Tuesday, April 18, 2017

Is Ireland’s business sector doing better than we think?

After the previous post’s trawl through the household sector accounts, here we have a look at the non-financial corporate sector in the Q4 Institutional Sector Accounts released last week.  Of course, whatever caveats there are about revisions are even more pronounced for the NFC sector but there is likely to be value in the data, particularly if we can gain some insight into what is happening in the domestic business sector (by assuming that revisions are more likely from the MNC side). 

First, the current account:

NFC Sector Current Account

We should immediately be drawn to the 21.3 per cent rise in Gross National Income in 2016.  Working through the numbers we can try to see what the source of this increase was.

It doesn’t appear to be increased output or profits.  Gross Domestic Product (i.e. value added) of the NFC sector grew by 3.8 per cent in 2016 and with COE paid growing by double that amount at 7.5 per cent there was “only” a 2.2 per cent rise in Gross Operating Surplus (akin to EBITDA).

So if profits are up two per cent how is Gross National Income of the NFC sector up more than 20 per cent?  It may be down to who is earning those profits.  It is a well-worn path but we know that the net profits of foreign-MNC subsidiaries operating in Ireland are rightly attributed to their foreign parents.  This can be explicitly through the payment of dividends or implicitly through the attribution of any retained earnings to the foreign parent.  The split doesn’t really matter.  Their sum gives us an indication of net MNC profits earned in Ireland.

In 2015, dividends paid and retained earnings owed by the NFC sector summed to €57.7 billion.  For 2016, it is estimated that these summed to €49.9 billion, a drop of almost €8 billion.  So while NFC profits may have increased by €3 billion it appears that the performance of domestic companies was much stronger as MNC profits appear to have fallen by €8 billion.

Increased profits and reduced factor outflows explain most of the increase in GNI (accounting for €11 billion of the €14 billion increase).  The remainder is explained by increased factor inflows. 

It can be seen that retained earnings owed to Irish-resident NFCs grew by more than 40 per cent in 2016, a rise of nearly €4 billion.  Although these could be the foreign-source profits of Irish MNCs most of the changes in the item have recently being driven by the foreign profits of companies which have redomiciled their headquarters to Ireland.  It is clear that these companies had a good 2016 but these profits bring no benefit to Ireland.

And we have one further caveat to explore before coming down strong that the performance of domestic companies was strong in 2016: depreciation.  The above table gives gross measures.  It will be the case that some of this gross income will be absorbed by depreciation.  If there has been an increase in the amount of depreciation attributed to the Irish assets of foreign-owned companies then the changes in gross income will not be reflective of changes in domestic businesses.  We can try and get some insight from this in the capital account.

NFC Sector Capital Account

There is a good bit going on but our focus is on “consumption of fixed capital”.  We can see that this was relatively stable in 2016, showing growth of just 1.9 per cent.  This is in marked contrast to what happened in 2015 as shown below.

NFC Depreciation

The dramatic rise in depreciation is obviously related to mobile assets.  The two candidates are aircraft and intangibles.  The scale of the increase in the capital stock means intangibles are the culprit.  This is the onshoring of intangibles by MNCs.  A transaction involving c.€24 billion of intangibles occurred in Q4 2016 (as reflected in the quarterly national accounts described here) but the impact this had on depreciation was small relative to the hundreds of billions of intangibles that were on-shored in early 2015.

The acquisition of these assets will enable the companies to avail of capital allowances to offset the capital expenditure incurred against their trading profits.  Although the Revenue Commissioners have not yet published the aggregate Corporation Tax statistics for 2015 we can expect that they will show an increase in the capital allowances used by companies of something approaching €30 billion.

In 2015, the Gross Operating Surplus of the NFC sector increased by €53 billion.  The amount of Corporation Tax paid by the NFC sector increased by €1.8 billion.  This suggests an increase in Taxable Income of around €20 billion.  The reason a large part of the increased Gross Trading Profits did not translate into Net Taxable Income was because of the use of Capital Allowances.  If Capital Allowances were not available then one could surmise that CT receipts would have been around €2.5 billion higher again.  However, if the Capital Allowances were not available then the IP would not have come here in the first place.

And it is also because of Capital Allowances that the distinction between gross and net profits in the NFC sector is important and why we have to be careful about drawing implications about the domestic sector from gross measures.

Still, the three pieces of evidence we have point us in the direction of a strong performance of domestic enterprises in 2016:

  • the sum of outbound dividends paid and retained earnings fell by €8 billion;
  • depreciation was relatively stable  increasing by just €1 billion;
  • retained earnings of re-domiciled PLCs accounted for a little over a quarter of the rise in Gross National Income

It is these muddying features it is hoped that the proposed GNI* will throw some transparency on to allow us to see what is happening the domestic economy.  As we said before:

In rough terms GNI* will be the standard “GDP less net factor income from abroad” to get to GNP with the (positive) balance of EU taxes and subsidies used to get to GNI.  After that, additional adjustments will be made for the depreciation of intangibles that MNCs have located here and the net income earned by redomiciled PLCs.  With these adjustments we should get a better measure of aggregate income developments for Irish residents.

When the Q4 QNAs were released we suggested that:

It’s little more than a guess but, assuming some fall in MNC profits last year, a growth rate in 2016 for GNI* of somewhere around 6 to 7 per cent may not be too wide of the mark.

There was nothing in the institutional sector accounts to contradict that conclusion.  As shown here the evidence supports it.

Aggregate improvement in the household sector continues

The publication last week of the Q4 Institutional Sector Non-Financial Accounts gives us a preliminary view of the various sectors of the economy in 2016.   The figures are subject to revision but can still offer some useful insights.  We’ll start here with a look at the current, capital and financial account of the household sector. First the current account.  Click to enlarge.

Household Sector Current Accounts 2007-2016

The headline is towards the bottom and shows that (nominal) gross disposable income is estimated to have grown by 4.5 per cent in 2016.  With consumption expenditure growing at a slower 3.5 per cent this means the saving rate increased in 2016 – which it did from 11.0 per cent in 2015 to 11.8 per cent in 2016.

The path to this 4.5 per cent increase in gross disposable income shows a few interesting developments.  Compensation of employees from the non-financial corporate sector continued its strong recent performance in 2016 growing by 7.5 per cent and is now up a remarkable 31 per cent from the level recorded in 2011.  Although it is the smallest source of compensation of employees the fastest growth in COE was actually from the household sector itself (through unincorporated entities).

Employee Compensation Paid

Compensation of employees from the corporate sector (financial plus non-financial) is now eight per cent greater, in nominal terms, than the local maximum recorded at the end of 2007.   Most of this is due to the NFC sector as shown in the first table from which COE paid in Q4 2016 was up ten per cent on it end-2007 peak.  Here is compensation of employees received by the household sector since the series began in 1999.

Compensation of Employees Received since 1999

This increase in COE is reflected in higher taxes on income and social contributions paid by the household sector. Taxes on income paid by the household sector rose 3.4 per cent and social contributions paid to the government sector rose 7.8 per cent.   So working through these gives the 4.5 per cent increase in gross disposable income.

Another notable feature of the data, as pointed out above, is that disposable income is rising faster than consumption expenditure.  Here are the seasonally adjusted series provided by the CSO.

Income and Consumption - Seasonally Adjusted

The widening gap between income and consumption in 2016 is evident.  A couple of asides on the chart:

  1. Looking at the chart would appear to suggest as though the growth of consumption in 2016 was close to nil.  In fact the Q4 number is actually slightly below the Q1 number.  However, that does not mean the annual growth figure for consumption was close to zero.  We have already seen that consumption expenditure grew by 3.5 per cent in 2016 and the seasonally adjusted figures in the chart above correspond with that.  The growth is as a result of the “carryover effect”.  Consumption might have been flat in 2016 but because there was growth in 2015, the quarterly levels in 2016 were above those from 2015.  The fact that consumption ended 2015 higher than it began the year causes a “carryover effect” for growth in 2016 which will give an annual growth rate even if there is little quarter-on-quarter growth from that level in 2016.
  2. The measure of income in the chart is Total Disposable Income.  This is Gross Disposable Income plus the adjustment for pension funds.  This adjustment adds back in a deduction which is counted as a social contribution but is actually a form of savings, i.e. contributions to pension funds.  This money is being put aside to fund consumption in the future.  The adjustment for pension funds is the difference between social contributions paid to the financial sector and social benefits received from the household sector.  For example, in 2016 the household sector paid €5,538 million of social contributions to the financial sector.  The household sector received €2,980 million of social benefits from the financial sector.  The adjustment for pension funds at the bottom of the table of €2,558 million is the difference between these two numbers.

The widening gap between income and consumption means the savings rate has increased.  The savings rate is the gap as a percentage of Total Disposable Income.

Savings Rate - Seasonally Adjusted

What are people doing with these savings?  To answer that we need to look at the capital and financial accounts.

First, it could be that people are using the savings to fund investment expenditure.  We can look for evidence of this in the capital account.  As would be expected the 2016 capital account for the household sector is hugely different to its 2007 equivalent.

Household Sector Capital Accounts  2007-2016

In 2007, the household sector has gross savings of €6.3 billion and undertook €23.2 billion of gross capital formation.  Thus to fund consumption and investment expenditure the household sector was a net borrower in 2007 to the tune of €16.9 billion (overall borrowing was growing much faster but that was due to transactions – buying existing houses off each other). 

A decade later and the household sector has gross savings of €11.7 billion but only undertakes €8.6 billion of gross capital formation.  Capital spending by the household sector is rising (and grew 16.5 per cent in 2016) but remains below the level of gross savings.  Thus the household sector is a net lender, and this was at a level of €3.4 billion in 2016.

Net Lending-Borrowing

We can see how this borrowing in 2007 was funded and get some insight into where the  lending of recent years is going by looking at the financial account – and in particular the transactions of the financial account.  The 2016 update won’t be published until later in the year but we can see the general trends in the changes to 2015.  Of course, these are net figures with lots of underlying movements.  The household sector isn’t a homogenous group.  Some people are borrowing to fund expenditure now, others are saving to fund expenditure in the future and others are saving to repay previous while others may be buying or selling financial assets.

Household Sector Financial Transaction Accounts 2007-2016

The most significant change is predictably enough for transactions relating to loan liabilities.  Back in 2007 loan transactions increased household indebtedness by nearly €25 billion (drawdowns far exceeded repayments) while for the past few years loan transactions have reduced household indebtedness by between €5 billion and €9 billion (repayments have exceeded drawdowns).  We can expect this to have continued in 2016.

On the asset side there has generally been an increase in deposits while transactions with insurance and pension reserves have seen a steady inflow of funds.  The pension component of these transactions corresponds to the “adjustment for pension funds” seen in the current account, i.e. the difference between contributions to, and drawdowns from, certain private pensions.  The transactions account also shows that the household sector is generally a seller of equity with the bulk of this made up of unlisted shares (private companies).

Here is the turnaround in financial transactions over the full period for which data is available.  Net financial transactions was negative up to 2008 and has been positive since then.

Financial Transactions

Transactions are only one factor that affects the balance sheet which will also reflect the impact of reclassifications and revaluations.  These are unlikely to significantly effect items like currency and deposits but can be a big factor behind changes in equity and pension reserves.

Household Sector Financial Balance Sheets 2007-2016

The net financial wealth of the household sector almost doubled between 2007 and 2015.  This was due to three factors:

  • €18.3 billion increase in Currency/Deposits (€18.2 billion of transactions)
  • €37.9 billion increase in Insurance/Pension Reserves (€22.9 billion of transactions)
  • €44.7 billion reduction in Loan Liabilities (€35.7 billion of transactions)

Of the €101 billion improvement in these items €77 billion was due to transactions. Reclassifications and revaluations had little impact on the change in Currency and Deposits.  The increase in Insurance and Pension Reserves was €15 billion more than that explained by transactions while the reduction in loans was €9 billion greater than the reduction due to the transactions.  Pensions funds have benefitted from rising asset values and there has been some write-offs of household debt. 

The household sector’s financial balance sheet has been improving but around three-quarters of it has been the result of ongoing saving and debt reduction rather than revaluations.  The overall balance sheet will include real assets (such as property, land, valuables etc.) but they are not part of this data. 

Here are the aggregate financial assets and liabilities of the household sector since 2002.

Financial Balance Sheet

The gap between the two lines above represents household net financial wealth.  This passed €200 billion for the first time in 2015 and there is little doubt that this improvement is ongoing.

Net Financial Assets

If housing assets were included net wealth would still be below the level seen in 2007.  To conclude here is a measure of debt-to-income for the household sector.

Debt to Income

Wednesday, March 22, 2017

The same but different, somehow

Apple and Samsung have distribution operations who manage the sale of their products to independent retailers in New Zealand.  Here are the aggregate accounts for these operations (for ten years in the case of Apple and seven years for Samsung).

Apple and Samsung New Zealand

Apple’s distribution to New Zealand is through a company that is resident and operated in Australia while Samsung used a branch of an Australian company up to 2013 and since then has used a New Zealand company.  The accounts of these companies and branches are easily accessible from the New Zealand Companies Office.

Apple’s distributor is slightly more profitable but there is little between them.  The average effective tax rates for the two are also very close.  One of these made front-page news; one didn’t.  A year ago we wondered the same for this side of the world.

Monday, March 20, 2017

Why is “arrears capitalisation” so difficult to understand?

The most common mortgage restructure currently used by lenders is “arrears capitalisation”.  Of the 121,000 PDH mortgage accounts that have been restructured, 38,500 have had this restructure applied to them.  It might be the most frequently used but it is also the most misunderstood.  One report states:

Arrears capitalisation, where arrears are added to the principal of the loan, was the most common form of restructure, comprising almost 22 per cent of the total, followed by “split mortgages” at 22.4 per cent, where part of a loan is warehoused for an agreed period.

This is wrong.  Arrears should never be added to the remaining principal.  We pointed this out two years ago but it still persists.  And a large part of the blame rests with the Central Bank.  Footnote 2 of their release says:

Arrears capitalisation is an arrangement whereby some or all of the outstanding arrears are added to the remaining principal balance, to be repaid over the life of the mortgage.

The only way someone can owe more when they miss payments is because of accrued interest; the fact of missing payments or going into arrears does not have an impact on the amount owed.  Adding arrears to the amount owed should never happen.

Consider a simplified situation of a loan for €120,000 to be repaid over 10 years.  To focus on the impact of arrears we will assume that the interest rate is zero.  Adding a positive interest does not change the argument.  So in this no-interest situation 120 payments of €1,000 a month are required to repay the loan over ten years.

Let’s say the borrower makes the payments for three years but then misses payments for an entire year.  The three years of payments (€1,000 x 12 x 3) will have reduced the balance to €84,000 and the year of missed payments will result in €12,000 in arrears.

At the start of year five the borrower is in a position to resume payments and engages with the lender.  The lender tells the borrower that the remaining balance is €84,000 and that there are €12,000 of arrears.  There is no basis for saying that the amount owed is €96,000 or any number other than €84,000.  It is nonsense to suggest so.  The borrower has borrowed €120,000, has repaid €36,000 and therefore owes €84,000.  With zero interest to be added that can only be the amount owed.

What is termed “arrears capitalisation” would actually be better described as “arrears amortisation”.  When the borrower engages with the bank at the start of year five there is a outstanding balance of €84,000 and six years remaining on the life of the loan to repay it.  Resuming payments of €1,000 per month will be insufficient to repay the loan over the remaining term.  Those payments would sum to €72,000 (€1000 x 12 x 6) so the shortfall would be €12,000, i.e. the amount of the arrears.

To ensure that the €12,000 of arrears is repaid over the life of the loan the monthly repayments are recalibrated to take account of the missed payments.  So repaying €84,000 over six years with no interest requires monthly repayments of €1,167.

The monthly repayment has gone up but it is not because any arrears have been added to the balance.  The payment has gone up to ensure that the arrears are paid once, not twice.  Under no circumstances should arrears be added to the balance.  The monthly payments have gone up because the borrower has a shorter period within which to repay the loan.  If the payments weren’t increased there would be a shortfall at the end which, in our simple case with no interest, would be equal to the amount of the missed payments.

In the case of our borrower with a debt of €120,000 the payments made are:

  • 36 x €1,000 for the first three years
  • 12 x zero for the year of missed payments
  • 72 x €1,167 for the remaining six years of the term.

The total amount repaid is €120,000.  If the arrears has been added on the total amount repaid would have been €132,000.  And if the borrower has missed two years of payments the total would have been €144,000.  How can the act of missing payments increase the amount that is owed?  Only interest can do that.

With an “arrears capitalisation” the payments are changed to ensure that the balance is paid over the term of the loan.  There is nothing added to the amount owed.  But I’m guessing there will be additions to the number of times we see it being said.

Do we need another category in the mortgage arrears data?

Last week the Central Bank published the Q4 update of their mortgage arrears dataset.  In general the situation is one of steady improvement but are we missing out on some of the underlying trends?

Q4 2016 PDH Arrears

The problem is that an ever larger proportion of the arrears accounts are in the final category for those over 720 days in arrears.  By the end of 2016 there were almost 33,500 PDH mortgage accounts in arrears of more than 720 days.  These accounts had an outstanding balance of €7.5 billion and had accumulated €2.2 billion of arrears.  Here are the reported categories as a proportion of the overall arrears problem.

Q4 2016 PDH Arrears Proportions

At the end of 2016 accounts over 720 days in arrears were 43 per cent of accounts in arrears, 53 per cent of the total outstanding balance in arrears and 89 per cent of the built-up arrears.  Can we really tell what is happening to arrears when so much is reported in an open-ended category?

We can look at what has happened to this category since it was first reported in Q3 2012.

PDH Arrears more than 720 days

There has been some improvement in the number of accounts in this category.  The number peaked in Q2 2015 at just over 38,000 and has now fallen below 33,500.  However both the average balance owing and the average amount of arrears accumulated continue to rise.  There may be a compositional effect at play if it is accounts below the average that are resolved, through whatever means, and removed from the category.

Taking that aside we see that the average balance on these accounts climbs ever higher. For the full period above it rose from €203,400 to €225,800.   This is likely a reflection of no or limited repayments being made to reduce the balance and the accumulated interest being added which increases in the balance.

The average amount of arrears also continues to rise and by the end of 2016 stood at €66,000 for these accounts.  We know these accounts are at least two years in arrears but it is hard to know how deep they go.  If the average monthly payment on these accounts was €1,500 then we are looking at accounts being, on average, something around 44 months in arrears.

It is often argued that very little has been done FOR those who are more than two years in arrears.  But it is also true that little has been done TO them.  It has not been possible to find comparable data for other countries in order to assess the extent to which they have experienced mortgage accounts more than two years in arrears.  Other countries don’t report such figures because it is something which would not be tolerated; some resolution would be applied.  That is not the case in Ireland and cases come before the courts where no payments have been received in five years or even longer.     

When the “more than 720 days” category was introduced in Q3 2012 it contained 15 per cent of accounts in arrears, 17 of the outstanding balance in arrears and 48 per cent of the built-up arrears.  As shown above, those figures are now 43 per cent, 53 per cent and 89 per cent.  OK, part of this reflects the improvements that have seen the arrears figure fall for the past few years but it’s clear these improvements have not been reflected in the 720 day category to the same extent.  A final open-ended category that contains a lot of the observations means we are limited in what can be learned from the data about some of the underlying trends.

It tells a lot about the approach to the problem that it is now necessary to introduce a category for accounts more 1,440 days in arrears.

Saturday, March 18, 2017

Company gets battered for paying higher rate of tax

The New Zealand Herald has a breathless story under the headline “Apple pays zero tax in NZ despite sales of $4.2 billion”.  The story takes the usual approach of linking sales and corporation tax regardless of the well-established principle that corporation tax is paid on profit not sales.  But this piece goes further and ignores the principle that companies pay tax to the country where their activities take place, not where their customers are located.

The Apple subsidiary at the centre of the piece made a profit of $113 million from 2007 to 2016 and its accounts show an income tax expense of $34 million.  On this the New Zealand Herald says:

The accounts also show apparent income tax payments of $37 million - but a close reading shows this sum was paid to Inland Revenue but was actually sent abroad to the Australian Tax Office, an arrangement that has been in place since at least 2007.

A close reading of this paragraph reveals it to be nonsense.  Companies pay corporation tax to the tax authority it is due to.  The company did not pay tax to the New Zealand Inland Revenue because it did not have a taxable presence in New Zealand.  There are no Apple activities in New Zealand to tax.  The company doesn’t have a subsidiary operating there; the company doesn’t have retail stores there.  There is no permanent establishment to levy tax on.

The piece makes a big deal about the amount of iPhones sold to New Zealanders.  But the number of iPhones that Apple sold in shops to New Zealanders is zero.  The sales in New Zealand are through third-party retailers.  Apple has a company, Apple Sales New Zealand, which acts as the distributor of Apple products to these New Zealand retailers.  The company name reflects the market it services; the company itself is based in Australia.

So the company paid the tax directly to the Australian Tax Office because that is where the taxable activities of the company are located.  And this principle has been in place since the 1920s not just since 2007.

The New Zealand Herald piece has all the information that points to this conclusion but chooses to ignore it.  It is pretty easy to see that the company pays its tax in Australia and not New Zealand.  Here is the tax calc from the 2016 accounts which the piece reproduces:

Apple NZ Tax calc

The tax rate applied to the profits is 30 per cent.  New Zealand’s corporate tax rate is 28 per cent; Australia’s is 30 per cent.  The tax is determined using Australia’s 30 per cent rate because that is where it does its business.  Some minor adjustments resulted in an effective tax rate of 32 per cent in 2016 and 33 per cent in 2015.

Maybe something should have clicked when the newspaper had to look to Australia to find someone from Apple to comment on the story:

In a statement issued from Australia, the multinational technology giant stressed it followed the law but did not directly address questions about the structuring of its New Zealand operations and the apparent lack of payments to Inland Revenue.

And the piece then lays it out straight:

Apple's New Zealand operations are wholly owned by an Australian parent and appear to be run from there.

If Apple had operated this subsidiary out of New Zealand it would have paid tax at 28 per cent.  Instead, it choose to base the company in Australia where it is subject to tax at 30 per cent.  So even when paying a higher tax rate companies can take a battering.

Friday, March 17, 2017

Mortgage Repayments in BOI

The last post looked at the aggregate reduction in the stock of PDH mortgage debt in Ireland.  It was a bit crude and the aggregate nature of the data meant some simplifications were required.  Using figures from the annual reports of the banks we can get a deeper insight into the evolution of mortgage balances.  So let’s have a look at Bank of Ireland (which we have done previously here).

First, let’s look at the total amount outstanding by year of origination.

BOI Mortgages Outstanding

In the five years from the end of 2011 the stock of mortgages BOI has in Ireland declined from €27.9 billion to €24.3 billion.  Of these €19.8 billion were PDH mortgages and €4.5 billion were BTL mortgages. 

This 13 per cent reduction since 2011 masks what actually happened to the stock of loans the bank had at the end of 2011 because the bank has, of course, being issuing mortgages since then. 

If we just look at loans issued up to 2011 we again start with a total of €27.9 billion. But ignoring loans issued since then shows that these have reduced to  €18.8 billion, a fall of 32 per cent.  This falls varies by year of origination and unsurprisingly older loans show the greatest falls.

The stock of loans issued before the year 2000 fell by 63 per cent between the end of 2011 and the end of 2016.  For loans issued during the peak of the lending bubble we see that there were 29 per cent reductions in the over the same five year period for loans issued in 2006 and 2007.

The reduction in the outstanding balance could be due to:

  • repayments on the existing loan
  • re-mortgages to a new loan or new provider
  • write-downs on the existing loan

Due to re-mortgages it is probable better to look at the average balance rather than the total stock of debt.  Here are the number of accounts for each years of origination.

BOI Mortgages Number

And using these numbers we can get the average balance outstanding by year of origination.

BOI Mortgages Average Balance

This probably gives a better insight into the capital reduction on mortgages being repaid on a typical or regular basis.  For mortgages issued during the lending bubble we can see that the average balance fell by about one-sixth in the five years from the end of 2011 to the end of 2016.

So for loans originating from 2005-2008 we have a 30 per cent drop in the stock of debt in the past five years and an 18 per cent drop in the average balance for loans that remain extant at the end of 2016.  Of course, we don’t know what happened to the 12 per cent of loans originating from 2005-2008 that were discharged/ended in the past five years.  They may have been replaced by new debt or just simply repaid.  But whatever way we look at it the overall stock of debt from the credit bubble is being reduced.

Mortgage repayments accelerate capital reduction

A lot of attention is right gives to mortgage arrears and property repossessions but it most also be remember that significant mortgage repayments are also being met.  Here is the total outstanding for PDH mortgage in the mortgage arrears statistics.

PDH Mortgage Balance

Since the middle of 2009 the amount of PDH mortgages has fallen from €118.7 billion to €99.6 billion. Still a long way to go you might say but the graph a above is not comparing like with like.  Each quarter is made up of different loans with some repaid and others drawn down.  New loans will will increase the total balance so repayments on the €118.7 billion of loans that was outstanding in Q3 2009 will be greater than €19.1 billion indicated by the chart above.

Figures from the Irish Banking and Payments Federation give the following amounts of PDH mortgage draw downs since the middle of 2009;

  • First Time Buyers: €13.2 billion
  • Mover-purchaser: €11.0 billion
  • Remortgages: €1.9 billion
  • Top-up mortgages: €1.5 billion

Some of these could be existing debt replaced by new debt.  To be conservative we will assume that all loans relating mover-purchases and remortgages resulted in no new debt being created, i.e. the amount of the new loans matched the amount of previous loans. 

There will be new debt from first-time buyers and top-up mortgages. Since the middle of 2009 there have been €14.6 billion of drawn downs on these loans.

This means that the stock of PDH mortgage debt of €118.7 billion has been reduced to €84.9 billion, a reduction of 28 per cent in seven years.  And if mover-purchases and remortgages resulted in additional mortgage debt being created (as they surely did) then this is the upper limit for the reduction that has taken place.  Let’s put it at 33 per cent.

That might suggest that there is another 14 years until the stock of debt from Q3 2009 is cleared for a total duration of 21 years.  But that is to misunderstand the nature of mortgage repayments.  Early in the term the majority interest will make up a greater proportion of the repayments than later in the term.  If the level of repayments remains the same then the rate of capital reduction will increase as the amount being consumed by interest declines.

For the estimated repayments looked at here.  The average reduction in the outstanding balance for the two years at the start of the series was €1.08 billion per quarter.  For the past two years this has average €1.32 billion per quarter.  As would be expected the rate of reduction in the outstanding balance is accelerating.

We are probably looking at the stock of PDH mortgage debt from 2009 being cleared in another ten years or so.  This gives an average term of 17 years.  Of course, this is just an average.  Some loans will be repaid quicker than 17 years and other might take a good bit longer.  But what ever about the persistent problems with arrears and repossessions it is also the case that there are ongoing repayments and the stock of legacy debt is reducing.

PDH Mortgage Balance Estimated Like-for-Like

Arrears is a terrible way of measuring current mortgage distress

The release of the Q4 2016 mortgage arrears statistics generated more interest than has usually been the case for these releases for the past two years or so.  Two elements have featured heavily in the reporting:

  1. That the highest number of PDHs on record were taken into possession by lenders
  2. That there was an increase in “early stage arrears”.

The first of these is fairly easy to identify.  At 455, the total number of PDHs taken into possession in Q4 was indeed the highest on record.

PDHs Possessed

Of these, 112 were the result of a court-ordered repossession while 343 were by agreement between the borrower and lender.  The term ‘voluntary surrender’ is a benign way of putting as the borrower will likely have faced strong pressure from the lender.  Voluntary surrenders are likely in instances where there is negative equity with hopefully agreement also reached on how to deal with any shortfall. 

There will also be instances where the borrowers undertake a forced sale of the property to clear the mortgage.  In these cases the borrowers also lose possession of the property but have some limited control over the process.  Figures for forced sales have never been collected.

The status of the properties taken into possession by the lenders is unknown but a share will be vacant or abandoned properties which should be taken into possession and resold by lenders.

There is also a divergent pattern since the middle of 2015 when there was a 50/50 split between court-ordered repossessions and voluntary surrenders.  Since then the number of court-order repossession has declined with the number of voluntary surrenders going in the opposite direction.

Since this data series began in the middle of 2009, lenders have take possession of 7,100 PDHs.  Of these 4,800 were by way of a voluntary surrenders and 2,300 the result of a court ordered repossession.  This is a small number relative to the scale of the arrears problem.

And it is suggested that part of the arrears problem could be getting worse.  Many reports are the same and this is extracted from one:

The latest arrears figures show that 23,224 mortgage accounts were in arrears for less than three months at the end of last year. This was up slightly on the previous quarter in 2016.

However, it was the first time since September [2012] there had been a rise in the numbers getting into early-stage arrears.

The editors obviously felt this was an important point and used the headline “Spike in mortgage arrears as banks repossess more homes” for the piece.  Here is the Q4 spike:

Less than 90 days in arrears

Hmmm.  There is no spike visible in the chart.  There isn’t even an increase visible.  The spike is an increase of 12.  Total.  In Q3, there were 23,212 PDH mortgage accounts in arrears of 90 days or less; in Q4 the figure was 23,224.  Yes, a rise of 12.

Experts said it was too early to say if there was a trend of arrears rising again.

They could also do with saying that the number of people in 90-days arrears doesn’t necessarily tells us anything about the number of people falling into “early-stage arrears” particular when the overall trend in arrears is down.

Arrears measures missed or partial payments relative to the contracted payment amount.  It tells us nothing about when those payments were missed.  If a borrower has a monthly payment of €1,000 and missed €2,000 worth of payments three years ago they will be 60 days in arrears – yet can have made all contracted payments in three years.

If such a borrower has €4,000 of arrears they will be 120 days in arrears.  If that borrower makes an excess payment of €2,000 they will move to being 60 days in arrears.  And this is why the number of accounts in 90-days in arrears is not necessarily a good guide to the number in “early-stage arrears”.  It can also be influenced by people moving from higher categories into lower ones.

And it can happen for odd reasons.  Consider a borrower on an agreed interest-only of €750 with €3,000 of arrears.  The borrower is 120 days in arrears.  If the interest-only period ends and the borrower moves to a capital+interest payment of €1,500 (which we assume they make) the borrower will now be 60 days in arrears.  The borrower has moved into the lower arrears category because their contracted payment has increased but the amount of arrears has remained unchanged.  Such a scenario is highly unlikely but points to some of quirks that the use of arrears as a measure of distress can result in.

Was there a rise in early-stage arrears at the end of 2016?  We can’t say but I doubt it.  It more likely reflects an improvement in the situation (i.e. lower arrears or restructures moving people into lower categories) than a deterioration.

Thursday, March 16, 2017

Ireland’s NIIP continues to improve

We have previously looked at the impact each of the sectors of the economy have on Ireland’s international investment position – that is, the balance of external financial assets and financial liabilities.  In the main the story is little changed since the previous post.

The CSO have published the Q4 2016 update of the IIP data and here is the Net IIP position for the total economy and for the economy excluding non-financial corporates.


Excluding the IFSC the Irish economy has a NIIP of –€382 billion which is not a very good headline figure.  However, that is hugely influenced by the –€454 billion NIIP of the non-financial corporate sector.  Unsurprisingly the cross-border position of Ireland’s NFC sector is itself hugely influenced by MNCs.  And what is shown above is the net figure.

The Irish NFC sector has €785 billion of external financial assets and €1.24 trillion of external financial liabilities.  The balance gives us the net position of –€454 billion.  Are the Irish operations of MNCs bankrupt?  No. 

This chart above only shows the financial position.  There have been some step-changes in the NIIP of the NFC sector and this is related to the onshoring of intangible assets.  Some Irish-resident companies of MNCs have borrowed huge sums of money and used that money to purchase intangible assets.  The scale of this was in the hundreds of billions in Q1 2015 with ten of billions of such transactions occurring in Q4 2016.  The NIIP of these companies doesn’t really tell us anything about the underlying position of the Irish economy.

We can get a much better insight if we remove them and that is what the blue line does above.  It can be seen that this has been steadily improving since the data series began in 2012 moving from –€90 billion then to +€72 billion now.  That is a large improvement in just five years. 

NIIP by Sector

Most of the improvement has been effected through the financial system.  In the early years of the crisis many of the external creditors of the banks were repaid with liquidity from the Central Bank which itself generated a negative Target2 balance.  While the banks had a relative small net position in 2012 the net position of the Central Bank was –€91 billion at that time.  Since then the banks have reduced their reliance on central bank funding and the external position of the Central Bank has improved with that.

Of the remaining sectors, financial intermediaries have a NIIP position of +€189 billion.  This, in large part, reflects the foreign financial assets of Irish investment and pension funds.  The government sector has a negative position of –€128 billion representing the international nature of much of the borrowing it undertook in the crisis.  Add up all those and you get our net position of +€72 billion – excluding those data polluting MNCs of course!

Monday, March 13, 2017

What was and wasn’t in the preliminary national accounts?

The CSO have published the Q4 Quarterly National Accounts which give a preliminary view of the full-year outcomes for 2016.  All the caveats about these being preliminary figures were hammered home last year when the initial 7.8 per cent GDP growth rate for 2015 published in March became the infamous 26.3 per cent growth when the full national accounts were published in July.  Anyway, this time around the preliminary figures show  that real GDP grew by an estimated 5.2 per cent in 2016 with real GNP recording an increase of 9.0 per cent.

GDP GNP 2016 Growth Rates

At first glance a five per cent growth rate seems about right for the Irish economy but the nature of Ireland’s macro statistics means we cannot simply take it at face value and, given the gap to the nine per cent growth in GNP, there may be reason to believe that the underlying growth rate of the economy could a bit above the five per cent growth seen in GDP. 

One explanation for the differing GDP and GNP growth rates could be if MNC profits in Ireland contracted in 2016.  This would mean that the value-added from the “domestic” economy grew by more than five per cent, and as this accrues to Irish-residents this would translate into a higher growth rate for GNP.  If ten per cent lower MNC profits was the only thing affecting the net-factor-income-from-abroad adjustment to get GNP then we could take the nine per cent growth rate of GNP as reflecting the performance of the “domestic” economy.  But such simplicity is a realm that Irish economic statistics have long departed.

In recent years there have been a few things other than the level of MNC profits in Ireland that have affected net factor income from abroad.  For example, the additional growth in GNP seen in 2016 could be due to an increase in MNC profits in Ireland not counted as a factor outflow because, say, of increased depreciation on MNC assets in Ireland (including intangibles) or it could be because of an increase in net factor inflows to redomiciled PLCs with their nominal headquarters in Ireland. 

We cannot see the first of these effects in this week’s release as a depreciation figure will not be available until the full National Income and Expenditure accounts are published in a few months.  Outflows of direct investment income fell from €59.7 billion in 2015 to €57.5 billion.  This could be because of a fall in MNC profits earned in Ireland or an increase in the amount of MNC profits consumed by the depreciation of their Irish assets.  However, looking (as best we can) at things like contract manufacturing suggests that MNC profits did indeed fall in 2016.

Goods Trade 2015 and 2016

In the National Accounts, the value of Ireland’s goods exports fell by around €9 billion in 2016.  However, in the custom-based External Trade data the value of the goods which were physically exported from Ireland rose by €4.5 billion.  The difference arises from the adjustments made for things like contract manufacturing in other countries undertaken for Irish-resident companies.  Here is the difference between the goods export figures in the Quarterly National Accounts and the External Trade Statistics since 2010.

National Accounts Goods Exports Adjustment

As the previous table shows there were €83.2 billion of additional goods exports in the 2015 National Accounts.  The preliminary 2016 figures suggest that this fell to €69.3 billion.  We can see that the associated trade balance of these adjustments with this fell by €12.6 billion in 2016. 

We have to be careful about inferring the GDP effect of this.  For a start there may have been a fall in royalty imports (though assuming most of the €12.6 billion fall is related to the activity that came with the 2015 surge that will not have been the case) and, secondly, these trade figures are nominal so there may have been price and/or exchange rate movements involved which would need to be accounted for before putting them in the context of changes in real GDP. 

And with nominal GDP growing by 3.9 per cent compared to the 5.2 per cent real growth rate, it is clear there was some price deflation with a lot of this arising on the goods trade side.  Nominal goods exports fell by 4.8 per cent but real goods exports only fell by 1.2 per cent.  We sold almost the same volume of goods in 2016 as we did in 2015 but lower prices meant the value was almost five per cent down.

But back to the higher growth in GNP.  There may have been more MNC profits consumed by depreciation in 2016 but we have no evidence of that (yet).  We do have evidence, through the contract manufacturing channel, of reduced MNC profits though there could be offsetting profit increases from their actual activities in Ireland.  Still, this hint of reduced MNC profits would suggest that the underlying growth rate of the economy in 2016 was above the five per cent GDP growth rate. 

It is not all the way to the nine per cent GNP growth rate as there is very likely to have been a redomiciled PLC effect pushing up GNP.  Inflows of direct investment income rose from €15.8 billion in 2015 to €18.8 billion in 2016.  Some portion of this may be increased foreign earnings of Irish MNCs but redomiciled PLCs contribute significantly to these inflows. 

The fall in outbound profits of MNCs and the rise in inbound profits of, presumably, redomiciled PLCs explains most of the change in net factor income from abroad which, in nominal terms, rose from –€53.2 billion in 2015 to –€47.5 billion in 2016.  It is because of these direct investment flows that GNP grew faster than GDP.  Whether that means the “domestic” economy grew by more than five per depends on what caused the fall in outbound MNC profits.

These are precisely the problems that it is hoped the new national income measure, GNI*, will address.  In rough terms GNI* will be the standard “GDP less net factor income from abroad” to get to GNP with the (positive) balance of EU taxes and subsidies used to get to GNI.  After that, additional adjustments will be made for the depreciation of intangibles that MNCs have located here and the net income earned by redomiciled PLCs.  With these adjustments we should get a better measure of aggregate income developments for Irish residents.  It’s little more than a guess but, assuming some fall in MNC profits last year, a growth rate in 2016 for GNI* of somewhere around 6 to 7 per cent may not be too wide of the mark.

So lets look at some of the sources of that growth.  First, the output approach:

GDP by Sector of Origin 2016

We see that all sectors of the economy grew in 2016.  The slowest real annual growth was the 2.4 per cent for the MNC-dominated industry sector and, of this lower growth in 2016, around one-third was due to building and construction even though it makes up only around seven per cent of the sector’s value added.  Value added in building and construction grew by 11.4 per cent in 2016.

MNC profits in the industry sector were the source of almost all of the excess that made up the 26 per cent growth in 2015 (as comparison to the 2014 figures show) but nothing like this happened in 2016.  This is reflected in the sectoral Corporation Tax receipts published by the Revenue Commissioners which show that CT receipts from manufacturing grew by three per cent in 2016.

As well as building and construction, the other non-MNC dominated sectors also grew fairly strongly with agriculture (6.2 per cent), public admin (4.4 per cent) and other services (6.0 per cent) all contributing strongly to growth.  Product taxes grew by 6.1 per cent and combining all of these gets us to the 5.2 per cent growth in real GDP at market prices.  With an overall MNC performance that seems weak this looks like the odd occasion when we can attribute the most of the growth to the non-MNC part of the economy.

That is not to say that there were not MNC effects in the accounts; just that they were largely GDP neutral.  The preliminary 2016 figures for the output approach might be relatively clean but the expenditure figures are a mess. 

OK, public and private consumption are fine with real private consumption growing by 3.0 per cent and public consumption motoring along with a real growth rate of 5.3 per cent but after that the figures are all over the place.  One chart is enough to highlight the nature of it.  Here is real quarterly investment (2014 prices) since 2006.

Quarterly GFCF since 2006

This series had been volatile recently because of aircraft and intangibles but it went “off the chart” in Q4.  More investment took place in last quarter of 2016 than in each of the years from 2010 to 2013.  The spike is bizarre but this is what we have come to expect in Irish economic statistics.  Like other recent changes it is related to the onshoring of intangible assets but the nature of the transaction that brings the intangible here is important. 

Some of the recent onshoring has been achieved by the company holding the IP becoming Irish-resident.  This involves a balance sheet relocation and while the IP is added to Ireland’s capital stock there is no domestic transaction to be reflected in the investment series.  The profits that the IP generates will be included in Irish GDP. 

The fact that the large onshoring in Q4 appeared in the investment data indicates that this was a transaction undertaken by an entity that was Irish-resident at the time the acquisition took place.  Although the size of the transaction runs to tens of billions of euro it is actually GDP neutral as the intangible has to be imported.  We can see this in the Balance of Payments current account which shows a huge spike in all business services imports.

Business Services Imports 2016

We know that the spike relates to intangibles (the CSO press statement says so) but unfortunately the Q4 figures for R&D imports and intangible investment have been suppressed.  Here is an extract from the CSO response to the recent group set up to explore ways to improve the presentation of Ireland’s macroeconomic statistics:

Recommendation 6: Quarterly publication of underlying investment and underlying domestic demand measures that take account of the impact of IP relocations, contract manufacturing, aircraft leasing and re-domiciled firms.

Deliverable:  The CSO currently publishes a breakdown of investment by tangible and intangible assets on a quarterly basis. We will add to this detail by quantifying the flows of IP relocations and aircraft leasing activity in 2017, in current and constant prices, at the time of the annual National Income and Expenditure results in mid-2017.

Well “currently publishes” is what they used to do.  Here is the table from this week’s release (click to enlarge).

Table 4A GFCF

The breakdown of investment by tangible and intangible assets for Q4 or 2016 as a whole was not provided.  So instead of going forwards we’re going backwards. It is not clear what has been achieved by this suppression.  It seems pretty clear that intangible investment in Q4 2016 was in the range of  €28 billion +/- €1 billion. 

Investment in intangibles is made up of three components:

  • in-house R&D carried out by the public and private sectors in Ireland
  • net service imports of R&D carried out for/in other countries
  • net outright purchases of IP assets to/from other countries

The Q4 spike (on the assumption of no similar sized transaction in Q1 2017) will have been in the last of these reflecting the one-off nature of the onshoring.  But how much more would we learn about the onshoring that took place if the figure for intangible investment in Q4 was actually provided?  We know it happened and we could probably have a good stab at working out the size of the transaction as the first two items are reasonably steady. 

But not knowing the precise level of intangible investment isn’t that serious an issue.  We don’t need to know it and to get measures of underlying investment and underlying domestic demand these transactions relating to the onshoring of IP are actually something we want to strip out.  But suppressing one figure is not enough; a minimum of two figures must be suppressed to make it effective.  And this means losing one of the key components of underlying investment.

In this instance, it is machinery and transport equipment.  After netting out ‘other transport equipment’ (i.e. rail, air and sea transport equipment but almost exclusively wide-bodied aircraft related to leasing activities) we are left with underlying machinery and equipment investment and this has ranged between €1.0-€3.0 billion per quarter (in 2014 prices) for the past six years.  Underlying machinery and equipment investment increased strongly from late-2012 through to the middle of 2015 but since then has been on a firm downward trajectory.

Machiner and Equipment Investment

The fall is notable but it is just another quirk in the statistics.  It is related to investment in equipment to manufacturer semi-conductors and processors (item 728.21 in the Trade Statistics).  Irish imports of such equipment spiked from virtually nothing in 2012 to around €1 billion in 2014 and 2015 and have fallen away again.

Processor Manufacturing Equipment

This is what has caused the fall in the red line above.  We could make yet another adjustment for that but pretty soon you get to the stage where there is no point in aggregating anything and we just look at everything individually.  And these machines are being installed here so while it is a useful pattern to be a aware of it does represent activity actually happening in Ireland.

While we don’t have any Q4 2016 figures for machinery and equipment investment in the QNAs it has been possible to identify investment in ‘other transport equipment’ in other data series published by the CSO, namely the External Trade statistics.  The following chart shows quarterly net imports of category 79: other transport equipment in the Trade Statistics and investment in other transport equipment in the Quarterly National Accounts since the start of 2010.

Trade and Investment in Other Transport Equipment

It is hard to tell but there actually are two lines shown for the period from 2010 to 2014.  The near perfect relationship stumbles a bit in 2015 before sundering completely in 2016.  It seems the ability to identify investment in ‘other transport equipment’ from the Exterbal Trade statistics is no more for some reason.  Net imports of ‘other transport equipment’ were €2 billion in Q4 2016 and that seems as likely as figure as any for investment in ‘other transport equipment’ in the quarter but it is a (somewhat informed) guess. 

If we use that €2 billion figure we are left with €30 billion of investment in Q4 to allocate between underlying machinery and equipment and intangibles.   The likely figure for underlying M&E in Q4 is between €1 billion and €3 billion.  It is this that gives us the €28 billion +/- €1 billion for investment in intangibles in Q4.

The equivalent Q4 underlying machinery and equipment investment figures for the prior two years were €2.0 billion and €2.3 billion respectively and are in the middle of the €1 billion to €3 billion range but determining the annual growth in underlying machinery and equipment investment is no longer possible.  As shown above the reported figures for Q1 to Q3 2016 showed a rather alarming 18 per cent drop in underlying machinery and investment investment compared to the same period in 2015.  Given the likely range of figures for Q4 the annual change in underlying machinery and equipment investment could have been anything from –27 per cent to –7 per cent.  We simply don’t know. 

For underlying investment the likely range for growth in 2016 is from –3.7 per cent to +4.8 per cent with the poor performance of underlying machinery and equipment being offset by strong growth in dwellings (+27.6%), improvements (+6.4%), other building and construction (+11.4%) and transfer costs (+9.7%) .  The poor performance in underlying machinery and equipment may seem puzzling (-18% year-to-date to Q3) given the strong growth in the other categories, but outside of equipment relating to processor manufacturing it too is probably showing positive growth as well. 

GFCF 2015 and 2016

With the 45.5% annual increase in investment driven by the onshoring of intangibles it would be nice to know what is happening to underlying investment in the economy.  Even with the growth in the categories shown in the above table the performance of underlying investment has been flat for the past year (noting that the chart below does not have Q4 figures).  But if strip out all machinery and equipment (a crude way of overcoming the issue with processor manufacturing equipment highlighted above), the story is much more positive.   This gives the red line in the chart below and that has growth of 14.4 per cent in the year-to-date to Q3 2016 (from 7.6 per cent in the FY 2014).

Underlying Investment

But the absence of Q4 figures for underlying investment also feeds into determining the growth of underlying domestic demand, though at the scale of that (c.€150 billion) the €2 billion range we have identified is not as significant with the likely growth in underlying domestic demand last year being somewhere between 2.3 per cent and 3.8 per cent.

Final Domestic Demand Table

After growing by 4.2 per cent in 2014 and 5.4 per cent in 2015 it looks like the growth of underlying final domestic demand slowed in 2016, pulled down by slower consumption growth and the fall in machinery and equipment investment.  But because of the suppressed figures we don’t know to what extent.  And just when the need to adjust for intangibles has never been greater.

Final Domestic Demand

And all this uncertainty derives from an onshoring event that we probably wouldn’t learn a whole lot more about if the suppressed figure for intangible investment in Q4 was actually provided.  Maybe we were lucky to get what we got, but still… 

Wednesday, February 15, 2017

Impact of Brexit on Exports– it’s about prices so far but watch out for those airplanes

The release today of the December 2016 External Trade figures saw a number links to Ireland’s export performance and the UK referendum on the EU back in June - notably Brexit wipes half a billion euro of Irish exports to Britain.

While it is true that our goods exports to Great Britain were lower by €496 million in 2016 the link to the referendum is less clear-cut.  And with goods imports from Great Britain falling by €1,354 million our net external trade position with Great Britain actually improved by €858 million in 2016.

External Trade with GB

The reason why imports are lower this year is largely related to refined fuels and natural gas. 

Up to November 2015 we imported €1.7 billion of refined fuels, whereas up to the same point in 2016 these imports were €1.1 billion.  The average price per tonne of these fuels fell from €500 to €385 with the quantity of these exports falling by ten per cent.  In 2015, 82 per cent of refined fuel came from Great Britain; in 2016 this fell to 72 per cent.  Imports from the United States filled the gap rising from six per cent to 11 per cent of imports in this category.  In total we imported three per cent more refined fuels by volume for 28 per cent less by value. 

We only import natural gas from Great Britain and the volume of gas imports are down 33 per cent in 2016. In value terms natural gas imports fell €1 billion to €0.6 billion.  It is these movements in refined fuels and natural gas that account for most of the improvement in Ireland’s balance of trade with Great Britain.

However, it is exports to Great Britain that are primary interest.  Since the shutting down of the “missing trader” VAT scam in 2002 Ireland’s goods exports to Great Britain have been remarkably stable. In 2003, Irish goods exports to GB were €13,488 million; in 2016 they were €13,314 million, just one percent higher in 13 years.

Good Exports to the GB

The half a billion drop seen in 2016 is not unusual but it is worth looking a little closer at the categories which are the source of this decrease.

External Trade with GB by Category

On its own SITC 7 – machinery and transport equipment – experienced a fall equivalent to more than three-quarters of the total fall in goods exports to Great Britain.  We only have the detailed data to November but most of the fall in this category is down to two sub-components:

  • SITC 79: Other transport equipment (including aircraft)
  • SITC 75: Office machines and automatic data processing machines

In the 11 months to November 2015, we sold 41 wide-bodied aircraft (SITC 792.40) with a value of €501 million to Great Britain.  To the same period in 2016 wide-bodied aircraft sales numbered 32 for a value of €266 million.  This represents a drop in exports of €235 million and is largely down to a small number of decisions taken by an even smaller number of aircraft leasing firms.

For SITC 75 the culprit appears to be storage devices (whether or not with the rest of a system), i.e. SITC 752.70.  Up tp November 2015, we sold €263 million worth of these devices to Great Britain, with exports of €221 million recorded in 2016 – a drop of €42 million.  And this may be a price effect.  In the first 11 months of 2015 the number of units sold was 68,000 while that actually increased to 78,000 in 2016.  So almost half of the drop in the value of goods exports to Great Britain can be attributed to wide-bodied aircraft and the decreasing cost of digital storage devices.

However, while we might be able to dismiss the fall in SITC 7, the drop in food exports to Great Britain is likely to be of real significance.  These exports were down €221 million or 5.5 per cent in 2016 though it should be noted that overall food exports had their best ever year in 2016 and exceeded €10 billion for the first time.

Food Exports since 2000

And it is also the case that the poor performance of food exports to the UK was evident right from the start of the year, though did accelerate markedly around the middle of the year (i.e. post the referendum on the EU).

Cumulative Change in Food Exports to GB
However, whatever export losses were experienced with Great Britain were, in aggregate terms at least, more than offset with increases elsewhere.  The most significant of these increases were in exports to the US and China.  Food exports to the US rose €144 million (up more than 50 per cent in the year) while food exports with China rose €207 million (a rise of almost one-third).   This €351 million rise in food exports to these two markets more than offset the €221 million reduction in sales to Great Britain.

The biggest increase in food exports to China was “Food preparations for infants, for retail sale, or flour, meal, starch or malt extract” (SITC 098.93) which one assumes contains baby formula.  Up to November these exports to China rose to €444 million in 2016 from €305 million the previous year.  It not clear what the extra sales to the US actually comprised.  Exports in the food category “Other food preparations, nes” (SITC 098.99) to the US rose from €37 million to €123 million in the first eleven months of 2016.

So, at an aggregate level, increased food exports to the US and China are offsetting the fall in good exports to Great Britain but it is not clear that the value added from these exports are accruing to Irish residents.  We don’t know who is selling the powdered milk to China and we don’t even know what it is that we are selling more of to the US. 

But a more pertinent question is to determine what exactly it is we are selling less of to Great Britain?  We can answer that using Trade Statistics figures and here are the outturns to November 2016 compared to the same period in 2015 for the three-digit SITC food categories. By November 2016 food exports to Great Britain were running €171 million behind what they had achieved the previous year.

Food Exports to GB by Category

The biggest drop is the €66 million decrease in category 017 other meat, with the majority of this relating to poultry, where exports to Great Britain fell by €47 million.  The next largest category is the anomalous 098 for items not classified elsewhere and within this is 098.93 - food preparations for infants - where exports to GB fell by €40 million.  These  

After those two there was a €34 million drop in cheese exports and a €20 million drop in butter exports through a combination of lower price (possibly via the exchange rate) and slightly lower quantities.  The only other category to show a decline of more than €10 million was that for cocoa and chocolate.

There aren’t too many categories showing increases and the only notable increase was for beef or veal which was up €42 million in the first 11 months of 2016 compared to the same period in 2015.  However, this 6 per cent increase in value should be considered in the context of an 18 per cent increase in volume.  Beef exports to GB rose from 127,000 tonnes to 155,000 tonnes.  Thus, the price per ton of beef exported to GB fell from €5,400 to €4,700. 

If fact if we look at the prices across all categories the price pressures are clear.

Food Exports Prices to GB by Category

The prices are measured per tonne of goods exported in each category so is rather crude.  But the pattern is clear.  Prices are down.  The price of beef exports to Great Britain are 13 per cent lower, cheese prices are nine per cent lower with mushroom prices six per cent lower.

Weighted by the value of export sales in 2016 the average price of food exports to Great Britain are eight per cent lower in 2016 compared to 2015.  This is likely the result of fixed prices in sterling translated into lower euro receipts.  In markets with tight margins this may not be sustainable.  So maybe with these pressures, something like this is merited.  And all this without the UK having actually left the EU.