Was the Irish election result a case of its the economy stupid?

Back in the day the presidential campaign of Bill Clinton came up with the phrase “Its the economy stupid” which worked on several levels. Firstly Bill got elected and secondly the phrase has echoed around since. But applying it to what has recently happened in Ireland is an example both of the phrase and the way we have these days to look beneath the official statistics.

Let me start the story by looking at GDP growth in Ireland.

On a seasonally adjusted basis, initial estimates indicate that GDP in volume terms increased by 1.7 per cent for the Q3 quarter of 2019. ( Central Statistics Office or CSO)

Something for an incumbent government to trumpet you might think and this continues with the annual comparison.

Initial estimates for the third quarter of 2019 indicate that there was an increase of 5.0 per cent in GDP in real terms in Q3 2019 compared with Q3 2018.

For these times that is quite a surge which puts Ireland far ahead of the Euro area average and the breakdown starts with a hint of a modern thriving economy.

 Information & Communication made the most positive contribution to the Q3 result, rising by 22.4 per cent with Agriculture recording an increase of 15.2 per cent.

Trouble,Trouble,Trouble

The Taylor Swift lyric appears as we look at some of the detail though.

 Capital formation decreased by 55.3 per cent or €25.2 billion in Q3 compared with the previous quarter.

That is quite a drop but you see we find the cause here with a similar number popping up elsewhere.

 Imports decreased commensurately by 22.5 per cent (€24.2 billion) in Q3 2019 compared with Q2 2019.

These are not the only conventional metrics which are lost in a land of confusion as Genesis would put it.

Exports increased by 2.4 per cent which meant that overall net exports increased by €26.8 billion quarter-on-quarter.

As you can see the economic growth story starts well but then has collapsing investment which is a warning and collapsing imports which is another warning accompanied by a triumph for net exports giving a strong signal.

Now let me bring in some context which is that if we look at Gross Value Added for the Irish economy it was 49.1 billion in the final quarter of 2014 and 79.7 billion in the third quarter of last year on a chain-linked basis. How could you not be re-elected with those numbers? Well regular readers may recall early 2015 which saw a 25.6% quarterly jump.

There are two major issues here which I looked at on December 18th 2017,

Data from the Fiscal Advisory Council (FAC) show that 2.5% of the 5.8% rise in Irish GDP (gross domestic product) in H1 2014, or 43%, came from contract manufacturing overseas, that has no material impact on jobs in the economy. Dell, the PC company, books its Polish output in Ireland for tax avoidance purposes. ( Finfacts )

Manufacturing has boomed but some of it has been the type of contract manufacturing described above. Next comes this issue.

These figures were affected by reduced levels of research and development costs, in particular intellectual property imports.

There is a large impact from intellectual property which sees money wash into and out of Ireland on such a grand scale it even affects the Euro area national account breakdown.

These have led the Central Bank of Ireland to develop this to try and help.

GNI* excludes the impact of redomiciled
companies and the depreciation of intellectual
property products and of leased aircraft from
GNI. When this is done, the level of nominal
GNI* is approximately two-thirds of the level
of nominal GDP in 2016.

Wealth and Debt

According to the Central Bank of Ireland there is a strong position here.

Household net worth reached a new high of €800bn in Q3 2019, which equates to €162,577 per capita. Household debt continued its downward trend, falling by €176m in Q3 2019.

If we look into the detail I note the following and the emphasis is mine.

The increase over Q3 2019 was driven by improvements in both households’ financial assets and housing assets. Financial assets rose by €11.5bn, due primarily to increases in the value of insurance and pension schemes. Housing assets rose to €545bn, an increase of €8.2bn over the quarter, the highest it has been since Q4 2008. Household liabilities remained unchanged at €147bn.

There has been success here too.

Household debt stood at €135bn, its lowest level since Q3 2005. This equates to €27,453 per capita. Household debt has decreased by a third, or €67.8bn, since its peak of €202bn in Q3 2008.

We can see by default that Irish companies borrow quite a bit.

Private sector debt as a proportion of GDP decreased by 2.4 percentage points to stand at 239 per cent in Q3 2019

Or do they as are the companies Irish?

 It should be noted that private sector debt in Ireland is significantly influenced by the presence of large multinational corporations (MNCs) and that restructuring by these entities has resulted in extremely large movements in Irish private sector debt, particularly from 2014 onwards.

Inflation

According to the official data there essentially has not been any in Ireland over the period we are looking at. The official Euro area measure was 101.8 last December after being set at 100 in 2015 so you can see I am guilty of only a slight exaggeration. But we are reminded of its flaw ( which even ECB policy makers are presently admitting) that is highlighted by this from the Irish Times on the 5th of this month.

House price growth is obviously one part of the equation; while it may be finally easing in Dublin, half a decade of double-digit growth has nonetheless pushed the cost of owning a home out of the reach of many.

Indeed as it goes on they have become both more expensive and unaffordable.

But in Ireland, and in many other countries across the globe, rising property prices have been compounded by wage stagnation. Pay rises have only returned in recent years and continue to significantly lag house price growth.

The inflation measure of the Euro area completely ignores the area of owner-occupied housing on the grounds of whatever excuse it thinks it can get away with.

Ireland has its own measure which tried to do better by including mortgage interest-rates but that valiant effort has been torpedoed by the advent of negative interest-rates and QE.

So here we see another problem for the official view as people are told there is no inflation and yet in Dublin the Irish Times tells us this.

Dublin has experienced the third-fastest rate of house price growth in the survey over the last five years, up by a staggering 61.9 per cent.

Although it has also had a relatively strong rate of income growth over the same period – up by 13.2 per cent – that still means there is a huge gap between the rates of increase.

In terms of house purchase real wages have not far off halved. No wonder people are unhappy and should be questioning the inflation data.

The official numbers do pick up rental inflation and both have it being around 17% since 2015. So even on the official data there has been a squeeze here too.

Comment

On today’s journey we have seen that the experience of an ordinary Irish person is very different to that of the official data. They are told it is a Celtic Tiger 2.0 but face ever more expensive housing costs and the concept of buying a home has changed fundamentally. Thus we see how what are fabulous looking metrics of surging GDP and virtually no inflation are for a type of virtual Ireland which is really rather different to the real one where housing costs have surged. This impacts in other sphere as for example national debt to GDP has plunged and Ireland has moved for being a recipient of EU funds to a net payer.

Context is needed as there have been economic improvements in Ireland for example the unemployment rate this January was 4.8% as opposed to the 16% of January 2012. Improved tax revenues have helped provide a budget with a surplus although this relies a bit on higher corporation tax from guess who?

The A grade economy of Ireland reminds us of the Celtic Tiger 2.0

The weekend just gone provided a reminder of how far the economy of Ireland has come.The troubled days of the Euro area crisis where it called for 85 billion Euros of  help from its Euro area partners and the IMF (International Monetary Fund) were replaced by this from the Fitch ratings agency.

Fitch Ratings has upgraded Ireland’s Long-term foreign and local currency Issuer Default Ratings (IDRs) to ‘A’ from ‘A-‘. The Outlooks are Stable.

So a promotion and one that is particularly significant when we note that only a few short years ago the debt dynamics of Ireland looked dreadful as the poor taxpayer found him and herself burdened as a large slug of banking debt was socialised.

What is the public debt situation now?

The situation is now much improved according to the research.

Public debt dynamics continue to improve, reflecting a combination of strong growth and a return to a primary budget surplus in 2014. Fitch now estimates gross general government debt/GDP at 96.6% at end-2015, compared with 105% in our previous review and from a high of 120.2% in 2012.

As you can see that is quite an improvement or a type of mirror image of Portugal. Then we get some cheerleading for the future.

According to our baseline scenario (which does not include any positive stock-flow adjustments from the banking sector), public debt will continue to fall steadily to 70% by 2024, although this is still well above the ‘A’ median of 44.5%.

Okay, so we learn that Ireland is not getting its upgrade to A status because it is there but because of the rapid change it has seen. Some care is needed here as back in late 2010 when Fitch twice downgraded Ireland things were heading in the opposite direction. Also there is something rather odd in this declaration.

The revision is partly the result of a much higher than expected GDP deflator in 2015, with Ireland benefiting substantially from positive terms of trade.

Really? I thought there was no inflation?!

If we look we see that the GDP deflator has risen  from 98 to 104.4 which is a little awkward for the “deflation nutters”. Actually it is another off quirk of national accounts as the Irish debt ratios look better because the Irish can buy less abroad due to the fall in the Euro!

A positive growth story

Back on September 11th last year I welcomed the Celtic Tiger Mark 2.0 with some music from U2 to celebrate the change in fortune.

I’m at a place called Vertigo (dónde estás?)

Or put more soberly Fitch put it like this.

Ireland’s economy continues to expand at a brisk pace, with real GDP growth averaging 7% in the first three quarters of 2015, the highest figure among developed economies……Fitch expects the economy will expand by around 4% this year, compared with 2.4% in our previous review.

That leaves it a little behind the Central Bank of Ireland which is expecting a number close to 5% for economic growth this year.

Looking Forwards

The business surveys in essence repeat the up,up and away theme. The manufacturing PMI was at 54.3 in January and reported this.

A key highlight of today’s report is the New Orders component, which reveals a sharp and accelerated expansion, extending the current run of positive readings to 31 months

The only way to describe the services numbers is stellar.

in business activity at their companies compared to one month ago – rose to 64.0 in January from 61.8 in December. This signalled the sharpest expansion in services output since June 2006. Activity has now risen in each of the past 42 months.

This morning this has been backed up by the construction sector which recorded 63.6 according to Ulster Bank. So really good growth figures which in the past would have seen a central bank respond in the spirit provided below.

The Federal Reserve, as one writer put it, after the recent increase in the discount rate, is in the position of the chaperone who has ordered the punch bowl removed just when the party was really warming up   (William McChesney Martin US Federal Reserve 1955)

The European Central Bank (ECB)

By contrast the ECB has its pedal close to the metal and if we include its Open Mouth Operations maybe at it. We have an official interest-rate of -0.3% combined with hints and promised of a further reduction at the March policy meeting plus 60 billion a month of bond purchases where more more more is also promised.

So Ireland which has a surging economy has a negative interest-rate and has seen some 8.4 billion of its bonds bought by the ECB as of the end of January. That is an even more inappropriate policy than that of the Riksbank in Sweden especially if we add in that the ECB is keen to drive the value of the Euro lower too. Although the latter has reversed in 2016 so far with the 1.12 or so versus the US Dollar accompanied by the UK Pound £ dipping below 1.30.

Seeing as the Irish economy got itself into a pickle at least partly driven by interest-rates sets for another economy (Germany back then) then poses an obvious warning as we think of The Specials.

You’ve done too much,
Much too young

House prices

This is an obvious potential issue in an economy running hot so let us take a look.

In the year to December, residential property prices at a national level, increased by 6.6%. This compares with an increase of 6.5% in November and an increase of 16.3% recorded in the twelve months to December 2014.

As you can see the numbers pose their own problems as we note that the index at 86.8 compared to 2005 =100 makes it own statement. Against the previous peak we see this.

Overall, the national index is 33.5% lower than its highest level in 2007

Another way of looking at this is to see what is happening to rents. If we look at the consumer inflation report we see that whilst the overall view is that there is no inflation – current figure is 0.1% but in essence the report has been flat even before the current disinflationary phase elsewhere – we see this “higher rents”. If we look deeper we see that they have risen by 8.3% in 2015 and that as social rents fell then private-sector rents rose by 9.6%.

In other words the housing market is running pretty hot!

The banks

This is an obvious consideration as we note that so many banks elsewhere have found themselves having a rocky start to 2016, or to be more precise finding themselves forced to tell a little more of the truth. The IMF pointed out recently that in spite of the recent economic improvement the situation remains deeply troubled here.

As a result, the stock of mortgage accounts in deep arrears (over 720 days) continues to increase, reaching 55 percent of past-due loans (over 90 days) in mid-2015 from 49 percent at end-2014. About half of the CRE [Commercial Real Estate] loans are still nonperforming, despite promising trends in restructurings and write downs.

Comment

This is a good news story overall and let me present the best part.

The seasonally adjusted unemployment rate for January 2016 was 8.6%, down from 8.8% in December 2015 and down from 10.1% in January 2015

Still high but a vast improvement on where it was. Let me also note an elephant in the room which is that Ireland is perhaps the Euro area country which can hold a candle to the performance of Iceland and that too is welcome. At this point Irish eyes are smiling although of course Joe Stiglitz only recently pointed out that Ireland would have done even better if it had copied Iceland..

However on the other side of the coin we have the banking sector which remains troubled in spite of the house price rises. We also have monetary policy running at the speed of Usain Bolt in a boom which does echo the middle of the last decade. Also there is the Irish GDP/GNP problem.

The factor income outflows recorded in Q3 2015 were €2,063m higher compared with Q3 2014 resulting in the 7.0 per cent increase in GDP becoming a 3.2 per cent increase in GNP over the same period.

If we move to the low tax model and the economic consequences then that has been in the news today. Take a look at this from the Guardian.

Workers at Google Ireland, the search group’s European sales hub, earn less than half the £160,000 average wage of colleagues in London despite the British sales team only providing a supporting role to their Irish counterparts.

Now is that Ireland being competitive and winning or undercutting workers in the UK? Intriguing when you consider that UK employment gains have involved real wage falls. But let me throw something else into the mix because of course placing itself in Ireland helps Google to do this.

Google Ireland booked £5bn in sales from UK advertisers last year, but paid no tax in the UK. The group’s controversial corporate structure means the UK subsidiary provides marketing services to Google Ireland.

Mind you there is an element of a first world problem in the Guardian here.

Despite comparatively modest pay for staff and directors,