13/12/19: World Bank and WEF reports highlight relatively poor competitiveness rankings for Ireland


The latest World Bank “Doing Business” report rankings and the WEF’s “Global Competitiveness Report” rankings show Ireland in a mid-tier 1 position (24th ranked in both tables) in terms of competitiveness – hardly an enviable position.

Ireland’s position marks a deterioration from 23rd rank in WEF table, driven by relatively poor performance in ICT adoption (hmmm… Silicon Docks economy is ranked 49th in the World), macroeconomic stability (ranked 34th), product markets competitiveness (35th), and financial system (42nd).

Full WEF report here: http://www3.weforum.org/docs/WEF_TheGlobalCompetitivenessReport2019.pdf and full WB report here: https://openknowledge.worldbank.org/bitstream/handle/10986/32436/9781464814402.pdf WB country profile for Ireland: https://www.doingbusiness.org/content/dam/doingBusiness/country/i/ireland/IRL.pdf.

A summary chart for Ireland from WB report:

Which, again shows poor performance in the area of credit supply, as well as trading across the border (correlated to the effective market size),  but also in access to electricity, registering property, dealing with construction permits, and enforcing contracts.

7/3/15: Fitch on Russian Banks: January data


Earlier this week, Fitch Ratings published ‘Russian Banks Datawatch’, covering banks’ balance sheet data as of 1 February 2015. Fitch Ratings noted the following key developments in January:

  • Corporate loans increased by RUB2.2trn (6.5%) in nominal terms in January”, down -0.9% “after adjusting for 23% rouble depreciation against the US dollar”
  • Retail lending dropped by a moderate RUB46bn (-0.4%) in nominal terms”, but fell -1.1% in USD terms. Majority of banks are deleveraging at a rate of 1-4%
  • Customer funding grew by RUB3.5trn (8.2%) in nominal terms”, down only -0.1% “net of currency valuation effects as RUB328bn outflow from retail accounts was only partially compensated by RUB264bn inflow of corporate (excluding government entities) funding”
  • CBR funding: “Banks repaid about RUB1trn of state funding in January, which had become expensive after the Central Bank of Russia (CBR) increased the key interest rate to 17% from 11.5% in December 2014 (before cutting it slightly to 15% in February 2015)”. Note: these repayments offset official forex outflows recorded in the months when banks borrowed funds. As a reminder, when a bank borrows in forex from the CBR, the borrowing is recorded as forex outflow. When the bank subsequently repays the funds in forex, the repayment is entered as forex inflow. But if the bank repays borrowings in RUB, the repayment is registered as an inflow in RUB.
  • Actual CBR funding deleveraging by the banks was even steeper: Banks repayment of RUB1trn is broken down into (1) “RUB1.6trn decrease of CBR funding” offset by (2) “RUB0.6trn increase in deposits from the Ministry of Finance, regional and federal budgets”. Note: as deposits are liabilities, higher holdings of official deposits within the CBR account counts against the CBR balance sheet.
  • Fitch notes that going forward, “This trend [of net repayment of CBR loans] is likely to continue unless the CBR lowers the key rate further …CBR funding of the sector in foreign currency has become significant, totalling USD21bn (of which USD9.5bn was provided to Otkrytie) at 1 February 2015”.
  • Banks’ profitability: “The sector reported a RUB34bn net loss in January (-6.2% annualised ROE). Alfa-bank significantly outperformed the sector with a net income of RUB30bn mainly due to FX-revaluation gains. Among state banks only Sberbank reported net income, at RUB3.7bn, while others were loss-making: VTB group had a loss of RUB21bn, Gazprombank RUB8bn and Russian Agricultural Bank RUB4bn. Retail banks performed poorly, and most were loss-making…”
  • Banks capital ratios: “The average total capital ratio (10% required minimum) of the 100 sample banks decreased by 54bps in January. As at end-1M15, seven banks in the sample (of those publishing capital ratios) had a total capital ratio below 11% [one of them] Fondservisbank (10.4%), was put under CBR temporary administration in February.”
  • Capitalisation forward: “The announced state recapitalisation measures of over RUB2trn should moderately support banks’ capitalisation, although these will be available primarily for larger banks” In other words, expect push for more banks consolidations from Q2 2015.

Summary: corporate lending is up in RUB terms but down in USD terms, retail lending is down both in RUB and USD terms. Deposits up in RUB terms and flat in USD terms, Profitability down significantly and the sector is generating net losses. Capitalisation down with a number of smaller banks heading closer to regulatory minimum, implying that recapitalisation funds will have to be used pretty soon and sector conslidation is likely to accelerate.

15/3/2013: IMF Assessment of the Euro Area Banking Sector Risks – part 2


This is the second post on today’s release by the IMF of the 2013 Financial System Stability Assessment Report for European Union report.

The first post – summarising top-line conclusion from the Technical Note on Progress with Bank Restructuring and Resolution in Europe is available here:

And related Euromoney Country Risk Survey study for Q1 2013 covering euro area banking sector risks is available here: http://trueeconomics.blogspot.ie/2013/03/1532013-irish-banks-still-second.html .

Some beef on the Non-Performing Loans (NPLs):

“NPLs in EU banks continue to rise, outpacing loan growth (Figure 4). Since 2007, loans to the economy have decreased by 3 percent while NPLs increased by almost 150 percent, i.e., €308 billion in absolute terms. And, this trend shows no sign of reversal, reflecting the continued macro deterioration in parts of the EU and the absence of restructuring.”

“When NPLs remain on balance sheets, they absorb management capacity, and continued losses can weaken banks’ profitability. They can also foster forbearance, thereby deterring new investors by impairing transparency. In several countries, independent asset quality reviews and stress tests have facilitated a diagnosis of the quality of banks’ assets, supporting prospects for private recapitalization.”

Per IMF note: NPLs have jumped from 2.6 percent in December 2007 to 8.4 percent of total loans in June 2012

Euro area periphery is worst-hit, for obvious reasons: “NPLs across EU banks differ largely, with those in the “peripheral” countries (Greece, Ireland, Italy, Portugal and Spain) witnessing the largest increases. For instance, from December 2007 to June 2012, the NPL ratio for Italy increased by 2.5 times, while in Spain, the increase was seven times (Figure 5). Ireland stands out with average NPLs of around 30 percent, followed by Hungary and Greece. However, definitions in this area remain non-harmonized and impair comparability across the EU”.

Now, note that ‘turned-the-corner’ Ireland is in the league of its own when it comes to NPLs ratio to total loans. Taken to the average ratio of total loans to GDP, Irish NPLs must be absolutely stratospheric.

And now, onto IMF view of the NPL resolution processes in the euro area (again, italics are mine and all quotes are directly from the IMF note):

“Borrower restructuring needs to be facilitated, with legal hurdles lifted. The legal framework should facilitate the restructuring of NPLs and maximize asset recovery. In several EU countries, including Italy, Greece and Portugal, the IMF is involved in bankruptcy/insolvency law reform, including by introducing fast track restructuring tools and out-of-court restructuring process. For instance, repossession of the collateral backing a retail mortgage may take several years in Italy versus few months in Scandinavia and United Kingdom. The asset recovery process is also very prolonged in many EEE countries.”

[Do note absence of IMF input in the case of Ireland and that is a general gist of the Note – it simply passes no assessment of the Irish personal insolvency regime ‘reforms’, which is strange given the prominence of these reforms and the fact that these are the first comprehensive reforms in the euro area periphery. Personally, I read this lack of analysis as the IMF reluctance to endorse the Irish Government approach to the NPLs resolution when it relates to mortgages.]

“An efficient framework for handling NPLs is key to rehabilitate viable borrowers and provide the exit of non-viable borrowers.”

[Note the IMF emphasis on rehabilitating viable borrowers AND providing the exit for non-viable borrowers. These twin objectives strike contrast with the Irish Government approach to resolving the personal insolvencies and mortgages crises. Instead of rehabilitating viable borrowers, the Irish Government is pursuing an approach of giving the banks full power to avoid any writedowns of the loans, even when such writedowns can define the difference between rehabilitation and insolvency. When it comes to providing exit for non-viable borrowers, the Irish Government has adopted the approach of reforming the personal insolvency regime from 12 years bankruptcy duration to 3 years, but then extended the process of availing of the bankruptcy from few months to up to 3 years. The pre-bankruptcy period of up to 3 years under the new regime is a period during which the banks have full power to extract all resources out of the households with little protection for the household, in contrast with the previous bankruptcy regime. Thus, in terms of life-cycle financial health, Irish households going through the new reformed personal insolvency process are unlikely to gain any meaningful relief compared to the previous regime.]

“Active management of NPLs is needed. In principle, NPLs can either be:

  1. retained and managed by banks themselves at appropriately written-down values, while the banks receive financial assistance from the government for recapitalization; or
  2. relocated or sold to one or more decentralized “bad banks,” loan recovery companies, or Asset Management Companies (AMCs) that specialize in the management of impaired assets; 
  3. sold to a centralized AMC set up for public policy purposes (possibly when the size of NPLs reaches systemic proportions).”

IMF also notes that: “The European Banking Coordination “Vienna” Initiative (2012) in a working group focused on NPL issues in Central, Eastern and Southeastern Europe. Recommendations, among others, focused on establishing a conducive legal framework for NPL resolution, removing tax impediments and regulatory obstacles, as well as enabling out-of-court settlements.”

Stay tuned for the third and subsequent posts covering other technical notes released by the IMF.

9/6/2012: Why IMF ‘vision’ on EA crisis is missing major points


An interesting speech given by the IMF Managing Director, Ms Christine Lagarde to the Annual Leaders’ Dialogue Hosted by Süddeutsche Zeitung last night. Here are some extensive exerts from it and my thoughts – sketched out, rather than focused – about her ideas.

Part 2 of the speech focused on the need for breaking the cycles of the crisis(that amplify risks to the economy, including global economy). Do note – coincidentally, the theme is exactly identical to my forthcoming Sunday Times article and to the research note currently awaiting legal clearance (both will be posted here early next week).

Per Ms Lagarde:
“One is an economic cycle. The feedback loop between weak sovereigns, weak banks and weak growth that continually undermine each other.

“…Another cycle on my mind: the political economy. It is a cycle that has become too familiar since the start of the crisis, like a movie we have watched one too many times. It looks something like this. Tensions escalate and, out of necessity, policymakers take action. But, just enough for the danger to subside. Then the urgency is lost, momentum wanes, and the policy discourse begins to fracture, too focused on their own backyards and not enough on the big picture. And so tensions start to rise again.
But, with the passing of each cycle, we reach a higher and higher level of uncertainty, and the stakes rise.

“In the case of Europe, the cycles are now threatening the very existence of the European project. We must break both of these cycles if we are to break the back of this crisis. And one cannot happen without the other.”

So far, on the money, although Ms Lagarde seems to be unwilling to recognize that we also have a structural growth problem in Europe, a problem linked with the above cycles, but also independently grave enough to warrant concern.

To break these cycles, “…the policy debate needs to move beyond the false dichotomies of growth versus austerity, stability versus opportunity, national versus international interests. We need to agree on a comprehensive strategy that is good for stability and good for growth.”

So, per Ms Lagarde, the core pillars of such a strategy are: “First, macroeconomic policies should help support the recovery and also tackle the underlying causes of the crisis.

  • Monetary policy should continue to be very supportive. Central banks, in particular the ECB, should further loosen monetary conditions, and remain ready to use unconventional tools to ease tensions and provide funding to address liquidity constraints. [In other words, Ms Lagarde is wisely going well beyond the rates policy alone. Good news, but no specifics.]
  • Public debt remains too high and countries need credible and ambitious roadmaps to bring it down over the medium term. For the most part, that adjustment should be gradual and steady, unless countries are forced by markets to move more aggressively—which is, of course, the case for several countries in the Eurozone. If growth becomes weaker than expected, countries should stick to announced fiscal measures, rather than announced fiscal targets—as economists say, they should let the automatic stabilizers to operate. [Basically: do austerity policies, but don’t chase targets too much. Unless you have to. In which case… well, nothing really new. Just do something?]

“Second, more effective crisis management. This is very urgent and mainly an issue for the euro area. But, a broader element is the collective effort to reinforce the global financial safety net. In this context, I welcome the increase in the IMF’s resources by $430 billion.” [A complete ‘Fail’ for Ms Lagarde here. Increasing ‘global safety net’ is hardly the only factor in carrying out effective crisis management. How about recognizing that all problems are inter-linked with each other, and thus effective crisis management should be not about creating another pot from which lending can occur to the sovereigns, but actually creating a system that can permanently and swiftly resolve the singular core pressure cause that might be specific for each country? E.g. for Ireland – a system that can address the banking sector debts loaded into the real economy, for Greece – a system that can write off a large portion of the country sovereign debt without restructuring it into new debt, and so on]

“Third, we need more determined progress on structural reforms. For example, labor market and product market reforms that can carry the torch of growth beyond the immediate support from macroeconomic policies.’ [Again, Ms Lagarde is exceptionally weak on specifics, in part because structural reforms are country-specific, but in part despite the fact that structural reforms for the euro area must include some – e.g. markets structure changes, moving economy away from state-dominated management and investment etc.]

In part 3 of her speech, Ms Lagarde focused on financial sector reforms.

“Let me be clear: the heart of European bank repair lies in Europe. That means more Europe, not less. … To break the vicious cycle of financial-sovereign risks, there simply must be more risk-sharing across borders in the banking system. …In the near term, this should include a pan-euro area facility that has the capacity to take direct stakes in banks. Looking a little further ahead, monetary union needs to be supported by building a true financial union that includes unified supervision; a single bank resolution authority with a common backstop; and a single deposit insurance fund.”

[Aside from the ‘true financial union’, the common deposits insurance system is exactly what I suggest as well, although my proposals go further to include a common resolution mechanism for banks insolvencies that is systemic, not debt-based, unlike Ms Lagarde’s approach that will simply pool bad debts into a larger warehousing facility, other than national one. Sadly, the logic of failed banking resolution policies to-date escapes Ms Lagarde. Pooling bad debts into a pan-European system instead of current national systems is equivalent to suggesting that putting all sick and healthy patients in one ward will somehow prevent contagion.]

“Moves toward deeper fiscal integration should go hand-in-hand with these efforts. In particular, the area needs to take the further step of some form of fiscal risk-sharing. Options here include some form of common bonds or a debt redemption fund. This would allow for common support before economic dislocation in one country develops into a costly crisis for the entire euro area.” [This is an extraordinary statement for IMF MD – as I show in my forthcoming Sunday Times article, pooling sovereign debt risks will mean euro area sovereign debt/GDP ratio in excess of 110% by 2014-2015. Where is Europe’s capacity to raise such debts and where its economic capacity to finance such debts?]

“And, on the upside, breaking the shackles of the sovereign-financial nexus will allow financial institutions to deliver credit and, in turn, create growth and jobs.” [This is a rather silly conclusion/ promise that resembles the Irish Government’s promises that first a global systemic guarantee, then Nama, subsequently extensive recaps – all policies advocated in this speech by Ms Lagarde, albeit at EA-wide level, instead of national levels – will create a healthy banking system with ample funding and risk-taking capacity to lend into the economy. In Irish case – this clearly did not happen. Neither has it happened in Japan. Why increasing the scale and spread of the diseases – the insolvent banking system – to supernational level should do the opposite?]

16/7/2014: What Exactly does JobBridge Public Sector Record Tells Us?


We are all familiar with the JobBridge scheme run by the Irish State:

  • Young people are ‘incentivised’ into ‘apprenticeships’ where they are paid social benefits plus EUR50/week by the State to work on ‘enhancing their skills’. 
  • In many cases (majority?) there are no real skills training components to the scheme and instead people are used as cheap labour.
  • In theory, upon completion of the scheme they are prioritised into hiring, since (in theory again) they have acquired new skills (of importance to their employer) and have established a proven track record of work.

So there can be two reasons why a JobBridge participation may result in not employing the intern:

  1. Intern proves herself/himself to be unsuited for the job (bad skills or bad aptitude etc); or
  2. JobBridge internship was set up not to lead to employment (in other words, from the start it was used as a vehicle for obtaining cheap temporary help).

“The Department of Social Protection has confirmed that 261 interns have worked at departments since the back-to-work scheme began, of whom 233 finished their internships. None were offered permanent jobs because there is a moratorium on recruitment in the public sector, which only allows staff to be hired in exceptional circumstances.” 

So, let’s ask: 

  • Was the reason that all 233 interns were not good enough for the job (remember, the article cites some instances where hiring was done, for the positions interns held, but not of interns themselves)? How can this be true if we have ‘the best educated workforce in the world’? And if JobBridge is a ‘competitive hiring scheme’ where there is pre-screening of the candidates for suitability going on? or
  • May be JobBridge was set up – in the case of these 233 internships – to extract cheap labour? Surely the Government would not do such a dubious (ethically) thing as deceive young unemployed into a promise of a reasonable chance of gaining a job at the end, while knowing that “there is a moratorium on recruitment in the public sector, which only allows staff to be hired in exceptional circumstances”? Surely not!

So which one is true, then (because there is no other, ‘third’ truth possible)? Our education system produces bad crops of candidates unsuited for employment in our excellence-focused public sector? Or our State Training Programmes are run with ex ante expectation of not hiring people completing them?

13/11/15: Fitch Survey of European Investors’ Outlook


Fitch survey of European credit investors shows that “the risk posed over the next 12 months by adverse developments in one or more emerging markets was high” at 59% up from 45% in previous survey in July. European investors continue to see EMs as the key drivers of downside fundamentals risks for 2016, with 3/4rs (80%) of all respondents saying EMs sovereign (corporate) fundamentals are likely to deteriorate in 2016 compared to 2/3rds (60%) in July survey. Some more details:

  • 29% of respondents see low commodity prices as the main risk to EMs, 
  • 26% see the key driver as slower global growth, 
  • 24% are expecting a Fed rate rise to be a key trigger for EMs risks amplification, and 
  • 21% cite high debt levels as the main driver. 

Fitch global growth forecast of 2.3% for 2015. Table below supplies IMF forecasts and historical comparatives:

Strangely enough, much of this focus on the EMs for European investors is probably down to the European economy having settled into what appears to be its ‘new normal’ of around 1.2-1.4% growth pattern – sluggish, predictable and non-threatening, thereby shifting focus for risk assessments elsewhere.

14/6/17: The Fed: Bravely Going Somewhere Amidst Rising Uncertainty


Predictably (in line with the median investors’ outlook) the Fed raised its base rate and provided more guidance on their plans to deleverage the Fed’s balance sheet (more on the latter in a subsequent post). The moves came against a revision of short term forecast for inflation (inflationary expectations moved down) and medium turn sustainable (or neutral) rate of unemployment (unemployment target moved down); both targets suggesting the Fed could have paused rate increase.

Rate hike was modest: the Federal Open Market Committee (FOMC) increased its benchmark target by a quarter point, so the new rate range will be 1 percent to 1.25 percent, against the previous 0.91 percent. This marks the third rate hike in 6 months and the Fed signalled that it is on track to hike rates again before the end of the year (with likely date for the next hike in September). The forecast for 2018 is for another 75 basis points rise in rates, unchanged on March forecast.

Interestingly, the Fed statement highlights that inflation (short term expectations) remains subdued. “Inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the committee’s 2 percent objective over the medium term,” the FOMC statement said. This changes the tack on previous months’ statements when the Fed described inflationary outlook as “broadly close” to target. Data released earlier today showed core consumer price inflation (ex-food and energy) slowed in May for the fourth straight month to 1.7 percent y-o-y. This is below the Fed target rate of 2 percent and suggests that monetary policy is currently running countercyclical to inflation. On expectations side, FOMC lowered its median forecast for inflation to 1.6 percent in 2017, from 1.9 percent forecast published in March. The FOMC left its forecasts for 2018 and 2019 unchanged at 2 percent.

The Fed, therefore, sees inflation slump to be temporary, which prompted U.S. 2 year yields to move sharply up:

Source: @Schuldensuehner

Which means that today’s hike was not about inflationary pressures, but rather unemployment, which dropped to a 16-year low at 4.3 percent in May.

As labour markets continue to overheat (we are now at 4.2 percent forecast 2017 unemployment and with over 1 million vacancies postings in excess of jobs seekers, suggesting a substantial and rising gap between the low quality of remaining skills on offer and the demand for higher skills), the Fed dropped its estimate of the neutral rate of unemployment (or, in common terms, the estimated minimum level of unemployment that can be sustained without a major uptick in wages inflation), from 4.7 percent in march to 4.6 percent today. At which point, it is worth noting the surreality of this number: the estimate has nothing to do with realistic balancing out of skills supply and demand, and is mechanically adjusted to match evolving balance between actual unemployment trends and inflation trends. In other words, the neutral rate of unemployment is Fed’s voodoo metric for justifying anything. How do I know this? Ok, consider the following forecasts & outlook figures from FOMC:

  • 2017 GDP growth at 2.2% compared to 2.1%, unemployment rate at 4.2% compared to 4.5% prior, and core inflation at 2.0%, same as prior. So growth outlook is, basically, stable, but unemployment is dropping and inflation not budging. 
  • 2018 GDP growth unchanged at 2.1%, inflation unchanged at 2.0%, and unemployment 4.2% vs 4.5% prior. So unemployment drops significantly, but GDP drops too and inflation stays put.
  • 2019 GDP 1.9% vs 1.9% prior, unemployment 4.2% vs 4.5% prior and inflation 2.0% vs 2.0% prior. Same story as in 2018. 

In other words, it no longer matters what the Fed forecasts for growth and unemployment, inflation stays put; and it doesn’t matter what it forecast for growth and inflation, unemployment drops, and you can stop worrying about joint forecast for inflation and unemployment, growth remains remarkably stable. It’s the New Normal of Alan Greenspan Redux.

The FOMC next meets in six weeks, on July 25-26. Here is the dots chart of Fed’s expectations on benchmark rate compared to previous:

Source: https://www.bloomberg.com/graphics/fomc-dot-plot/

The key takeaway from all of this is that the Fed is currently at a crossroads: the uncertainty about key economic indicators remains elevated, as the Fed is compressing 2017-2018 guidance on rates. In other words, more certainty signalled by the Fed runs against more uncertainty signalled by the economy. Go figure…

19/10/2013: Debt Bias and Wealth Taxes: Pesky IMF Ideas…


Nasty little bit from the IMF Fiscal Monitor – a box-out on page 49 of the report…

So the IMF basically reminds us that once things get desperate, wealth taxes (err… Irish pensions levy anyone?) or put differently – expropriation of private wealth – can be contemplated…

Reinhart and Rogoff have warned us all about the Financial Repression coming, so no surprise here. What is, however, surprising is the IMF estimate at the end of the box-out. “The tax rates needed to bring public debt to precrisis levels… are sizeable: reducing debt ratios to end-2007 levels would require (for a sample of 15 euro area countries) a tax rate of about 10 percent of households with positive net wealth”.

Give it a thought – 10 percent on average for the euro area… for Ireland? 20%? 30%?.. And, of course, what will that do to households’ debt?.. oh, wait, that does not matter in Europe…

Oh, and while on the topic of debt. I wrote recently (here) about the issue of ‘debt bias’ (incentives to hold debt over equity) in tax systems… Here’s a chart from the same report (page 45) showing the impact of eliminating ‘debt bias’ in tax system on systemic stability of the country financial system:

Of course, Irish policymakers are keen to eliminate the bias – not because it can help repair the systemic instability of our financial system, but because eliminating the bias will increase state yields from debt-funded property loans (via closing of the mortgages interest relief).

Once again, the problem is that of legacy – what do such closures of ‘debt bias’ do to sustainability of mortgages debt already carried in the system? Once again, no one pays any attention to the issue…

07/06/2011: Residential property prices

An impressively decent dataset from CSO on residential property prices has been released for the second monthly installment, so here are the charts and some high level analysis.

  • Overall Residential Property Price Index (RPPI) for April was 78.2 or 0.8 points below March levels. Hence, mom the index has fallen 1.013% and is now 1 point below its 3mo MA. Year on year the index has fallen 12.233% and relative to peak of 130.5 reached in September 2007 it is now down 40.077%.
  • Overall RPPI has recorded its 8th month of consecutive declines having risen statistically and economically insignificant 0.11%mom in August 2010. Year on year, April marked 38th consecutive month of declines.
  • April index for houses fell 0.9 points to 81.3, down 1.095% mom, or 1 point below 3mo MA. Year on year index has fallen 12.013%. The peak for this sub-index was reached in September 2007 at 132.0.
  • April index for apartments fell to 60.4, down 0.6 points – a mom decline of 0.984% and a yoy decline of 15.288%. April reading was 1.233 points below 3mo MA. This sub-index peaked at 123.9 in February 2007.
  • Dublin properties sub-index has fallen 0.5 points in April to 70.5, a decline of 0.704%mom or 12.963% yoy. The sub-index now stands 0.77 points below 3mo MA and 47.584% below the peak of 134.5 in February 2007

Charts to illustrate:
To summarize – the deflation of house prices continues, although the monthly rate of decline has now fallen below both 6mo and 12mo average. This, however, might be due to seasonality, since April marks a relatively moderate month in terms of price movements in every year since 2008. house prices have now fallen 38.41% since their peak, while apartments prices have declined 51.25% from their peak.

It is worth noting – not as a criticism of the CSO, since it cannot do anything about the data – that the index is computed based on mortgages drawdowns, hence excluding any share of transactions that might take place on the ‘gray market’ (tax evading payments, swaps etc), as well as cash-only purchases and mortgages issued by lenders other than the 8 largest lending institutions from which the data is available.

Another issue, again – little that CSO can do for this – relates to hedonic adjustments undertaken in index computation. Hedonic characteristics used by CSO exclude a number of relevant parameters, such as number of bathrooms and the site size, as well as existence of garage and/or off-street parking. This, alongside with the tendency – due to planning permissions restrictions – to under-report actual floor area and number of bedrooms – means that the hedonic model might be relatively weak.

Finally, CSO employes a Laspeyers-type indexation method, which is “calculated by updating the previous month’s weights by the estimated monthly changes in their average prices”. However, like all types of indices, Laspeyers indices suffer from some specific drawbacks. In particular, these indices are weaker in periods of adjustment in the markets. Here’s a quick non-technical discussion:

Laspeyers index is designed to answer the question: “How much is the sales price today for the house that is of the same quality as in the base year (2005)?” Quality is compared using the hedonic model mentioned above, based on specific size of the house (floor area), its amenities (number of bedrooms, house type) and location (note – we do not know the granularity of such ‘location’ adjustment, which can be critical. For example, I live in Dublin 4, but not the “fashionable” part of it. This means that if location code used is D4 for my house, it will receive signficantly higher locational weight relative to true value of my location than a house in a “fashionable” D4 locale.

One key objection to Laspeyers index is that it is computed while assuming that the base year (2005) house remains unchanged over time. Hence, quality is assumed to be constant for referencing, implying the index over-states inflation and under-states deflation.

In addition, index does not capture the effects of substitution in housing. In other words, Laspeyers index does not reflect conversions of house features to substitute away from more expensive options, etc, or purchases shifting in favour of smaller properties.

Index also assumes that geographical distribution of house sales does not change over time – a feature that introduces significant biases into the index when locational markets are not uniform (when there are significant differences within the markets).

Finally, the index overstates price appreciation at the peak of the bubble, since at that point, less desirable properties were disproportionately represented in the market as buyers chased any home available for sale. This is known on the basis of the US data where at the top of the markets ‘gentrification’ of lower quality locations in many states has led to Laspeyers indices understating price inflation.

For thes reasons, Laspeyers indices are known as ‘constant quality’ indices.

Chain-linked indexation, employed by CSO, helps addressing some of these issues, but it does not eliminate them. Of course, that too has its drawbacks, namely the more substantial data requirement, plus the lack of index additivity (you can see this indirectly in the first chart above by the gravitational pull of the houses index on overall index.

8/6/2012: QNHS Q1 2012: Irish broader unemployment metrics


In previous blog posts I covered core results from QNHS, sectoral decomposition of QNHS, and public sector numbers. This post will focus on broader measures of unemployment.

CSO reports seasonally unadjusted data for part time employment that disaggregates part-time employees into those considered to be underemployed and employed. Those considered to be underemployed are individuals who hold part time employment, but are willing and available to work additional hours (new definition).

At the end of Q1 2012 there were 282,600 individuals who were working part time but did not report themselves to be underemployed – a number below 283,300 in Q4 2011 and well below 304,800 in Q1 2011. At the same time, 135,200 individuals were reported as underemployed – down from 141,500 in Q4 2011 and up on 121,900 in Q1 2011. In fact, Q1 2012 marked absolute record for any Q1 since the series started. Keeping in mind that it is seasonally unadjusted series, y/y comparatives are what matters. In Q1 2012, annual rate of increase in underemployed was 10.9% down from 18% in Q1 2011 and up on 5.2% in Q1 2010. Since the crisis began, the number of those underemployed rose 3,458% – that’s right – almost 35-fold.

The chart below shows only those underemployed as defined under new methodology.

Combining unemployed and under-employed we have:

Which implies that our ‘dependency’ ratio – the ratio of full-time employees to total adult population of 15 years and older is still rending down, having already reached a new all time low in Q1 2012:

While traditional seasonally unadjusted unemployment rate is now at 14.7%, combined unemployed, underemployed and marginally attached to labour force ratio to the labour force – or what I term a broad unemployment rate is now 21.94%, up on 21.76% in Q4 2011 and 20.77% in Q1 2011.