Now before we all get too excited about this, I think it is worth bearing in mind that August's was still the second lowest reading (only beaten by July's) since the series began in September 2004. Interestingly, all the sub components improved (including employment expectations) except current employment conditions (and this of course is a direct reflection of the data we have from INEM that I put up yesterday). Basically, I think two things happened in August, the price of oil fell back from the July high, and the government had a much publicised mid August "working session to address the crisis" where additional measures were announced to try to "refloat" the economy. I suspect both of these did something to help revive confidence. That, and the holiday break of course.
On a more anecdotal level, I happened to walk past the Italian Consulate in Barcelona yesterday, and the queue of immigrants seemingly there in an attempt to obtain documentation (to go and look for work in Italy presumably) stretched half way round the block. On the other hand I just visited my local supermarket, and after a long spell of "immigrants only" on checkout Spanish faces have now reappeared. I don't think these two things are connected by anything more than the very problematic labour market conditions, with everyone being pushed down a rung, which in some cases means, of course, getting a hefty shove straight out of the country. At the moment this exodus is a mere trickle, but I am worried that at some point it might become a flood, and then I worry about how long it will really take for the Spanish urban housing market to recover, and how long it will really be before we see positive GDP growth again in Spain. Perhaps one day we will learn to look back on that lamentable 0.1% growth we just squeezed out in Q2 with something resembling naustalgia. Always assuming that is, that we continue to drift along as we are at present - a la deriva - consoling ourselves that all the signs of inactivity we discern in Madrid and Brussels are not simply an optical illusion, and really do mean that nothing important is happening or about to happen.
Ireland Is Not So Different From Spain
Now the other eurozone economy which is facing a construction correction of a similar order of magnitude to Spain's is Ireland. (I say THE other, something may be happening in Greece, which also has had a construction boom of sorts, and certainly has a whopping 13% of GDP current account deficit, but the data from Greece is normally late, and often unreliable, so it really is quite hard to decide anything for sure at the moment, but building activity was down 16.3% year on year in May - which is the latest month for which they have data, and retail sales were down on May over April, and June over May, so something is definitely happening in Greece).
Anyway, in the Irish case we can drop the "maybe", something IS happening to the Irish economy, and it is the most similar of any of the old EU economies to what is happening in Spain at this point. Here's the latest Markit Economics services sector PMI chart which will give you some idea of the speed of the deterioration in the Irish economy.
Ireland's services sector has recorded a continuing downward trend since the turn of the year, and the seasonally adjusted Business Activity Index registered a new survey low of 39.8 in August. The Index has signalled a contraction of activity among service providers in each month since February 2008,
Ireland's Exchequer is also experiencing a rapid deterioration in its financial throughput (as is Spain's, see here). Figures for August from the Department of Finance show that tax receipts are now almost €2.8 billion short of target, signalling a further sharp deterioration in the Irish public finances with an expanding deficit. The Exchequer deficit for the first eight months of the year was just over €8.4 billion, three times the figure for the same period in 2007.
Evidentally, as business slows, and unemployment rises, the exchequer rakes a double hit. Total tax receipts were just under €24.8 billion, with VAT receipts at more than €1.1 billion behind target as consumer spending weakens. Stamp duties (which are associated with property transactions) are almost €500m behind target and capital gains taxes are more than €400m lower than expected.
Analysts now estimate that the tax shortfall for the year could exceed €5 billion. This is far worse than the Government had anticipated in July, when it had projected a tax shortfall of €3 billion for the year, but a rapid slowdown in consumer spending has hit VAT receipts, while the dramatic slowdown in stamp duty and capital gains tax receipts has continued due to the property slump. If tax revenue misses by €4.5bn it is almost certain that Ireland will breach the 3% GDP annual deficit limit imposed by the EU already in 2008. Spain will not breach this threshold till 2009.
What is most worrying about all this I think is the almost complete silence (or worse denial) at the European institutional level about the gravity of what is happening in Spain and Ireland (and maybe Greece), or about what responsibility ECB monetary policy might have had in the creation of the bubble in the first place (surely you can't supply the matches to start a fire and then walk away saying "I told you it was dangerous to play with them") or what role it may now have in exaccerbating the unwind. Basically Spain and Ireland are going to continue to need "exceptional funding" from the ECB - and probably a lot more than they are getting so far - and they are going to need a licence to break out of the 3% Growth and Stability Package straightjacket, and yet there is no visible accommodation at the official discourse level to the fact that any of this is happening.
The Irish government is clearly pretty worried about the way this issue is developing, and have taken the unprecedented step of advancing debate on the 2009 budget by six weeks - to October 14. In a statement which is very reminiscent in its wording to those we are now accustomed to receiving from Pedro Solbes, the Irish government declared that the country was now facing "an unprecedented set of unfavourable international factors", including turbulence on financial markets, weaker economic growth, currency movements and sharp rises in oil and other commodity prices. Not to mention, of course, that other little detail, the construction slump.
In fact the number of new homes registered in Ireland in August plunged by 70% compared with August 2007, according to figures from the Irish home guarantee scheme Homebond. Homebond said 510 homes were registered last month, compared with 1,714 in August 2007. In the three months to August, only 1,800 homes were registered, down 73% from a year earlier and the lowest reading for any three months since the figures began in 1995.
And the annual rate of increase in new mortgages is dropping steadily.The Irish Central Bank recently reported that the annual growth rate of Irish residential mortgages, inclusive of securitised residential mortgages, dropped to 9.6 per cent in July. The last time the annual rate of increase in residential mortgages was in single figures was at December 1987. And of course the rate continues to drop.
Even if new mortgage issues are not collapsing as fast as they are in Spain, house prices are already falling, and average Irish national house prices fell by 9.7% in year to July according to the latest edition of the TSB/ ESRI House Price Index. Prices fell 0.2% in July over June.
Sales are also falling, and August monthly car sales were down by 41.6 per cent on August 2007, not too different from the Spanish drop of 41.3%.
And unemployment is also on the rise. The numbers on the Ireland's Live Register increased in August by 9,100 to 235,100 - though the rise was not as big as in the previous two months. In the year to August there has been an unadjusted increase of 73,178 (+42.0%) - the highest in any year since 1967. The standardised unemployment rose to 6.1% in August.
Ireland is also similar to Spain for the way in which massive inward migration was required to find the labour supply needed to match the capital made easily available via the ECBs generous cheap liquidity offer. According to the Irish CSO total immigration into Ireland in 2007 was 109,500. For a country of just over 4 million people, this means about 2.5% of population annual rate which is, frankly, massive, and higher as a percentage even than Spain. The numbers of new migrants are now falling - between April 2007 and April 2008 there were 83,800 new arrivals, down 26,000 from the year earlier number. The number of emigrants in the year to April also rose slightly (to 45,300), and as a result net Irish migration is estimated to have fallen from 67,300 in the year ending April 2007 to 38,500 in the one to April 2008. But so far it is the rate of increase that is slowing, and there is little sign of net exit. Let's just hope it stays that way.
Or Is It?
There is one sense in which Ireland does seem to be different from Spain though, and that is in the volume of noise produced by Irish bank borrowing at the ECB. For the past nine months complaints about possible abuse of ECB credit lines by the Spanish banks have been virtually non-stop. But about the activity of Irish banks hardly a drop of ink has been spilt. Yet it turns out that in July Irish banks needed some 44.1 billion euros of funding from the ECB, not far short of the 49 billion euros the Spanish banks are drawing. Ireland is, of course, a much smaller country than Spain. In the photo above you can see European Central Bank President Jean-Claude Trichet welcoming Irish Finance Minister Brian Lenihan to the 10th anniversary celebration of the ECB, in Frankfurt on Monday, June 02, 2008. Would it be unfair to conclude that the Irish banks, for some reason or another, are more welcome over at the ECB, or at least, that the activities of Irish banks are somehow less controversial among financial journalists?
Oh, yes, now I have it: Ireland doesn't belong to the notorious "pigs" group (you know, Portugal, Italy, Greece, and Spain) so they can't possibly have contracted "swine fever" now can they!
1 comment:
I never knew, thanks for the insight!
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