17/10/2013: Budget 2014 Missing the Targets: Sunday Times, October 13

This is an unedited version of my Sunday Times column from October 13, 2013.


Recent events have led to a significant reframing of the Budget 2014. With these, the Government is now actively signaling a more accommodative stance on next year's cuts. Alas, the good news end there and the bad news begin. Any easing on austerity in 2014 will be unlikely to produce a material improvement in household budgets. In return, the Government will be placing huge hopes on robust growth returning in 2014. If this fails to materialise, lower austerity today will spell more pain in 2015. Like a dysfunctional alcoholic, unable to stop binging at closing time, we ignore tomorrow’s hangover.


A combination of the latest IMF report on the Irish economy and the outcome of the Seanad abolition referendum have settled the debate on the scale of adjustment to be taken on October 15th. Embarrassing defeat in the referendum has meant that the continuation of Taoiseach's leadership required some symbolic gesture toward the electorate. Lowering the 2014 cuts targets on October 15th can serve the purpose for a few crucial months until the New Year.

Meanwhile, ambiguity-embracing IMF lent a helping had. The IMF repeated its insistence on EUR5.1 billion combined 2014-2015 cuts in the latest assessment of the Irish economy. Yet, the IMF avoided specifying the breakdown of these adjustments between 2014 and 2015. This has given the Government confidence to argue the case in favour of partially delaying 2014 adjustment in front of the EU overseers of our budgets.

Immediately after the IMF report publication, Irish media was promptly fed the rumors that the Minister for Finance was seeking a reduction in the level of budgetary cuts. This week Minister Noonan said that the 2014 adjustment will be EUR600 million lower than EUR3.1 billion originally agreed with the Troika. The savings will amount to 0.37 percent of our GDP: a small boost for the Irish economy, but a massive splash in the PR spin terms for the Government.

With some cuts delayed to 2015, Ireland’s debt sustainability and deficit targets now hinge on the Government’s forecasts for growth materializing over the next twelve months. The risks to these are non-negligible. Last week IMF lowered Irish GDP growth forecasts for every year from 2013 through 2018. Compared to the forecasts released in June this year, October forecasts for inflation are also down. This implies that nominal growth – the source of budget deficits and debt dynamics – is expected to be even slower. If back in June this year IMF expected Irish economy to be at EUR205.8 billion by 2018, now the fund is projecting it to hit EUR201.7 billion. Cumulated forecast nominal GDP for 2013-2018 is EUR15.6 billion lower in October report than in June assessment.  Even before Minister Noonan’s latest reductions in fiscal adjustment for Budget 2014, IMF projected worsening of Irish deficits in 2014-2018.

Department of Finance forecasts, released this week and underpinning the Budget 2014 calculations are more optimistic on nominal growth, expecting higher inflation and anticipating more domestic consumption and investment than the IMF. If the Department gets its forecasts wrong, we will pay 2015 for the delays in cuts planned for the next year.



Flying on hopium of rosy growth expectations is a risky proposition for the Exchequer especially ahead of our drawing down the final tranche of the Troika funding. For this risk, the savings to be delivered in the Budget 2014 are likely to be insignificant from economy’s point of view.

Given the precarious position of the Government in public opinion polls, it is a safe bet to assume that the coalition will be putting the money to ‘work’ as an investment stimulus and a cushion against cuts to social welfare and health.

New building programmes in the more sensitive constituencies hold some serious political capital. But planning allocation of large sums to new investment is a lengthy process before construction jobs actually materialise. Growth impact of these measures in 2014 is unlikely to be significant.

But the thrust of 'savings' is likely to go to the second option. Doing as little as possible for yet another year in structurally altering the way we spend on social supports and healthcare will mean that the budgetary changes to health spending in 2014 will likely be identical to those undertaken in the past. Expect more cost shifting to private insurance, more sabre-rattling over cost overruns and more imaginary gains in productivity. Social welfare ‘cost containment’ measures will continue to rely on 'demand attrition' - the declines in demand due to unemployment benefits expiration and emigration. This means zero impact on growth in 2014.

Meanwhile, revenue side of the budgetary equation will keep pressuring the economy.

Fine Gael's side of the Coalition is promising us that the Budget will contain no new taxes. Alas, in Ireland we have a very narrow definition of both terms: 'new' and 'taxes'. In 2014 we will be facing a full annual Property Tax bill, which is expected to take out additional EUR250 from the average household income. The Budget will also likely raise charges on families to fund education and healthcare. The Irish Government is saying these are not new taxes. Anyone expected to pay them would disagree.

Last year, PRSI changes and reduction in child benefits were not identified as 'new taxes' either. These cost an average working family with two children some EUR494 per annum – an involuntary reduction in family income.

Per research note published by Grant Thornton two weeks ago, a family on EUR80,000 with two earners with two children saw their tax bill rise by 54 per cent since 2008. Their disposable income is now down a massive EUR6,132 per annum. Only a small fraction of these were officially recognised as new tax measures.

Meanwhile, the same families have also seen the costs of basic services provided by the state agencies and enterprises, or controlled by the state regulators and heavily taxed, rise dramatically over the course of the crisis. On average Irish consumer prices fell 1.6 percent between August 2008 and August 2013. Health insurance costs more than doubled over the same period, education costs inflated by 29 percent, bus fares have gone up over 46 percent, and motor tax went up 27 percent. Increases in core public services costs have taken out close to EUR3,500 annually out of the pockets of an average Irish family. These came on top of the Grant Thornton tax cost estimates cited above.

What is the opportunity cost for the families of the losses brought about by the fiscal crisis? For an average family with expected working life of 25 years, the above costs of austerity are equivalent to around EUR111,000 in foregone pensions savings. This excludes costs of the same measures continuing beyond December 31, 2013 and the new measures yet to come in 2014-2015.

The devastation of the above financial arithmetic is even more apparent when we realise that we are far from completing the full set of fiscal adjustments needed to restore our public finances to health. Medium-term Government fiscal consolidation forecasts confirmed by the IMF last week, envision total fiscal consolidation for 2014-2015 to be EUR5.1 billion. Of this, new revenue measures for 2014-2015 are to be set at EUR1.5 billion against carry forward measures of EUR0.3 billion. Current spending cuts are set at EUR3.2 billion. These adjustments translate into additional fiscal burden of EUR3,300-3,500 per annum for an ordinary family.

The hope is that the general economic recovery will mop up the household finances blood spilled by the fiscal crisis.  This rosy expectation is in turn driven by Minister Noonan’s worldview in which Irish trade partners are expected to also grow faster in years ahead. Alas, this Tuesday, IMF cut its global growth forecasts for both 2013 and 2014.


Forecasts aside, today, Ireland has run out of the road on tax hikes and revenue raising measures.

Instead of hiking tax rates, the Government is expected to widen the tax base in Budget 2014. The most efficient way for doing so would be to close loopholes on income exemptions. Less efficient, will be to lower income threshold at which upper marginal tax rate kicks in. Middle and upper-middle class families will pay in either scenario, but the costs to them will be higher in the latter.

In addition, the Government has been briefed on the potential for hiking PRSI for self-employed, while opening up access for this category of workers to social security net. Conditions for accessing cover will be so onerous, few self-employed will ever be able to qualify, but the hike will be politically acceptable. Currently, a self-employed person earning the equivalent of minimum wage pays almost six times as much tax and PRSI as an employee. Few interest groups so far have taken up a challenge of pointing this fact out.

Reality is, Ministers Noonan and Howlin have hit the brick wall. All the low-hanging fruit of marginal tax hikes and revenues extraction schemes has been picked. What's left now are two possible options. Option one: cut social welfare and health. Option two: delay adjustments and hope that comes Budget 2015 day, growth will pick up, unemployment assistance costs will fall, and Brussels will be happy enough reveling in the euro recovery to let things slip a bit on targets in Dublin. No prizes for guessing which option the Coalition will pursue comes next Tuesday.

Source: Department of Finance

BOX-OUT:

This week, the IMF published an assessment of the impact of the monetary policies deployed since 2008 by the ECB, the US Fed and the Bank of England. These unorthodox measures ranged from outright quantitative easing to lowering of the key interest rates to direct lending to the banks against riskier collateral. These monetary interventions, it has been argued in the media and by the majority of analysts, helped to ameliorate euro area sovereign crises. Per conventional wisdom, as the result of the central banks interventions, and particularly those carried out by the ECB, government bond yields and borrowing costs declined post-2011 across the euro area periphery. In addition, supporters of these policies have suggested that unconventional MPs were responsible for increasing equity funding in the real economies, thus supporting the recovery.

Rejecting the mainstream claims, the IMF researchers found that over 2008-2012 various monetary policies had zero statistical impact on the sovereign bond yields in Ireland, Portugal, and Greece. The policies have let to a moderate reduction in Italian Government bond yields, and a weak reduction in Spanish yields. In the case of Ireland, the IMF found no benefits to sovereign bond flows or prices that can be associated directly with the ECB interventions. Furthermore, ECB interventions were associated with outflows of liquidity from Irish equity funds. In contrast, Fed and Bank of England interventions resulted in net inflows of funds into Irish equities.

The paper clearly suggests that the ECB has not done enough to support recovery in sovereign debt and equity markets in the euro periphery.

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4/10/2013: IMF 11th review of Ireland: Growth Warnings

So IMF released its 11th review of Irish economy under the Extended Arrangement for funding.

Key points:

"Real GDP declined in the first quarter, reflecting a fall in exports and weak domestic demand. Nonetheless, fiscal results remain on track and sovereign and bank bond yields have risen relatively modestly in response to declining global risk  appetite. A range of other economic indicators are more encouraging, suggesting lower but still positive growth in 2013, though uncertainty remains. Growth projections for 2014 are also lowered given weaker prospects for consumption recovery and for trading partner growth."

So weaker than forecast growth conditions… ok… How much weaker?

"Balancing the weak GDP results for the first quarter against a range of more positive indicators, the growth projection for 2013 has been pared back by a ½ percentage point to 0.6 percent y/y, but uncertainties remain." Boom! Ugly stuff, folks. And replace 'but' with 'and' and you will get a double Boom!


"Most importantly, export growth has been cut by 1½ percentage points as data indicate a larger impact from the patent cliff and tepid recoveries in important trading partners. Lower imports dampen the impact on growth." Wait, weren't we told that patent cliff doesn't matter much cause exports are offset by imports etc?

"Domestic demand is expected to be flat, with private consumption still contracting modestly owing to fiscal consolidation and household debt reduction, cushioned by employment growth and low inflation. Fixed investment is expected to expand by some 2 percent given improving business sentiment and the uptick in housing starts, but remains the most volatile GDP component. This projection will need to be further reviewed when Q2 national accounts data become available near end September." We have that Q2 data available now… see here: http://www.fergco.co/2013/09/2092013-domestic-economy-continuing-its.html and it ain't pretty…

More details here: http://www.fergco.co/2013/09/2092013-h1-2013-qna-domestic-economy-vs.html Net: Gross Fixed Capital Formation (basically investment in the economy) is down 9.40% in H1 2013 compared to H1 2012, down 14.09% compared to H1 2011 and down 67.73% compared to H1 2007. The reductions in capital investment jun H1 2013 compared to H1 2007 are ten-fold the size of reductions in current Government spending at EUR17,542 million. For another comparison, reductions in personal expenditure on goods and services by households over the same period is EUR4,757 million.

"Weaker consumption and export growth are expected to dampen the pace of recovery, with growth now penciled in at 1.8 percent in 2014. Export and consumption growth are expected to benefit from a projected rise in trading partner growth with employment growth contributing to incomes and confidence. Although consumption growth is still expected to become modestly positive in 2014, the pick up is weaker because a 1½ percentage point downward revision to household saving in 2012 suggests less room for lower savings given the priority households attach to debt reduction. Public consumption is also expected to be softer than previously anticipated as the full effects of the Haddington Road Agreement feed through in 2014. Export growth in 2014 is scaled back to reflect the possibility that recent weakness could persist."

Per IMF: "Growth firms to 2½ percent in 2015 as external growth rises further and fiscal consolidation eases, but durable recovery hinges on reversing the tide of NPLs." The miracle of 3%+ growth for ever, projected back in 2010-2011 to start in 2013-2014 is now replaced by the miracle of 2.5% growth projected to start in 2015… And the new projections out to 2018 no longer feature a single year of growth expected to rise above 2.5%… but all is still sustainable, just as it was in 2010 and 2011 and 2012 and… And the dream of 2.5% growth will, per IMF, be consistent with a positive output gap of ca 0.3%, which means that that is not the expected long-run real growth rate.

In effect, IMF admits now that Ireland cannot be expected to grow sustainably at the rates in excess of 3% per annum in real terms. Say goodbye to Ireland's 'growth miracle', say hello to Ireland's Belgium decades...


Another kicker: after 2015: "…the recovery continues to rely principally on net exports as domestic demand recovery is expected to be protracted as many households continue to deleverage in the medium term. Resolution of mortgages is not expected provide significant direct support to consumption recovery, as while some households may have a reduction in debt service due under a split mortgage restructuring, they may have previously been temporarily on interest-only terms, while other households may need to adjust consumption to serving their debt even if the debt service due is reduced. Rather it is expected that progress in reducing NPLs and enhancing bank profitability will gradually enhance the terms of banks’ access to market funding and their ability and willingness to lend to less indebted borrowers—which includes the younger cohort of households—unlocking housing market turnover and reducing household uncertainty."

Wow! So the IMF is warning us that things are going to remain tough even after the mortgages crisis 'resolutions'… Not like our Government is listening… And the IMF is telling us that the economy is going to get more polarised and paralysed... where did you hear that? Oh... http://www.fergco.co/2013/08/782013-sunday-times-july-28-2013.html

Employment: long-term unemployment remains a problem (we know that)… and surprisingly: "Facilitating SME examinership could aid resolution of SMEs in arrears, supporting their potential to invest and create jobs." Now, here's the key point: in all this excitement about family homes and repossessions we forgot that roughly 50% of SMEs loans are in arrears… and of the remaining 50%, unknown quantum is at risk… Hm… I wonder how that 'facilitated examinership' going to work for the employment stats and for property markets and mortgages arrears, when examiners go into the SMEs books to uncover potential subsidies to proprietor's income or when examinerships lead to cuts in employment levels?..

So back in 2011, IMF predicted Irish economy to grow 2.4% (GDP) in 2013, 2.9% in 2014 and 3.3% in 2015. This time, IMF is projecting Irish economy to grow 0.6% in 2013, 1.8% in 2014 and 2.5% in 2015. Nominal GDP was supposed to reach EUR182.5 billion by end of 2015 back in 2011 projections and is now forecast to reach EUR178.4 billion… What's being down EUR4.1 billion (one year difference) between friends, or EUR6.5 billion over three years, eh? Especially when all of this is sustainable, right?..

Still, gives us some perspective as to the whole circus going on: we are sticking to EUR3.1 billion fiscal target for 'adjustment' and washing off EUR4.1 billion in growth expectations underpinning 'sustainability' analysis… You'd think this is monkeys with abacus, but no - these are highly paid 'analysts', 'economists' on Government side, state side, sell-side at stockbrokerages and banks, ECB side, EU side, IMF side… And they all sing in unison: all is sustainable, just as they revise continuously their forecasts down and down and down. Which begs a question: at what stage will the sustainability malarky be replaced by the admission of the crisis? Presumably when GDP growth is revised to nil into perpetuity?

I will be updating charts on Irish economy forecasts from the IMF over the next few days, so stay tuned. Before that, I will be blogging more on key topics covered by the IMF review later today, also stay tuned…

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20/9/2013: Domestic Economy: Continuing Its Sextuplet Dip in Q2 2013

Total Domestic Demand is defined as :

• Consumer Spending on goods and services + 
• Government Spending on Current (as opposed to capital) goods and services + 
• Gross Fixed Capital Formation (basically gross investment) + 
• Change in Stocks of goods and services in the economy. 

In a more old-fashioned way, it is Investment + Consumption + Net Government Spending.

Put differently, this is the domestic economy (excluding exports net of imports, and outflows of income to the rest of the world net of inflows of income from the rest of the world).

Now, here are the quarterly changes in the domestic economy from 2007 on, for real (constant prices) seasonally adjusted series:

I define 'dips' in the above series similar to the official definition of a recession: two consecutive q/q downward movements. Remember, we have been told since Q2 2010 that the Irish economy has 'stabilised' and even 'returned to growth'. Since then we had: eight quarters of contraction and four quarters of growth in Total Domestic Demand.

The two core drivers downward in the domestic economy on q/q basis are:

On the good news side, q/q increase in Personal Consumption component (above) and external trade (below):

And external trade showing strong performance on q/q basis, which, alas, only partially offsetting the decline recorded in Q1 2013...

And this concludes my analysis of the QNA for Q2 2013.

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20/9/2013: H1 2013 QNA: Domestic Economy vs External Trade

In the previous two posts I looked at Q2 national accounts for Ireland in terms of headline GDP and GNP figures, y/y and q/q changes in the first post; and half-yearly figures analysis in the second post. The headline conclusion was that:

• Q2 2013 real (constant prices) GDP performance is weak, but posits some growth, pushing us out of official third dip recession. 
• Irish real GNP fell 0.1% in Q2 2013 compared to Q2 2012, having only marginally reversed the 6.01% y/y rise recorded in Q1 2013. 
• Broadly-speaking, H1 figures show continued economic performance within the new structural range of slower economic activity that set on with the 'recovery' of H2 2010 (the Celtic Canary period).
• Crucially, moving to less volatile half-yearly figures, Y/Y Irish real GDP fell 1.10% in H1 2013, marking a second consecutive 6-months period of declines (it was down y/y 0.75% in H2 2012 as well). 
• Y/Y Irish real GNP rose 2.87% in H1 2013, marking third consecutive 6-months period of increases in GNP.
• At current rates of growth (that is taking 3-year average, since current annual rate is negative), it will take us until 2029 before we can reach real levels of GDP consistent with the pre-crisis levels. 

Now, let's take a look at the underlying components of GDP and GNP from the expenditure side of the national accounts. Since we have half-yearly data, we might as well focus on longer-term, more stable series. For this purpose, let us also look at nominal (not real) values, so we have some idea as to actual activity on the ground, reflective of price changes, as well as volumes changes. There are several reasons for doing this:

1. Nominal values, expressed in current prices are actually linked to what we get paid, what we pay for and what the economy produces;
2. Nominal values are also reflective of what the Government spends, collects and what the potential for debt servicing is when it comes to economy's output; and
3. Nominal values are free from the impact of the inflation adjustments, which are made based on 'average' households and firms, rather than on what we do observe in the economy itself.

There are drawbacks to this analysis, so like everything else in economics, this is not intended to be 'completely and comprehensively' conclusive.

As can be seen from Chart above, Personal Expenditure on Goods and Services rose 0.4% y/y in H1 2013 - which is good news. However, the same was down on H1 2011 (recall that the Government is keen on claiming that consumer confidence and consumption spending rose during its tenure, which is obviously contradicted by the data we have). Compared to peak pre-crisis performance (peak referencing output peak, not specific series peak), we are down 10.61% on H1 2007.

Understandably, Government spending (net of tax receipts) is down when it comes to current goods and services (as opposed to capital goods and services): -2.11% on H1 2012, -4.27% on H1 2011 and -12.46% on H1 2007. You might think this is 'huge', but y/y over the first 6 months of 2013 our net current Government spending is down only EUR 278 million and when it comes to vast/deep cuts since 2007, H1 2007 spending was cut EUR1,754 million by the end of H1 2013.

Meanwhile, Gross Fixed Capital Formation (basically investment in the economy) is down 9.40% in H1 2013 compared to H1 2012, down 14.09% compared to H1 2011 and down 67.73% compared to H1 2007. The reductions in capital investment jun H1 2013 compared to H1 2007 are ten-fold the size of reductions in current Government spending at EUR17,542 million. For another comparison, reductions in personal expenditure on goods and services by households over the same period is EUR4,757 million.

Put in different terms, domestic economy is still falling, with no stabilisation in sight.

Next: external trade and GDP & GNP series:

Exports of goods and services - the only part of the economy that was booming (+15.94% in H1 2013 on H1 2007 and +5.44% on H1 2011) are hitting some bumps. H1 2013 posted a decline in total exports of 0.67% y/y. Meanwhile, imports of goods and services were up 0.08% y/y. As the result of this, our trade balance fell 2.32% y/y in Q2 2013 and is down 3.15% y/y for H1 2013. This is not good, as key Exchequer projections and debt sustainability analysis require healthy growth in trade surplus, not a decline. But more on this below…

GDP at current prices fell 1.49% in H1 2013 compared to H1 2012 and is down 0.28% on H1 2011 and down 15.26% on H1 2007. Recall that our real GDP fell 1.10% y/y in H1 2013. In other words, there is no growth in actual underlying activity. This is pretty bad. Actual euro notes we have in the economy's 'pockets' at the end of H1 2013 (as imperfectly measured by GDP) were fewer than at the end of H1 2012 and H1 2011. And these fewer euros were not worth more, either. I wouldn't call this 'stabilisation'.

Net factor income outflows abroad are falling as well and I commented on these in the previous posts.

GNP expressed in current market prices is 2.32% ahead in H1 2013 compared to H1 2012 and 2.92% ahead of H1 2011. This is good news, especially since GNP is a more accurate reflection of our real economy's output (also rather imperfect) than GDP. Not so good news: GNP is still down 17.53% on H1 2007. 

Chart below drills into the composition of our external trade:

The above clearly shows the massive swing of our external trade activities from goods sectors to services sectors. And on imports of goods side it shows the legacy of the consumption bust, which remains one of the two largest drivers for improved external trade statistics we see on national accounts.

Finally, total domestic demand: the measure of the economy that covers all domestic activities of private and government consumption and investment combined, plus chafes in stocks.

As the above shows, domestic economy continues to suffer losses in activity: Total Domestic Demand fell 0.95% in H1 2013 compared to H1 2012 and is down 3.05% on H1 2011. Compared to H1 2007, Total Domestic Demand is down 27.41%.

Summary: Bad news: Despite improvements in real variables in Q2 2013, domestic economy continued to contract in H1 2013, with domestic demand down compared to H1 2012, driven by declines in Net Government Current Expenditure and in Gross Fixed Capital Formation. Good news is that decline in domestic demand was ameliorated by a marginal increase in Personal Expenditure on Goods and Services. On the bad news side, exports of goods and services fell in H1 2013 compared to H1 2012. These changes, together with domestic demand movements resulted in GDP falling in H1 2013 compared to H1 2012. Lower rate of profits repatriation out of Ireland by the MNCs has resulted in an increase in GNP in H1 2013 compared to H1 2012.

In simple terms, if Irish economy were a student asking for a report card for H1 2013, I don't think there would be much on it worth boasting about. Let's hope H2 2013 will be different for the better.

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19/9/2013: First Half 2013: Irish GDP and GNP growth divergence

CSO published Q2 national accounts for Ireland today and these are worth detailed analysis, which I will break up into a series of posts next. 

In the previous post, I covered headline GDP and GNP figures, y/y and q/q changes. As a reminder, the headline conclusions were that:

• In Q2 2013 Irish real GDP fell 1.17% on Q2 2012, marking the fourth consecutive quarter of real GDP contractions, the longest period of continuous contractions since the end of Q2 2010. 
• Irish real GNP fell 0.1% in Q2 2013 compared to Q2 2012, having only marginally reversed the 6.01% y/y rise recorded in Q1 2013. 
• On quarterly basis, seasonally-adjusted Q2 2013 real GDP rose 0.45% on Q1 2013, ending the third spell of the recession that lasted from Q3 2012 through Q1 2013. The expansion, however was weak and well below the one recorded during the previous recovery periods. 
• I am continuing to expect that Q3 2013 will post stronger performance than Q2 2013 with possible GDP q/q upside of closer to 1%.

Now, let's move onto H1 (first half of 2013) analysis.

Q2 2013 release allows us to look at half-annual GDP and GNP changes, something that removes some of the quarterly volatility and also brings us closer to the analysis that is relevant from the budgetary perspective. Remember, budgets are not based on quarterly forecasts, but annual ones.

H1 2013 GDP at constant prices seasonally adjusted fell 0.47% on H2 2012, marking the third consecutive half-yearly period of declines. Last time we had a half-yearly period of growth was in H2 2011.

H1 2013 GNP grew 2.17% over H1 2013 compared to H2 2012, marking the third consecutive 6-months period of growth. In other words, GNP perfectly countermoves against GDP. Why? Because of the changes in transfers of earned profits by the multinationals. 

Here's an interesting thing. The chart above shows three periods of Irish growth history (I am being sarcastic/humorous here, so no offence intended): 

1. The Celtic Tiger period - for which we have consistent data here is only covered by the period from 1997 through 2000: averaged H/H growth rates of 4.49%;
2. The Celtic Garfield period - which lasted roughly from 2001 through H1 2007; Celtic Garfield period growth averaged 2.51%; and
3. The Celtic Canary period (as the proverbial one in the EU's economic model coal mine) that started with the imaginary 'recovery' of 2010 and is running currently: averaged growth of 0.24% (do remember, that excludes the period of massive contraction between H2 2007 and H2 2009 when the average rate of growth was -2.0% H/H)

You can see that the slowdown in growth is not only due to the crisis, but appears to be structural in nature. The Canary part is because Irish economy's fundamentals are such that we should be growing at 3.5-4.5 percent annually. Yet we are growing at - say averaging Celtic Garfield and Celtic Canary periods - at 1.35-1.4 percent annually. This is the slowdown toward the European levels of growth for Ireland... something to think about?

Next, take a look at the levels of activity based on 6 months figures:

And now, let's talk about year-on-year changes in H1 2013:

• Y/Y Irish real GDP fell 1.10% in H1 2013 (in other words, against H1 2012), marking a second consecutive 6-months period of declines (it was down y/y 0.75% in H2 2012 as well). 
• Y/Y Irish real GNP rose 2.87% in H1 2013, marking third consecutive 6-months period of increases in GNP.
• Overall, H1 real GDP (non-seasonally-adjusted) was up 1.65% on H1 2010 when we first heard about the 'recovery' of Irish economy or 'stabilisation'. Thus over 3 years, our GDP grew 1.65% - producing average annual rate of growth of 0.55%. Not exactly stellar, but better than nothing.

Our current H1 2013 GDP is down 7.98% on peak levels, so we are still far away from recovering to pre-crisis levels in real terms. In fact, at current rates of growth (that is taking 3-year average, since current annual rate is negative), it will take us until 2029 before we can reach real levels of GDP consistent with the pre-crisis levels. When someone says we have a lost decade, what they really mean - in real GDP terms - is that we are likely to have lost 23 years. And that does not count the opportunity cost of foregone growth. That is one hell of a long 'lost decade'.

To summarise the above: Good news is: real GNP is up 2.87% y/y, and up for the third consecutive 6-month period. Bad news is: our real GDP is down 1.1% y/y and this marks second consecutive 6-month period of declines.

I expect growth to be positive in H2 2013, with y/y around 1.0-1.2%.  Which should push our full year growth closer to zero.

Stay tuned for more analysis of QNA results.

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19/9/2013: Irish GDP and GNP: Q2 2013 & the 'end of the third recession'

CSO published Q2 national accounts for Ireland today and these are worth detailed analysis, which I will break up into a series of posts next. 

Starting with the headline GDP and GNP figures:

In Q2 2013 Irish real (constant prices) GDP fell 1.17% compared to Q2 2012, compounding the previous fall of 1.04% y/y recorded in Q1 2013. On an annual basis, this marks the fourth consecutive quarter of real GDP contractions, the longest period of continuous contractions since the end of Q2 2010. Currently, real GDP stands 7.83% below the historical peak.

At the same time, Irish real GNP fell 0.1% in Q2 2013 compared to Q2 2012, having only marginally reversed the 6.01% y/y rise recorded in Q1 2013. Despite a surprisingly robust rise in Q1, Q2 2013 real GNP stood 10.40% lower than pre-crisis peak.

The swing in the direction between GDP and GNP was driven in Q2 2013 by a 5.85% drop in the outflows of transfer payments to the rest of the world compared to Q2 2012, which compounded a massive 28.26% decline in the transfer payments recorded in Q1 2013. In other words, GNP improvements appeared to have been sustained by a massive parking of MNCs profits in Ireland. The reasons for this are unknown, but we can speculate that the MNCs are holding back profits from transferring out of Ireland due tot ax considerations and due to subdued global investment activities. It remains to be seen what happens to the GDP and GNP were the MNCs to begin once again actively exporting retained earnings.

Note: shaded periods show episodes of more than 2 quarters consecutive contractions (here on y/y basis, so these are not official recessions)

On quarterly basis, seasonally-adjusted series:

Q2 2013 real GDP rose 0.45% on Q1 2013, partially compensating for the 0.59% contraction in Q1 2013 and ending the third spell of the recession that lasted from Q3.2012 through Q1 2013. The expansion, however was weak and well below the one recorded during the previous recovery periods. For example in Q1 2010, the end of the second recessionary dip, GDP expanded by 0.82%. The end to one-quarter drop of Q2 2010 led to a GDP rise of 1.08% in Q3 2010, the end of one quarter contraction in Q4 2010 was followed by 1.48% expansion in Q1 2011 and 1.38% expansion in Q2 2011, even the end of Q1 2012 quarterly decline was marked by a 0.48% expansion in Q2 2012. In previous episodes, recovery that was associated with growth rates at below 0.7% q/q was swiftly followed by the subsequent quarter contraction in GDP. This suggests underlying weakness in the GDP performance in Q2 2013, although my personal expectation is that Q3 2013 will post stronger performance than Q2 2013 with possible GDP q/q upside of closer to 1%.

On GNP side, seasonally-adjusted real GNP fell 0.37% in Q2 2013 in q/q terms, ending two consecutive quarters of quarterly growth (Q1 2013 growth was robust 2.2% q/q and Q4 2012 growth was weak at 0.32%).

Two charts:

Note: shaded periods show episodes of more than 2 quarters consecutive contractions (here on q/q basis, seasonally adjusted, thus representing official recessions).

On historical comparison basis, table below summarises latest movements in GDP and GNP:

So a summary: we are officially out of the third dip of the Great Recession. This is a good news. 

Bad news is that this data is once again being paraded around as a sing of 'stabilisation' of economic activity. Alas, the first time we've heard this 'stabilisation' argument was in Q1 2010, when the main - longest and deepest - second dip ended. Since then, Irish economy has managed to grow by just 2.63% in real GDP terms and only 3.54% in real GNP terms. Since the onset of the recovery, we have posted average quarterly growth of only 0.18% (seasonally-adjusted figures) and this effectively means that the economy is in a stabilisation pattern closer to coma than to a sustained recovery.

Good note to all of this is that, as mentioned above, I do expect stronger activity to be recorded for Q3 2013 and possibly for Q4 2013 as well.

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17/7/2013: Sunday Times, July 14: The New Normal for Ireland

This is an unedited version of my Sunday Times article from July 14, 2013.



The release of the Irish quarterly national accounts for Q1 2013 two weeks ago should have been a watershed moment for Ireland. Aside from confirming the fact that Irish economy is back in a recession, the new figures reinforce the case for the New Normal – a longer-term slowdown in trend growth and continued volatility of economic performance along this trend. The former revelation warrants a change in the short-term policies direction. The latter requires a more structural policies shift.


Months ago, based on the preliminary data for the last quarter of 2012, it was painfully clear that Irish economy has entered another period of economic recession. This point was made on these very pages back in early March although it was, at the time, vigorously denied by the official Ireland.

Irish economy is currently in its fourth recession in GDP terms since 2007. Q1 2013 marked the third consecutive quarter in the latest recessionary episode. Since the onset of the crisis, Ireland had 17 quarters of negative growth in private and public domestic investment and expenditure, and counting.

For the Government that spent a good part of the last 2 years telling everyone willing to listen about our returning fortunes, things are looking pretty grim. Since settling into the office by the end of H1 2011, through the first quarter 2013, Coalition-steered economy has contracted by EUR1.52 billion or 3.75%.

The fabled exports-led recovery, first declared in Q1 2010, is not translating into real economic expansion. Neither do scores of strategic policies documents launched with promises of tens of thousands of new jobs.

With the national accounts officially in the red, the bubble of claimed policies successes is bursting. What is emerging from behind this bubble is the New Normal. Whether we like it or not, in years to come we will continue facing high risks to growth and a lower long-term growth trend. Traditional Keynesianism and Parish Pump Gombeenism - the two, largely complementary policy options normally promoted in Ireland - cannot sustain us in the future.

Prior to the crisis, Irish economy experienced three periods of economic growth, all driven by different internal and external forces, none of which are likely to materialize once again any time soon.

The first period of 1991-1997 witnessed rapid convergence in physical and financial capital, as well as in human capital utilization to the standards, observed in other small open economies of the EU.

From 1998 through 2003, Irish economy experienced a combination of rising share of economic activity generated in the domestic economy and rapid expansion of the financial services. This period is characterised by two short-lived, but significant booms and busts: the dot.com expansion and the subsequent dramatic acceleration in public spending.

From the late 1990s, Ireland also experienced accelerating property boom, which culminated in an unsustainable investment bubble. All three periods of economic expansion in recent past were underpinned by favourable external demand for MNCs exports out of Ireland, low or falling cost of capital and accommodative tax environments, in which tax competition was an accepted norm.

These drivers are now history.

Since the onset of the second stage of the domestic economy’s recession in H2 2010, Ireland has entered an entirely new period of development that will shape our long-term growth performance.

Externally, our capacity to extract rents and growth out of tax arbitrage is coming under severe pressures, best highlighted by the recent G8 decisions, the CCCTB proposals tabled in Europe and by accelerated tax policies gains in countries capable of serving big growth regions outside the EU. The financial repression that commonly follows credit busts is also denting our tax-driven growth engine by raising competition for tax revenues, and lowering our real cost competitiveness vis-à-vis Europe and North America.

Internally, since 2002, MNCs-led manufacturing in Ireland has suffered what appears to be an irreversible decline. Goods exports are down from EUR90.4bn in 2002 to EUR78.7bn in 2012 before we take account for inflation. Meanwhile, exports of services are up from EUR32.2bn to EUR93.3bn. Problem is: over the same time, services exports net contribution to the economy has expanded by only EUR18 billion. More worryingly, services exports growth is now falling precipitously.

Data from the Purchasing Managers Indices confirms the long-term nature of our economic slowdown. Average rates of growth in GDP are now closer to 1.5% per annum based on Services sectors contribution and closer to 1.0% for Manufacturing. Prior to the crisis these were 7.0% and 2.6%, respectively. In 1990-2007, all sectors included, Ireland experienced average annual growth of 6.6%. Now, we are looking at ca 1.5-1.7% average growth rates through 2020.

Lower growth rates for Ireland will be further reinforced by the lack of access to credit flows previously abundantly available from the global funding markets. This will impact our banks lending, direct debt issuance by companies, and securitised or asset-backed credit.

The retrenchment of the global financial flows away from the euro area, coupled with regulatory changes in European banking suggest that investment in the New Normal will become inseparably linked to the internal economy and significantly more expensive than the decade preceding the 2008 crisis. Much of this change will be driven by the same financial repression that will act to reduce our tax regime advantages.

This means that at the times of adverse shocks - such as, for example, a fall in revenues from exports or an increase in foreign companies extraction of profits from Ireland – our economy will be experiencing more severe credit and income contractions. This will put more pressure on investment and lower the velocity of money in the economy. Longer-term capital financing will become more difficult as domestic investors will face more uncertain returns and higher liquidity risk. A bust and severely restricted in competitiveness banking sector - legacy of the misguided post-2008 reforms - will not be helpful.

Thus, in the future, switch to services exports away from manufacturing and domestic investment, and reduced access to credit will mean higher volatility in growth, and lower predictability of our economic environment.

The New Normal requires more agile, more responsive and better-diversified economic systems, alongside a more conservative risk management in fiscal policies and less centralisation and harmonisation of policies at super-national level. It also calls for more aggressive incentivising of domestic investment and savings.

In terms of the fiscal policy stance, this means adopting a more cautious approach advocated, in part, by the ESRI this week. Irish Government should aim to continue reducing public spending, but do so in a structural way, not in a simplified framework of pursuing slash-and-burn targets. In addition, the Government needs to re-focus on identifying lines of expenditure that can be re-directed toward more productive use. In the short run, this can take the form of switching some of the current expenditure into capital investment programmes.

Reforms of social welfare, public education, health and state pensions systems will have to make these lines of spending more effective in helping people in real need, while slimmer in terms of total spend allocations. This can be achieved by direct means-testing and capping some of the benefits. But majority of these changes will have to wait until after the immediate unemployment and growth crises have passed.

In the longer run, going beyond the ESRI proposals, the Government should permanently reallocate some of the spending (such as, for example, overseas aid or poorly performing enterprise supports) to areas where it can increase value-added in public services (e.g. water supply or public transport) and create new exports platforms (e.g. e-health and higher quality internationally marketable education). Additionally, new revenues should be raised from severely undertaxed sectors and assets, such as agriculture and land, to be used to lower tax burden on both, ordinary and highly skilled workers.

Beyond a short-term stimulus, rather than directing tax- and debt-funded new investment, public sector should help generate new opportunities for more intensive growth. Increasing value added in existent activities, not simply scaling these activities up in terms of quantity of services deployed or employment levels involved should become the priority for future public sector growth.

Adding further to the ESRI analysis, the objective of using fiscal policy to drive enterprise creation requires simultaneously freeing more resources in the private sector to invest in new technologies acquisition and adoption, and development of indigenous R&D. We need to increase, not shrink, disposable incomes of the middle- and upper-middle classes and improve incentives for these segments of the population to invest. IBEC's suggestion this week that the Government should abandon any future tax increases makes sense in this context. The key, however, is that direct and indirect income tax increases of recent years must be reversed.

We need to recognise, support and scale up clustering initiatives in the tech and R&D sectors that deliver partnerships between the existent MNCs and larger domestic enterprises and start ups. To do this, we should create direct links between the existent clusters, such as for example IT@Cork initiative and public procurement systems. To re-orient public procurement toward supporting younger enterprises, larger procurement tenders should explicitly target new opportunities for partnerships between MNCs and SMEs or start-ups.

To address structural decline in debt financing available in the economy, we should exempt from taxation capital gains accruing to any real investment in Irish enterprises, including the IPOs and new rights issues, where such investments are held for at least 5 years. To qualify for this scheme, an enterprise should have at least a quarter of its worldwide employees based in Ireland.

The New Normal of lower trend growth and higher uncertainty about the economic environment is here. Addressing the challenges it presents requires robust policy reforms. The least painful and the most productive way of implementing these would be to start as early as possible.

Box-out:

Recent report from CBRE on office market in Dublin for Q2 2013 provides an interesting insight into the commercial real estate markets dynamics in Ireland. Despite the cheerful headlines and some marginally encouraging news, the market remains in deep slump and so far, hard data shows no signs of a major revival. Good news: vacancy rate in Dublin office space has declined by 4% on Q1 2013, to 17.2% in Q2 2013. The vacancy rate was 19.32% in Q2 2012. Bad news: at this rate, it will take us good part of 10 years to catch up with the EU-average rates. More bad news: office investment spend fell from EUR79.6mln in Q2 2012 to EUR72.6mln in Q2 2013. Adding an insult to the injury, prime yields fell from 7.0% to 6.25% in the year through June 2013. The office market in Dublin is firmly reflective of what is happening in the economy. Only 37% of offices take ups in Q2 2013 were by Irish companies. Massive 65-66% of the city and suburban office space was taken up by the ICT and Financial services providers in a clear sign that outside these sectors, economic activity remains largely stagnant. Overall, on a quarterly basis, offices take up in Dublin has fallen for the second quarter in a row while there was the first annual decline since Q3 2012.

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