6/2/2013: Irish Manufacturing PMI - January 2013

Last night I wrote briefly about the Services PMI for January for Ireland (see post here and an added post on the longer term link between PMI and Services Index here). Going over the database, however, made me realise that I have not posted on the latest Manufacturing PMI figures for January, so correcting this, here's the analysis.

Headline seasonally adjusted Manufacturing PMI posted a decline from 51.4 in December 2012 to 50.3 in January 2013, leaving the index notionally above 50.0 line for 11th month in a row. Alas, 50.3 is not statistically significantly different from 50.0 and in total out of the 11 months of consecutive notional readings above 50, in reality only 3 months posted readings that are significantly distinct from 50.0 zero-growth line.

Dynamics are flat at just around 51.5 (also not statistically distinct from 50.0), with 12mo MA at 51.5, 3mo MA at 51.4 and previous 3 mo MA at 51.6. This, however, compares relatively positively with 3mo MA through January 2012 (48.5) and 3mo MA through January 2010 (48.6) although the current 3mo MA reading is below 53.1 reading for 3mo MA through January 2011. 6mo MA is 51.5.

In brief - growth is sluggish and lacking a catalyst.

Charts:

Per above, Output index posted a slight rise in headline reading from 51.2 in December to 51.5 in January, marking 9th consecutive month of above 50 notional readings, with just 4 of these months posting readings statistically consistent with being above 50.0. 3mo MA was at 52.2 in 3mos through October 2012 and is at 52.2 in 3mo through January 2013. It is bang-on in line with 12mo MA of 52.1 and is identical to 52.2 6mo MA.

New Orders sub-index posted surprise contraction to 49.5 (not statistically distinct from zero-growth, so a very shallow contraction if any) in January from shallow growth of 50.9 in December. 12mo MA is at 52.0, with 3mo MA through January 2013 at 50.8 and 3mo MA through October 2012 at 52.3, marking a clear slowdown in growth over the last 6 months. That said, January 2013 was the first sub-50 reading in the series since January 2012.

New Export Orders posted slower rate of expansion at 50.9 in January 2013, down from 53.6 in December 2012. Again, as above, 50.9 is not statistically different from 50.0, although 53.6 was clearly statistically above 50.0. January 2013 reading was the weakest in 4 months and the second weakest in 11 months. 3mo MA through January 2013 is at 52.2, above 51.2 3mo MA through October 2012, 6mo MA at 51.7 and 12mo MA is at 52.5, so by all averages, January came in relatively weak.

Other series summed up in the charts below:

Output prices posted a clear decline in January 2013 (48.2) after posting a mild expansion (and a surprise one) in December 2012 (51.3). Overall, in last 24 months, only 9 months posted notional above 50.0 readings, when it comes to output prices. Meanwhile, input prices continued to inflate, with index reading of 57.1 in January 2012 being somewhat lower than 59.9 in December. In last 24 months, there was only one instance when input prices inflation was negative. All of which does not bode well for profit margins: in 3 mo through January 2013, average input prices inflation was consistent with 58.7 and in 3mo through October 2012 it stood at 59.4. At the same time, output prices were contracting by 49.7 in 3mo through January 2013 and were expanding at a slower pace than inputs costs were inflating (51.7 vs 59.4) in 3 months through October. In other words, profitability has been shrinking, on average over last 6 months and indeed over the last 12 months.

Now onto composite measures of current and future activity. These are computed based on my own formula, so not a part of NCB-released data. The Current Composite index is based on a  weighted average of Output and headline PMI index, relating current PMI to Output, as opposed to changes in stocks of goods and purchases orders. The Forward Composite Index is based on a weighted average of New Orders and New Export Orders, weighted relative to each series correlation to headline PMI. As such, both indices attempt to remove impact of temporary factors on underlying activity.

Current Composite Manufacturing PMI (CCM index) fell from 51.3 in December 2012 to 50.9 in January 2013, with overall notional levels above 50 recorded now in 9 consecutive months. However, statistically, the CCM Index was above 50.0 in only four out of the last 12 months. Forward Composite PMI (FCM index) also slipped in January from 52.2 in December 2012 to 50.2. Above 50.0 notional readings were now recorded in 11 consecutive months, although only four months posted readings statistically above 50.0.

On the net, the indices mark significant slowdown in current and forward activity, although current readings are consistent with progressing weak recovery (statistically indifferent from stagnation). Given overall global improvements in sentiment and trade, this can represent simply a lagging effect to global growth (upside potential) and / or drag on Irish activity from the Euro area and the UK economies weaker-than-global performance (downside potential).

5/2/2013: Services PMI v CSO Services Index... hmm...

In the previous post, I raised some questions about the real tangible quality of the PMI data for Services when it comes to reflecting upon the Irish economy. Here is a bit of more disturbing evidence. I plotted in the chart below the contemporaneous index of services sectors activity as measured by the CSO and the services PMI.

In short - there is no relationship. It is effectively zero. So either PMI does not accurately reflect services activity, or services activity index doesn't reflect it. Or more likely - both series have serious shortfalls. However, overall the question about PMI for services validity in providing an insight into the real economy is still open...

5/2/2013: Irish Services PMI for January 2013

The latest data from Services PMIs - released this am - is full of positive news. In this light, it is both hard and, perhaps, unjust to rain on the parade with detailed analysis of hypotheticals. But, alas, this is what needed for the dose of reality check.

Before we do, here are the straight forward numbers.

Overall headline Business Activity index rose to 56.8 in January 2013 from seasonally adjusted 55.8 in December 2012 - a strong level of activity that marks the highest index reading for any month since August 2007 when the index reached 57.0.

This is the good bit. And it gets even better when we consider 3mo MA to smooth out some of the monthly index volatility: current 3mo MA stands at 56.2, ahead of previous 3mo MA through October 2012 of 53.9. Year ago, 3mo MA was at contractionary 49.8 and in 2011 the same period 3mo MA was at 50.7 against 2010 3mo MA through January reading 46.5. In other words, we have solid increase in 3mo MA, which is more sustainable reading than monthly series.

12mo MA is at robust 53.0, implying that last 6 months have seen, on average, stronger activity in the sector (55.1) than February-July 2012 (50.9). Also good news.

Chart to illustrate:

Per chart above, Business Activity expansion was backed by New Business Index growth. New Business Index reading reached 56.6 in January, up on already strong reading of 56.4 in December. However, unlike overall activity, new business expansion was not as dramatic in historic terms, with January marking third fastest rate of expansion in 6 months. 3mo MA through January 2013 stood at 56.5 - faster than 54.5 3mo MA through October 2012. In 2012, same period 3mo MA was 49.9 and in 2011 it was 47.6, while in 2010 it was 46.8, which means that the last 3mo MA expansionary reading (and strong one at that) is the first expansionary reading in 4 years.

12mo MA for New Business Activity is now at 53.4, with last 6mo MA at 55.5 against first 6mo MA at 51.3, suggesting that New Business Activity is a major driver behind Overall Business Activity acceleration in the last 6 months.

Chart below shows snapshot of both indices over shorter period of time, allowing for better understanding of the underlying short term trend:

The close coincidence in series since November 2011 is indicative that sector activity is gaining momentum on foot of New Business Orders (as opposed to jobs inventories and backlogs) and trend acceleration since July 2012 also shows sustained momentum.

All of this is good news. And there is more. New Export Business index rose to 63.5 in January from 61.3 in December, marking the highest reading in series history with previous record of 63.3 reached in June 2006. 3mo MA through January 2013 is at 60.3, against previous 3mo MA of 55.5. This contrasts with 3mo MA through January 2012 at 52.4, 3mo MA through January 2011 of 53.1 and 3mo MA through January 2010 of 52.6.

This blistering pace of activity should, however, be treated with some concern. Now, take a look at the rates of expansion here, contrasted with rates of robust rises in Employment. Employment index rose to 56.5 in January from 53.4 in December. The Index posted above 50 readings in 5 months in a row and 3mo MA for the index is now at 54.6, up on previous 3mo MA of 51.3. Over the last 6 months, thus, employment in services sector have expanded rather rapidly.

Meanwhile, profitability in the sector continued to contract: Profitability Index (I compute my own for comparative analysis with Manufacturing, but let's stick to 'official' Profitability reading for now) remained well below 50, at 49.2, marking 62nd consecutive month of contracting profits in the Services sector.

Now, ask yourselves a simple question: 62 months of uninterrupted collapse in profits, plus over the same period 11 months of expanding employment, plus 21 months over the same period of rapidly growing exports, equals what? How can catastrophically less and less profitable business retain relatively robust employment levels and expand dramatically exports? Oh, well, the answer to this dilema is a simple, but unpleasant one - most of our services activity (and roughly speaking 90% of our services exports activity) is dominated by the tax-optimising MNCs. In other words, while the headline numbers are rosy, the underlying reality is probably less tangible to the Irish economy than we would like to believe. Employment growth in these MNCs-led sectors is primarily focused on importing skills (so no effect of reducing unemployment), while shrinking profitability in the Business Services sector and Transport, Travel, Tourism and Leisure sector (which led in profitability decline) means lower revenues for the Exchequer and lower indigenous employment.

One thing Irish Stuffbrokers issuing upbeat reports on PMIs basis are too lazy to check is the composition of what they are talking about at the aggregate levels. Here's a simple snapshot of employment increases over the last 6 months, reported in the PMIs:

Contrasted by 6mo data for profitability:

And contrasted again by New Export Business figures:

It turns out, on average, over 6 months, the ENTIRE range of PMI-covered services subsectors have managed to post increases in employment, and even mor robust rises in New exports, with largest rises, by far in the MNCs-dominated ICT services and Financial Services. But Business Services - the ones that are suffering from deep cuts in profits - are also posting rises in exports and employment. This is either bonkers data collection, or a severe selection bias toward MNCs with tax optimisation, not real activity on their minds.

You can see that new exports are acting to grow current employment, while shrinking profitability seemingly has no effect on current employment (current points marked in red) here:

More on profitability conditions and employment in both Manufacturing and Services PMIs in subsequent posts, but overall, the data is very positive. It is just worth asking a question just how much relevant is this data to real economic activity?

5/2/2012: Global & Irish Economic Conditions: UCC, January 2013

Slides for my recent presentation on the Global Economic environment and Ireland, delivered at UCC (click on individual slides to enlarge):

3/2/2013: Argentina v Chile: Government & External Balances

In the previous post I looked at the real economy comparatives between Latin America's best-in-class Chile and worst-in-class Argentina.

As promised, now a quick look at the Government and external balances.

If in terms of real economy comparatives, Argentina hardly significantly underperformed Chile since the mid 2000s, in terms of straight down the line General Government Deficits the country is a veritable basket case:

Just as in the case of the real economy, Chile moved dramatically away from Argentina in terms of gross deficits in 1996-2008, outperforming Argentina over that period of time in every year. After 2010, the same picture repeats. On a 5-year average basis, in 1996-2000, average General Deficit in Argentina stood at -3.0%, rising to 6.13% in 2001-2005, declining to -1.74% in 2006-2010 and rising again to -2.83% for 2011-2015 (based on IMF forecasts). Over the same periods of time, Chile recorded average surpluses in every 5 year period: +0.37% in 1996-2000, +0.90% in 2001-2005, +3.03% in 2006-2010 and forecast +0.02% in 2011-2015.

However, much of the headline deficit underperformance by Argentina relates directly to the burden of debt servicing. In this context, Primary Deficits are much more benign to Argentina's case, as illustrated in two charts below:

Again, consider 5-year periods in average annual terms. Due to lack of comprable data for Argentina for 1996-2000, let's omit this subperiod. In 2001-2005, Argentina's primary balance was on average in a surplus of 3.60%, with surplus declining to +2.26% in 2006-2010 and turning a deficit of -0.38% in 2011-2015 forecast period. Meanwhile, Chile enjoyed lower surplus of 1.38% in 2001-2005 epriod, higher surplus of 2.92% in 2006-2010 and a surplus of +0.17% in 2011-2015 period. So while overall Chile did show stronger performance, Argentina's primary deficits were hardly a substantial issue over the period of 2001-present.

Of course, Argentina's debt mountain is legendary... or should it be 'was legendary'?

Argentina's Government Debt/GDP ratio has peaked at 165% in the crisis year of 2002. So much is true. However, overall, the ramp up of debt (dynamics of debt accumulation) and the reduction in debt ratio to economy since the peak have been more than telling. In 1996-2000 Argentina's Government debt/GDP ratio averaged 40.6% - hardly a significant drag on either growth or public finances. In 2001-2005 the same stood at 114.44% of GDP - clearly well in excess of the known bounds for debt sustainability. With debt restructuring and return of economic growth, Argentina's Government debt/GDP ratio fell to 61.99% average for 2006-2010 period and is now on track to hit 43.42% average for 2011-2015. In other words, the country is expected to basically return to pre-crisis levels of Government debt burden by the end of 2015, some 13 years after the crisis.

Over the same period of time, Chile showed exemplary debt performance. Government debt/GDP ratio stood at 13.29% on average during 1996-2000 period, falling to 11.91% in 2001-2005 period and to 5.65% in 2006-2010. Since the devastating earthquake in 2010, debt/GDP ratio notched up to 12.09% for 2011-2015 period.

On external account side, Chile has been a recipient of the strong capital inflows from abroad over recent decades, the position that allowed the country to run significant deficits on trade side. Despite this, overall exports in both countries have been growing roughly-speaking in tandem, with slightly higher volatility for Argentina:

Thus, cumulated current account deficits in the case of Chile run at -104.2% of GDP over 1980-2017 period, against a cumulated deficit of just 24.54% for Argentina. Since 1990 through 2017, Argentina's current account deficits on a cumulated basis will amount to 4.43% of GDP against Chile's 36.62%. And over the period 2000-2017, the IMF is projecting cumulated current account deficit of 9.91% for Chile and a surplus of 20.62% for Argentina.

On the net, excluding fiscal performance and inflation, and keeping in mind that some of the official stats from Argentina are rather dodgy, there is little evidence to suggest that Argentine economy is a 'veritable basket case'. Instead, it is rather an economy struggling with Government debt overhang and fiscal situation whereby benign primary deficits are simply overwhelmed by debt servicing costs. In that sense, Argentina is closer to Italy (correcting for differences in growth rates) than to the 1990s crisis-stricken HIPCs.

2/2/2013: Argentina v Chile: Real Economy Side

Can't say much, but some debate has rekindled earlier today on twitter about the merits or failures of the Argentine model. In part, this revival of interest stems from the IMF issuing another Executive Board statement on the country (here) basically confirming Argentina's continued failure to implement measures to bring the country back on track with the IMF programme. In part, the said interest has been kept alive by various economics commentators, most notably Paul Krugman (see example here), putting Argentina forward as some sort of a maverick economy with miraculous escape velocity from the clutches of the IMF.

I am of no camp on Argentina. It has made hash of long term macroeconomic management, and had seen virtually no structural change on its erroneous ways of the past. On the other hand, by many macro aggregates, the country is muddling through its perpetual crisis rather well. Yet, some indicators point to very deep problems, namely: inflation, and government spending. It's a mixed bag and I have never advocated its mode of policy choices as a road for anyone to copy.

So with this rather neutral stance, here are some comparatives between Argentina and the strongest economy in the region, Chile (now, Chile is in many ways an example of policy reforms I do like and do put forward occasionally as an example for other countries to pursue).

Let's start from the top: real GDP growth:

All in, based on 5 year averages, Argentina's economy expanded at the average rates of 4.78% in 1991-1995, 2.66% in 1996-2000, 2.35% in 2001-2005, 6.78% in 2006-2010 and expected to grow at 4.47% in 2011-2015 period. At the same time, Chilean economy grew, respectively at 7.88%, 4.21%, 4.4%, 3.86% and 4.91%. Thus, Argentina managed to outperform Chile in growth terms only in one five-year period, namely in 2006-2010 period. How much of this outperformance was due to potentially 'massaged' figures from Argentina on inflation and growth, no one knows.

To make the growth comparatives more clear, let's create two indices, setting GDP at 100 for 1990 and for 2000 for both countries and then computing cumulated path of GDP. It is clear that Chilean economy relative outperformance during the 1990s is the core driver for cumulated differences between the two economies, with that difference becoming virtually zero on aggregate during the 2000-2013 period.

GDP at an aggregate level can present a distorted picture of actual activity, due to a number of demographic factors and price comparatives differentials. Here is what has been happening in the two countries in terms of PPP-adjusted (controlling for price and FX rates differentials) GDP per capita.
Per chart below, the comparatives are sensitive to the specific sub-period:

In absolute terms, per capita income in both countries is tracing relatively similar path, although Chile is running slightly ahead of Argentina since 2012 and this is expected to amplify slightly in 2013-2017. However, the starting point for these comparatives was a significant gap between Chile and Argentina in incomes in the 1980s that became erased by 2000. To see this better, consider the index of GDP epr capital, PPP-adjusted that normalises both countries incomes to 100 in 1980:

Since parity in the 1980 (imposed by assumption here) two countries' incomes closely matched each other until ca 1987. There after, Chile saw dramatic uplift in income per capita, while Argentina experienced relative stagnation until roughly 2001-2002. Since 2002, however, both countries income per capita are growing in relatively parallele fashion, although Chile remains an out-performer compared to Argentina.

Relative differences between the countries in terms of income per capita dynamics are closely matched to difference in savings and investment:

Chile strongly outperformed Argentina in terms of gross national investment in 1991-2005 with average investment rate (by 5 year averages) running at 17.23% in 1991-1995, 19.36% in 1996-2000 and 15.98% in 2001-2005 for Argentina, against 27.46%, 26.84% and 22.33% for Chile. In 2006-2011 this was reversed, with Argentina's gross investment running at 23.56% against 22.19% in Chile. In 2011-2015 it is forecast that Argentina's investment rate will remain at high 24.87% while Chile's investment rate is expected to rise to even more robust 25.53% of GDP.

Identical to investment dynamics are traceable across Gross National Savings:

Thus, there were few notable differences in the savings/investment gap between the two countries, with exception for the period of immediate default in Argentina. Both countries reliance on borrowing and external investment was roughly identical in the period 2006-2010, with weaker reliance in Chile in 1996-2005 and stronger reliance in Chile prior to 1995.

Per unemployment - another variable heavily 'massage-able' by the Governments (and Argentina had quite a share of accusations here):

It is very clear that for Argentina, sky-high rates of unemployment that were present in 1994-2004 period have been declining over time, with 2008-2013 unemployment rates virtually identical for both Chile and Argentina. There is little drama here, as far as we can trust Argentine numbers.

I will focus my attention on comparatives between two countries in terms of fiscal and external balance in the next post, but so far, there is little evidence to suggests hugely dramatic underperformance of Argentine economy in recent years compared to 'best-in-class' case of Chile - a country that as it happens is similar to Argentina in terms of income per capita (which is, of course, a major reason why Argentina should not be compared directly with Brazil).

Stay tuned for more.

1/2/2013: The Innocence of Double-Irish

Irish corporate tax policies issues have now penetrated (agt last) into the RTE newsflow - link here.  Of course, the most priceless reaction is, surprise, surprise, via our Minister Noonan:

"In the Dáil in recent weeks, Finance Minister Michael Noonan said: “The problem with the so-called ‘Double Irish’ from Ireland’s point of view is that it has that name. People think that something we do here gives rise to it. That is not the case.” Mr Noonan blamed tax codes elsewhere, including the way the US government treats certain tax arrangements."

Yep, folks, that's right, Irish law allowing dodgy entities set up off-shore to be tax exempt is, apparently, not Irish problem. Serves those Americans right, then...

I'd love to see him repeat this comes St Patricks Day in Washington. Should be the joke of the dinner.

Yes, US tax codes are to be blamed. And so are the UK, German, French, etc Governments' inability to tackle what is rampant tax optimisation. But in the end, Double-Irish is Double-Irish. Not a Double-Japanese or a Tripple-Mongolian.

Note: here are some lists of recent literature on Irish corporate tax heaven.