Monday, April 28, 2014

Retail sales fall sharply

The CSO have published the provisional figures for the March retail sales index.  Once the motor trades are stripped out (which have a weighting of 29 per cent in the All Business Index in March) we see the following for the value and volume series.

Retail Sales to Mar 14

The strong increasing trend (in volume in particular) seen toward the end of 2013 has been replaced with an equally strong downward trend.  However, the scale of the year-end increases mean that even with the recent falls the annual comparisons paint a slightly better picture.

Annual Change in RSI to Mar 14

In real (i.e. volume) terms retail sales in the first quarter of this year were around three per cent higher than in the same quarter last year.  If the recent monthly changes are repeated over the next quarter then the annual comparisons in volume may not be positive for much longer.

Monthly Change in RSI to Mar 14

The monthly changes are very volatile and March 2014 figures are only provisional but it can be seen that the monthly drops in March were the largest such declines going back to late 2012 (and that was following the spike in electrical goods caused by the digital switchover).

At the time of the budget last October the Department of Finance projection was that the Consumption Expenditure component of real GDP would grow by 1.8 per cent in 2014.  Last week’s SPU increased this to 2.0 per cent.  Thus far the retail sales figures would suggest that is achievable but there will be significant increases required just to keep pace with the increase seen towards the end of 2013.  The DoF forecast is plausible particularly when the strong start to 2014 for the Motor Trades are included.

RSI All Business to Mar 14

Increased car sales make the consumption and retail sales figures look better but the overall impact on the economy is much more limited as the increased activity is the result of increased imports.

In the six months to February 2013 imports of Road Vehicles were €895.4 million.  In the same period to February 2014 these imports were €1,137.3 million, a rise of 27 per cent.  Of course, there are some gains to increased car sales.  The operating surplus and maybe even employment in the car sales trade increases and the government sector is a beneficiary through increased VAT and VRT receipts.

Consumption Expenditure also includes services not measure by the Retail Sales Index such as housing and accommodation, utilities, public transport, restaurants and communications as well as education, health, personal, professional and financial services.  The CSO does have a Monthly Services Index but that is driven by business-to-business services more than end-user consumption of services.

Anyway the take-out feature of this month’s RSI release is the sharp drop since the start of the year once the motor trades are excluded.  This is not reflective a nascent recovery.

Wednesday, April 23, 2014

The apparent stability of GDP

The previous post looked at the 3 per cent rise recorded for GNP in 2013 and attributed it to three factors.

  • GDP remained unchanged;
  • Retained earnings owed by companies fell by €3.4 billion; and
  • Dividends received by domestic sectors increased by €1.3 billion.

The question that remained was why did GDP remain largely unchanged when the retained earnings owed by Irish-resident companies fell by €3.4 billion (with most of this likely owing to non-residents).  The following table looks at Gross Value Added by sector of origin.  Data back to 2007 are shown but it is the 2013 changes that initially interest.  Click to enlarge.


As would probably be expected GVA from Industry fell by €1.6 billion (most of which is likely in Chemicals and Pharmaceuticals) and there was also a €0.9 billion drop in GVA from Distribution, Transport, Software and Communications (likely due to increased outbound royalty payments made by IT companies).

This €2.7 billion reduction was offset by small increases in GVA from the Agriculture, Forestry and Fishing sector and the Building and Construction sector.  These increases were large in relative terms though at 6.6 per cent and 10.7 per cent.

Most notable though was the 3.1 per cent increase in GVA from the Other Services (including Rent) sector.  This is:

The total of estimated earnings (cash and kind) and profits in the case of all professions, financial and insurance concerns, health services, personal services (private domestic service, hairdressing, undertaking, etc.), entertainment and sport etc. as well as net rent (actual and imputed).

Essentially this is NACE Rev. 2 sectors K-U excluding O.  A breakdown of GVA by these sub-sectors is yet only available to 2012 and is shown below.

GVA at BC for Other Services

The notable changes are a 4.2 per cent in the GVA from Financial and Insurance Activities (K) and a 20.1 per cent rise in GVA from Administrative and Support Service Activities (N).  It is not clear if the growth in these sectors continued in 2013.  The growth in sector K is likely linked to the increased balance of services from the IFSC.  Here are the sub-categories that comprise sector N.

NACE Rev 2 N

7735 looks a likely candidate but not for €1.3 billion of additional GVA in 2012 surely.  But what else could be expanding at that rate and magnitude?  Call centre activities in 822 maybe but that doesn’t seen like a high value-added activity.  Whatever is going on we’re doing a lot more of it and it likely explains a good deal of the offset that was necessary to counter the impact of the ‘patent cliff’ in the 2013 GDP outturn.

The other item in the first table that explains the stability of GDP is the 2.8 per cent increase in ‘Taxes less Subsidies’ which was equal to €413 million.  The subsidies element of this is relatively stable most years (mainly from the EU) so most of the changes happen on the tax side.

Product Taxes

To conclude it is probably worth noting the seemingly small drop that has been recorded for real Gross Value Added in the Irish economy.  In 2011 prices, this peaked in 2007 at €153.3 billion.  The provisional figure for 2013 is €148.0 billion, giving a drop of 4 per cent from the peak.  Over the same period the impact of Taxes less Subsidies on GDP has fallen from €22.3 billion to €15.2 billion, a drop of 32 per cent.

In 2011 prices, GDP has fallen €13.3 billion (equal to 7.6 per cent) over the past six years.  This can be broken down as:

  • Reduction in Gross Value Added: €6.2 billion
  • Reduction in Taxes less Subsidies: €7.1 billion

Changes in taxes have had a greater impact on GDP than changes in output.  There have been some compositional changes in the sector of origin of GVA in the economy.  Between 2007 and 2012 GVA from Chemical and Pharmaceuticals rose from €11.4 billion to €17.6 billion (in 2011 prices).  This was not accompanied by an associated increase in employment.  Over the same period there were significant reductions in GVA from Computers and Instruments and from Building and Construction.  These did lead to significant losses in employment.

On the changes in taxes it can be seen that most of the reduction can be attributed to D214C: Taxes on financial and capital transactions, D214D: Car registration taxes and D211: Value added type taxes.  And as we know large amounts of the activity that gave rise to these taxes was funded with borrowed money.

So why did GDP remain stable even if the patent cliff and increased royalty imports were negative factors (and reflected in the external income flows used in GNP)?

  • Output in the Agriculture, Forestry and Fishing sector and in Building and Construction rose by modest amounts, €0.2 billion.
  • Taxes on products rose by around €0.4 billion.
  • Output in Other Services rose by close to €2.0 billion and is likely related to IFSC activities and aircraft leasing.

Wednesday, April 16, 2014

The rise in GNP

Of the notable features of the first estimates of the 2013 national income statistics was the 3.4 per cent rise in real GNP.  The following table draws on data from the subsequently released quarterly non-financial accounts for Q4 2013 to get some insight into this. 

Final year figures for 2013 have not yet been released so the 2013 figures in the table reflect the sum of the individual quarterly outturns for 2013 so are incomplete and subject to revision.  Figures for earlier years are annual figures taken from the non-financial accounts.  All the figures are nominal.  Click to enlarge.

GNI from GDP

The table starts with Gross Domestic Product (GDP) ends with Gross National Income (GNI).  GNI is very similar to GNP with the only difference being minor flows of international (i.e. EU) taxes and subsidies on products. 

What do we see? The 2013 increase in GNI was 3.8 per cent which is close 4.0 per cent increase in nominal GNP shown in the preliminary results from the quarterly national accounts.   It can also be seen that the starting point of nominal GDP was largely unchanged over the last year with a rise of 0.1 per cent recorded.

From there the primary reason for the €5.1 billion increase in GNI is the €3.4 billion reduction in the retained earnings of companies in Ireland.  It is likely that most of this is owed to non-residents (the Rest of the World sector) and is related to the fall in profitability in the pharmaceutical sector arising from the ‘patent cliff’.

An unusual feature of this is that it is not reflected in the GDP figure which serves as the starting point in the above transition to GNI .  It must be the case that something else rose to offset the GDP impact of the reduction in profits of foreign-owned firms.

Part of this can be seen in the table above: product taxes collected by the government.  These rose by around €1 billion during the year.  This increases GDP but on their own are not enough to explain the stability of GDP.

Within the GNI calculation itself it can be seen that dividends received by the domestic sectors increased by €1.4 billion.  Dividends received by government, financial corporations and non-financial corporations all increased in 2013.  Click to enlarge.

Dividends and Retained Earnings

The increase in the dividend receipts and retained earnings resources of non-financial corporations since 2010 is particularly noticeable but, as stated, much of the 2013 increase is attributed to the government and non-financial corporate sectors.  If these arose from the profits of domestic firms then it would be reflecting in the GDP and GOS figures but to the extent that these dividends are paid from abroad they would be a reason behind the increase in GNI.

Finally, in the first table there is the measure of “Property Income” which excludes dividends and retained earnings and includes interest, rent and income attributed to insurance policy holders (pensions and life assurance).  By far the largest elements of this is interest.  The net amount of this property income increased from €6.2 billion in 2012 to €7.4 billion in 2013. Here are the recent interest flows (these are the interest amounts after the FISIM adjustment).


The numbers are very large.  Looking at the net flows with the Rest of the World we have interest paid by ROW to Ireland minus Interest paid by Ireland to ROW which gives:

  • 2012: €35,989m -  €28,081m = €7,908m
  • 2013: €32,972m - €24,153 = €8,819m

Ireland has a large external debt but there is more interest paid into the country than leaves (after the FISIM adjustment).  In 2013, this net flow provisionally increased by €0.9 billion.  This probably didn’t have a large impact on GNI though. 

The lower panel of the above table shows that almost all of the interest is received by the non-financial corporate sector: €39.1 billion out of €41.1 billion.  Most of this again is received by collective investment funds which form part of the IFSC.  And most of the return/profit earned on this will be in the €25.5 billion of dividends/retained earnings owed by financial corporations shown in the previous table with the likelihood being that most of that is owed to non-residents.  For the years up to 2012 it can be seen that the bulk of dividends/retained earnings is owed to the Rest of the World (in 2012 it was €57.4 billion out of €80.6 billion).

So interest doesn’t really explain the increase in GNI.  One point worth noting in the table is the drop in interest receipts of the household sector from €4.3 billion to 2008 to €0.6 billion in 2013 (after the FISIM adjustment).  Lower interest rates are good for borrowers but not for households with savings.

Anyway, why did GNP rise?

  • GDP remained unchanged (with increased product taxes offsetting some of the fall in company profits from the ‘patent cliff’)
  • Retained earnings owed by companies fell by €3.4 billion (with most of the likely owed by non-resident companies)
  • Dividends received by domestic sectors increased by €1.3 billion (with some of this likely paid by non-resident companies)

But this doesn’t really answer the question.  The key is GDP remaining flat in spite of the drop of profits for foreign-owned companies.  So the question is not why did GNP rise, but why did GDP stay flat.

Tuesday, April 8, 2014

Effective Corporate Tax Rates for the EU28

The issue of effective rates for corporate income tax is getting some attention at the moment.  Suggestions that the effective rate for Ireland is around 11 per cent are generating the expected responses.

One of the measures of the effective tax rate proposed is corporate income tax paid (D51B) as a proportion of the Net Operating Surplus (B2N) of non-financial corporations (S11) and financial corporations (S12).

A further question is how this compares relative to the equivalent rate for other EU countries.  Here are the answers, where available, for the EU28. Click to enlarge.


The Irish figure is again 10.9 per cent, which can clearly seen to be ‘low’ relative to the un-weighted EU28 average of 19.2 per cent.  And this of course is deliberately and transparently so.  At 12.5 per cent Ireland has one of the lowest headline rates for corporation tax in the EU.  There is nothing hidden or secret about that.

Only two countries have an average annual rate lower than Ireland: Estonia (1.7 per cent) and Lithuania (7.0 per cent).  Latvia (13.1 per cent) and Bulgaria (13.2 per cent) have the next lowest rates above Ireland’s.

There are probably lots of important details that need to be understood when interpreting the above table (the rate for Germany seems unexpectedly low) and people can make of it what they wish.  From an Irish perspective it can simply be noted that the Eurostat data show a figure of 10.9 per cent.

Just what was guaranteed and who was bailed out?

We are all aware that the decision of September 30th 2008 resulted in a the creation of a contingent liability of around €440 billion for the State but details about this total have been scant. 

We know that €75 billion was a result of the Deposit Guarantee Scheme, the limits of which has been substantially increased just over a week previously and this chart from page 77 of the Nyberg Report provided an overall breakdown of the €375 billion of liabilities covered by the near-blanket guarantee.

Guaranteed Liabilities

Via an FOI request by TD Stephen Donnelly, new figures (well new to me anyway) giving the breakdown of these liabilities by institution have now been released.  This may be raking over old ground but here are the figures. Click to enlarge.

Guaranteed Liabilities by Institution

There are no hot embers and the figures are much as would be expected from looking at the annual reports of the banks issued for this period (though only Anglo had a year-end at the time that coincided with end-September 2008).

The figures of central interest are undoubtedly those for Anglo and INBS.  These are the institutions which, in retrospect, should not have been saved.  All told, the State provided €34.7 billion of capital injections to shore up these delinquent institutions.  Most of this money went to depositors.

Between them Anglo and INBS had €77.4 billion covered by the guarantee.  Of this, €2.4 billion was date subordinated debt none of which matured during the two years of the guarantee and was subsequently subject to haircuts of between 50 and 70 per cent.  That leaves €75.0 billion of liabilities to meet the €34.7 billion of losses covered by the State’s capital injections.  For simplicity we will combine the two banks as one, which of course did subsequently happen.

If this could have been known at the time, or some immediate way was found to freeze these liabilities until the total loss was known then a haircut of 39 per cent would have been required.  If a fixed 39 per cent haircut was applied across the board then the following losses would have resulted.

Anglo-INBS Rescue

If put into resolution, the customer deposits up to €100,000 protected by the Deposit Guarantee Scheme (DGS) would need to be made good and the DGS would then take the place of the depositors but as an unsecured creditor of the bank.  That is why the DGS appears in the above table of estimated losses and means the €34.7 billion would be spread across most of the banks’ creditors.  [If the DGS deposits were paid from the assets of the bank the required haircut on the other creditors would rise to 46 per cent to give the €34.7 billion of savings. But that is not how it would work.]

Even if the bank was put into immediate resolution the DGS scheme would have had to meet a loss of around €5.2 billion and presumably this would have come from public resources.  Of course there is also the question of where €13.2 billion would have come from to make good the covered deposits up front.  It was going to be the “cheapest bailout in the world”.

After the losses that have remained to be absorbed by the State (via the DGS) we can see that depositors outside the DGS were sheltered from around €20 billion of losses through the guarantee and senior unsecured bonds from around €9 billion.  This assumes that the same fixed haircut is applied to all creditors and that the resolution wasn’t botched to the same extent that the Cypriot case was four years later. 

Haircuts to depositors would have been a very remote possibility in September 2008.  If the resolution option was taken it is likely that all deposits would have been made good in the manner of the DGS-backed deposits with the State taking their place as an unsecured creditor. 

To cover all the deposits in Anglo and INBS this would have required finding €63.8 billion up front with the State only getting €38.7 billion of this back if the resolution resulted in the same level of losses that have been provided for to date.  A deposit rescue of Anglo and INBS would have cost the State €25.1 billion.

Simplifying assumptions aside this shows that, by amount, the big winners from the decision to guarantee Anglo and INBS were depositors, not bondholders.  Bondholders did dodge something around €9 billion of losses through the failure to put Anglo and INBS into resolution around the time it became known they were insolvent.  €9 billion is a massive amount of money.