Domestic demand, credit flows, and employment

In a speech largely saying nothing, Mario Draghi today described how domestic demand, and absence of reforms are risks to growth. Reforms, of course, could mean anything at all, and they are the Eurocrat catch-all for ‘we don’t know’, but domestic demand is something we can measure, and it’s something the ESRI have worked a lot on recently (.pdf). Your average undergraduate knows about the relationship between employment and domestic demand, and should also be aware that credit conditions matter for the growth of the real economy.

If we look at the Irish economy, in levels indexed to Q1, 2007, the chart below shows total domestic demand and employment on the left hand axis, which I start at 60 to pull out the difference between them a bit, and, measured on the right hand axis, the bar chart shows the flow of credit advanced when you exclude financial intermediation and property.

On the last reading domestic demand is about 21% down from Q1, 2007, while employment is about 15% down from the peak in early 2008. The annual change in the employment series from Q42012 to Q42013 is about 3%, while the annual change in demand is almost 0%.

Credit advanced meanwhile is, unsurprisingly, negative, relative to Q1 2007, from Q3 2010 onwards.

By Stephen Kinsella

Senior Lecturer in Economics at the University of Limerick.

32 replies on “Domestic demand, credit flows, and employment”

Credit is going to keep contracting for a long time too. A huge amount of property related debt was issued in the years leading up to the crash which will amortise over the next 20 years or so. In the meantime, the amount of new lending remains a small fraction of its former glory.

Is there any hope for strong economic growth over the next decade in Ireland given that the government, private households and non-financial corporates will all be paying down debt at a fairly steady rate?

If credit has been contracting and continues to contract, how is it that we’re hearing (endlessly, breathlessly) of a new “boom” in property? Where are these buyers coming from? Can they possibly all be cash buyers?

Any economists have any views?

“A speech largely saying nothing”!

Are you sure?

Draghi’s approach, and that of other ECB board members, has been aptly described as “open mouth operations”. The effect seems not to last very long although it has again caused the euro to drop.

What is meant by “reforms” is well understood and documented in various EU publications. The problem is that it is up to member countries to implement them. The newly formed French government shows every sign of being unwilling to do so.


To paraphrase Eamon Dunphy, Draghi bottled it.

Is it conceivable that, if the inflation rate had been approaching 3.5% instead of approaching 0.5%, interest rates would not have been raised?

The ECB board has sided, Pilate-like, with the EZ creditors and savers, at the direct expense of the unemployed.
It reminds me of an exhortation to beaten and non-existent troops in a book that I am reading;
“Forward through the mud! Forward through the snow! Forward by day! Forward by night……”

@ JR

I would suggest that the key comment by Draghi was the following (apart from the definite signal to the markets that the ECB would intervene and in unconventional ways were deflation to be seen to take hold);

“Frankly, I would like the IMF to be as generous as they have been towards us also with other monetary policy jurisdictions, like for example issuing statements just the day before a (US Federal Reserve) meeting would take place.”

A comment that was entirely justified and especially against the background of an attempt by the French head of the IMF, Lagarde, to introduce a new and unknown term into the economic lexicon – “lowflation” – when the new French PM is signalling that France wants a third (!) relaxation of the targets that all countries of the EU have signed up to.

Furthermore, the choice that you outline does IMHO not really exist.


What is meant by “reforms” is well understood and documented in various EU publications. The problem is that it is up to member countries to implement them. The newly formed French government shows every sign of being unwilling to do so.

The definite response to this kind of magical thinking is still Aidan Regan’s The Fairytale of Europe’s Magic Improving Dust Formula.

So what is the core economic idea that they (the ECB, ECONFIN, Germany and the European Commission) share? It is the magic economy dust formula of ‘structural reforms’. It is the idea that if national governments just sprinkle enough structural reforms into the economy to enhance market competition they will, eventually, generate the conditions for employment growth….But the point to be noted is that the empirical non-falsifiability of structural reform policies is the idea that underpins the consensus between the national and supranational. It enables all of the actors to sell a policy that no one understands or can even refute. It is a fairytale.

Structural reforms are the constant cry of the European neoliberal (“More cuts, more privitizations, they’ll start working soon! The plain people understand!”) but these faith based policies have been an utter failure in dealing with a real world economic crisis. After five years of EU policy failure the only people left saying that structural reforms of national economies will make the current flavour of EMU work are liars, fools and Germans.

Warning: Long post alert.

I was recently encouraged by @grumpy to make my annual check on (GDP) growth forecasts made by the Department of Finance.

Each year I have been using the ‘envelope’ which is really an optimism filter. Last year’s go is in the link at 8.39am and you can trace the story backwards by clicking if you like.

I did try this a few days ago in the TCD rebranding thread but it seems more appropriate here and I want to do it again using exactly the same format as last year for fairness.

The optimism filter comes from a paper that suggests that on average growth forecasts are over-optimistic by:
Year 1: 0.2%
Year 2: 0.8%
Year 3: 1.5%

Last year I noted.

“In June 2011 the DoF predicted growth (GDP) of:
2011 : 0.75%
2012 : 2.5%
2013 : 3%

“I applied the ‘optimism tendency’ (see ft link) adjuster and got:
2011 : 0.55%
2012 : 1.7%
2013 : 1.5%

“According to the latest EU Commission Winter 2013 figures we now have:
2011 : 1.4%
2012 : 0.7%
2013 : 1.1% (predicted)”

Just to note here that EU Commission Winter 2014 figures are now in and we can see that 2013 growth in that year was 0.3%.

2-1 to the envelope but the envelope wasn’t pessimistic enough looking two years ahead (and works just as effectively on the EU Commission Forecasts).

Last year I also noted:

“Looking to the future, we can start again with the Department of Finance’s forecast as of the Budget, December 2012:
2013 : 1.5% (predicted)
2014 : 2.5%
2015 : 2.9%

“Apply optimism filter and the envelope says:
2013 : 1.3%
2014 : 1.7%
2015 : 1.4%”

As of now, April 2014, we can look at the EU Commission Winter Growth Forecasts and we see:
2013: 0.3%
2014: 1.8% (predicted)
2015: 2.9% (predicted)

So, in this set, it is currently 2-1 to the envelope, with only the result from 2013 being in, 2014 looking very good for the envelope and the envelope stoutly saying that both the Dof and EU Forecast for 2015 is way over (which is it’s job).

Setting up the next round The DoF forecast at budget, end 2013 (the date moved a bit, you’ll remember) is:
2014: 2.0% (all predicted)
2015: 2.3%
2016: 2.8%

(Note how the trend of each annual budget is once again moving towards the envelope).

Apply the envelope and we get:
2014: 1.8%
2015: 1.5%
2016: 1.3%

The EU Commission Winter 2014 forecast is saying:
2014: 1.8%
2015: 2.9%
2016: N/A

As things stand the envelope is at 1-1 with 2016 not in view yet from the EU. But, of course the point is to see if, yet again, as the middle and further future becomes more near, the figures move to the envelope’s prediction.

As before I’ll leave any subjective observations to another post.

Mario Draghi made it clear that the EA differs from the US in terms of the channelling of QE as most corporate credit in Europe comes from banks.

He’s clearly concerned to avoid the situation where part of the big boosts in liquidity in recent years was put on deposit and some was used to purchase sovereign bonds.

Nicolas Véron of Bruegel has made the point that the European Commission has appeared to take a punitive approach to non-bank credit channels.

Reference to reform is standard in the opening statement and Draghi lived through a decade of stagnation in Italy when there were booms elsewhere.

In Japan, the central bank will eventually run out of gas if disposable income does not rise, female labour participation remains low and the taboo of immigration is not addressed – – it’s called the ‘third arrow’ if ‘reform’ is a problem word.

@ MH

As you point out, the definition of the “reforms” that may be required vary from country to country but a layman’s definition would simply be the removal of rent-seeking to the maximum extent possible because of the drag on efficiency involved. There is no shortage of examples in the countries of the EU and certainly not in Ireland. The problem in France is acute as it has a Scandinavian level of public expenditure without the necessary level of productivity to fund it. As a PM under Sarkozy (Francois Fillon) remarked years ago, France had to reduce her “lifestyle” but nothing much has happened.

The one positive that can be noted is that German policymakers also seem to be beginning to worry about the strength of the euro especially against the background of fears – exaggerated – about the impact on competitiveness of other – SPD inspired – measures notably the introduction of a minimum wage and now the possible impact on energy prices of the crisis in the Ukraine. (Gabriel, leader of the SPD, and minister for energy, has stated bluntly that it would be unrealistic to expect that Germany could cease gas imports from Russia) cf.

I just wonder if it isn’t all headed for a Japan style lost 25 years and not just in Ireland . For all of the market optimism prices are held up by CB support. DOCM talks about reform which means little people giving up things but the companies and comfortable have to sacrifice as well. Vested interests everywhere. Interest rates still on the floor. “Success” in the UK and US seems to be driven by housing bubbles and devaluation. Mass deleveraging, mass devaluation and mass export led growth are impossible.

“In real life, unlike in many of our models, crises are not an instant but a time period. This time dimension creates ample opportunity for all sort of strategic decisions within a crisis.”

Models just not up to it.
Debt is still the drag.
Animal spirits still not strong enough to pull everyone else along.


“fair value” is about 1.25 $ to the Euro. That it now corrects a tiny little bit towards that is certainly no case for being concernced nor frohlocking.

The Fed, the greatest currency manipulator in the history of mankind, and is now reducing their manipulation, a.k.a. QE, with getting a little, just a little cold feet about running open inflation.

Sooooo, are we going to be entertained, or just bored?

In this situation , talking down the Euro is completely fair game, helps our south by south west neighbors with the exports, and I would come over personally to spit on any available US representative and sing “yehova, yehova” if that would help. Most of you know the related Monthy Python youtube : – )

The mandate is for <= 2.0% inflation over a longer period, that still has at least half a year to work out at present inflation, and our word is our bond.

An interesting poll about the German mood to get into any military adventures

And some interesting background info on the Crimea:

First, Russia seems to be now able and swift,

Second, only 4400 of 18000 “ukrainian” soldiers, or < 25% stayed “loyal”


The mandate is for <= 2.0% inflation over a longer period, that still has at least half a year to work out at present inflation, and our word is our bond.

The current formula is The Governing Council has also clarified that, in the pursuit of price stability, it aims to maintain inflation rates below, but close to, 2% over the medium term. but medium term has been left undefined.

Of course in reality “medium term” means whatever Germany wants it to mean and Germany’s wants are entirely set by Germany’s needs. The medium term could be ten years from next April. Your “word” to Europe is to not care about it. Germany’s intensely selfish, short sighted and cruel influence on EU monetary (and effectively fiscal) policy may doom the entire enterprise.

Germany is good at capturing things Francis, usually because people underestimate its hive mentality and maniacal self belief. However three attempts to gain control of Europe in the same century is tempting fate.

I think Stephen Kinsella is right to focus on the paucity of growth in the domestic economy.

But the apparent relationship between domestic demand and employment does not look very robust. The latter has been rising since end 2011 on official data, while the former remains in a downtrend. Not even much of a correlation, let alone causality. The relationship between employment and credit growth, or demand and credit growth seems tenuous.

Households in Ireland have little capacity to increase borrowing. Firms have no need. Profits have risen since 2008.


how many votes in the irish parliament represent your habitual racist hate monger attitude ?

@Prudent Hans

‘Germany is cannibalizing the South of Europe to stay prosperous, but it’s not a sustainable situation.

[…] Europe is on a downward trend. They started from a better place than the US (universal healthcare, decent welfare systems), but that does not alter the trajectory. Their fall is an odd mixture of an insistence on keeping the EU together, while refusing to actually make the EU a proper federal state and take care of everyone in it. As it stands, the EU does not make sense: most countries, including Greece, Italy, Spain and Portugal, but not limited to them, would be better off leaving it. Or, frankly, the rest of the EU should kick Germany out, and erect tariffs against their goods.

England should be kicked out as well, for serial bad behaviour.

It is impossible, right now, to regulate the world economy in any way beneficial to ordinary citizens of the majority of states. The doctrine of free trade, which is really about free financial flows and deregulation of labor, has made actual economic policy almost impossible unless a country finds a way to opt out of the neoliberal consensus (aka. China), or use its structure to their (temporary) advantage (aka. Germany.)’ [h/t


Is the skimming of a profit margin by the capitalist classes not also “drag on efficiency” and, indeed, the worst sort of rent seeking? Seems the “reform” we need is the abolition of capitalism.


How is it racist to describe German behaviour as it is?

Anyway, the idea of a German calling anyone a racist is, er, rich.

text from Blind Biddy in Lim .. ick! Ah – the game.

A must read for those interested in Ukraine. Investigative reporter Robert Parry broke many of the Iran-Contra stories for The Associated Press and Newsweek in the 1980s. Link here to his new book, America’s Stolen Narrative.

” The Danger of False Narrative

March 27, 2014
Exclusive: Like a decade ago with Iraq, Official Washington’s pundits and pols are locked shoulder-to-shoulder in a phalanx of misguided consensus on Ukraine, presenting a false narrative that is taking U.S. policy into dangerous directions, writes Robert Parry

[…] Today, Official Washington is marching in lockstep just as it did in 2002-03 when it enforced the misguided consensus on Iraq’s WMD. The latest case is Ukraine where Russian President Vladimir Putin is accused of committing “aggression” to expand Russian territory at the expense of noble ”democratic” reformers in Kiev.

Not only is this the dominant storyline in the U.S. media; it is virtually the only narrative permitted in the mainstream press. But the real narrative is that the United States and the European Union provoked this crisis by trying to take Ukraine out of its traditional sphere of influence, Russia, and put it in to a new association with the EU
[…] Though the Maidan protests involved hundreds of thousands of Ukrainians simply eager for a better life and a less corrupt government, some of the most militant factions came from far-right parties, like Svoboda, and even neo-Nazi militias from the Right Sektor. When protesters seized City Hall, Nazi symbols and a Confederate battle flag were put on display.

As the protests grew angrier, U.S. officials, including Assistant Secretary Nuland and Sen. McCain, openly sided with the demonstrators despite banners honoring Stepan Bandera, a World War II-era fascist whose paramilitary forces collaborated with the Nazis in the extermination of Poles and Jews. Nuland passed out cookies and McCain stood shoulder to shoulder with right-wing Ukrainian nationalists. [For more on the role of Ukrainian neo-Nazis, watch this report from the BBC.]

If this makes sense then something is very seriously wrong with the way Ireland is “disposing” of the property it has in receivership.

CAP (Canadian Apartment Properties) REIT (Real Estate Investment Trust) bought 4 properties out of receivership July 2013 for C$59 million and expects to do an IPO for C$300 million today. Over 500% ROI in less than a year.

It bothers me in that it makes us fit the feckless, drunk out of our skulls, stereotype.

@Mickey Hickey the unit price does not pencil,its a sighted capital raise.Canadian market specifically the Toronto condo/apartments is overheated and about to be overbuilt if not already.Looking too geographically diversify and with no new supply Dublin apt mkt. is/was under priced with very attractive yields.
Green is going back to raise some more cash too,only in a banana republic could a state agency sell over 5BILLION of face value assets for a little over 1BILLION yet claim its a dirty little secret what they sold 5,000,0000,0000 off state assets for !
They have no further exposure to this market why is the price sensitive and who gets to decide that…is too avoid blushes down the road when another us vulture fund does NAMA’s job?
Why no JV,carry or back end piece are we to assume then that NAMA thinks the price is maxed and best cash out now,not hang around for any upside or will no buyers work with this mickey mouse outfit?
They cant even lend money they were the sellers here yet no one will take their money or JV,its simply a glorified brokerage shop at this point w/o the fee income.

“Bank of Ireland financed the Central Park deal with a five-year €150m senior loan priced at 295 bps over three-month LIBOR, CoStar News understands, underlining the REITs ability to command competitively priced acquisition finance.”

@John Gallaher
In the Toronto market Condos are selling, the question that goes unanswered is how much of it is coming from out of country speculators. The gov’t has made eleven tightening moves in the past three years mostly adjusting length of mortgage downward, increasing down payments, reducing insurance coverage and increasing cost of mandatory lender insurance. In addition to telling the lenders they will be allowed to hang. Condos are a commodity, the price bubble is in single family stand alone housing due to scarcity of serviced developable land. Vancouver has levelled off in the last few years, Calgary is now the bubble leader with Toronto coming on strong.
Jobs are being created and unemployment is under 7%, inflation is under 2%. When the Bank of Canada tightens the bubble will blow, estimated to be 18 to 24 months out.

@Mickey Hickey ..”In the Toronto market Condos are selling, the question that goes unanswered is how much of it is coming from out of country speculators.”

single family is still ‘hot’ condos cold.
off shore investors got smacked in Feb budget.

The investor class were usually parents of young children who would buy a 2500 sq ft. house in a leafy suburb. Dad would work for a few months and then walk across the border to the US and fly back home for 6 months or more. Return the same way, rinse and repeat, get citizenship (meeting residency requirements)for the whole family in 5 years and then fly home with dual citizenship. The University age children would then get a good affordable university education in Canada. The locals got restless so the gov’t reined it in. The schools are uniformly good in Canada, unlike the US where there are wide variations.

The investor class have little affect on the housing market because of the churn. The ones intending to go back will do so over 5 to 10 years and longer where the children go to university.

Usually the biggest risk is Condos where the number of overseas buyers is masked by Lawyers and agents acting as intermediaries. When the market starts falling they rush for the exits causing a two year sharp downturn in prices. The upside is that Condos are the new apartments and there is a rental market to partially absorb the shock.


One dead pensioner is nothing as to the glory that is EMU and a strong, thrusting Euro. I call it “Stability kultur”.

Malaria has now returned to Greece, cases of TB have doubled, suicide rates have increased by 45% and largely thanks to the Troika’s particular combination of ideological fixity and indifference to human suffering.

What an incredibly cruel and stupid place the EU has become


how many votes in the irish parliament represent your habitual racist hate monger attitude ?

Given the attitude of the German parliament to the well being of the people of the periphery (Feckless work shy southerners who must be made to suffer.) I think we can safely say that the there are less racists in the Dail than in the Bundestag. You must have some inkling of this yourself surely?

After all you understand that, despite Americans being friendly, open, kind and likable people (more open than the Irish I think) who ostensibly live in a democracy, US foreign policy has a largely malign effect on the world. The US is entirely capable of great achievements while holding the rest of the world back from moderate ones.

Thus it is with Germany, the EU and EMU. Similar reasons I think – feelings of national superiority, a tradition of conformity and utter ideological certainty in the governing elites.

Comments are closed.