Draft SPU Update: Risks

The Department of Finance has released a Spring-less Statement (.pdf), showing some interesting debt dynamics projections and a really nice risk-assessment section (see page 26) and their likely impacts on the Irish economy. Brexit figures highly, as one might imagine, but so do other external demand shocks and domestic issues, and the fiscal risks associated with not meeting our climate change targets. The Department writes:

There are fiscal risks associated with a legally binding EU Effort Sharing Decision on climate change covering the 2013-2020 period. Ireland is obliged to achieve a 20 per cent Greenhouse Gas emissions reduction (compared to 2005 levels) in certain sectors. Current EPA projections estimate that Ireland will not achieve this reduction and failure to comply may incur costs of hundreds of millions through the purchase of carbon credits until such time as the target is complied with. Similarly, further new costs may arise in the context of a new EU climate and energy framework for the period 2020-2030, which will set new emissions reduction targets.

Scary stuff.

Redistribution in the Age of Austerity

Readers of this blog might be interested in this working paper we’ve just put up on the Levy working paper series. The abstract is below.

We examine the relationship between changes in a country’s public sector fiscal position and inequality at the top and bottom of the income distribution during the age of austerity (2006–13). We use a parametric Lorenz curve model and Gini-like indices of inequality as our measures to assess distributional changes. Based on the EU’s Statistics on Income and Living Conditions SLIC and International Monetary Fund data for 12 European countries, we find that more severe adjustments to the cyclically adjusted primary balance (i.e., more austerity) are associated with a more unequal distribution of income driven by rising inequality at the top. The data also weakly suggest a decrease in inequality at the bottom. The distributional impact of austerity measures reflects the reliance on regressive policies, and likely produces increased incentives for rent seeking while reducing incentives for workers to increase productivity.

African Demographic Trends and European Policy Responses

The Demographic Transition, which started in Europe in the late 18th century, had a huge positive impact on average human welfare. Population levels and growth rates became dependent upon societal preferences rather than upon famine and disease. The demographic transition has now spread around the world to all continents, except Africa. Surprisingly, Africa has not made the switch. Rather than seeing population growth easing and then stopping, in a typical post-demographic transition pattern, African population growth rates have stayed at a very high rate for many decades. Even in recent years, while many demographers expected a slowdown finally to take hold, African population levels have rocketed up. So for example, from the National Geographic: Continue reading “African Demographic Trends and European Policy Responses”

Irish Performance since Independence and the Scottish Debate

This paper of mine just came out in a special issue of Oxford Review of Economic Policy on the question of Scottish independence.  I had been asked to reflect on Irish economic performance since independence, on the exercise of fiscal and monetary sovereignty, and on migration policy, without saying anything about Scotland.

From an earlier draft I attach a comparison of population growth in Ireland and Scotland and their respective peripheries.

Changes to national accounting practices

There has been some comments in the media over the past week or so about changes to the way national accounts are compiled in the EU.

A good deal of this has focussed on changes relating to illegal/informal/underground economic activities.  It should be noted that there is no change to the treatment of these activities in ESA2010.  The definitions and conceptual approach to such activities remains exactly as it was in ESA95.  The major differences between ESA95 and ESA2010 are summarised here.

Continue reading “Changes to national accounting practices”

Profiling the indebtedness of Irish SMES

This is exactly the kind of responsive research the Irish Central Bank should be doing. The Central Bank’s Fergal McCann takes a look at Irish SME indebtedness in the wake, presumably, of Morgan’s latest Irish Times op-ed on the subject. Fergal solves the data problem the ICB has for SME indebtedness levels using Red-C data.

There’s no doubt, I think, that there is a serious debt problem within Irish SMEs. But 34% lot of them have no debt at all, with others with very little debt relative to turnover.

McCann’s work is not of the ‘it’s grand lads, nothing to look at here’ variety, either, and it does put a shape on the problem for us.

The seriously indebted medium-sized enterprises are in trouble, though, and we now have a good measure of the likely extent of how many of these firms there are.

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.

The latest national accounts data

I have been waiting for someone else to post on the national accounts data for 2013, available here, but no-one has yet, and it deserves a thread.

Real GDP, which as we know is mis-measured as a result of transfer pricing, declined 0.3% in 2013. Real GNP, which we learned last year has its problems too, was up by 3.4%. Nominal GDP rose by just 0.1%, which is not good for the debt to GDP ratio. Nominal GNP rose by 4%.

I guess that a marketing problem the government faces is that if it plays up the GNP numbers too much as being clearly superior, which I suppose we still believe they are (?), someone out there may start dividing our debt by GNP.

Domestic demand in historical context

Today’s CSO readings are good news and should be seen in their recent historical context.

News headlines are pointing to the ‘domestic’ part of the economy experiencing an uptick. Let’s look at final domestic demand as one measure of this. The two figures below bear this out, with the latest data coloured in red, and the series indexed to 2008 Q1, the peak of final domestic demand. The first plots out the movement from 2002 until 2013 Q3, the second from 2010.

The clear uptick can be seen, but the economy is obviously still fragile and the uptick, in the context of a rather demand-depressed economy, shouldn’t be overstated.

Successful Completion of Tenth Review of Troika Programme

In a statement issued at the end of this Review yesterday, we were given the by-now familiar plaudits for achieving various benchmarks. Going forward, ‘strict implementation’ of this year’s budgetary targets is urged.

The gravity of the unemployment situation is acknowledged. ‘Swift action needed to deal with unemployment’ the newspaper headlines proclaimed. The onus for this is placed on the Irish government and a familiar list of policies proposed, including for example ‘the need for enhanced engagement with the unemployed and the opening up of competition in sheltered sectors like legal services’.

I wonder how much our readers think increased competition between lawyers will contribute to lowering our unemployment rate.

Reaping the Benefits of Globalisation: What are the Opportunities and Challenges for Europe and Ireland?

This Conference, jointly organised with the European Commission, is an associated event of the Irish Presidency of the Council of the EU. It will present and discuss the main findings of the 2012 edition of the European Competitiveness Report as well as recent related empirical evidence and their implications for industrial and innovation policies in Europe and Ireland. The Conference Programme and more information are available here.

Prospects for the agri-food sector in 2012

Teagasc economists have just released their Situation and Outlook Report for the Irish primary agriculture sector for 2012 (proceedings here and presentations here). In 2011 there was a significant and welcome recovery in farm incomes (up 33% over 2010) although this was entirely due to higher prices and higher subsidies – the volume of agricultural output (at basic prices) remained unchanged despite slightly higher volume consumption of intermediate inputs.

The Teagasc view is that the value of gross output in agriculture will fall back slightly in 2012, due to a combination of lower production in some sectors and lower prices in others. There will be some savings on input costs, but lower subsidies in 2012 (due to a carryover of payments in 2011) means that operating surplus in agriculture is expected to fall by 12%.

Continue reading “Prospects for the agri-food sector in 2012”

Public Capital Programme

Here is a link to the new infrastructure and capital investment programme. There is a lot in there so it will take a little time to digest it.

Some quick points:

– There is a commitment to the National Children’s Hospital;

– There is funding for new schools;

– Luas BXD to go ahead (Metro North and DART Interconnector shelved, Metro West was shelved some time ago);

– the A5 project in Northern Ireland (80 km from the border to Derry) has now also been shelved (in addition to the shelving of 45 other national roads projects announced some time ago);

More on Savings Rates in Ireland.

Seamus’ excellent post today reminded me to post something I looked at some weeks ago. The September Budgetary and Economic Statistics from the Department of Finance carried some really useful information in Table 25 on investment, Gross National income, and gross and net savings. The figure below shows the evolution of gross and net national saving and the gross total available for investment from 1995 to 2010.

We can see clearly from the figure that the spike in net national savings in 2007 is rapidly diminished, with only 21 million euros put aside, so to speak, in 2009, and 1951 million euros in 2010. Occasionally the notion gets floated that there is a load of money somewhere in a bank account to be taxed. This should be dispelled rather quickly, as households don’t seem to be saving their way through the crisis much at all. In addition, the total available for investment seems to have dropped off, with no rebound in sight, which is a worry.

Seamus Coffey on the Savings Rate

One of the point that has been made repeatedly about the Irish economy over the past year or so is that weak domestic demand is connected with a high savings rate. (Admittedly, the actual national income data on personal savings rates are only available with a long lag but the slow pace of consumption spending is consistent with this story). Many, including now Minister Noonan, put this increase in the savings rate down to discretionary precautionary savings and believe that once people relax about their future, domestic demand will take off again.

I’ve always been pretty skeptical of this argument. My take on spending patterns has been that the increase in the savings rate may be more connected to people who had previously been able to live beyond their means having to pay back debt because of the change in financial market conditions, while others who have always saved continue to do so.

The implications of this story for the future evolution of the savings rate are quite different. There is little reason to think those who have been saving all along (e.g. for retirement) will reduce their propensity to do so. Indeed, if they were reliant on their funds invested in Irish property or in Irish pension funds now subject to the new levy, then the opposite would be the case. And those who are apparently saving because they are re-paying debt are, in practice, feeling as if every euro they earn is earmarked for either debt repayment or managing to keep going. These people are also unlikely to suddenly start spending if the economy stabilises.

Anyway, I’ve meant to make that point on this blog loads of times but didn’t. Then Seamus Coffey wrote this excellent post and, in comment speak, I want to say “What he said.”

Poor Economics

One of the most important economics books aimed at wider audiences to emerge in the last few years is Poor Economics by Abhijit Banerjee and Esther Duflo. Banerjee and Duflo are two of the leading economists of their generation and are particularly associated with the use of randomised controlled trials in development economics. However, this book is broader in its scope and tackles a wide range of issues in the economics of poverty, development economics and the economics of the family. The book has ten chapters and two major sections, one dealing with individual behaviour among the poor and the second dealing with the role of institutions. Like the best popular economics works, each chapter deals with very big issues backed with the recent literature but presented in a punchy and readable fashion. It is a cracking read. The first section deals with nutrition, public health interventions, education interventions and fertility. The second section looks at insurance for the poor, microcredit, savings and entrepeneurship. Chapter 10 sets their argument in the overall context of development debates raging between people like Sachs and Easterly.

The book pushes strongly for the continued development of experimental approaches to economic development that attempt to find workable solutions that large-scale philantrophic and government funding initiatives could be aimed toward. It is important reading for anyone working in microeconometrics and development economics broadly defined and also would be great reading for anyone in Ireland working around the area of foreign aid policy. I open up this thread for anyone who wants to debate aspects of the book or the surrounding issues. From an irisheconomy perspective, it is worth thinking about how the ideas in the book might influence how the Irish government directs the overseas aid budget.

Why we should hope fiscal multipliers are large

One of the frustrating things about doing macroeconomics during the crisis is that it is so hard to pin down key empirical parameters.    The size of fiscal multipliers is probably the main case in point.   The combination of short time series and a wide range of conditioning factors – confidence effects, the state of credit markets, import leakages, etc. – make it hard to identify the causal impacts of changes in taxes and government spending.  

While there is a widespread view that Irish fiscal multipliers are small (mainly due to the openness of the economy), I have always believed this is exaggerated given offsetting factors such binding credit constraints, an almost completely accommodating monetary policy and a large negative output gap.  At a time when I thought Ireland could retain its creditworthiness, this led me to believe we should pursue as gradual a fiscal adjustment as the State creditworthiness constraint would allow.    But with creditworthiness proving more fragile than expected, there is now little choice but to move expeditiously to close the deficit. 

With significantly more fiscal adjustment to come – probably at a minimum the €9 billion planned for in the EU/IMF programme – there is an obvious reason to hope fiscal multipliers are small.   But there is also a reason to hope they are large.   With the IMF reducing its growth estimate for 2011 and the exchequer returns hinting at a weaker than expected recovery, we would be better off if the fiscal adjustment is a significant source of the observed weakness in domestic demand.  

It is the underlying rate of potential output growth that really matters for Ireland’s debt sustainability.   Uncertainty about this rate is a significant part of our creditworthiness problem.    As others have pointed out, there are competing narratives about Ireland’s medium-term growth potential.   On the positive side is the strong growth in net exports (which added about 3.5 percentage points to Ireland’s real GDP growth in 2010).  On the negative side is the combined impact of the fiscal austerity and the drag from impaired balance sheets (which subtracted about 4.5 percentage points from growth in 2010).  

While unfortunately we are in for a good deal more austerity, it will eventually end; the more of the current drag on domestic demand that is coming from the austerity, the higher is the implied underlying potential growth rate.   Even if the fiscal adjustment is making less headway now in reducing the deficit due to relatively high multipliers, the large changes in taxes and social welfare rates should allow for a rapid improvement in the deficit once the austerity ends and decent overall growth returns.    The hoped for growth narrative – which I think we have good reason to believe is true – is that Ireland has an economy with a strong underlying export-driven growth potential that is being temporarily held back by unavoidable fiscal adjustment. 

Some thoughts on the QNA release

With all that was going on in Brussels, the fourth-quarter QNA release got less attention than might have been expected.  As usual, the numbers don’t all point in one direction.  And also as usual, the quarterly numbers must be treated with caution given their volatility and propensity for revision. 

The annual declines in real GDP (1 percent) and real GNP (2.1 percent) received the most coverage.   But the annual numbers can give a misleading picture when the economy is at a turning point.   A better measure is the percentage change over the same quarter of the previous year.   I linked to these graphs on the thread following the release.   The noticeable turnaround in real GNP is encouraging (up 2.7 percent on quarter four of 2009); less encouraging is the 0.6 percent decline in real GDP, with the overall performance dragged down by a poor final quarter.    

The final graph in the set shows again the “two economies” reality of recent Irish growth performance.   The only thing that I would add is that the underlying potential growth of the economy is a critical factor for our capacity to pull out of the debt crisis without default.   Recognising the likely impact of the austerity measures on domestic demand, I think the picture is consistent with the (ESRI) view of solid underlying export-driven growth potential.

The main bad news in the release relates to the performance of nominal GDP.    The Budget 2011 forecast for nominal GDP in 2010 was €157.3 billion.   The actual nominal GDP turned out to be €153.9 billion – a 2.1 percent shortfall over the budget day forecast.   Readers might recall that the €157.3 billion was itself the result of an earlier downward revision (see Philip Lane’s explanation here).  

If that nominal shortfall carried over to 2014, the deficit would have to be reduced by an additional €94.1 million to meet the 2.8 percent of GDP deficit target for that year.   This back-of-the-envelope calculation ignores the impact of any additional deficit reduction on GDP.   Of course, there are even more severe implications if we are required to hit the higher intermediate targets along the way (for these targets see Table 6, p. D19 here; see p. D9 for the Budget 2011 nominal GDP projections).   For example, an extra €316 million would have to be taken off the deficit to meet the 9.4 percent deficit target for 2011.  It should be noted, however, that the poor performance for nominal GDP mainly reflects an eyebrow-raising quarter-on-quarter drop in the final quarter (down 6.6 percent, seasonally adjusted), and could be even more than usually subject to revision. 

Ireland First Blueprint Document

Via Namawinelake, here‘s the up-to-now secret “Blueprint for Ireland’s Recovery” that has been produced by a group that apparently call themselves Ireland First. As you’ve probably heard, the group includes businessmen like Dermot Desmond and Denis O’Brien as well as various grandees with links to Fine Gael (John Bruton, Frank Flannery, Peter Sutherland), Fianna Fail (Ray McSharry) and Labour (Dick Spring).

Naturally, given that it’s an economic recovery plan, there isn’t an economist in sight. And, as is often the way with non-economist plans, it’s mainly a long laundry list of stuff the group would like to see happen combined with ambitious claims and targets related to what might happen if the chosen policies were adopted. Many of the policies proposed are sensible, some less so.

I particularly disliked this bit: “There needs to be a positive engagement with editorial and ownership/senior management of media organisations in order to ensure we have balanced coverage and that good news stories are covered.”  Ah yes, the meeja need to stop talking down the economy.  Some things never change.

Triumph of the City

A book that deserves some attention from policymakers here is Edward Glaeser’s new book “Triumph of the City“. The book has nine chapters, along with an intro and conclusion. It makes the case that city-living is, in general, conducive to innovation, health and environmental protection. The nine chapters go through the role cities play in bringing people with ideas together, the role of slums in acting as a pathway from destitution, the attractiveness of cities as places to live, the health advances that have been made in cities, the benefits of building up, the role of human capital policies, and the environmental advantages of cities.  Glaeser puts particular store on policies designed to build human capital in cities through education and through attracting intelligent and entrepeneurial people. Its simplifying his position somewhat but he strongly advocates building up rather than sprawl and he is a critic of the use of building projects as methods of urban renewal. Glaeser has published several highly influential articles in Economics and he really packs ideas into this readable book. If anyone has read it, or is going to read it, feel free to use this thread to talk about some of the ideas in the book as well as their relevance in Ireland.

Migration Estimates

This is an addendum to John McHale’s last post and a response to JTO’s plea for more real data on this site. Below is a consistent series (based on CSO data) for the net migration rate from 1961 to 2010.  The net flow has been expressed as a rate per 1,000 average population. The years are to end-April.
We await with great interest the results of the 2011 Census, which will give us a fix on the migration trend for the year ending April 2011 and allow the estimate for 2002 to 2010 to be updated. 
Preliminary Census results should become available by the end of the summer.