Retail Sales continue to stall

The CSO have just published the May release of the Retail Price Index.  Given the large increase in new car sales we have been following, it is no surprise that the overall retail sales index is performing reasonably well.
The overall index by volume is up 3.5% on the year to May, but is actually down -0.1% by value.  What is of more interest is the retail sales index excluding motor trades, given how heavily weighted the overall index is toward this one sector.   Motor trades make up 25% of the overall retail sales index in May.
When looking at a previous release we felt that a recovery in retail sales may be imminent (retail sales climb again) but it is now clear that this has stalled.  Here is the retail sales index excluding motor trades by value and volume.  Although the huge decline seen in 2008 and 2009 has eased considerable, there is an absence of a real recovery.

This absence of a sustained recovery is also supported when looking at the annual and monthly changes.

The annual change in value index remains stubbornly negative due to effects of price deflation and increased consumer bargain-hunting.  The annual change in the volume index turned positive in April but dropped back towards zero in May.
Although the monthly change in the volume index has been positive for four of the past five months, the monthly change in the value index has been negative for three of the past four months.
The volume index only barely rose in May (+0.1%) suggesting that the increases seen up to March have petered out.  The value index fell in May (-0.4%) and does not augur well for VAT revenues which are obviously based on the value of sales.

Core deflation eases slightly

The headline measure of price changes in Ireland  from the latest CPI release may be heading towards inflation once again – the June annual CPI inflation figure of –0.9% is slightly up on the May figure of –1.1% – but the measure of core inflation we have been tracking is still very much negative.
Deflation remains, though the figure did rise slightly in June. We have previously looked at this figure using the March, April and May CPI releases from the CSO.  Here is the June update.

The measure of core inflation excludes the impact of mortgage interest and energy products, which between them make up about 15% of the index. The June figures suggest that core deflation in Ireland is running at -2.5%, up from -2.7% in May.
The measure is showing strong persistence and has been between the range of –2.5% to –2.8% for the past six months, even as the overall inflation rate has continued to move towards positive territory.

The Two Irish Economies

The following graph illustrates the destruction of employment that has occurred in the Irish labour market since the middle of 2007.

Employment in Ireland peaked in Q4 2007 when 2,138,800 people had jobs.  Since then there has been a 12.6% reduction in the number employed with a reduction of 270,200 to 1,868,600.

Here are two contrasting images of jobs performance in the Irish Economy.

Car sales trend continues

The upward trend that we have been following in new car sales continued into June according to the most recent figures released by the Society of the Irish Motor Industry (SIMI).

New car sales in the first half of the year are over 21,000 ahead of sales in the same six months last year.  Sales are still way down on where they were in 2007 and 2008 but now there is a clear and growing divergence between the 2009 low and the 2010 line.

European Food Prices – Ireland is cheap!!

This release from Eurostat on European food prices caused a minor stir last week when it revealed that Ireland had the second highest food prices in the 27 countries of the EU behind Denmark.

Danish food prices are 39% ahead of the EU average, while in Ireland we pay 29% above the EU average.  In contrast UK prices were 3% below the EU average.  The cheapest food prices were in Poland which are 36% below the EU average.

The media reaction was overwhelmingly negative with many reviving the image of “Rip-off Republic”.

• Irish food prices second highest in Europe (RTE)
• Ireland ranks 2nd in EU for high prices (Irish Examiner)
• We're second most expensive country in EU to buy groceries (Irish Independent)
• Irish prices among highest in EU (Irish Times)

To be honest, this didn’t quiet sit with me.  I cannot say that I feel hard done by for the price I have to pay for food.  I sought some hard evidence to support my anecdotal feeling.  I got it from the United States Department of Agriculture’s Economic Research Service.

A table on their website gives the percent of household final consumption expenditures spent on food, alcoholic beverages, and tobacco that were consumed at home.  The 2007 version of the table is available here with the data for the EU combined with the Eurostat data in my table below.

Exchequer Balance Improves (sort of – again!)

We saw a €3 billion ‘improvement’ in the Exchequer Balance in May 2010 compared to last year.  This was attributable to the frontloading of a €3 billion contribution to the National Pension Reserve Fund to finance the recapitalisation of AIB and BOI.
The June Exchequer Returns that have just been released indicate a further €3 billion ‘improvement’ in the state of the public finances.

Can we explain why the red line for 2010 is outperforming the green line for 2009?  We haven’t turned that big a corner. 
As with the May ‘improvement’ the June equivalent is easy to explain.  In June 2009 we poured €3 billion into the nationalised Anglo Irish Bank.  This was included in the June 2009 Exchequer Statement.  We are continuing to pour money into Anglo but this is under the contrived construct of Promissory Notes and does not appear on the Exchequer Accounts (yet!). 
The EU Commission may yet rule that these transfers to banking sector have to be included in the Exchequer Accounts and the improvement shown above will instantly evaporate.
The creative accounting techniques used in the overall Exchequer Balance mean it is of little use in analysing the state of the public finances. A more instructive measure, and one slightly less open to manipulation, is the Exchequer Current Account Balance.  How has that been faring out given the steps that have been taken to restore order to the public finances?

That does not look good. The Current Budget Deficit up to June 2010 is €831 million or 11.5% worse than it was by the same time last year (a deficit of €8,045 million in 2010 versus one of €7,213 million in 2009).  The public finances continue to deteriorate.
Last June there was a monthly current budget deficit of €767 million.  This year the equivalent monthly deficit was slightly worse at €803 million.  With tax revenue up on the same month last year, this increase in the deficit is due to an increase in current expenditure.
Last June, Current Expenditure was €2,930 million while this year it was €3,403 million.  Timing issues allays the weight we can put on these monthly comparisons.  In the first six months of the year Current Expenditure was €19,655 million.  This is only 1.9% or €376 million below the 2009 figure of €20,031 million.
Of this €19.7 billion in Current Expenditure some €5.9 billion or 30% of the total has been current Social Welfare Expenditure.  This is the only area to show an increase in current expenditure.

This graph does not compare like with like, as a March reorganisation of government Departments saw the budget of the state training agency, FAS, come under the remit of the newly named Department of Social Protection.  Even before this change current social welfare expenditure was rising but the surge in the past few months is due to the reorganisation rather than a further acceleration of social welfare spending.

June Exchequer Returns

Last Friday the Department of Finance published the Exchequer Statement for June.  The gives us a picture of tax returns for the first half of the year.  It appears to me that the rate of decline in tax revenues has eased dramatically and we may not be too far from some real stabilisation.  Prepare for death by tables in the following analysis!  The usual graphs are also produced.
The source documents are:

• Exchequer Statement
• Analysis of Tax Revenue
• Analysis of Voted Expenditure
• Information Note

Most of the mainstream commentary focused on €227 million or 1.6% shortfall relative to the Department of Finance forecasts.  This is only a small part of the picture.  What is of more interest is the performance of tax revenues in the first six months of 2010 relative to the same period in 2009.