What is austerity and how much of it have we seen?

The subject of austerity is something which has accompanied the lifespan of this blog so 7 years now. The cause of its rise to prominence was of course the onset of the credit crunch which led to higher fiscal deficits and then national debts via two routes. The first was the economic recession ( for example in the UK GDP fell by approximately 6% as an initial response) leading to a fall in tax revenue and a rise in social security payments. The next factor was the banking bailouts which added to national debts of which the extreme case was Ireland where the national debt to GDP ratio rose from as low as 24% in 2006 to 120% in 2012.  It was a rarely challenged feature of the time that the banks had to be bailed out as they were treated like “the precious” in the Lord of the Rings and there was no Frodo to throw them into the fires of Mount Doom.

It was considered that there had to be a change in economic policy in response to the weaker economic situation and higher public-sector deficits and debts. This was supported on the theoretical side by this summarised by the LSE.

The Reinhart-Rogoff research is best known for its result that, across a broad range of countries and historical periods, economic growth declines dramatically when a country’s level of public debt exceeds 90% of gross domestic product……… they report that average (i.e. the mean figure in formal statistical terms) annual GDP growth ranges between about 3% and 4% when the ratio of public debt to GDP is below 90%. But they claimed that average growth collapses to -0.1% when the ratio rises above a 90% threshold.

The work of Reinhart and Rogoff was later pulled apart due to mistakes in it but by then it was too late to initial policy. It was also apparently too late to reverse the perception amongst some that Kenneth Rogoff who these days spend much of his time trying to get cash money banned is a genius. That moniker seems to have arrived via telling the establishment what it wants to hear.

The current situation

The UK Shadow Chancellor John McDonnell wrote an op-ed in the Financial Times ahead of Wednesday’s UK Budget stating this.

The chancellor should use this moment to lift his sights, address the immediate crisis in Britain’s public services that his party created, and change course from the past seven disastrous years of austerity.

If we ignore the politics the issue of austerity is in the headlines again but what it is has changed over time. Before I move on it seems that both our Chancellor who seemed to think there were no unemployed at one point over the weekend and the Shadow Chancellor was seems to be unaware the UK economy has been growing for around 5 years seem equally out of touch.

Original Austerity

This involved cutting back government expenditure and raising taxation to reduce the fiscal deficits which has risen for the reasons explained earlier. Furthermore it was claimed that such policies would stop rises in the national debt and in some extreme examples reduce it. The extreme hardcore example of this was the Euro area austerity imposed on Greece as summarised in May 2010 by the IMF.

First, the government’s finances must be sustainable. That requires reducing the fiscal deficit and placing the debt-to-GDP ratio on a downward trajectory……With the budget deficit at 13.6 percent of GDP and public debt at 115 percent in 2009, adjustment is a matter of extreme urgency to avoid the debt spiraling further out of control.

A savage version of austerity was begun which frankly looked more like a punishment beating than an economic policy.

The authorities have already begun fiscal consolidation equivalent to 5 percent of GDP.

But the Managing Director of the IMF Dominique Strauss-Khan was apparently confident that austerity in this form would lead to economic growth.

we are confident that the economy will emerge more dynamic and robust from this crisis—and able to deliver the growth, jobs and prosperity that the country needs for the future.

Maybe one day it will but so far there has been very little recovery from the economic depression inflicted on Greece by the policy prescription. This has meant that the national debt to GDP ratio has risen to 175% in spite of the fact that there was the “PSI” partial default in 2012. It is hard to think of a clearer case of an economic policy disaster than this form of disaster as for example my suggestion that you needed  a currency devaluation to kick-start growth in such a situation was ignored.

A gentler variation

This came from the UK where the coalition government announced this in the summer of 2010.

a policy decision to reduce total spending by an additional £32 billion a year by 2014-15, including debt interest savings;

In addition there were tax rises of which the headline was the rise in the expenditure tax VAT from 17.5% to 20%. These were supposed to lead to this.

Public sector net borrowing falls from 11.0 per cent of GDP in 2009-10 to 1.1 per cent in 2015-16. Public sector net debt is forecast to rise to a peak of 70.3 per cent of GDP in 2013-14, before falling to 67.4 per cent in 2015-16.

As Fleetwood Mac would put it “Oh Well”. In fact the deficit was 3.8% of GDP in the year in question and the national debt continued to rise to 83.8% of GDP. So we have a mixed scorecard where the idea of a surplus was a mirage but the deficit did fall but not fast enough to prevent the national debt from rising. Much of the positive news though comes from the fact that the UK economy began a period of sustained economic growth in 2012.

Economic growth

We have already seen the impact of economic growth via having some (  UK) and seeing none and indeed continued contractions ( Greece). But the classic case of the impact of it on the public finances is Ireland where the national debt to GDP ratio os now reported as being 72.8%.

Sadly the Irish figures rely on you believing that nominal GDP rose by 68 billion Euros or 36.8% in 2015 which frankly brings the numbers into disrepute.

Comment

The textbook definitions of austerity used to involved bringing public sector deficits into surplus and cutting the national debt. These days this has been watered down and may for example involve reducing expenditure as a percentage of the economy which may mean it still grows as long as the economy grows faster! The FT defines it thus.

Austerity measures refer to official actions taken by the government, during a period of adverse economic conditions, to reduce its budget deficit using a combination of spending cuts or tax rises.

So are we always in “adverse economic conditions” in the UK now? After all we still have austerity after 5 years of official economic growth.

What we have discovered is that expenditure cuts are hard to achieve and in fact have often been transfers. For example benefits have been squeezed but the basic state pension has benefited from the triple lock. Also if last years shambles over National Insurance is any guide we are finding it increasingly hard to raise taxes. Not impossible as Stamp Duty receipts have surged for example but they may well be eroded on Wednesday.

Also something unexpected, indeed for governments “something wonderful” happened which was the general reduction in the cost of debt via lower bond yields. Some of that was a result of long-term planning as the rise of “independent” central banks allowed them to indulge in bond buying on an extraordinary scale and some as Prince would say is a Sign O’The Times. As we stand the new lower bond yield environment has shifted the goal posts to some extent in my opinion. The only issue is whether we will take advantage of it or blow it? Also if we had the bond yields we might have expected with the current situation would public finances have improved much?

Meanwhile let me wonder if a subsection of austerity was always a bad idea? This is from DW in August.

Germany’s federal budget  surplus hit a record 18.3 billion euros ($21.6 billion) for the first half of 2017.

With its role in the Euro area should a country with its trade surpluses be aiming at a fiscal surplus too or should it be more expansionary to help reduce both and thus help others?

 

 

Advertisements

Whatever happened to savers and the savings ratio?

A feature of the credit crunch era has been the fall and some would say plummet in quite a range of interest-rates and bond yields. This opened with central banks cutting official short-term interest-rates heavily in response to the initial impact with the Bank of England for example trimming around 4% off its Bank Rate to reduce it to 0.5%. If we go to market rates the drop was even larger because it is often forgotten now that one-year interest-rates in the UK rose to 7% for around a year or so as the credit crunch built up in what was a last hurrah of sorts for savers. Next central banks moved to reduce bond yields via purchases of sovereign bonds via QE ( Quantitative Easing) programmes. In the UK this was followed by some Bank of England rhetoric heading towards the First World War pictures of Lord Kitchener saying your country needs you.

Here is Bank of England Deputy Governor Charlie Bean from September 2010.

“What we’re trying to do by our policy is encourage more spending. Ideally we’d like to see that in the form of more business spending, but part of the mechanism … is having more household spending, so in the short-term we want to see households not saving more but spending more’.

Our Charlie was keen to point out that this was a temporary situation.

“It’s very much swings and roundabouts. At the current juncture, savers might be suffering as a result of bank rate being at low levels, but there will be times in the future — as there have been times in the past — when they will be doing very well.

Mr.Bean was displaying his usual forecasting accuracy here as of course savers have seen only swings and no roundabouts as the Bank Rate got cut even further to 0.25% and the £79.6 billion of the Term Funding Scheme means that banks rarely have to compete for their deposits. This next bit may put savers teeth on edge.

“Savers shouldn’t see themselves as being uniquely hit by this. A lot of people are suffering during this downturn … Savers shouldn’t necessarily expect to be able to live just off their income in times when interest rates are low. It may make sense for them to eat into their capital a bit.”

In May 2014 Charlie was at the same game according to the Financial Times.

BoE’s Charlie Bean expects 3% interest rate within 5 years

There is little sign of that so far although of course Sir Charlie is unlikely to be bothered much with his index-linked pension worth around £4 million if I recall correctly plus his role at the Office for Budget Responsibility.

House prices

I add this in because the UK saw an establishment move to get them back into buying houses. This involved subsidies such as the Bank of England starting the Funding for Lending Scheme in the summer of 2013 to reduce mortgage rates ( by around 1% initially then up to 2%) which continues with the Term Funding Scheme. Also there was the Help to Buy Scheme of the government. I raise these because why would you save when all you have to do is buy a house and the price accelerates into the stratosphere?

The picture on saving gets complex here. Some may save for a deposit but of course the official pressure for larger deposits soon faded. Also the net worth gains are the equivalent of saving in theoretical terms at least but only apply to some and make first time buyers poorer. Also care is needed with net worth gains as people can hardly withdraw them en masse and what goes up can come down. Furthermore there are regional differences here as for example the gains are by far the largest in London which leads to a clear irony as official regional policy is supposed to be spreading wealth, funds and money out of London.

There is also the issue of rents as those affected here have no house price gains to give them theoretical wealth. However the impact of the fact that real wages are still below the credit crunch peak has meant that rents have increasingly become reported as a burden. So the chance to save may be treated with a wry smile by those in Generation rent especially if they are repaying Student Loans.

Share Prices

This is a by now familiar situation. If we skip for a moment the issue of whether it involves an investment or saving as it is mostly both we find yet another side effect of central bank action. In spite of the recent impact of the North Korea situation stock markets are mostly at or near all time highs. The UK FTSE 100 is still around 7300 which is good for existing shareholders but perhaps not so good for those planning to save.

Number Crunching

There are various ways of looking at the state of play or rather as to what the state of play was as we are at best usually a few months behind events. From the Financial Times at the end of June.

UK households have responded to a tight squeeze on incomes from rising inflation, taxes and falling wages by saving less than at any time in at least 50 years. According to new figures from the Office for National Statistics, 1.7 per cent of income was left unspent in the first quarter of 2017, the lowest savings ratio since comparable records began in 1963.

This compares to what?

The savings ratio has averaged 9.2 per cent of disposable income over the past 54 years,

Some of the move was supposed to be temporary which poses its own question but if we move onto July was added to by this.

In Quarter 1 2017, the households and NPISH saving ratio on a cash basis fell to negative 4.8%, which implies that households and NPISH spent more than they earned in income during the quarter.

The above number is a new one which excludes “imputed” numbers a trend I hope will spread further across our official statistics. It also came with a troubling reminder.

This is the lowest quarterly saving ratio on a cash basis since Quarter 1 2008, when it was negative 6.7%.

As they say on the BBC’s Question of Sport television programme, what happened next?

The United States

We in the UK are not entirely alone as this from the Financial Times Alphaville section a week ago points out.

Newly revised data from the Bureau of Economic Analysis show that American consumers have spent the past two years embracing option 2. The average American now saves about 35 per cent less than in 2015……….Not since the beginning of 2008 have Americans saved so little — and that’s before accounting for inflation.

Comment

One of the features of the credit crunch was that central banks changed balance between savers and debtors massively in the latter’s favour. Measure after measure has been applied and along this road the claims of “temporary” have looked ever more permanent. Therefore it is hardly a surprise that savings seem to be out of favour just as it is really no surprise that unsecured credit has been booming. It is after all official policy albeit one which is only confessed to in back corridors and in the shadows. After all look at the central bank panic when inflation fell to ~0% and gave savers some relief relative to inflation. If we consider inflation there has been another campaign going on as measures exclude the asset prices that central banks try to push higher. Fears of bank deposits being confiscated will only add to all of this.

Meanwhile as we find so often the numbers are unreliable. In addition to the revisions above from the US I note that yesterday Ireland revised its savings ratio lower and the UK reshuffled its definitions a couple of years or so ago. I do not know whether to laugh or cry at the view that the changed would boost the numbers?! I doubt the ch-ch-changes are entirely a statistical illusion but the scale may be, aren’t you glad that is clear? We are left mulling what is saving? What is investment?

But we travel a road where many cheerleaders for central bank actions now want us to panic over an entirely predictable consequence. Or to put it another way that poor battered can that was kicked into the future trips us up every now and then.

 

 

 

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.

 

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?

 

 

Falling prices have provided quite an economic boost for the UK,Spain, Ireland and now France

Today as we observe in particular the consumer inflation numbers from the Euro area gives an opportunity to look again at one of the main themes of this website. That is my argument that low/no inflation provides an economic boost via higher real wages and hence domestic consumption and demand. Back on the 29th of January 2015 I pointed out this.

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. This could not contradict conventional economic theory much more clearly.

I also pointed out that those in love with inflation and who claim that against all the evidence that it provides an economic boost – in spite of all the evidence to the contrary – would look away now.

If the history of the credit crunch is any guide many will try to ignore reality and instead cling to their prized and pet theories but I prefer reality ever time.

There are more than a few people around in the UK establishment for example who would like the consumer inflation target to be raised to 3% or 4% from the current 2% per annum.

The orthodoxy challenged

This has been provided by that bastion of orthodoxy the Financial Times already today.

Deflationary pressure persists in France

This gives the impression that something bad is happening there. It is based on this morning’s data release.

Year-on-year, consumer prices should decline by 0.1% in May 2016……..On all markets (French market and foreign markets), producer prices fell back in April 2016 (-0.3% following +0.2%). Year over year, they decreased by 3.9%, mainly due to plummeting prices for refined petroleum products (-30.9%)

The “end of the world as we know it” impression however was contradicted by the data released yesterday.

In Q1 2016, GDP in volume terms* increased by 0.6%, thereby revising the first estimate slightly upwards (+0.5%).

So the best quarter for economic growth driven by “consumption and investment”. Indeed we see this.

Household consumption expenditure recovered sharply (+1.0% after +0.0%).

This rather challenges the way the FT uses “headwinds remain” to describe something that I see as a benefit. Oh and they have used the wrong inflation number as regular readers will be aware of the way it rejects RPI and pushes to CPI in the UK. Well what we call CPI did this.

Year-on-year, it should be stable after a slight decrease during the three previous months (-0.1%).

Oh dear.

Ireland

The Emerald Isle was one of the countries I expected to do well in response to lower inflation so let us take a look again. From the Central Statistics Office.

The  volume of retail sales (i.e. excluding price effects) increased by 0.8% in April 2016 when compared with March 2016 and there was an increase of 5.1% in the annual figure.

This happened when we note that there was a fall in consumer inflation of 0.2% according to the Euro area standard and heavy price falls in the retail sector.

There was an increase of 0.4% in the value of retail sales in April 2016 when compared with March 2016 and there was an annual increase of 2.5% when compared with April 2015.

So volume up 5.1% but value up 2.5% shows there was both “deflationary pressure” and “headwinds remain” in fact are very strong. So a bit awkward to say the least to explain why volume growth was 5.1%. Actually the figures are very similar to what they were in January 2015 showing that retail sales have done their bit for the Irish economic recovery of the last couple of years.

Spain

Here too we have seen an economic recovery so let us look at the retail sales data.

In April, the General Retail Trade Index registered a variation of 4.1% as compared to the same month of 2015, after adjusting for seasonal and calendar effects. This annual rate was three tenths lower than that registered in March. The original series of the RTI at constant prices registered a 6.4% variation as compared to April 2015, standing 2.2 points above the rate of the previous month.

So with a 0.6% rise in the month itself we see that yes this has been a powerful player in the Spanish economic recovery. If we look back we see that the overall pattern does fit the theory whilst retail sales numbers individually can be erratic the overall series began a more positive theme in the autumn of 2014 which fits with the beginning of disinflationary pressure.

Also this is helping with the elevated level of unemployment in Spain.

In April, the employment index in the retail trade sector registered a variation of 1.5%, as compared to the same month of 2015.

Of course there are regional effects as we note one of the strongest growing regions was Comunidad de Madrid (8.3%). Real and Atletico will not be the Champions League finalists every year although they are both in strong patches. I guess for June there will be stronger growth in areas which support Real Madrid.

Again we see evidence of disinflation in the retail sector being much stronger than in the wider economy.

The annual change of the HICP flash estimate is –1.1%

We have to look fairly deeply for disinflation in the retail sector in Spain but when we do we see that volume gains of 5.1% in April are combined with turnover or value gains of 1% so disinflation was of the order of 4%. According to conventional economic theory the Spanish retail sector should be collapsing rather than booming. Will they tell us next that the Madrid clubs cannot play football?

This improved phase for Spanish retail sales is very welcome after a long winter and in spite of this better phase it is below that levels of 2010 by just over 5%.

The UK

We have long learned that the UK consumer needs very little excuse to splash the cash.

Continuing a sustained period of year-on-year growth, the volume of retail sales in March 2016 is estimated to have increased by 2.7% compared with March 2015. This was the 35th consecutive month of year-on-year growth.

Indeed I note that the Office for National Statistics now agrees with and backs up my theme. The emphasis is mine.

Figure 1 shows that the quantity bought remained fairly constant until late 2013, but began to increase steadily as average prices in store started to fall. The amount spent increased steadily during the period, however, as prices in store decreased the amount spent remained steady, implying that as prices fell, consumers bought more goods.

The inflation measure here or implied deflator is at 95.1 where 2012=100 so we see that yet again conventional theory was wrong. Looking forwards it is the return of inflation which troubles me as I fear it will reduce and possibly end retail sales growth via its impact on real wages. Whereas inflationistas will be left yet again scrabbling for excuses and refusing to play Men At Work.

Saying it’s a mistake
It’s a mistake
It’s a mistake
It’s a mistake

 

Comment

There is much to consider in the burst of disinflation which has hit many of the world’s economies. It has mostly been driven by the lower oil price as I note that energy costs in the year to April fell by 8.1% in the Euro area. This is something that Mario Draghi and the ECB (European Central Bank) is trying to end with negative interest-rates and 80 billion Euros a month of QE bond purchases. Yet in Ireland and Spain we have seen a strong rise in retail sales in response to this as purchasing power and real wages rise. What is not to like about that? The central planners and their media acolytes should be quizzed a  lot more on this in my view.

Of course lower prices are not the only thing going on but in economics there is no equivalent of a test-tube experiment. It is also true that the economies which seem to be more in tune with the UK are seeing a stronger effect. But lower prices have led to higher retail sales via higher real wage growth which will presumably reverse when the central bankers get back the inflation they love so much.

 

 

 

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,