a pathway
toward Bethlehem, shut off by blizzard.

And the bearers of moderate gifts
leap on buses and jam all the doorways,
disappear into courtyards that gape,
though they know that there’s nothing inside there:
not a beast, not a crib, nor yet her,
round whose head gleams a nimbus of gold.

Emptiness. But the mere thought of that
brings forth lights as if out of nowhere.
Herod reigns but the stronger he is,
the more sure, the more certain the wonder.
In the constancy of this relation
is the basic mechanics of Christmas.

That’s what they celebrate everywhere,
for its coming push tables together.
No demand for a star for a while,
but a sort of good will touched with grace
can be seen in all men from afar,
and the shepherds have kindled their fires.

Snow is falling: not smoking but sounding
chimney pots on the roof, every face like a stain.
Herod drinks. Every wife hides her child.
He who comes is a mystery: features
are not known beforehand, men’s hearts may
not be quick to distinguish the stranger.

But when drafts through the doorway disperse
the thick mist of the hours of darkness
and a shape in a shawl stands revealed,
both a newborn and Spirit that’s Holy
in your self you discover; you stare
skyward, and it’s right there:

a star.

And another one from Brodsky: 50 years old today:

50 years since: Joseph Brodsky's Christmas 1963:

Рождество 1963

Волхвы пришли. Младенец крепко спал.
Звезда светила ярко с небосвода.
Холодный ветер снег в сугроб сгребал.
Шуршал песок. Костер трещал у входа.
Дым шел свечой. Огонь вился крючком.
И тени становились то короче,
то вдруг длинней. Никто не знал кругом,
что жизни счет начнется с этой ночи.
Волхвы пришли. Младенец крепко спал.
Крутые своды ясли окружали.
Кружился снег. Клубился белый пар.
Лежал младенец, и дары лежали.

What can I say, but that Christmas is, as Brodsky described it:
"Emptiness. But the mere thought of that
brings forth lights as if out of nowhere."

Merry Christmas to all!

24/12/2013: Should Government Do More on Credit Supply? Or Do Better?

We commonly hear about the need for the Government to do something about 'credit supply' to the real economy and 'fixing the bad loans' problem in the banks. Alas, as per the IMF assessment shown in the chart below, Ireland is already well ahead of the majority of its euro area counterparts (save Spain and Slovenia) in terms of policies aimed at supporting supply of credit. And we are way ahead of everyone else in terms of policies that are designed to address the issue of bad loans.

Given having policies ≠ having effective policies or allowing policies on the books to be implemented in the real world. So may be the Government shouldn't be 'doing more' to fix credit supply and demand, but instead 'do better'?

Note: Policies aimed at enhancing credit supply include: fiscal programmes on credit (e.g. credit support schemes, etc), supportive financial regulation, capital markets measures (e.g. funding via state agencies etc), and bank restructuring (that the IMF and the Irish Government often confuse for repairing). Supporting credit demand policies include policies aimed at facilitating corporate debt restructuring and household debt restructuring.

Monday, December 23, 2013

23/12/2013: Long term growth in Advanced Economies and Ireland

Long range growth figures are a fascinating source of insight into what is happening in the economies over decades. Here's the data on GDP growth in advanced economies (29 countries) for 1980-2013. All figures are computed by me from the IMF data.

Let's start with a long view.

Chart below shows growth in real GDP per capita cumulated over 1980-2013 period:

The chart above clearly shows that after 33 years spanning periods of growth and two crises, Ireland is well-ahead of all euro area and Western economies in terms of cumulated growth in real GDP (the series are based on GDP expressed in constant prices in national currencies).

What the chart above does not show is that:

  • In the period of 1980-1989 Irish growth run at an annualised rate of 1.8% per annum, earning us 17th rank out of all 29 economies
  • In the period of 1990-1999 Irish growth run at an annualised rate of 5.6% per annum, earning us 1st rank out of all 29 economies
  • In the period of 2000-2009 Irish growth run at an annualised rate of 0.74% per annum, earning us 17th rank out of all 29 economies
  • In the period of 2010-2013 Irish growth run at an annualised rate of 0.65% per annum, earning us 17th rank out of all 29 economies

What does the above suggest? One: it suggests that our 'catching up' period of the 1990s was very robust: we outperformed the group average growth rate by a factor of x2.66 times.
Two: it also suggests that the 'catching up' period was not followed by sustainable growth momentum, as our growth rates declined in 2000-2013 period to those below the rates recorded in the 1980-1989 period and once again fell below those for the majority of advanced economies average.
Three: With our catch-up growth still putting us well ahead of the average in cumulated growth terms, including the growth rates for comparable catch-up economies, it is unlikely that we are due another 'catching up' period of growth any time soon. In other words, we need to get organic, sustainable growth sources to continue expanding in the future.

Chart below shows our performance across the above metric by decade:

Our performance, once adjusted for FX rates and price differentials tells a slightly different story: once we control for currencies movements, it turns out that we were less exceptional than based on comparatives for GDP expressed in national currencies:

  • In the period of 1980-1989 Irish growth run at an annualised rate of 5.6% per annum, earning us 17th rank out of all 29 economies. The average growth for all of the 29 economies was 6.4% and median was 5.8%, so we were below average, but not that much different from the median.
  • In the period of 1990-1999 Irish growth in GDP per capita pop-adjusted run accelerated to an annualised rate of 7.6% per annum, earning us 1st rank out of all 29 economies. The average for the 29 economies fell to 4.0% and the median to 3.8%. This was the period of our catch-up. So instead of x2.66 rate of growth relative to the average, we got x1.90 times the average.
  • In the period of 2000-2009 Irish growth in GDP per capita PPP-adjusted run at an annualised rate of 2.6%% per annum, earning us 21st rank out of all 29 economies, which averaged growth rate of 3.05% and median of 2.9% per annum. The period marked the end of our catching up and the on-set of our bubble-driven growth that still was less than average or median.
  • In the period of 2010-2013 Irish growth run at an annualised rate of 2.7% per annum, earning us 17th rank out of all 29 economies, against their average of 2.2%, but a median of 3.0%. This confirmed the growth trends in 2000-2009.
  • Beyond our own case, note the steady decline in the advanced economies average growth rates by decade.

Do note two interesting facts emerging from the above, based on both GDP in national currencies and GDP PPP-adjusted:

  • By both metrics of GDP per capita growth, Ireland in 2000-2009 had growth lower than Ireland in the abysmal 1980s (that is the effect of the massive crisis covering years of 2008-2010).
  • By both metrics of GDP per capita growth, 2010-2013 period (after we officially 'emerged' from the Great Recession) have been worse than the dreaded 1980s.

One last chart, showing evolution of GDP per capita over time:

Sunday, December 22, 2013

22/12/2013: Most Important Charts of the Year: via BusinessInsider

A new set of The Most Important Charts from BusinessInsider.com is out, this time covering the full year:

My contribution is here: http://www.businessinsider.com/most-important-charts-2013-12#constantin-gurdgiev-trinity-college-dublin-85

The full chart:

Note: 2013 marks the fifth consecutive year of the European growth crisis. Amidst the recent firming up in global conditions, it is important to remember that per capita GDP (in US Dollar terms) in both the euro area and the UK remains below the pre-crisis peaks. In absolute terms, euro area cumulated 2008-2013 losses in GDP per capita range from EUR 1,311 for Malta to EUR 56,496 for Ireland, with the euro area average losses of EUR 20,318. No advanced economy within the EU27 has managed to recover cumulative losses  in GDP per capita to-date. On average, euro area GDP per capita in 2013 is forecast to be 9.7% lower than pre-crisis. Across other advanced economies, the GDP per capita is expected to be 8.4% higher in 2013. While this makes the euro area a strong candidate for growth in 2014-2015, absent apparent catalysts for longer term gains in value added, and TFP and labour productivity expansion, a European recovery can be a short-lived bounce-back, rather than a dawn of a New Age.

Sources: Author own calculations based on IMF data.

There is an earlier version of the same chart I prepared, covering also the duration of the crisis and its extent using as a metric GDP per capita in constant prices in national currency (not USD):

Saturday, December 21, 2013

21/12/2013: WLASze: Weekend Links on Arts, Sciences and zero economics

This is WLASze: Weekend Links on Arts, Sciences and zero economics. Enjoy:

BARBARA KRUGER show is out in Bregenz, Austria with a show "Believe + Doubt" through January 12 - an absolutely brilliant nostalgia for the 1980s art that still goes on primarily because of its capacity to contextualise reality without relying on referencing visual techniques that age (e.g. 1970s minimalism) or semiotics of neo-geometrism, neo-pop and much of free figuration that became quickly over-exposed and exhausted.

Last time I saw Kruger's work it was some years ago in Berlin. And although I prefer another Typographist - Jenny Holzer - Kruger's work still strikes me as fresh, powerful and well-balanced when it comes to the juxtaposition of the medium, exhibition space and context.


Pdf of the catalogue:

A fantastic Korean artis, Lee Jinju 

Haunting paintings that visualise philosophical vignettes - brief, momentary contemplations over the remnants of memory of an event, infused with traces of emotions. Floating islands dissected in an almost quasi-scientific ways, the paintings are full of relics, artefacts of memory. A quote from the artist: "Life wanders, but memories remain" (http://www.artistjinju.com/Artist-s-Note).

And one more:

And a fragment of the above:

There is quiet, or rather icy elegance to her work.

In woods of Cate Marvin:
"You strip the cut, splice it to strips, you mill
the wind, you scissor the air into ecstasy until
all lawns shimmer with your bluest energy."

A very interesting work by Christian Zander aka the Emperor of Antarctica, blending graphic design and art into contemplation of texture and depth. Contemplation driven by endless continuity of image...

Drawing on the end of 2013, a retrospective video covering top stories from 2013 relating to exploration of the Cosmos: Exploring the Beyond: Top Space Stories in 2013 http://on.wsj.com/1kafjQL

And preparing for 2014, here's a DeZeen guide to top design shows in 2014: http://www.dezeenguide.com/?id=2014-40-London+Design+Festival

And Wallpaper's Graduate Directory 2014: http://www.wallpaper.com/v2/commercial/wbespoke/graduate-directory-2014

Again on the theme of 2014, this time moving history into the near-future: http://www.theartnewspaper.com/articles/Rush-to-remember-/31087
Russia is about to open a museum dedicated to WW1 (100th anniversary is due next year) and the concept of this museum will have (or at least promises to have) a twist…

Friday, December 20, 2013

20/12/2013: Q3 GDP: Is There a Domestic Recovery?

In previous posts, I covered:
1) top-level data on GDP and GNP growth in q3 2013 (here: http://trueeconomics.blogspot.ie/2013/12/19122013-good-gdp-gnp-growth-headlines.html)
2) expenditure components of GDP and GNP (here: http://trueeconomics.blogspot.ie/2013/12/19122013-qna-q3-2013-expenditure-side.html), and
3) 3-quarters aggregates changes in GDP and GNP (here: http://trueeconomics.blogspot.ie/2013/12/20122013-how-real-is-that-gdp-and-gnp.html)

Now, onto the Domestic Demand.

With both GDP and GNP now severely skewed by the transfer pricing going on in the ICT Services sectors in Ireland, it is no longer reasonable to look at either GDP or GNP for the signs of underlying activity gains in the real Irish economy. Instead, we should consider a combination of all three: changes in GDP, GNP and Final Domestic Demand. Final Domestic Demand is defined as a combination of:

  • Government spending on goods and services (other than investment goods)
  • Government and private investment in the economy, and
  • Private household consumption of goods and services

Unlike Total Domestic Demand, Final Domestic Demand excludes stocks built up by businesses.

First, looking at the Q1-Q3 aggregates comparatives based on data that is not seasonally-adjusted and is expressed in constant euros. In Q1-Q3 2013, final domestic demand in Ireland fell 1.41% compared to the same period in 2012 (down EUR1,293 million y/y). Final Domestic Demand is now down 2.89% on the first three quarters of 2011 and is down 21.6% on the same period of 2007.

In other words, over Q-Q3 2013, on aggregate, there is still no recovery in the domestic economy in Ireland.

Second, let's take a look at q/q changes in the GDP, GNP and Final Domestic Demand. For this purpose, we consider seasonally-adjusted constant euros series.

In Q3 2013, Exports of goods and services fell 0.80% q/q on seasonally-adjusted basis. The decline was shallow compared to 4.63% rise in Q2 2013, but it replicates the pattern of 'quarter up, quarter down' established since Q3 2012.

Overall, since Q1 2011 (in other words since the 'adjustment programme' or 'bailout' started) Irish exports of goods and services were up over 6 quarters and down over 5 quarters. Exports-led recovery stacks ups s follows:

  • In 1997-2007 average quarterly growth in exports of goods and services in Ireland stood at 2.445%;
  • In 2008-present that rate was 0.281% and
  • In 2011-present it is 0.4988%

In other words, massive increases in ICT services exports over the period of the crisis are not strong enough to generate significant uplift momentum in exports growth.

GDP at constant market prices rose 1.502% q/q in Q3 2013, marking a second consecutive quarter of growth. In Q2 2013 the rise was 1.023%. Since Q1 2011, GDP rose on a quarterly basis in 7 quarters and was down in 4 quarters. Overall recovery comparatives are:

  • In 1997-2007 GDP growth average 1.630% on a quarterly basis;
  • Over 2008-present the average is -0.353% and
  • Over Q1 2011-present the average is +0.358%

So there is a longer-term recovery on average, based on GDP, but it is weak, consistent with annualised rate of growth of just 1.44%.

GNP at constant market prices rose 1.580% q/q in Q3 2013, marking the first quarter of growth. In Q2 2013 the GNP contracted 0.133%. Since Q1 2011, GNP rose on a quarterly basis in 6 quarters, it was flat at zero in one quarter, and was down in 4 quarters. Overall recovery comparatives are:

  • In 1997-2007 GNP growth averaged 1.522% on a quarterly basis;
  • Over 2008-present the average is -0.302% and
  • Over Q1 2011-present the average is +0.171%

So there is a longer-term recovery on average, based on GNP, but it is weak, consistent with annualised rate of growth of just 0.68%.

Final Domestic Demand at constant market prices rose 2.412% q/q in Q3 2013, marking the second quarter of growth. In Q2 2013 the FDD was up 0.218%. Since Q1 2011, Final Domestic Demand rose on a quarterly basis in 7 quarters, and was down in 4 quarters. Overall recovery comparatives are:

  • In 1997-2007 FDD growth averaged 1.621% on a quarterly basis;
  • Over 2008-present the average is -0.961% and
  • Over Q1 2011-present the average is -0.175%

So there is no longer-term recovery on average, based on Final Domestic Demand, with FDD contracting on average at an annualised rate of 0.70%. There is, however, good news of FDD rising for two consecutive quarters, clocking cumulative growth of just 2.64% over 6 months or 5.34% annualised. The problem is that the levels from which this growth is taking place are low.

As shown above, overall recovery is not yet taking hold in the domestic economy, although there are some gains recorded in the domestic demand that are encouraging and have been sustained over 2 consecutive quarters.

20/12/2013: How Real Is that GDP and GNP Growth in Ireland? Q3 data

In previous two posts, I covered top-level data on GDP and GNP growth in q3 2013 (here: http://trueeconomics.blogspot.ie/2013/12/19122013-good-gdp-gnp-growth-headlines.html) and expenditure components of GDP and GNP (here: http://trueeconomics.blogspot.ie/2013/12/19122013-qna-q3-2013-expenditure-side.html).

Now, let's take a look at 3-quarters aggregates. The reason why looking at 3 quarters aggregates makes sense is that q/q changes are volatile, while y/y changes are only reflective of quarter-wide movements in activity. 9-months January-September 2013 data comparatives to a year ago provide a better visibility as to what has been happening in the economy so far during this year.

All analysis below is based on seasonally unadjusted data in constant prices terms.

In 3 quarters (Q1-Q3) of 2013, Personal Consumption of Goods and Services fell 1.22% when compared to the same period in 2012. The series are down 1.93% on Q1-Q3 2011. In level terms, personal consumption is down EUR734 million for the first 9 months of 2013 compared to a year ago.

Expenditure by Central and Local Government on Current Goods and Services was down 0.96% for the 9 months January-September 2013 compared to the same period of 2012 and is down 5.03% on same period in 2011. In level terms, Government spending on goods and services is down EUR178 million in Q1-Q3 2013 compared to a year ago.

Gross Domestic Fixed Capital Formation for the nine months January-September 2013 has fallen 2.90% compared to the same period a year ago (in level terms, -EUR381 million). Compared to the same period in 2011, gross fixed capital formation is now down 4.42%. When we talk about 'big increases' in investment, keep in mind, Q1-Q3 cumulated Gross Fixed Capital Formation was down 55% on the same period for 2007.

Exports of Goods and Services for the nine months January-September 2013 were down 0.8% on the same period a year ago (-EUR1,013 million), but up 0.84% on the same period of 2011. This hardly shows 'robust growth' in exports. Exports composition has shifted once again in favour of Services. Goods exports shrunk over the last nine months by 4.51% compared to same period 2012 (-EUR2,809 million) and are now down 8.29% on Q1-Q3 cumulative for 2011 and down 2.47% on Q1-Q3 2007 too. Meanwhile, exports of services rose 2.77% in Q1-Q3 2013 compared to a year ago (+EUR1,796 million) as per 'Google-tax effect' and these are now up 10.69% on Q1-Q3 2011 and up 21.29% on Q1-Q3 2007. At the rate we are going, pretty soon Barrow Street GDP will exceed that of South Korea, which will make Poly's Pizza more economically important than Geneva.

Sarcasm aside, Imports of goods and services (another driver - via their collapse - of positive GDP and GNP news) are down 0.93% y/y in Q1-Q3 2013 (-EUR908 million) and are down 1.35% on same period 2011. Compared to Q1-Q3 2007 imports of goods and services are down massive 9.49% - the effect that contributes significantly to upside of GDP. Goods imports alone are now down 33.3% on Q1-Q3 2007 and these were down 4% (-EUR1,419 million) on Q1-Q3 cumulative for 2012.

So, let's add few things. In 9 months January-September 2013, relative to the same period of 2012:
1) Personal consumption fell EUR734 million
2) Government consumption fell EUR178 million
3) Domestic Gross Fixed Capital formation fell EUR381 million
4) Exports of Goods and Services fell EUR1,013 million
5) Imports of Goods and Services fell EUR908 million, and
6) Stocks of goods rose EUR503 million.

(1)-(4) subtracted from GDP growth, (5) and (6) added to GDP growth. Which means that the only two positive contributions to growth in our GDP came from: imports decline and stocks of goods held by businesses rise. This is hardly a good news, as both sources of growth are really not about increased/improved activity in the economy.

Thus, GDP at constant market prices fell over the period of Q1-Q3 2013 compared to Q1-Q3 2012 by 0.58% (or EUR706 million). Notice the word 'fell' - whilst there were rises in GDP in Q3 and Q2 in q/q basis, overall so far, 2013 total output in the economy is below that registered for the same period in 2012.

GDP is also down 0.04% on same period 2011 and is down 6.82% on the same period in 2007.

Let me know if you are spotting any positive growth in the above.

Next, the difference between GDP and GNP is formed by the Net Factor Income from the Rest of the World. This also fell in Q1-Q3 2013 compared to the same period of 2012 - down 14.37% y/y (or -EUR3,378 million), which 'contributed' a positive swing to the GNP in the amount of almost EUR3.38 billion. The reason for this? Well, growth-generating fall-off in activity in the phrama sector meant that MNCs were booking lower profits via Ireland and this, allegedly, has a positive effect on our economy… err… on our GNP.

GNP, propelled by stocks accounting tricks, hocus-pocus of transfer pricing and continued decline in imports rose 2.69% in Q1-Q3 2013 compared to Q1-Q3 2012 (up EUR2,670 million = decline in GDP of -EUR706million plus decline in factor payments of +EUR3,378 million). Seriously, folks, this is beginning to look like a joke!

Based on the same physics of transfer pricing miracles, Irish GNP is now 4.16% ahead of Q1-Q3 reading for 2011.

Recap: On expenditure side of the National Accounts, growth in 2013 is not exactly real (for GNP) and not present (for GDP).

Analysis of Total Domestic Demand (aka domestic economy) is to follow. Before then, charts to illustrate the above:

20/12/2013: Are the bondholders' bailouts off the table now?

From late 2008 on through today, myself (including on this blog) and a small number of other economists and analysts have maintained a very clear line that burning of Anglo and INBS bondholders would have been a preferred option for Ireland.

Not to speak for others, I still maintain that writing off the Government bonds held by the ECB is the only course of action open to us today and that it should be pursued.

The ex-IMF's official statements yesterday concerning the preference for burning senior unsecured bondholders in Anglo and INBS, and the claim that this option is no longer viable for Ireland,  are neither new, nor material. For three reasons:

  1. Anglo and INBS bondholders should have been bailed-in in full regardless of their status. Those who held secured bonds should have been bailed-in via equity swaps after the full bailing-in of unsecured bondholders. The action would have saved Irish taxpayers tens of billions, not just billions as the ex-IMF-er claims.
  2. Other banks: AIB and ptsb bondholders should have bailed-in as well.
  3. ECB objections to such a course of action were exceptionally robust, but Ireland should have pursued more aggressive stance with respect to the ECB. Not quite a full exit, but possibly a combination of a threat, plus a concerted push alongside other 'peripheral' countries in the European structures to force ECB engagement.
  4. It is never too late to do the right thing: the debts are still there, only in a different form. Anglo-INBS debts are now held by the Central Bank in the form of sovereign bonds, converted into the latter by the acts of the current Government. These bonds should not be repaid. There are many ways in which such non-repayment can be structured, including with cooperation of the ECB and European officials. One example would be converting the bonds into perpetual zero coupon bonds.

In other words, late admission by the ex-IMF employee of the wrongs, backed by the claim that 'nothing more can be done' are not good enough. We need real corrective action from the EU.

Report on actual statement is here: http://www.breakingnews.ie/ireland/imf-ireland-could-have-saved-billions-by-burning-anglo-bondholders-617688.html

Update: H/T to @aidanodr for the following:

This pretty much sums up the EU Commission's stance on the 'seismic' banks deal 'negotiated' by the Irish Government in June 2012. It is also wrong, offensive and belligerent. Mr Barroso's comments are simply economically illiterate. Assume Ireland did cause the euro area crisis. Can anyone (Mr Barroso?) explain how the euro can be deemed sustainable if it can be destabilised by a crisis in one of the smallest nations members of the union? Alternatively, imagine the US Dollar being as vulnerable to a banking crisis in New Hampshire in a way that euro (per Mr Barroso's claims) was allegedly vulnerable to the Irish crisis?