Can we make any sense of the GDP data for Ireland?

Firstly let me wish everyone a Happy St.Patrick’s day as we also wait for England versus Ireland in the Six Nations rugby tomorrow. In that spirit let us immediately open with some good news. From the Irish Central Statistics Office or CSO.

Preliminary estimates indicate that GDP in volume terms increased by 5.2 per cent for the year 2016. GNP showed an increase of 9.0 per cent in 2016 over 2015.

On a seasonally adjusted basis, constant price GDP for the fourth quarter of 2016 increased by 2.5 per cent compared with the previous quarter while GNP increased by 3.2 per cent over the same period.

What grew? Well pretty much everything.

Building and construction recorded an 11.4 per cent increase in real terms and manufacturing recorded a 1.8 per cent increase . The distribution, transport, software and communications sector increased by 7.8 per cent while the agriculture sector increased by 6.2 per cent, and other services by 6.0 per cent. Public administration and defence recorded an annual increase of 4.4 per cent.

Looking ahead

The good news theme continues as we peruse the business surveys.

The latest Investec Services PMI Ireland report shows that business activity continued to increase sharply during February, with the rate of expansion only slightly weaker than January’s seven-month high. The headline PMI came in at 60.6, versus 61.0 in the previous month.

As we look around we do not get many readings in the 60s so let us look at manufacturing.

The latest Investec Manufacturing PMI Ireland report shows a further solid improvement in business conditions, albeit the pace of growth has slowed for a second successive month. The headline PMI was 53.8 in February, down from 55.5 in the preceding month.

So good numbers especially in the services sector although with the nature of these surveys they are less reliable than in larger countries as we have seen before on occasion in Ireland with the example of a cut in pharmaceutical production ( Lipitor going off-patent) which was missed.

Also in the circumstances this raised a wry smile.

On the latter, we note that panellists again highlighted the UK as a particular source of demand.

Unemployment

A consequence of the better economic data has been this.

The seasonally adjusted unemployment rate for February 2017 was 6.6%, down from 6.7% in January 2017 and down from 8.4% in February 2016.

This represents quite an improvement on the 10.1% of February 2015 and a vast improvement of the 15.2% of January 2012. It is not yet back to the pre credit crunch lows, however, which were around 2% lower.

Inflation

Here is an interesting combination with the good news above as you see central bankers will have a mind block because Ireland has not had inflation for some time.

Prices on average, as measured by the EU Harmonised Index of Consumer Prices (HICP), increased by 0.3% compared with February 2016.

Actually I am slightly exaggerating but if we use the Irish CPI and base it at 100 in 2011 then it was 101.5 in 2016. Even worse for the inflationoholics who run central banks and of course the media who copy and paste such views it was possible for relative prices to change.

The sub index for Services rose by 2.0% in the year to February, while Goods decreased by 1.5%.

So if low/no inflation has been good for Ireland how does it feel about the European Central Bank determination to push it higher? I forecast good news from this back on the 29th of January 2015.

However if we look at the retail-sectors in the UK,Spain and Ireland we see that price falls are so far being accompanied by volume gains and as it happens by strong volume gains.

Trouble

In spite of the official news being good there are signs of what Taylor Swift would call “Trouble, trouble,trouble” if you look below the headlines. The Irish Times pointed out this last December.

The fact that more than 6,000 people, including children, are now officially “homeless” and living in emergency accommodation in hotels, guesthouses and charity shelters is offensive……….It flows from policy decisions and political collusion that created a deeply unequal society.

Focus Ireland counted 7148 and pointed out that the number was up 40% over the past year and was likely to be under recorded. There are other issues in this sector as we look at the sale of property by the bad bank NAMA. Firstly the excellent NAMA Wine Lake is critical of the accountancy at play here.

NAMA acquired €74bn of loans for €32bn. The NAMA “profit” is on the €32bn acquisition price. We bailed out the banks for the €74bn-€32bn.

How is that going?

NAMA lost £190m on £4.5bn par value Project Eagle sale. How much will NAMA lose on (average of) €50m loans it will sell in next 24 hours?

Also there is the issue of all this apparently surplus property being traded around whilst people are homeless on an increasing scale.

House Prices

These are of course ignored by the consumer inflation numbers although of course not by anyone wanting to buy a house. Signs of problems are clear.

In the year to January, residential property prices at national level increased by 7.9%. This compares with an increase of 7.9% in the year to December and an increase of 5.6% in the twelve months to January 2016.

If we look for some perspective we see this.

From the trough in early 2013, prices nationally have increased by 49.6%. In the same period, Dublin residential property prices have increased 65.2%………..Overall, the national index is 31.8% lower than its highest level in 2007. Dublin residential property prices are 32.4% lower than their February 2007 peak,

What might be wrong with the official data?

There is an obvious concern with GDP (Gross Domestic Product) rising by 21% in one quarter as it did at the opening of 2015. I have covered this before so this time let us examine the view of the Central Bank of Ireland from its Quarterly Bulletin.

However, this masked offsetting trends in the components of GDP, in particular investment and trade, which were not closely aligned with indicators of activity in the domestic economy, but were mainly accounted for by the off-shore activities of multinational firms.

If we return to the official data what did happen to recorded investment in Ireland in 2016?

On the expenditure side of the accounts (Table 3), capital formation rose strongly by 45.5 per cent during 2016.

There is more.

The potential for volatility in the measurement of Irish GDP reflects the fact that parts of the output recorded in Irish GDP now reflects activity which takes place in other countries.

When you consider that the numbers are supposed to represent Ireland and its economy this confession is really rather extraordinary.

In the trade data, for example, changes in the level of contract manufacturing abroad by multinational firms can have a significant impact on exports and imports.

If we look at the data for the last quarter of 2016 there is this.

On the expenditure side there was a decline in net exports of €17,396m (93.7 per cent) during the quarter, largely driven by higher imports (37.2 per cent).

Actually the higher investment and import numbers often represent the same things.

The central bank also looked at the economic impact of Aircraft Leasing where the sums are enormous even for these times.

Assuming that the industry in Ireland is to continue to account for some 50 per cent of the leased output (as per current estimates), this would imply approximately €1.4 trillion ($1.5 trillion17)in new assets – either acquired or via finance leases inward – held by the sector in Ireland

Yet in terms of actual action this generates ” a certain degree of employment and tax revenues ” in reality so how much then? Over 1200 and 300 million Euros a year which are no doubt very welcome but poses a question for measurement.

Comment

The Irish situation opens more than one can of worms. Has the economy grown in recent years? I think so but the data poses lots of questions and let me highlight this with something from the CSO. In response to the issues above it thinks that Net National Product or NNP may help because it allows for depreciation and thus takes out much of the cross-border flows. So is Ireland’s annual economic output 255.8 billion Euros ( GDP) or 202.6 billion Euros (GNP) or 141.1 billion Euros (NNP)? The numbers are for 2015 but also was economic growth 32.4% (GDP) or 24% or 6.4%?

Also how do we relate the national debt to economic output? Perhaps as we have discussed before the best measure is to compare it to tax revenue.

 

Advertisements

Ireland exposes the flaws of using GDP as an economic measure

Firstly let me welcome you all to what is already being called MayDay in the UK as it will see our second female Prime Minister. However as I noted yesterday there has been quite an event in the world of economic measurement that has occurred across the Irish Sea and it is something which has taken place in spite of all the “improvements” that were made with the ESA 10 changes. Indeed more than a few of you may be wondering if someone has been indulging rather too liberally in one of the boosts to GDP (Gross Domestic Product) that it brought namely the addition of illegal drugs such as cocaine.

The Financial Times summarised it thus.

That is the highest level of growth for decades and far outstrips the original estimate of Irish economic activity last year, which the official Central Statistics Office had put at 7.8 per cent. A growth rate of more than 26 per cent is nearly three times the highest level recorded during Ireland’s Celtic Tiger boom years in the early 2000s.

To be precise the annual rate of growth was revised upwards to 26.3% with the first quarter of 2015 being the main culprit as it recorded economic growth of 21%. It was only on the 22nd of last month that I pointed out that the Irish economy was doing well so here is the comparison with what we were previously told.

Preliminary estimates indicate that GDP in volume terms increased by 7.8 per cent for the year 2015.  GNP showed an increase of 5.7 per cent in 2015 over 2014.

As you can see 26.3% is the new 7.8%! This of course was quite a rate of economic growth in itself. Also we should not move on without considering the point that this is treble the rate of growth claimed in the Celtic Tiger boom which of course ended in a painful bust.

There is another consequence of all this and let me explain with something else from the 22nd of June.

In 2015 GDP was 203.5 billion Euros and GNP (Gross National Product) was 171.9 billion Euros.

I was using this to explain a problem I will return to in a moment. But you will get my point if I tell you that the new revised 2015 GDP is 243.9 billion Euros and the new 2015 GNP is 194 billion Euros. So they are 20% higher and 13% higher respectively! Let us just remind ourselves that this is for the year just gone and consider the scale of this when sometimes changes in GDP growth rates as small as 0.1% are debated and indeed forecast.

The gap between GDP and GNP

This has been a regular topic on here concerning Ireland.

The difference is that a lot of businesses in Ireland are non-domiciled there and send the money home. They want to take advantage of the low corporation tax rate and other benefits but do not consider it to be home. As you can see it is a big deal.

The difference is that the “big deal” as I called it has just got a lot bigger. The gap was previously reported as 31.6 billion Euros and is now 49.9 billion Euros. But this is only part of the story as GNP rose by 18.7% itself in 2015.

An Inflation Problem

We are regularly told that there is no inflation in the Euro area and consumer inflation in Ireland has been close to zero for some time. Thus you will not be surprised to note my eyes alighted on these inflation measures. The deflator for GDP rose by 4.9% in 2015 and the deflator for GNP rose by 4.5%. So if Ireland had its own monetary policy and used the widest inflation measure of all for monetary policy then it certainly would not have an official deposit rate of -0.4%!

Care is needed as consumer inflation is a significant part of the GDP deflator (24% in the UK for example) but is far from all of it. The catch is that as I look elsewhere I see few signs of the difference. For example we know that there is some services inflation around but if we look it falls well short of what we are told.

Services prices in Quarter 1 2016, as measured by the experimental SPPI, were on average 1.5% higher in the year when compared with the same period last year.

Actually services inflation was a fair bit higher early in 2014.

There was a burst of inflation in the output price index for manufacturing early in 2015 as the annual rate rose to 9.5% but by the end of the year this had faded. But we have a problem as you see output is recorded as much higher and it seems to have done so accompanied by higher prices! If only we could all do that…….

Ch-ch-changes

This came in the world of net trade so let me take you back to where we thought we were only a few short months ago.

Import growth during the year of 16.4 per cent outpaced that of exports at 13.8 per cent.

I pointed out back then that Ireland was doing its bit for world and European trade. However that story has expired also and been replaced by a new version.

On the expenditure side of the accounts exports grew by 34.4% between 2014 and 2015 (Table 6, at constant prices). Imports increased also, by 21.7%, over the same period.

So as you can see there was an exports surge and in fact rather than helping demand in other nations Ireland in fact has increased its own current account surplus. So export led growth for it but not so good for its trading partners as we observe yet another large change.

The revised current account surplus for 2015 was €26,157m, an increase of €22,954m on 2014.

The current account surplus is now on its way to 15% of GDP. So is it Ireland that has used a lower exchange rate to boost its exports in the same way as Germany? That point is a little tongue in cheek but there is a point to it.

Manufacturing

I did point out that there was a potential issue with prices being higher whilst output also surges. As the surge in prices was taking place then quarterly exports of merchandise trade rose from 30.1 billion Euros to 46.5 billion Euros. Apart from the obvious question of how this happened without the official statisticians noticing there is a lot which requires investigation here. The national accounts do provide a clue of sorts.

Industry (including building) advanced by 87.3% ( in 2015)

That happened without anybody noticing it for quite a while.

Comment

Let me now bring in some of the factors which have been at play here. A lot of aircraft leasing activity takes place in Ireland. This has been booked as an increase in assets and therefore GDP. An explanation has been provided by Colm McCarthy on the Irish Economy website.

There are roughly 750 commercial passenger aircraft on the Irish register for April 2016. The number actually based at Irish airports and serving Irish traffic is only about 100. Ryanair registers all its 340 aircraft here but only 10% are based at Irish airports.

There is debate over the numbers but not the principle. Also it appears that factors such as the patents of international firms have been booked in Ireland and counted in GDP. Did I say firms as this from the Central Statistics Office might mean one firm?!

As a consequence of the overall scale of these additions, elements of the results that would previously been published are now suppressed to protect the confidentiality of the contributing companies, in accordance with the Statistics Act 1993.

Even the Governor of the Central Bank of Ireland is concerned by this according to the Irish Times.

The Irish Times has learned Prof Lane met the CSO on Monday and made known his concerns that the GDP growth figures do not accurately reflect economic activity in Ireland.

Please do not misunderstand me I think that the Irish economy is growing as there are other measures such as the rise in employment. But the sad part is that we now have very little idea of at what rate! Rather ironically Ireland will be paying more to the European Union because of all of this and because of money it may never see. At first I thought that it would be based on the rate of growth for net national income which was a more subdued 6.5%. However I have rechecked my notes and it is Gross National Income which is used for the major part of EU contributions and that rose by 18.7%. But it is time to hear from Marvin Gaye one more time.

Oh, what’s going on?
What’s going on?
Ya, what’s going on?
Ah, what’s going on?

Meanwhile I did point out on the 22nd of June that other measures pose questions as to the whole narrative.

Ireland and Luxemburg showing a very large difference between these two measures of household welfare. Using the AIC measure, Irish households are closer to Italian than Danish levels of welfare.

As the television series Soap used to tell us “Confused? You soon will be!”

Oh and as Claus Vistesen points out

Bonkers … it will likely lead to an upward revision of EZ GDP growth of 0.3pp in 2015. That’s 1.9% then, punchy

 

 

 

 

 

The economic conundrum that is Ireland

Let us take a brief break from the affairs of the UK and tomorrow’s Brexit referendum to take a look at an economy which bears many similarities but one crucial difference. That is the green island of Ireland where the crucial difference is that via its membership of the Euro it has an official deposit rate of -0.4% and 80 billion Euros a month of QE or Quantitative Easing. So we see that the monetary policy taps are open wide but we also see that Ireland is in a boom at the moment. This brings back some old memories of how it all went wrong last time so let us investigate further.

The Irish boom

The Irish take the slow road to producing economic growth ( GDP) numbers but here is the latest release.

On a seasonally adjusted basis, constant price GDP for the fourth quarter of 2015 increased by 2.7 per cent compared with the previous quarter while GNP increased by 3.4 per cent over the same period.

As you can see these quarterly numbers are ones which many of its Euro area partners ( Italy and Portugal spring to mind) would love to have. If it was a game of economic football being played between Ireland and Italy tonight it would be a landslide. The annual data only reinforces this view.

Preliminary estimates indicate that GDP in volume terms increased by 7.8 per cent for the year 2015.  GNP showed an increase of 5.7 per cent in 2015 over 2014.

The good news story continues as the growth is both investment and export driven. Indeed Ireland is doing its bit for world trade.

Import growth during the year of 16.4 per cent outpaced that of exports at 13.8 per cent.

Care is needed as Ireland has quite a current account surplus according to the official data so that net exports grew.

Also there is the perennial GDP/GNP issue which I have explained before. In 2015 GDP was 203.5 billion Euros and GNP (Gross National Product) was 171.9 billion Euros. The difference is that a lot of businesses in Ireland are non-domiciled there and send the money home. They want to take advantage of the low corporation tax rate and other benefits but do not consider it to be home. As you can see it is a big deal.

The problem that is housing

This intervenes on several levels. Firstly there was the boom which rather like in Spain led to houses and towns being built but ended up being like the “Road to Nowhere” sung about by the band Talking Heads. According to Vincent Boland in the Financial Times this happened.

A decade ago, Ireland was building many more homes than its demographic trends warranted: 90,000 a year at the peak of its building boom in 2006.

There was a consequence to this and as boom turned to dust Shane and Maria Bradshaw have experienced this.

It showed a newly planned town — the first in Ireland for 50 years — with a projected population of about 25,000, within easy commuting distance of the city and a high street lined with shops, restaurants and a cinema.

Seven years later, that glossy brochure offers a picture not so much of a suburban dream as a national nightmare…..
Only 15 per cent of Adamstown’s planned 10,000 homes have been built. Its 3,000 or so residents are surrounded by fenced-off fields where houses were by now supposed to be. The train station linking the town to central Dublin is eerily underused. And the Bradshaws are still waiting for their high street.

Actually some commuters would love the idea of an “underused” railway and developers not fulfilling their promises is hardly new but there is an element here which sings along with The Specials.

Do you remember the good old days
Before the ghost town?
We danced and sang,
And the music played inna de boomtown

Yet let me move this to economic measurement and GDP/GNP. As you see back in the day the houses referred to below would have boosted those numbers. Is that right?

Moreover, it is happening in a country that has 230,000 vacant homes. Some are in “ghost estates” in far-flung towns where few Irish people now wish to live — if they ever did. Even some of the half-finished developments can feel ghostly.

So there is the question posed today. Should these fully count in GDP? Someone like Paul Krugman with his call for “Space Aliens” would say yes but I think we need some sort of measure of what happens afterwards. After all it is a waste of finite resources to build houses that nobody lives in. Also we learn that Kevin Costner was not always right in the film Field of Dreams.

If you build it, he will come

Also with so many empty house this seems rather shameful.

A report by a cross-party committee of MPs last week says there are over 1,000 homeless families in Ireland today, compared with 400 at the beginning of last year.

A Monetary Problem

We know that Mario Draghi and his colleagues have turned the monetary taps open to boost Euro area economies. We also know that the housing market in Ireland tends to respond strongly to such a stimulus. Otherwise there would have been no boom and then bust. How is that going?

Last year fewer than 13,000 new homes were built, while demand is running at 25,000 a year, the majority of it in the capital Dublin.

Indeed this bit will echo around ECB Towers.

a scarcity of development finance,

There may of course be a case of once bitten twice shy at play here but this does pose a real question for the ECB and its policies. Also there is something awkward for the theme that there is no inflation.

According to the Society of Chartered Surveyors
Ireland, it costs €330,000 to provide a standard family home, a figure that appears to have changed little despite the deep recession.

This is a familiar echo of the UK exceeds what can be afforded by the majority.

especially for first-time buyers, most of whom can borrow no more than €300,000 .

Now I realise that inflation is a flow and that the price level is a stock but there is a problem here in telling people there is no inflation and yet despite extraordinarily low official interest-rates they still cannot afford property. After all the economy and their position is supposed to be booming. Oh and fans of macroprudential policy might like to mull that particular side-effect of it.

Oh and there is another problem shared with the UK.

It is becoming clear that Ireland may need to build a different, more affordable and higher quality product than it has offered up to now.

Comment

There is much to consider here as the official view is of a Phoenix rising from the ashes of the bust. Last year’s surge means that both GDP ( 43,906 versus 42454 Euros) and GNP ( 37,077 versus 35,657 Euros) per head  have passed the peak seen in 2007. All good so far even if we are returned by default to the GDP/GNP gap. But like in the UK there is often expressed a view that reality is not quite represented by that. Well Phillip Kinsella makes an offer of why.

Ireland and Luxemburg showing a very large difference between these two measures of household welfare. Using the AIC measure, Irish households are closer to Italian than Danish levels of welfare.

Economics imitates football as we note the Italian link. But let me explain. If you use GDP per capita then Irish eyes are smiling as in 2015 it was 1.45 times the European Union average. However if you switch to actual individual consumption or AIC  it is only 0.95 times the EU average. Whereas Italy is at a more stable 0.95 times and 0.97 times respectively. For comparison purposes the UK is at 1.1 times and 1.16 times which is consistent with our consumption culture. So the question for Ireland is posed by the late great Marvyn Gaye.

Oh, what’s going on?
What’s going on?
Ya, what’s going on?
Ah, what’s going on?

 

 

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,

 

 

 

Is it time to welcome the Celtic Tiger mark two?

It has been a while since I ventured across the Irish Sea to take a look at the economy of the Emerald Isle so let me put that right today. After all they can be considered part of an economic tour of the Rugby World Cup after looking at the UK,France and New Zealand earlier this week! Also Irish rugby fans may be wondering exactly what zero inflation means as they try to book accommodation? From the Irish Independent.

“The hotel price increases in Cardiff are the most extreme we have ever reported for an event in the UK,” said Denise Bartlett from Trivago. “The average in Cardiff for all match nights is £574/€789, which is 140pc more expensive than a night in London during the Rugby World Cup.”..Rates in Cardiff have been similarly expensive for October 11, when France clash with Ireland in the city (£927/€1,275 on average)

Strangely enough there still seems to be plenty of rooms available…

Economic growth surges

This was so strong that we need to remind ourselves that the numbers below are not annualised and are for just one-quarter. From the Central Statistics Office.

On a seasonally adjusted basis, initial estimates indicate that GDP in volume terms increased by 1.9 per cent for the second quarter of 2015.  Growth in GNP also increased by 1.9 per cent in this quarter.

If we look for a driver of these numbers it was a surge in investment.

Capital formation increased by 19.2 per cent compared to the previous quarter.

Also it showed that austerity and economic growth can be bedfellows.

while government expenditure decreased by 0.7 per cent over the same period.

The annual figures were also extraordinary although they also highlighted one of the key issues in the Irish economy.

The factor income outflows recorded in Q2 2015 were €1,026m higher compared with Q2 2014 resulting in the 6.7 per cent increase in GDP becoming a 5.3 per cent increase in GNP over the same period.

Again investment was to the fore and unlike quite a few countries production was strong..

On the expenditure side, Capital investment rose by 34.2 per cent…..The Industry sector (including building and construction) and other services both increased by 4.4 per cent.

Oh and perhaps an old stereotype has seen its day.

Agriculture, forestry and fishing decreased by 1.2 per cent compared with the same quarter of 2014,

So overall the picture for GDP was rather aptly described by U2.

It was a beautiful day
Don’t let it get away
Beautiful day

The outlook is good too

The services sector remains very strong as readings in the 60s for a Purchasing Managers Index are relatively rare beasts.

The headline PMI was little changed at 62.1 (versus 63.4 in July) while across the individual components of the survey we see clear indications that Irish services firms remain upbeat on the prospects for the sector.

The picture for manufacturing has slowed but we are not a lot wiser as it has been proved spectacularly wrong in the credit crunch era.

The headline PMI slowed to 53.6 from July’s 56.7, although the sequence of growth now extends to 27 months.

What about unemployment?

Like quite a few Euro area countries Ireland saw its unemployment rate elevate well into double-figures so let us see how this has been influenced by the growth spurt.

The seasonally adjusted unemployment rate for August 2015 was 9.5%, unchanged from the July 2015 rate and down from 11.1% in August 2014. The seasonally adjusted number of persons unemployed was 206,500 in August 2015, an increase of 400 when compared to the July 2015 figure or a decrease of 32,200 when compared to August 2014.

Wages?

The picture here is not one which will set Irish eyes smiling as on the surface it looks okay.

Preliminary estimates show that average weekly earnings were €697.52 in Q2 2015, a rise of 1.8% from €684.97 a year earlier.

But now take a look at this.

In the five years to Q2 2015 overall average hourly earnings decreased by 0.5% (€0.10) from €21.95 to €21.85.

This hides quite a shift as the IT sector saw a 15.9% rise but health and social work saw a 7% fall.

So a recovery but one that so far has lacked any wage growth for the employed group as a whole. Not quite a wage less recovery but one without wage growth.

Inflation

On the headline measure there isn’t any to be found.

Prices on average, as measured by the CPI, remained unchanged in August compared with August 2014.

Actually Ireland was way ahead of the disinflation theme that has been hitting the rest of the world as in essence there has been no inflation there for some time. I am exaggerating a little but it has totalled some 2.3% since 2011 and 6.8% since 2006 so below 1% per annum.

Thus real wages have fallen by a lower amount than in the UK where the Bank of England recklessly “looked through”  inflation pushing above 5% per annum in 2011 leading to sharp falls in real wages. Most commentators lauded this and are consequently silent about the consequences.

House Price Inflation

The picture here could have been included in my house price bubble analysis of yesterday.

In the month of July, residential property prices rose by 0.9% nationwide.  Residential property prices remained up 9.4% on an annual basis……In Dublin residential property prices rose by 0.7% in July.  Dublin residential property prices were 9.0% higher than in July 2014.

Before we start mimicking a Eurovision entry and singing “Boom,bang a boom” we need to remind ourselves of this.

At national level residential property prices were 36.9% lower than their peak level in 2007.  Dublin house prices were 36.3% lower than their peak, Dublin apartment prices were 40.6% lower than their peak and Dublin residential property prices overall were  37.9% lower than their highest level.

Now here’s a thing as we need an expert on relativity like Albert Einstein to tell us where we are! Let me illustrate from the house price series for Dublin which was set at 100 in January 2005 boomed to 133 as soon as 2007 and busted to 57.3 in July 2012 and as of July this year was 83.5.

Oh and the turnaround coincided exactly with the Bank of England’s Funding for (Mortgage) Lending Scheme. Did it? Could it? Maybe to some extent although of course there was also the trillion Euros of the ECB LTROs applied in early 2012.

What about the public finances?

The situation here saw perhaps the most extreme of all as the national debt to GDP ratio of less than 25% saw around 100% added to it as private banking debt was socialised and the Irish economy struggled. Now we see the benefit of economic growth coming through.

Ireland’s General Government Gross Debt (GG Debt) at face value stood at €203,624 million or 104.7% of annualised GDP at the end of Q1 2015,

However some care is needed as the deficit goes on.

Ireland’s General Government Deficit (GG Deficit) amounted to -€2,687 million in the first quarter of 2015 representing -5.4% of quarterly GDP.

So a different aspect of austerity to that noted earlier. If I was involved in setting examination questions for Masters degree economic I would ask if this is austerity or Keynesianism?

The ECB

This is of course buying Irish government bonds right now as part of its QE (Quantitative Easing) program. Some 4.4 billion Euros worth so far in an economy growing at over 6%. In examination terms I would simply say discuss?

It also means that Ireland can borrow extremely cheaply. From the NTMA yesterday.

10 September 2015 – The National Treasury Management Agency (NTMA) has today completed an auction of €1,000 million of the benchmark 15-year Irish Government bond, 2.4% Treasury Bond 2030, at a yield of 1.8157%.

Comment

Firstly let me welcome the advent of the Celtic Tiger 2.0 and the economic growth it has brought. The growth is so fast that I am reminded of another U2 song.

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

I note another potential exam question posed yesterday by Roel_D

So is anyone going to revisit the Iceland vs Ireland discussion?

However we also need to note the fact that the housing market and the economy seem to be in tune again which if history is any guide would have the Starship Enterprise on yellow alert. Also the gap between GDP and GNP was 14.5% in the second quarter of this year which relates to the company equivalent of “residential non-doms” (Google for example) where there is some genuine economic activity but much larger transfers of money which leave Ireland as soon as they arrive. It affects the trade figures too.

Oh and whilst Ireland is in the Euro area and it threw off the shackles of UK rule a long tome ago now its economic pattern is very similar to ours.