Category: Economic Performance

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 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.

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* 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.

Too early to call the end of the eurozone recession…

…says the CEPR Business Cycle Dating Committee, here.