Archive for the ‘Economic Performance’ Category

TCD Policy Institute event on mortgage arrears

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Wednesday, May 13th, 2015

The topic of mortgage arrears remains close to the top of the political agenda, with the Government set to announce measures today on the issue. Next week, we are very fortunate to have in Dublin one of the world’s leading experts on housing markets, arrears and foreclosure, Fernando Ferreira of Wharton Business School at the University of Pennsylvania.

The Policy Institute, based at Trinity College Dublin, has organised a mini-conference on mortgage arrears for the morning (9am to 11.30am), next Monday 18th May in Trinity College Dublin (JM Synge Theatre, Room 2039, Arts Building). The mini-conference centres on factors influencing mortgage arrears and repossession and focuses in particular on the US and Irish experiences. Speakers include Fernando Ferreira (Wharton & NBER) and Yvonne McCarthy (Central Bank of Ireland). There will also be a panel discussion and time for questions/comments from participants.

All welcome with no need to register.

International Investment Position & External Debt – Q4 2014

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Wednesday, March 25th, 2015

The CSO have published the Q4 2014 update for these data.  As pointed out 12 months ago there is a lot of noise in the figures.

Ireland’s gross external debt was estimated to be €1,721.6 billion at the end of 2014.  On the other side of the ledger there are €2,623.8 billion of external assets in debt instruments.  This means we have a net position of -€902.2bn, i.e. assets exceed liabilities.  Of course, these figures are close to meaningless in any real sense as they are polluted by financial services sector.

Under the heading “IFSC” the CSO records total foreign assets of €2,757.5 billion and total foreign liabilities of €2,790.4 billion.  The gross totals are immense but the net position is small by comparison.  Here are the net international investment positions by sector excluding the impact of the IFSC.

Looking at the NIIP by sector is not the end of the story.  We equally have to account for the MNC effect that will impact the figures for non-financial companies.  For example in debt instruments alone there is €168 billion of external debt and €242 billion of external assets in debt associated with direct investment (outside the IFSC).  This is further muddied by foreign direct investment into Ireland and investment abroad by Irish domiciled (and sometimes foreign-owned) companies.  Part of the impact of this can be seen in the second panel which shows the NIIP by type of investment.

Ireland gross external debt (excluding the IFSC) is around €470 billion.  By factoring for external assets in debt instruments the equivalent net external debt is (just) €55 billion.  However, if we exclude the impact of direct investment in both directions (mainly MNCs but not exclusively foreign-owned MNCs) the situation is:

The gross external debt figure is just over €300 billion and has fallen around €100 billion over the past three years.  As more of the external assets in debt instruments are associated with direct investment the net external debt figure here is €130 billion (higher than the €55 billion figure including direct investment).  This has fallen by around €75 billion over the past three years.

If we look at the overall net international investment position we see the following (the chart begins in Q1 2012 as that is when the new BPM6 series start):

Note the subcategories are not the same.  In the external debt chart we were able to remove assets and liabilities associated with direct investment.  For the NIIP only a division by sectors is available.  Thus we can show the NIIP excluding non-financial companies which in the main will reflect the activities of MNCs but not exclusively so.  Outside of the IFSC and NFCs Ireland has a net external liability of €80 billion which is an improvement of €60 billion on the position at the start of 2012.

CSO Updates

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Thursday, March 12th, 2015

The CSO have published the Q4 2014 Quarterly National Accounts which provide us with the first  full-year estimates for 2014.

Real GDP growth in 2014 is estimated to have been 4.8 per cent. Real GNP expanded by 5.2 per cent.

Nominal GDP grew by 6.1 per cent and now stands at €185 billion.  Real GDP growth was 0.2 per cent in Q4 2014 compared to previous quarter.  The Balance of Payments shows a current account surplus equivalent to 6.2 per cent of GDP (€11.5 billion) for 2014.

As per usual there is likely a lot happening under the surface of the headline figures with factors like contract manufacturing and re-domiciling PLCs impacting previous figures.

Prices rose 0.6 per cent in February but annual inflation remained negative at –0.4 per cent.

Expectations, credit and house prices

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Monday, January 5th, 2015

Happy new year to the irisheconomy.ie community. Of course new year means new quarter and new quarter means house price reports…

The latest Daft.ie House Price report is out this morning. The PDF is available here. For me, the key takeaway is as follows: house prices fell in the final quarter of 2014 and it seems very unlikely to have been statistical noise or a seasonal effect. 35 areas are analysed in each report. For each of the first three quarters of the year, an average of 32 showed quarterly gains in asking prices. For the final quarter, this flipped, with 30 of 35 regions showing a fall. For Dublin, this was the first quarterly fall since mid-2012. (Given the size of increases earlier in the year, a one-quarter fall still leaves the year-on-year change large and positive: 20% in Dublin and 8% elsewhere.) Broadly speaking, a mix-adjusted analysis of Price Register transactions shows the same. While it is only one quarter, it seems more than just a statistical blip.

For me, the check-list of what matters for house prices contains five items: [1] household incomes, [2] demographics and [3] housing supply (“the fundamentals”); and [4] credit and [5] expectations, these last two being the “asset factors” that can create and destroy housing bubbles. None of the fundamentals changed dramatically in the final three months of the year (the only thing you could argue was a slightly higher volume of listings in Dublin), so the change after September must be due to asset factors.

The Central Bank proposed in October to cap residential mortgages as early as January 2015, although this could not affect prices directly in 2014. So the last remaining candidate is expectations.* The quarterly Daft.ie report includes findings from a survey of housing market sentiment. This survey indicates that, yes, those active in the housing market did revise downward their expectations about future house price growth, particularly in Dublin. Whereas those surveyed in September expected a 12% increase in Dublin house prices over the next 12 months, this had fallen to less than 5% by December. I expect that the Central Bank would be happy if it were the case that their proposals strengthened the link in people’s heads between fundamentals (in particular people’s incomes) and house prices.

As for my opinions on the Central Bank guidelines themselves, I submitted a response to the Central Bank’s Consultation Paper, which is available online here. The TL;DR version is “max LTV good, max LTI bad”. I made similar points at an Oireachtas hearing on this and related topics in late November.

* Some have argued that the end of Capital Gains Tax relief was what drove trends in the final months of 2014. The theoretical reasoning behind this is unclear – it is not obvious that this would affect supply more than demand – while practically speaking, it is also not clear how this would have managed to infiltrate the vast bulk of the market which is not of interest to investors. When asked what they thought was driving house prices, those active in the housing market rarely mentioned tax factors, instead picking credit and supply as the main factors.

Quarterly National Accounts

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Thursday, September 18th, 2014

The Q2 National Accounts and Balance of Payments updates have been published by the CSO.

The quarterly changes will attract plenty of attention but little can be judged from them given the volatility of the series, the possibility of revisions and the impact of the MNC and IFSC sectors.

Quarterly Changes: GDP +1.5%; GNP +0.6%

More significantly perhaps are the year-on-year changes for the first six months of the year. 

  • Real GDP (2012 prices)
  • H1 2013: €85,163m
  • H1 2014: €90,069m

That is an annual increase of 5.8%.  For GNP the equivalent change is +6.0%. Wow!

Value added increased in all sectors when compared with H1 2013: (% = real annual growth, € = amount in 2012 prices)

  • Agriculture, Forestry and Fisheries: +11.9% to €2.45bn
  • Industry: +0.7% to €22.52bn
    • with Building and Construction: +8.3% to €1.51bn
  • Distribution, Transport, Communications and Software: +10.9% to €20.35bn
  • Public Administration and Defence: +3.7% to €3.22bn
  • Other Services (including implied rent): +3.3% to €33.90bn
  • Taxes on goods/services less subsidies: +9.8% to €8.31bn

For fiscal rules junkies, nominal GDP for H1 2014 is €90.2 billion.  Last April’s Stability Programme Update had a forecast of nominal GDP in 2014 of €168.4 billion.  The methodological revisions completed by the CSO over the summer and the recent growth mean that a nominal GDP of around €180 billion is now likely this year.  Sticking with the Department’s 3.6% nominal growth projection for next year gives a 2015 figure of €186.5 billion.  These increases in the denominator will significantly improve the appearance of fiscal ratios.

Although net exports increased and contributed around 40% of the increase in GDP the remainder is due to domestic demand.  Real total domestic demand in H1 2014 is 4.0% up on the equivalent period in 2013.  Although all components are up (consumption +1.2%, government expenditure +5.2%) much of the increase is driven by investment which is up 11.3% year-on-year.  In recent years much of the volatility in this component has been the result of aircraft purchases by leasing companies based in Ireland.

The current account of the Balance of Payments shows a surplus of 4.3% of GDP for H1 2014 compared to one of 2.5% of GDP for H1 2013.

Too early to call the end of the eurozone recession…

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Tuesday, June 17th, 2014

…says the CEPR Business Cycle Dating Committee, here.

Changes to national accounting practices

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Tuesday, June 3rd, 2014

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.

(more…)

Stability Programme Update

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Tuesday, April 15th, 2014

A DoF presentation with some of the key forecasts in the SPU is available here. There is also a press release.

The full text is here.

Government Finance Statistics

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Monday, April 14th, 2014

The CSO have published the end-2013 update of these series:

There isn’t much to surprise in the figures.  Gross debt at the end of 2013 was €203 billion (124 per cent of GDP).  Once offsetting assets of €42 billion in the same categories are accounted for net debt was €161 billion.  The assets were:

  • Cash: €23.8 billion
  • Bonds: €10.8 billion
  • Loans: €7.1 billion

Other assets not used in the net debt calculation are include shares and other equity of €29.8 billion and other financial assets (mainly accounts receivable) of €9.2 billion.

The market value of Ireland’s €203 billion of nominal debt instruments was €219 billion at the end of the year.  The estimated pension liabilities of the government are put at €98 billion, while contingent liabilities are “just” €73 billion.

The 2013 general government deficit is provisionally estimated to have been €11.8 billion (7.2 per cent of GDP) from €13.4 billion in 2012.

The ‘operating balance’ of the government sector went from a deficit of €12.5 billion in 2012 to one of €11.8 billion in 2013, an improvement of just €0.7 billion.  The improvement in the overall deficit was greater because of changes in the capital budget.

Gross fixed capital formation was further reduced from €3.1 billion in 2012 to €2.7 billion in 2013.  With consumption of fixed capital at €2.3 billion the increase in the public capital stock was just €0.4 billion.  The main change in the capital account was a €0.7 billion gain in the ‘net acquisition of unproduced assets’ which likely relates to things such as mobile phone and lottery licenses.

Revenue from taxes and social contributions rose from €49.1 billion to €51.6 billion, while investment income was up around €0.5 billion to €2.7 billion. Much of these increases were offset by an increase in interest expenditure of €1.5 billion to €7.4 billion.  Social transfers paid decreased from €29.0 billion to €28.6 billion, of which €24.0 billion were in cash.

Q4 2013 International Investment Position and External Debt

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Thursday, March 27th, 2014

The CSO have published the Q4 2013 update of the IIP data.

These are important data but, as with many macro aggregates on the Irish economy, establishing meaningful trends can be difficult.  In the data the totals look enormous but the IFSC sector has foreign assets of €2,390 billion and foreign liabilities of €2,394 billion for a net external liability of just €4 billion.  It is possible to generate some ridiculously large external debt figures for Ireland by including the liabilities of the IFSC but they are wholly matched by foreign assets.

The net international investment position of the non-IFSC sector improved significantly in the final quarter of 2013, moving from –€172 billion to –€150 billion.  This measure troughed in Q4 2011 at -€196 billion.  The bulk of the –€150 billion arises from the –€116 billion net IIP of the government sector.

The net IIP of the non-IFSC sector began to improve in 2012 though obviously the position of the government sector continued to deteriorate.  However, this  was more than offset by the improvement in the net IIP of the Central Bank which fell from –€101 billion at the end of 2011 to –€37 billion now (these are the liabilities to the ESCB including TARGET2 balances).  Most of this improvement occurred in 2012.

In the most recent quarter there was a €6 billion improvement in the net IIP of the non-financial corporate sector, from –€87 billion to –€81 billion.  However, on this the release notes the following:

With the relocation of a number of group headquarters to Ireland, foreign assets of Non-Financial Companies increased by €47.5bn and foreign liabilities increased by €41.4bn resulting in a decrease of €6.1bn in the net liability to €81.2bn

Thus, all of the quarterly improvement for the sector (and half of the total quarterly improvement for the non-IFSC sector) is as a result of company re-domiciling.  To the extent that these companies have retained earnings on their balance sheets this is also likely to have impacted GNP figures for the same quarter.

Ireland’s Gross External Debt was largely unchanged at €1,604 billion, with 70 per cent of this arising from the foreign debt-instrument liabilities of the IFSC sector.  The Net External Debt after subtracting foreign assets in debt instruments was –€696 billion (i.e. an asset position). 

Removing the impact of the IFSC, the Net External Debt of the non-IFSC sector at the end of 2013 was a liability position of €92 billion.  This was €146 billion at the end of 2012 and €182 billion at the end of 2011.  Again, the improvement in 2012 was due to improvements in the Central Bank position but this did not continue into 2013.  The 2013 improvement in Net External Debt can mainly be attributed a jump in debt instrument assets under the heading “debt liabilities to affiliated enterprises”. These debt instrument assets show an increase of €30 billion over the year, all of which happened in Q4.  Again this can be attributed to the re-domiciling of firms.

As a result of the impact of the IFSC sector looking at the overall totals for Ireland is largely meaningless.  There has been some improvement in the stripped-out results for the non-IFSC sector but, recently at least, much of that can be attributed to boardroom decisions.

Forfás: Survey of Economic Impact

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Tuesday, March 25th, 2014

The 2012 release of the Annual Business Survey of Economic Impact is available here.

The coverage is obviously not as broad as the various equivalent figures provided by the CSO.  The Forfás survey is limited to “client” companies with ten employees or more but a benefit of the survey is that the indicators surveyed are decomposed by company ownership.

 

Some Very Positive Labour Market Numbers

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Friday, February 28th, 2014

The results of the Quarter 4 2013 National Household Survey are available here.
The year-on-year increase in the numbers at work of 3.3% is all the more remarkable in view of the continuing decline in public sector employment.
The overall unemployment rate (seasonally adjusted) fell from 12.7% to 12.1%, and the long-term rate from 8.2% to 7.2%.

IGEES launches new website

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Thursday, February 13th, 2014

The Irish Government Economic and Evaluation Service has launched its new website at http://igees.gov.ie/

Full-Year Exchequer Statement

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Friday, January 3rd, 2014

December 2013 Exchequer Statement

Related Documents

QHNS Q3 2013

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Tuesday, November 26th, 2013

The CSO have published the latest Quarterly National Household Survey: Press release and Main release.

Employment is up 58,000 in the year.  Full-time employment accounts 53,500 of that.  Concerns about the distribution of the numbers employed into each sector remain (particularly the Agriculture, Forestry and Fishing sector).  There was a 30,200 increase in the numbers self-employed and a 27,300 increase in the number of employees.

Unemployment using the QNHS is now at 282,900, a drop of 41,700 over the year.  Self-classified unemployment is at 326,700 down 45,000 in the last 12 months.

The unemployment rate was 13.0 percent in Q3 (seasonally adjusted 12.8 percent).  Using the Live Register the CSO project that the SA rate in October was 12.6 percent.

The labour force has increased by 16,000 in the same time with a 0.5pp annual increase in the participation rate to 60.7 percent.

The number unemployed for one year or longer fell 27,800 of which 25,800 were males.  The long-term unemployment rate is 7.6 percent (8.9 percent a year ago).

Youth unemployment (15-24) has fallen from 74,000 to 60,400 with the youth unemployment rate at 26.5 percent.  The youth unemployment ratio is 10.3 percent. 

There is lots more detail in the release.  The Earnings and Labour Costs Survey for Q3 has also been released.

Fiscal Assessment Report

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Friday, November 22nd, 2013

The latest report from the FAC is available here.

EC Autumn Forecast 2013

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Tuesday, November 5th, 2013

All the documents can be accessed from here.

The main figures for Ireland (“rebalancing on track”) are:

Among Euroarea countries six are expected to face a BoP current account deficit in 2014: Estonia, Greece, France, Cyprus, Latvia and Finland.  The largest deficit is expected to be in Estonia at 2.2% of GDP.  On the other side Germany, Luxembourg, the Netherlands and Slovenia will have a current account surplus of more than 6% of GDP.  The first three will have three-year averages greater than the 6% of GDP threshold set out in the Macroeconomic Imbalance Procedure.  In aggregate the euroarea is projected to have a current acount surplus of around 3% of GDP for the next two years.

The Spanish public deficit is forecast to increase to 6.5% of GDP in 2015 with France, Cyprus, Malta, Slovenia and Slovakia also projected to have deficits in 2015 over the 3% of GDP threshold for the Excessive Deficit Procedure.  In aggregate the Euroarea is expected to run a public deficit of around 2.5% of GDP for the next two years with public debt steady at around 95% of GDP.

Quarterly national accounts

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Thursday, September 19th, 2013

Ireland’s second quarter national accounts have just been released. Full details are here.

On a quarterly basis GDP was up 0.4% and GNP was down 0.4%. As Colm McCarthy is forever pointing out, our quarterly data are highly volatile and not too much should be read into a single set of figures. On an annual basis GDP was down by a little more than 1%, and GNP was essentially flat. Ireland is still bumping along the bottom. But, because of the mad way in which recessions are officially defined, the headlines this lunchtime are of Ireland “exiting recession”.

Good News on the Labour Market

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Thursday, August 29th, 2013

The CSO released the results of the Quarterly National Household Survey for Quarter 2 2013 this morning, together with their population estimates for April of this year and the components of population change over the previous twelve months.

The news is mostly positive, showing clear evidence of a recovering labour market.

The level of employment has risen, with full-time employment up for the first time since 2008. Private sector employment is growing fairly strongly, offsetting the decline in public sector numbers.

Although still very high, overall unemployment is down and long-term unemployment has fallen as a proportion of the total.

The population increased only marginally between April 2012 and April 2013. The slowdown in population growth was due to (i) the continued high level of net emigration, with an increase in the outflow of Irish nationals, and (ii) a sharp fall in natural increase, due to the drop of almost 5% in the number of births.

Ireland’s (and Britain’s, and Italy’s…) long recession

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Tuesday, July 23rd, 2013

Jeff Frankel has a terrific piece here on the unsatisfactory way in which recessions and recoveries are called in Europe.

The current European definition of a recession (two successive quarters of declining GDP) is particularly unsuitable in Ireland, given its dodgy and volatile GDP statistics — looking at a broader range of indicators over a longer period of time would surely make more sense here.

There is an additional cost to the two-quarter rule of thumb in the Irish and Eurozone context: it implies that Ireland is periodically proclaimed to be out of recession. This then allows Eurozone politicians and central bankers to defend the status quo monetary and fiscal policies prolonging the economic crisis in Ireland and elsewhere. (And to express “surprise” when Ireland tips into recession “again”, despite its model pupil status.)

Update: the CEPR’s Euro area business cycle dating committee does not use the “two-quarter GDP decline” rule of thumb. Details of their methodology are available here.

Lessons from the 1950s?

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Saturday, June 15th, 2013

The institutional innovations over the deep crisis of the 1950s gave birth to the modern Irish economy. I analysed the process in this article  in the Irish Independent last week.  Brendan Keenan re edited it slightly to highlight his interpretation of what I was saying. One of the fascinating things about writing anything is how it takes on a life of its own in readers’ minds.   (“And the word was made flesh and dwelt among us”).  Edna Longley once destroyed the meaning of something I had written by aggressive editing; fortunately no such problems arise with Brendan.  I wrote a similar piece for historyhub.ie, a new site developed by a group of young historians.  Though I disagree with much of what Bryce Evans has to say on Lemass, I found his interpretation of what I had written illuminating: “it makes the case very convincingly for expertise offered as a basis for policy-making being more robustly based on both independence and breadth of opinion.”

Institutional Sector Accounts: Non-Financial

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Monday, April 15th, 2013

The CSO have published the Q4 2012 and 2012 (preliminary) non-financial ISAs.  The preliminary annual data are not included in the release (they can be roughly derived from the online quarterly dataset) but the commentary indicates that there were annual rises in the household sector for all of income, consumption and savings.

Gross disposable income displayed an annual rise 2.5% to €86.3 billion, with increases in wages (+1.0% to €68.8 billion) and, in particular, self-employed profits (+11.1% to €19.5 billion) accounting for the rise.  Household expenditure rose 0.5% to €77.9 billion and the household gross savings ratio increased from 10.7% in 2011 to 12.5% in 2012 with gross savings of €11.1 billion.

The measure of the government sector in the accounts recorded a net borrowing requirement of €12.2 billion in 2012.  Gross savings increased in the NFC sector, rising from €14.7 billion in 2011 to €16.4 billion in 2012.

‘Panic Driven Austerity’

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Friday, March 1st, 2013

Paul de Grauwe and Yuemei Ji have an interesting commentary on the causes and effects of austerity here.

Benchmarking current economic performance in the US (and elsewhere)

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Monday, October 8th, 2012

Moritz Schularick and Alan Taylor have a useful piece on the topic, informed by economic history, here.

Inflation in Ireland and the Euro area

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Saturday, August 18th, 2012

In an earlier post I drew attention to the extent to which Ireland’s recent apparent competitive gains reflected the weakness of the euro relative to the dollar and sterling.

Another component of competitiveness is, of course, our rate of inflation relative to that of the Euro area as a whole.

It is therefore of interest to put on record the inflation rates in Ireland and in the Euro area since 1999.

This is facilitated by the European Central Bank’s website, from which monthly data on the rate of inflation as measured by the Harmonised Index of Consumer Prices (HICP) may be readily downloaded.

The following Chart tells the story.

It may be seen that for the first five years of the new monetary union Ireland’s inflation rate was – contrary to expectations – significantly higher than the Euro area average.  This resulted in a significant loss of competitiveness relative to the rest of the Euro area.

For the years between 2004 and 2007 our inflation rate behaved as expected in a monetary union and differed little from that of the Euro area average.

During 2009 and 2010 we experienced more deflation than the rest of the Euro area. This helped restore some of the competitiveness we had lost in the early years of membership and the ‘internal devaluation’ was hailed at the time in the belief that it would play a big role in getting the economy moving again.

Since 2010, however, our inflation rate has been climbing back up towards the Euro area average.

It would seem that any further ‘restoration of competitiveness’ will require further weakness of the euro on the foreign exchange markets.

Regaining Competitiveness

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Tuesday, July 24th, 2012

The orthodox view is that enhanced competitiveness should play a significant part in Ireland’s (and other euro area countries’) recovery from recession.

In the March 2012 “Review Under the Extended Arrangement” the IMF team states that:

“Ireland’s economy has shown a capacity for export-led growth, aided by significant progress in unwinding past competitiveness losses.” (my italics)

The evidence does indeed point to a significant improvement in Ireland’s competitiveness between 2008 and the present.  The following two graphs show the ECB’s ‘Harmonized  Competitiveness Indicator’ (HCI) based on (a) Consumer Prices and (b) Unit Labour Costs.  (A rising index implies a loss of competitiveness.) Both graphs show a competitive gain since 2008, with second  showing the more dramatic improvement. However, this measure is affected by the changing composition of the labour force, which became smaller but more high-tech as a result of the collapse of many low-productivity sectors during the recession.

Concentrating on the HCI based on the CPI, the Irish competitive gain has still been impressive – our HCI fell 17% between mid-2008 and mid-2012, giving us the largest competitive gain recorded in any of the 17 euro-area countries over these years.  Greece, at the other extreme, recorded no change in its HCI, Portugal fell only 4.5%, Spain 6.6%, Italy 6.8%.  So by this measure Ireland is some PIIG(S)!

However, we need to dig deeper and understand why Ireland’s HCI has fallen so steeply.

Part of the story – the part on which some commentators dwell – is that early in the recession the Irish price level and Irish nominal wages fell. From a peak of 108 in 2008 the Irish Consumer Price Index fell to 100 in January 2010. But it has started to rise again – by mid-2012 it was back up to 105. The fall in the Harmonized Index of Consumer Prices has been even less impressive – from a peak of 110 to a low of 105 and now rising back to its previous peak.

Wages are more important than prices as an index of competitiveness because price indices are influenced by indirect taxes and include many non-traded services and administered prices. But Irish nominal wages tell much the same story as the price indices. The index of hourly earnings in manufacturing peaked around 106 at the end of 2009 (2008 = 100) and then fell to a low of 102 in 2011, where it appears to have stabilized.  Even in the construction sector, where employment collapsed in the wake of the building bust, wage rates declined only 6 per cent between 2008 and 2011.

Falling wages and prices are in line with what many commentators thought would happen after the surge in unemployment in 2008.  Widely-publicized wage cuts in the private and public sectors were seen as part of the ‘internal devaluation’ needed to rescue the Irish economy from the recession.  It was argued that this was the only way we could engineer a reduction in our real exchange rate given our commitment to the euro. (Paul Krugman likes to refer pejoratively to an ‘internal devaluation’ as simply ‘wage cuts’.)

However,  the Irish wage and price deflation has not been very dramatic and seems to have stalled in 2011, even though the unemployment rate continues to climb.

So why has Ireland’s competitiveness improved so sharply since 2008 if the ‘internal devaluation’ has been so modest?  The answer, of course, lies in the behaviour of the euro on world currency markets and the fact that non-euro area trade is much more important for  Ireland than for any other member of the EMU.

This can be seen by looking at the HCI for the euro area as a whole.  The euro area HCI fell from 100 in mid-2008 to 84.7 in mid-2012 – almost as big a fall as was recorded for Ireland and far higher than that recorded in any other euro area country.

The paradox that the euro area HCI has fallen much further than the average (however weighted) of the constituent EMU countries is explained by the fact that for each individual country the HCI is compiled using weights that reflect the structure of that country’s total international trade, but for the euro area as a whole the weights reflect the only the area’s trade with the non-euro world.

In its notes on the series the ECB draws attention to this:

“The purpose of harmonized competitiveness indicators (HCIs) is to provide consistent and comparable measures of euro area countries’ price and cost competitiveness that are also consistent with the real effective exchange rates (EERs) of the euro. The HCIs are constructed using the same methodology and data sources that are used for the euro EERs. While the HCI of a specific country takes into account both intra and extra-euro area trade, however, the euro EERs  are based on extra-euro area trade only.” (my italics)

It is understandable that Ireland should show a large competitive gain by euro area standards as the euro declined on world markets after 2008 because non-euro area trade is far more important to Ireland than to any of the other 16 members of the EMU. A fall in the dollar value of the euro does nothing to make France more competitive relative to Germany, or Greece relative to either of them, but it does a lot for Ireland relative to its two most important trading partners – the UK and the US.

As a consequence, the decline in the value of the euro on world currency markets, and especially relative to sterling and the dollar, has had a much larger effect on our competitiveness than on that of any other euro area country.

The following graph shows the USD / EUR exchange rate and Ireland’s HCI since 2008.  It does not take any econometrics to convince me that the main driving force behind Ireland’s competitive gain has been the weakness of the euro.  Undoubtedly a more sophisticated treatment, including the euro-sterling and other exchange rates of importance to Ireland – duly weighted – would show an even closer co-movement.

This should alert us to the point that Ireland’s much-praised recent competitive gain has been due more to the weakening of the euro on the world currency markets than to domestic wage and price discipline.

No doubt it could also be shown that a significant amount of the loss of competitiveness in the years before 2008 was due to the strength of the euro.

The fault – and the blame – lay not with us but with the far-from-optimal currency arrangement under which we labour.

Continuing gains in  competitiveness would therefore seem to depend more on further euro weakness than on the process of ‘internal devaluation’.  Should this have been a condition of our Agreement with the Troika?

We’re different, roysh? The decoupling of the Dublin property market

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Monday, July 2nd, 2012

Today sees the launch of the fiftieth Daft Report, with a commentary by yours truly. To mark the occasion, and to mark five years of Ireland’s property market crash, Daft.ie and the All-Island Research Observatory at NUI Maynooth, have launched a property value heatmap tool. In a companion post to this one, I outline the tool, how it works and what it tells us about Ireland’s property market crash.

In this post, though, I’d like to highlight what’s in the report itself. The principal finding from Q2 was that conditions in the Dublin market do indeed look to have improved considerably since the start of the year. This has happened at a time when conditions elsewhere in the country are pretty much unchanged. It seems the decoupling of the Dublin property market from the rest of the country has already begun.

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Get them while they’re hot (or cold): Heatmaps of property values in Ireland now available

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Monday, July 2nd, 2012

As I note in the companion post to this one, today sees the launch of the fiftieth Daft Report, with a commentary by yours truly. To mark the occasion, and to mark five years of Ireland’s property market crash, Daft.ie and the All-Island Research Observatory at NUI Maynooth, have launched a property value heatmap tool. In this post, I’ll give an outline of what the tool is and does, and what we can learn from it.

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Measuring Youth Unemployment

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Friday, June 29th, 2012

The problem of youth unemployment has rightly been highlighted as one of the major issues facing European countries today.  The newspapers have fastened on the shocking statistic that the unemployment rate among Spaniards and Greeks aged 15 – 25 is about 50 per cent, while the rate for the EU as a whole is about 20 per cent.  These are alarming numbers, but they are also somewhat misleading.

As Stephen Hill pointed out in a piece in the Financial Times on June 24th, the unemployment rate may not be the best measure of labour market conditions among young people who have opportunities to stay in the educational and training systems rather than entering a depressed labour market.  For this reason, an alternative measure, the unemployment ratio, has gained currency.

The conventional unemployment rate is  the numbers ‘unemployed’ as a proportion of the ‘labour force’.  The ‘labour force’ is the sum of the employed and unemployed.  The ‘unemployed’ are those actively seeking work, but not at work. (For young people it is of interest to break unemployment down into those ‘looking for first regular job’ and those who are ‘unemployed having lost or given up previous job’.)

The problem with using the  unemployment rate to measure labour market conditions among young people is that the denominator does not include those who are in the educational system or on full-time training courses.  During a recession, the higher the proportion of a youth cohort that stays on in school or college or in training, the smaller the labour force and the higher the unemployment rate. This is perverse.

By using the whole cohort as the denominator, the unemployment ratio avoids this pitfall and it may be argued that it therefore provides a clearer picture of hardship being caused by the lack of employment. (Of course this is subject to the reservation that increased educational participation may involve putting square pegs in round holes, with some young people taking courses in which they have no interest.)

The limitations of the unemployment rate as a measure of labour market conditions among the youth population is acknowledged by Eurostat, who now publish both the ratio and the rate for the population aged 15-24.  (Their recent figures for Ireland for 2011 are low and may not reflect the latest Census returns.)

The distinction between the unemployment rate and ratio certainly matters.  Data in the recently-released 2011 Census of Population volume This is Ireland Part 2 show the population classified by ‘principal economic status’. These reveal an unemployment rate of 38.7 per cent among the population aged 15-24 compared with an unemployment ratio of 14.2 per cent. While the ratio of 14.2 per cent gives no grounds for complacency, it is less alarming than the headline rate of almost 40 per cent.

It is perhaps even more important to note that the unemployment ratio has not risen as dramatically as the unemployment rate since the onset of the recession in 2008. The Figure displays the three concepts based on the 2006 and 2011 Census data.

(The Table at the end provides more details.)

Whereas the unemployment rate rose by 140% the ratio rose by 90%.  Thus, the rate tends to overstate both the level of unemployment among young people and the rate at which it has risen.

It may, however, be objected that the unemployment ratio includes all those who are not in the labour force in the denominator but excludes discouraged workers and similar forms of disguised unemployment from the numerator.  This bias would certainly be significant among older workers, who are more likely to cease looking for work and to drop out of the labour force because no jobs are available.  Its effect on the youth data, however, is smaller because labour force categories other than ‘employed’, ‘student, and ‘unemployed’ are relatively unimportant among the young.  In 2011 less than 2 per cent of population aged 15- 24 are classified as ‘looking after home/family’!

None the less, to take account of ‘dsicouraged workers’ it is worth looking at another concept that has gained some currency .  This is the NEET ratio. It refers to the proportion of the population that is Not in Employment, Education or Training.  To calculate this ratio for Ireland I have assumed that those in ‘(full-time) training’ are classified as ‘students’ in the Census.  The resulting ratio must, by definition, fall between the unemployment ratio and the unemployment rate.  From the Figure we can see that it lies closer to the unemployment ratio. Moreover, it has risen less rapidly than either the unemployment rate or ratio.   In 2011 the NEET ratio was ‘only’ 65 per cent above it 2006 level.

It is striking that the widely-used unemployment rate is so much higher, and has risen so much more, than the alternative – and arguably better – measures of the situation in the youth labour market.

The reason why the unemployment rate overstates both the level and rise in Irish youth unemployment is the high level of educational participation and its marked increase over the past five years. The proportion of the 15-24 year-old population in the educational system rose from 50.1 per cent in 2006 to 60.5 per cent in 2011.  While not all of the additional years of schooling will be as productive as we would wish, being in the educational system is less wasteful than being unemployed.  This aspect of the adjustment to the present crisis is concealed by the conventional youth unemployment rate.

None the less, we cannot lose sight of the collapse of employment among the youth population.  In 2006 39.5 per cent of the population aged 15-24 was in employment.  By 2011 this percentage had fallen to 22.5.  Among those aged 20-24 the rate declined from 60.0 to 39.0.  While the youth unemployment crisis may not be as severe as suggested by the headline youth unemployment rate, it is a crisis.

The possible shape of a second bailout for Ireland

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Tuesday, June 12th, 2012

..is discussed in the Irish Times today by my UL colleague Donal Donovan. From the piece:

The prospects for Ireland being able to access sufficient market funding by late 2013 do not appear favourable. The lending environment for sovereigns in much of the euro zone has worsened steadily and, barring miracles in Greece and Spain, is unlikely to improve sharply soon. Notwithstanding Ireland’s Yes vote and continued adherence to the troika programme, we can’t avoid being affected by the general market nervousness. Ireland’s budget deficit, at 8-9 per cent of gross domestic product, remains the highest among debt-distressed euro zone members.

Even under favourable assumptions, without specific debt-alleviation measures, the debt to GDP ratio will be over 100 per cent – second only to Greece – for some time.

Despite encouraging words from European Central Bank president Mario Draghi, it is hard to be confident that the estimated €40 billion needed to cover the budget deficit and repay maturing debt obligations in 2014-2015 can be obtained at affordable market terms.