Ireland exits the EDP

Unsurprisingly the European Commission have concluded that Ireland’s “excessive deficit” per the reference values in the TFEU has been corrected.  The Commission decision is here.

The Commission have also published their country-specific recommendations on Ireland based on this staff report.

There is lots in the staff report but on the fiscal side in introducing their CSRs the Commission note:

[Following the abrogation of the excessive deficit procedure, Ireland is in the preventive arm of the Stability and Growth Pact and subject to the transitional debt rule.] In its 2016 stability programme, which is based on a no-policy-change assumption, the government plans gradual improvements of the headline balance until reaching a surplus of 0.4% of GDP in 2018. The revised medium-term budgetary objective  a structural deficit of 0.5% of GDP – is expected to be reached in 2018. However, the annual change in the recalculated11 structural balance of 0.1% of GDP in 2016 does not ensure sufficient progress towards the medium-term budgetary objective. According to the stability programme, the government debt-toGDP ratio is expected to fall to 88.2% in 2016 and to continue declining to 85.5% in 2017. The macroeconomic scenario underpinning these budgetary projections is plausible. However, the measures needed to support the planned deficit targets from 2017 onwards have not been sufficiently specified. Based on the Commission 2016 spring forecast, there is a risk of some deviation from the recommended fiscal adjustment in 2016, while Ireland is projected to be compliant in 2017 under unchanged policies. Ireland is forecast to comply with the transitional debt rule in 2016 and 2017. Based on its assessment of the stability programme and taking into account the Commission 2016 spring forecast, the Council is of the opinion that Ireland is expected to broadly comply with the provisions of the Stability and Growth Pact. Nevertheless, further measures will be needed to ensure compliance in 2016.

The Commission press release detailing all of the decisions taken and documents published today is here.

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.

Canada Day

Yesterday, the First of July, was Canada Day.

Discussing  the crisis in the Eurozone with some visiting Canadian relatives led to the question How stable is the Canadian currency union?

At first sight it seems to be much more stable than its European counterpart. The Canadian banking system is renowned for its solidness. It is dominated by five national banks that operate coast to coast, supervised by the much-admired Bank of Canada.  There is a large national budget that includes important elements of inter-provincial fiscal equalization. Internal labour mobility is relatively high.

But on the other hand the provincial governments are not constrained in their borrowing, there are enormous differences between the economic structures of the provinces, and there is always the Quebec question.

In fact, to a surprising extent, the stability of the Canadian union appears to depend on the fact that, as the author of this article puts it,”there are no Greeces here”.  He draws attention to flaws in the design of the Canadian currency union that could come home to roost some day.

TCD Policy Institute event on mortgage arrears

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

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

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

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

The latest 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 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

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.

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”

Government Finance Statistics

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

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

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

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%.

QHNS Q3 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.

EC Autumn Forecast 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

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

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

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?

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, 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.”