Car sales continue to improve

Without much fanfare the Society of the Irish Motor Industry released their car sales figures for March last week.  The figures show a continued recovery in the sales of new cars.  This is good news.
Sales in March 2010 were 78% better than sales in March 2009 (13,813 versus 7,764).   This follows a 39% increase for February and a 5% increase for January.  Here are the monthly sales figures for the first three months of the year for 2007 to 2010.  Click image to enlarge.

The improved performance in 2010 can be clearly seen for February and March.  There has been a 31% increase in new car sales for the first quarter relative to the same period last year. 
This year 42,554 new cars have been registered compared to 32,447 last year, an increase of just over 10,000.  It is true that there are more ‘10’ reg cars on the road.

Industrial Production maintains January gains

After following a downward trend for two years the CSO’s index of Industrial Production volume jumped up in January.  Provisional February figures were released today and show that the increases in January have been maintained.  Here is a graph of the index for all industries (NACE 0 to 35).  Click graphs to enlarge.

In looking at annual changes production volume in January 2010 was 5.8% higher than in January 2009.  The corresponding February increase is 11.7%.  The annual changes can be seen here.

This is the first time there has been two consecutive months of positive annual change since September 2008.  In 12 of the 15 months beginning in October 2008 the annual change was negative.
This is good news.  But let’s look at the sectors driving this change in a little more detail.
One of the key industrial sectors in Ireland is Basic Pharmaceutical Products and Preparation (NACE 21).  The performance of this sector recently has been exceptional.  Here we have the index of production volume in the since 2005.

The production index was relatively stable from 2005 through to the end of 2007.  We can see that when the recession took hold from early 2008 that production in the pharmaceutical sector shot up.  Production volume in this sector is now about 50% greater than it was three years ago.  Some of the annual changes are staggering.  What recession?
The pharmaceutical sector is a huge proportion of Irish industrial output.  Using the CSO’s figures the gross value added of all industries (NACE 05-35) in Ireland in 2005 was just under €31 billion.  On its own Basic Pharmaceutical Products and Preparation (NACE 21) accounted for some €10 billion or 32.7% of this.  Using the same 2005 data the sector comprises 36.2% of all manufacturing in Ireland.
These 2005 figures completely underestimate the current importance of the pharmaceutical sector.  Since then we have seen that production in the sector has grown by about 50% since 2008 while production in most other sectors has been in line with the recession and has declined.  I am only guessing but it could be that pharmaceuticals make up about 50% of the total industrial gross value added in Ireland. 
[The Census of Industrial Production would reveal more but it is classified by NACE revision 1.1 rather than NACE revision 2.0 so it would take a small bit of work to reconcile the two.  For our present purposes the 2005 data used to calculate the weights in the Industrial Production release are fine.]
The CSO are being quite laboured in producing employment data for 2009.  Data does not extend beyond the second quarter of last year.  In Table 3 of the Industrial Production release the CSO provide some employment data for the ‘modern' sector.  One row of figures relates to four sectors: chemicals and related products (NACE 20), basic pharmaceutical products and preparation (NACE 21), reproduction of recorded media (NACE 1820), and medical and dental instruments and supplies (NACE 3250).  By gross value added the pharmaceutical sector made up 76.7% of this group. 
If we look at the employment figures for this group.

Quarter	Numbers employed	Change
2008 Q2	42,400
2008 Q3	42,600	+200
2008 Q4	40,900	-1,700
2009 Q1	40,100	-800

At a time when the reported level of output has been expanding at a huge pace the number of people employed in the sector has been declining.

The same but different (for now)

A recent comparison we did here suggested that there was not much difference between the current borrowing positions of Ireland and Greece, except that Ireland is coming from a much lower borrowing base.

Today’s monthly ECB meeting is set to be overshadowed by the Greek debt crisis which say Greek bond yields reach a record high for the euro period.  Here is a graph from Bloomberg of Irish, Greek and German 10-year yields for the past three years.  Larger graph here.

[If you click the graph you will get through to the Bloomberg app that allows you to create graphs like the above.  The codes for the 10-year bond yields are <GIGB10YR:IND> for Ireland, <GDBR10:IND> for Germany and <GGGB10YR:IND> for Greece.  Paste the code between the < > to “add security”.  Note that the date line on the horizontal axis is not correct and that when you have more than one variable the vertical axis will measure the relative change in basis points (bps) (one bp  = 0.01%).]

The graph here shows the relative performance of the yields on Irish (green line), Greek (yellow line) and German (orange line) bonds for the past three years, i.e. they are all set equal at the start of the period – 9th April 207.  This is actually quite close to reality as back in April 2007 the spread between Irish and Greek bonds versus German bunds was small at just over 0.2%.  These figures are in the following table along with the most figures for April 2010 (11.30am today) from Bloomberg.

	9th April 2007 10- Year Yield	Premium over Germany	8th April 2010 10- Year Yield	Premium over Germany
Germany	4.128%	-	3.092%	-
Ireland	4.331%	0.203%	4.452%	1.360%
Greece	4.343%	0.215%	7.501%	4.409%

We see that the premium on Greek bonds has soared to nearly 4.5%.  This will have been driven by a drop in the price of the bonds as doubts about Greece’s ability to repay increase.  Irish bonds had a higher yield than Greek bonds up to about six months, but as concerns about Greece began to gather momentum Greek yields have soared in the past six months.  This difference is even more profound in a graph of the relative performances of tw0-year bond yields.  The last six months are crazy and today is the worst yet!

What about Ireland?

On the other hand, Irish yields have been relatively stable over the past six months with little reaction one way or the other to last December’s budget and the recent NAMA and banking announcements.  Irish yields have dropped from their peaks caused by the Deposit Guarantee Scheme (Sep 2008 to 6.025%) and the Anglo Irish Bank Nationalisation (Jan 2009 to 5.872%).  After that there was a fall back to under 5% and there has been little volatility in Irish yields since then.

Although yields are set by the market through the buying and selling bonds they are the key determinant of the coupon to be set on new bonds or borrowings.  If a country issues a 10-year bond at a 5% coupon, the interest they have to pay on that bond will be 5% for the 10 year duration of the bond.  The yield will change as the price people pay to buy these bonds on bond markets change.  However, if the country needs to issue new debt, the coupon on these new bonds will have to be close to the yield on existing bonds if the country is going to find people to take them.

This is the problem Greece finds itself in.  Greece needs to borrow or refinance over €50 billion this year with over €11 billion needed in May alone.  Doing this at rates over 7% will exacerbate the existing problem.  That is if they can find takers for the new bonds.  If they can’t, an EU or IMF bailout of some kind is a certainty and even a default becomes ever more likely.

Looking at Ireland it can be argued that we have been performing relatively well (relative to Greece) in the eyes of bond markets.  The National Treasury Management Agency seem to think so in the press release to mark their third bond issue of 2010.  The Irish 10-year bond was sold at a rate of 4.5%.  This is the interest we are committed to paying over the 10 year life of the bond.  Even if Irish yields were to soar (because the price of Irish bonds falls) we would not be faced with any additional costs on this debt.

As with Greece, the problem will be with new and refinanced debt.  The NTMA are halfway to their €20 billion target for the year.  The stability in yields suggest that if they use 10-year bonds they should be able to raise the remainder at a rate close to the 4.5% of the last bond issue.  Funding the Exchequer deficits we will have over the next five years should also be possible.  Again it could be argued that we are different to Greece.

But with Ireland it is important to look beyond the ‘headline’ figures and look at our ‘off-balance sheet operations’.  This of course means NAMA.

NAMA is being financed with Government bonds.  We are not giving the banks cash for their development loans but are issuing them with Government Backed Securities.  These are different to most government bonds as they have what has been described as a ‘floating interest rate’.  The mechanics of how this interest rate will be determined are vague at best as it does not appear to be a market rate.

Unlike most bonds it seems that it is not the purchaser/holder of the bonds who is carrying the risk.  If there is an increase in yield (fall in price) of a bond I hold, I suffer the loss.  However, the NAMA bonds are being used to support our ailing banks.  If the value of these bonds falls, the value of bonds on the bank’s balance sheet falls (assuming they haven’t sold them on) and the recapitalisation process falls short.  The NAMA bonds are also short-term bonds meaning they will have be re-issued a number of times during NAMA’s lifetime.

If the NAMA bonds had been issued as long-term (10 year) fixed-coupon bonds then it would be bondholders who carry the risk of these bonds falling in value.  In the first instance this would be the banks.  However as they are short-term floating-interest bonds it is the taxpayer who carries the risk of these bonds falling in value.  If this happens, the bonds will have to be re-issued at a higher rate increasing the cost to the taxpayer, exacerbating an already critical debt situation.  Sound familiar?

Whose problem is it anyway?

Here’s an update on an old saying, a variation of which is attributed to Lord Keynes.

“If you owe the bank a thousand euro it’s your problem. If you owe the bank a million euro it’s their problem. If you owe the bank a billion euro it’s everyone’s problem.”

The Goldenballs Dilemma

Here’s a short paper that uses the TV show Goldenballs as a natural experiment of the Prisoner’s Dilemma.

A Natural Experiment in the Prisoner's Dilemma

Conclusion: Age, gender, occupation and hair colour (!) matter.

There are lots of studies on the importance of age and gender in determining outcomes. Hair colour may be about to join them. See abstract here.

Finally, you can watch a Goldenballs episode that had one of the biggest jackpots played for.  Great viewing.

Exchequer balance stops getting worse but…

After more than two years of huge deterioration in our public finances, the March Exchequer Return suggests that the Exchequer Balance is finally beginning to stabilise,  i.e. it has stopped getting worse.  It is truly awful but at least the downward spiral seems to have stopped.  The cumulative deficit for the first three months of 2010 is €3,942 million.
Here we see the pattern of the cumulative Exchequer Balance by month since 2007.  Click to enlarge.

The 2010 (red) line is tracking the 2009 (green) line.  A close up of the figures to March of each year can be seen here. 
This is not to say that tracking the 2009 pattern is an achievement to laud.  For 2009, the Exchequer ran a deficit of nearly €25 billion.  This was a huge deterioration on the 2008 deficit of just under €13 billion, which itself was a huge fall on 2007 which had a deficit of less than €2 billion.
But at least after two years of rapidly deteriorating Exchequer deficits, there now seems to be a pattern of stability emerging.  The deficit is still 6% larger than it was last this time last year but the rate of decline is easing.   For example, in March 2009 the deficit (€3,721 million) was some 950% greater than the deficit in March 2008 (€354 million).  An annual comparison of the monthly deficits shows that January 2007 was the last month to have a better Exchequer Balance than the same month 12 months previously. The comparison has been negative for the past 39  months in a row.  See table here.
While the deterioration was routinely worse than a 100%, and oftentimes much more, the figures for the first three months of this year are –4.4%, –15.5% and –5.9%.  The rapid expansion of the Exchequer Deficit is easing.  With tax revenues continuing to fall, much of this stability has been brought about with moderation in expenditure.
A table with a comparison of the monthly Exchequer Balances is available here.  Although the monthly figures do contain a lot of noise we can see that the deficit in March was actually €102 million or 6.2% less than in was in the same month in 2009.
Here comes the but….
If we disaggregate the Exchequer Balance to its Current and Capital components we see that there is continued deterioration in the Current Budget Deficit.  Click to enlarge.
A snap-shot of the patterns to March can be see here.  The cumulative Current Budget Deficit in March (€3,706 million) is over 40% worse than what it was at this time last year (€2,613 million). And for March alone the Current Budget Deficit is over 50% worse than it was in the same month last year.  This is not good.
Tables of the cumulative Current  Budget Deficits and the monthly Current Budget Deficits are available. 

Fall in tax revenue eases slightly

The March Exchequer Returns have just been published and allow us to update our analysis of tax revenue from February.  In a statement released with the return, the Minister for Finance has indicated his satisfaction with the figures.

“At end-March, €7¼ billion in tax receipts has been collected, some 3½ per cent behind profile for the period and 15 per cent below what was collected in the first quarter of 2009. However, a substantial year-on-year decline had been anticipated in the early stages of 2010 and for the year as a whole, the Budget day forecast of €31 billion, which represents a 6 per cent year-on-year decline, is still a valid target. The widely held view is that the economy will return to growth in the second half of the year and this should improve tax performance.”

In looking at the March tax figures we can see that the 15% drop for the first three months of the year represents a fall in revenue of €1,274 million below the amount collected in the same period last year. 
We can examine the pattern of tax receipts since 2007 with a graph that tracks cumulative tax receipts by month.  Click the graph to enlarge.
There is now a gap emerging between the 2009 (green) line and the 2010 (red) line.  See close-up here. Similar graphs are also available for the main tax heads.  Click to view.

• Income Tax
• VAT
• Corporation Tax
• Excise Duty
• Stamp Duty
• Capital Gains Tax

The graphs show that corporation tax revenue is very low and is down 73% on last year, with very little preliminary tax paid.  Relative to last year the best performing tax is Excise Duty (-1.8%).  The complete collapse in stamp duty and capital gains tax revenues relative to 2007 and 2008 is also evident.
Returning to the total tax take for 2010, the annual rate of decline eased somewhat in March.  After rates of 17.6% and 17.9% in January and February, the March 2010 was ‘only’ 9.2% below the corresponding figure for March 2009.  Here are the monthly tax revenues in millions with the associated annual changes.We can also look at the forecasts made by the Department of Finance back in February. No monthly forecast of January tax revenue was made.  We see that the outturn has fallen below the Department’s forecast for each of the last two months and that the forecast error increased from 3.7% in February to 7.5% in March.
Looking at the individual tax heads we see how the overall drop of 15% varies across the different headings.  The double-digit drops in both income tax and VAT give rise for concern.The monthly equivalents for March 2010 and March 2009 are available here.  There even are some positive signs used in the table!  The performance of the individual taxes relative to the Department’s forecasts can be seen here.
The strongest performing tax is Excise Duties – up 12.1% on the same month last year and only down 1.8% for the year.  We don’t have the breakdown of revenue by excise duty.  Excise duties on oil (38.8%), tobacco (20.9%), alcohol (19.1%) and Vehicle Registration Tax (20.0%) are the main sources of revenue (using 2008 figures). 
The relatively good performance of Excise Duties in 2010 is probably down to changes in the rates applied rather than any improvement in activity.  Revenue will have increased because of the introduction of the carbon tax in last December’s Budget, though this will have been offset somewhat by the reduction in duties on beer and cider.  The effect of the €1,500 VRT rebate is also unknown.
For 2010 as a whole the Department predict that tax revenue will fall by €1,993 million.  In the first three months of the year there is already a drop of €1,274 million or 15% below the amount collected in the first three months of last year.  Tax revenue for the next nine months can only be €719 million or 3% below the amount collected in the last nine months of last year.
There will have to be a substantial improvement from the 15% drop we have seen so far this year if this target is to be met.   The monthly rate of decline has eased to 9.2% and the Department are forecasting that this will continue with a 4.9% drop forecast for April.
How will our forecast of a 7.2% lower tax revenue for the rest of the year fare out?