Friday, November 21, 2014

21/11/2014: The Latest Troika Report: Risks, No Buffers, Lots of Hope

The Troika did it bit… flew into Dublin on the 17th and flew out of here today. And left this as a present for all of us to enjoy…

Summary of their statement with my comments (outside quotes).

"Ireland has enjoyed a year beyond all reasonable expectations following the completion of its EU‑IMF supported program. Growth has accelerated to be highest in the euro area, job creation has continued, bond yields are at historic lows, and the fiscal deficit will again be below target. Ireland’s resolute implementation of steady and measured fiscal adjustment has been critical to this success."

Good news all… albeit no mention on the effect of ESA2010 accounting rules on our deficit and debt 'performance', but still, let's bask in some sunshine, for what follows is less sunny.

"Ireland should stick with this proven approach. Why? Growth prospects in coming years are still very uncertain... Current highly favorable international financial conditions may not last as major central banks begin to shift their stance and geopolitical risks can evolve rapidly. A sound fiscal position is a critical buffer in these circumstances."

Hold on there. So there are risks. And these risks included the dreaded prospect of rising interest rates. And our risk buffers are not up to meeting them. Too bad the Government has promised giveaways already for Budget 2016.

IMF goes on: "Ireland’s economic recovery is currently strong, yet major uncertainties remain." Major uncertainties?… "The sharp rebound in 2014 is led by exports and investment and is increasingly supported by consumer spending. …The mission estimates growth at just over 4 percent in 2014, yet there are significant uncertainties owing to the large contribution of offshore manufacturing to exports. Growth is projected to ease to about 3 percent in 2015 but the range of forecasts is wide, in part reflecting risks to growth in Euro Area trading partners and to international financial conditions." Oh dear. What this means is that growth is here, but much of it is based on:

  1. MNCs exports, and
  2. Hoped-for domestic recovery yet to materialise in any substantial form.

And what about those pesky "financial conditions"? Well, they are allegedly "...highly favorable and lending may be picking up from subdued levels. ...yet nonperforming loans (NPLs) remain very high. Lending has been weak, in part reflecting firms’ reliance on retained earnings, but mortgage loans have recently picked up in the context of sharply rising housing prices driven by job gains, declining household uncertainties, and a weak construction supply response."

House prices driven by jobs gains? Presumably in D2/D4/D6 where the 'middle Ireland' is bidding over 500K for 3-beds. Some jobs creation boost. With the "financial conditions" being fine, except in the real economy, where they are bad, we are back in the 'things are so bad, they must improve sometime' growthology.

Key kicker is Fiscal Policy - something that Government directly controls. Here's IMF on that:
"...a budget deficit that may be over 4 percent of GDP in 2014 remains too large to put Ireland’s high debt firmly on a downward path. Moving to a balanced budget over time would also buttress Ireland’s highly open economy against the broad range of shocks to which it is exposed."

Wait, this is straight from the Fiscal Council textbook (and do note - they are going to wade in with their 'views-to-be-ignored' next week). But it is worse than the Fiscal Council 'below 3% target' - this is about balanced budget aka 'zero % target'.

"The mission estimates that Budget 2015 generates an adjustment of about ½ percent of GDP in structural terms. A somewhat faster pace of improvement would have been preferable in view of relatively strong near-term growth prospects. Hence, any revenue over-performance or additional interest savings should be used to lower the deficit in 2015."

But Budget 2015 was billed by the Government as 'sustaining the recovery' effort. Not so much, says the IMF in the above. Rather looks like 'gambling on the continued recovery' effort to me.

"In the medium term, ... the authorities’ strategy to reach balance centers on fiscal restraint as set out in the expenditure ceilings and in the Comprehensive Expenditure report 2015‑2017. The mission estimates that this entails annual structural adjustment of ¾ percent of GDP over 2016–18, which avoids undue drag on growth. Such a steady approach to consolidation will help cushion shocks and result in faster progress to balance if medium-term growth is stronger than expected, and vice versa. Fully utilizing asset disposals, notably of the banks, to hasten debt reduction will reduce interest expenses, thereby containing the cumulative consolidation required."

In other words, you thought austerity is gone? Well, think again:

  1. The above says there is more needed, albeit at marginal levels, and
  2. The above assumes no slippage on 'savings' achieved to-date. Which is going to be very very hard to maintain as public sector agreements of the past come to renegotiations just at the time when political cycle favours giveaways to powerful interests.

Risks to the above also include, as IMF notes "…age-related demands for public services are rising and other expenditure pressures may emerge after prolonged restraint. Further reforms will be needed to generate savings while protecting public services and investment, and progress in containing the wage bill must be preserved." I flagged the rapid rise in retired numbers in recent analysis of the QNHS data. It now looks like the IMF is concerned we are swapping spending on unemployment supports for spending on early retirement schemes for public workers.

Another perennial headache is mortgages arrears. Much of policy expanded on this and the progress is questionable at best. IMF view is:  "Banks report good progress on workouts in relation to the CBI’s targets. The low rate of redefaults to date is welcome [I wonder if the low rates of re-default are 38% rate of actual redefaults reported by the CBofI in whauch case the Troika shows some humour here], yet some cures with smaller debt service reductions may not prove to be lasting, requiring banks to better target solutions. With about half of arrears cases under legal proceedings, it is important that these proceedings, together with active follow-up by the banks, are effective in motivating borrowers to reengage in a timely manner to reach restructuring solutions where feasible. Substantial unfinished mortgage resolution work requires continued supervisory targets for coming years, with due attention to reversing the continued rise of buy-to-let loans in arrears."

So the crisis has not gone away. And the evidence on quality of resolutions is dubious. But the IMF solution is - hammer more the borrowers, even though hammering them today might backfire tomorrow. I wonder if rational expectations form a part of the IMF economics team heads?

Problem number two: arrears in SMEs loans. "Implementation of lasting solutions for distressed commercial loans is also essential. Corporate, SME, and commercial real estate loans comprise the largest share of NPLs. Supervision should ensure that banks are either encouraging appropriate progress by distressed borrowers in the execution of workout plans or are making timely loan disposals."

Basically, this says "We've given up. Nothing seems to work, so just bankrupt the lot or sell the toxic stuff for someone else to bankrupt the lot". Not good. Not good at all.

Patrick Honohan got a ringing endorsement for his efforts to cool off the property lending (that is nowhere to be seen… which is sort of like evading icebergs in the middle of the Gulf of Mexico):
"New residential mortgage lending rules proposed by the CBI are a welcome step… The introduction of loan-to-value and loan-to-income ceilings will increase the resilience of both the banking and household sectors to financial shocks…"

And the last bit - the fabled Structural Reforms. Here, IMF remains true to its previous commitments of not producing any new thinking. Just keep raising the ghosts of the past, that is construction and employment activation.

"A stronger construction supply response is needed to help contain pressures on housing prices and rents. Housing completions remain low despite a 42 percent rise in Dublin house prices from their trough, which is also contributing to rising rents. A range of factors are impeding an adequate supply response by the construction sector, potentially hindering a renewal of migration inflows. Timely implementation of the government’s Construction 2020 initiatives is therefore important. In particular, the introduction of use-it-or-lose-it planning permissions together with vacant site levies could usefully help counter reluctance to develop properties owing to expectations of further price appreciation."

This is, frankly, a loony bin of policy proposals. The market is utterly dysfunctional - funding is hard to get, land is overpriced, supply of land is effectively controlled by Nama and vultures. Construction costs are sky high due to Government own 'reforms' from the past. And the IMF is offering to make things even more costly for development? Are they for real?

On employment activation: "Efforts to strengthen employment and training services should continue.  High levels of youth and long-term unemployment pose downside risks to employment and hence to growth in the medium term. Steady progress on engaging with long-term unemployed persons is being made and the private sector provision of employment services is expected to start in the second half of 2015. The establishment of regional Education and Training Boards that will collaborate with Intreo offices to facilitate referrals of jobseekers to training is welcome. Ensuring that these new frameworks are most effective in helping the unemployed return to work will require ongoing evaluation and adaptation."

In basic terms, there is nothing new in the above. Keep going the way we've been going: more questionable quality training programmes, more forced participation, more exits from the labour force dressing up unemployment figures. Just shove the long-term unemployed under the rug and pretend there is nothing there.

In short, the Troika review is a dud: it found little new, it offered no new policies, save for making things worse for developers and builders. But it, usefully, pointed the hotheads from the Government 'spend and be merry' side in the direction of the cooler winds of risks painting our horizon in unpleasantly steely hues.

21/11/2014: Irish Property Markets: Not in Rude Health, Yet...

Four slides from my ICA presentation today, covering construction sector and property market in Ireland:

Thursday, November 20, 2014

20/11/2014: Oil Prices: Supply and Demand Drivers

An interesting BofE note on links between commodities prices & UK inflation:

A key chart - from global perspective - is this one:

Main points are:

  1. 2014 demand growth is way down, driven primarily by contracting demand in the OECD economies (advanced economies rot) and to a lesser extent relatively flat (compared to 2000-2007) growth in non-OECD economies.
  2. Supply from non-OPEC sources is way up, while OPEC is cutting back. Net effect - growth in supply is way above 2000-2007 average.
This suggests that OPEC will have little room to cut continued growth in supply, while some restoration in demand should take place if the OECD economies post more robust growth in 2015. Still, it is hard to see how the above dynamics can support oil prices in USD100+/b over the next 12-15 months.

Wednesday, November 19, 2014

19/11/2014: Two articles on Russian economy and reforms

Two important articles on Russian economy and policy via Bloomberg:

19/11/2014: Irish Patents Filings: Q3 2014

As a taster for my Friday presentation at the ICA, here's a slide from my deck on Ireland and our challenges and opportunities forward:

Note: data plotted is via @newmorningip .

And here is monthly data:

One major point to be made on the above data: Irish patent filings are still falling below 50% of all filings, while Irish acedemic filings are still running at around 8% of the total. The gap between foreign and domestic filings has fallen to 73:100 in Q3 2014 from 82:100 in Q2 2014.

Tuesday, November 18, 2014

18/11/2014: Commodities-linked Currencies and Ruble

Good chart plotting side by side all commodities-linked currencies relative to USD (via @auaurelija) :

Above suggests that Ruble devaluations from September 1 to-date are somewhere around 3/10th part due to same effects that impact other major commodities producers. Given Russian energy exports exposure to European markets, the effect might be as large as 3/7th.

Monday, November 17, 2014

17/11/2014: Central Bank Strategic Forecasting

"In most of the literature on transparency it has been standard to assume that central banks release truthful information when communicating with the public. However, the monetary policymaker may act strategically and misrepresent private information intending to reduce economic volatility by manipulating inflation expectations. We set up a simple model which includes misrepresentation as a possible action for the central bank and derive some testable implications. The empirical evidence from the analysis of inflation forecasts of six central banks (Brazil, Canada, England, Iceland, New Zealand, and Sweden) is consistent with the existence of strategic forecasting."

Italics are mine. The quote is from Gomez-Barrero, Sebastian and Parra-Polania, Julian A., "Central Bank Strategic Forecasting" (October 2014). Contemporary Economic Policy, Vol. 32, Issue 4, pp. 802-810, 2014.

Nothing else to add, other than that the guardians of data, the supervisors of the financial system, the enforcers of rules and regulations are… crooked when it comes to the forecasts they lavish on the unsuspecting journos and public.

H/T to CeBaSCo @cebastcom

17/11/2014: All the years draining into banking cesspool...

So the tale of European banks deleveraging... record provisions, zero supply of credit for years, scores of devastated borrowers (corporate and personal), record subsidies, record drop in competition, rounds and rounds of 'stress testing' - all passed by virtually all, the Banking Union, the ESM break, forced writedowns in some countries, nationalisations, various LTROs, TLTROs, MROs, ABS, promises, threats, regulatory squeezes ... and the end game 6 years into the crisis?..

Per Bloomberg Brief, the sickest banking system on Planet Earth is... drum roll... Wester European one.

It is only made uglier by all the efforts wasted.

H/T for the chart to Jonathan. 

17/11/2014: G20 and Russia: G19+1 or G20-8?..

My comment for the Portugal's Expresso on the G20 summit in the context of the Russia-West relations:

Sunday, November 16, 2014

16/11/2014: The Sunny Side of the Stormy Irish Recovery

My article on the state of the Irish economy published by the ZeroHedge:

16/11/2014: America's Scariest Chart...

Yes, US unemployment is declining. Yes, US economy is adding jobs. Yes, the crisis is… almost over… Except…

Except that is:

  • Average duration of unemployment rose in October (the latest we have data for) and
  • Average duration of unemployment remains totally out of touch with previous recessions.

Now, note the following regularity:

  • After 2001 recession, average duration of unemployment never returned to pre-recession levels;
  • The same has happened in the recession of 1990-1991.

In other words, so far in all three most recent recessions there was a permanent increase in unemployment duration over and above pre-recessionary average.

Every time this happens in the economy the following takes place: some of those who were long term unemployed during the recession become permanently unemployed. And every time this happens, the jobs being created in a recovery are by-passing those who have been long-term unemployed.

Now look back at the current crisis running stats. Average time it took unemployment duration to fall back to pre-crisis levels in all previous recessions is 61 months. We are now into 77th month of unemployment duration staying above pre-recessionary levels. And counting. By length of the crisis to-date, this is the third worst recession in post-war history.

We are also at the duration levels vastly in excess of those recorded in all previous recessions. By this matrix, the US is in its worst recession in post-war history.

Here is the raw data:

While the US economy might be generating jobs, it is not generating enough of the jobs to shift the long-term unemployed, and it is not generating the types of jobs that can get this massive army of people forced to rely on unemployment benefits back into productive employment.

Saturday, November 15, 2014

15/11/2014: Emerging Markets Rot Drives Russian Economic Uncertainty

Some interesting data from the Policy Uncertainty Index for Russia (see I traced out the main news markers over the period covered by the index (click on the chart to enlarge):

Note: higher values of Index, greater attention to the domestic economic and economic policy uncertainty in the media.

There is a clear pattern of rising policy uncertainty from, roughly speaking, early 2008, with both geopolitical risks (Georgia conflict) and economic risks (the 2009 recession) as well as internal political risks (2012 elections) all coincident with amplification in uncertainty. Ukraine crisis period is clearly only comparable in uncertainty with the last Yeltsin elections (which almost lost to the Communist Party candidate).

Volatility in uncertainty has also been on the rising trend, since, roughly, 2009 (note: the chart below is plotting 24mo MA):

However, it is worth correcting in the above data for the general global changes, not just Russia-own trends. To do so, let's take a look at Russia's Policy Uncertainty Index relative to the average of the same indices for China and India:

Notably, Russia's relative uncertainty has peaked around April-May 2014 and then subsided despite the fact that Ukraine conflict remains active. This suggests that post-May 2014, the acceleration in the rising trend in Russian economic and policy uncertainty is driven more by the general rot setting in in the Emerging Markets, and less by the geopolitical crisis.

Here is a chart plotting Policy Uncertainty Indices for the U.S., Russia, China and India:

This further confirms the above proposition: China is now showing levels of policy uncertainty on par with those in Russia. Geopolitics take a back seat to economics of the Emerging Markets slowdown.