Friday, August 28, 2015

Ireland’s Vanishing Current Account Surplus

Earlier this week Prof. John Fitzgerald had an article in The Irish Times that reached a very important conclusion.  When looking at the current account of Ireland’s Balance of Payments he concluded that:

In the revised figures, rather than a significant surplus in 2014, as suggested by the unrevised data, there was actually a very small deficit

For a country with large legacy external debts and an on-going investment shortfall the current account is a very important indicator.  At first glance it would appears that Ireland’s current account has improved markedly over the past few years and that are running a large surplus.  Here are the first estimates up to 2014 there were published in March of this year.

Current Account March 2015

The deterioration in the current account during the credit-fuelled boom can be seen but the improvement since the crash in 2008 is remarkable.  Using the most recent national income estimates Ireland moves from a current account deficit of 7 per cent of GNP in 2008 to a current account surplus of 7 per cent of GNP in 2014.  Fitzgerald points out two important factors that need to be considered before lauding this turnaround.

  1. The impact on Ireland’s Balance of Payments of companies who shift their headquarters or re-domicile to Ireland, and
  2. The treatment of aircraft purchases by aircraft leasing companies based in Ireland.

These issues were addressed in recent information notes published by the CSO.  Looking first at the impact of re-domiciled PLCs.  In their information note the CSO provide on estimate on the impact the retained earnings of these companies are currently having on Ireland’'

Retained Earnings of Redomiciled PLCs

In essence this represents the retained portion (i.e. not distributed as dividends) of the profits of these companies from their activities and investments in the countries they actually operate in..  In time, these profits may be distributed to their foreign shareholders which will then make the current account worse than it actually is. For the moment, however, these profits are accruing to the Irish-based headquarters, are not being distributed and are making the current account appear better than it really is.

The following table removes the net income of these companies from the Current Account to try and get a better picture of the underlying balance.

CA minus net income of PLCs

There is still an improvement but the swing from the 2008 deficit of 7 per cent of GNP is now to a surplus of 3 per cent of GNP in 2014 rather than 7 per cent of GNP.  This is still pretty good but Fitzgerald further points out that the treatment aircraft leasing needs to be considered.

Again the CSO’s information note is illustrative.  They start by pointing out the increase of net exports accruing to Ireland from operational leasing activities.

Net Exports of Operational Leasing

This in itself is not an issue.  There are lots of foreign-owned companies operating in Ireland who contribute to our external trade surplus.  And a lot of what normally happens to these earnings was previously done.  If the profits were paid or accrued to a non-resident they were counted as an outflow of primary income in the current account.

However, there was one major exception: the treatment of the expenditure which led to these earnings.  For aircraft leasing companies this is the purchase of aircraft.  Under the old methodology most of the purchases of aircraft by leasing companies were not included in the current account of the balance of payments – they were included in the financial account of the balance of payments.

Thus in the current account we had the net inflow of income from operational leasing and the outflow of the profits due to non-residents.  But of course all the operating income of these companies does not transfer into profits for shareholders as they have to buy the aircraft in the first place.  The outflowing funds used to buy the aircraft did not form part of Ireland’s current account thus the previous treatment of aircraft leasing was overstating Ireland’s underlying current account.

The CSO show the impact that recording this aircraft purchases (and some other minor changes) had on Ireland’s balance of trade.

Revisions to Trade Data

It can be seen that this resulted in the recording of additional imports in SITC79: Transport Equipment other than Road Vehicles of around €5 billion for each of the past few years.  These are purchases that aircraft leasing companies based in Ireland made but did not previously appear in our External Trade or Balance of Payments data because the aircraft were not registered here.  The income from leasing these aircraft was recorded in the Balance of Payments though.

So if we do record the aircraft purchases in the current account where does all this leave our Balance of Payments surplus?

Revisions to Current Account

And like that it was gone! The revised treatment of aircraft purchases and the exclusion of the net income of redomiciled PLCs has Ireland showing a small deficit on the current account.

In December 2010, Brian Lenihan’s speech for Budget 2011 included:

The balance of payments is expected to record a small surplus next year, meaning that the economy as a whole will be paying its way in the world.

As we can see in the table above the outcome was an underlying deficit of 5.5 per cent of GNP.

Two years later and the current Minister for Finance in the speech for Budget 2013 said:

Our large exporting sector, which includes both multi nationals and growing indigenous companies is forging ahead delivering solid export growth, and a strong balance of payments surplus.

Although the improvement in the balance of payments is still pretty remarkable (from a deficit of 7 per cent of GNP in 2012 to near balance in 2014) we probably won’t be hearing much about current account surpluses this October.

In the Stability Programme Update back in April the Department of Finance said:

Over the medium term, the current account surplus is likely to fall slowly, as higher levels of investment lead to a narrowing of the domestic saving-investment gap.

There is no surplus to fund investment and Fitzgerald points out:

The revised figures have important implications for policy today. If the current account surplus had been as large as previously believed, this would have suggested significant room to stimulate domestic demand, even though this would have increased imports. However, the revised figures indicate that there is not much scope for such action. Instead, the necessary expansion in investment should be funded out of domestic savings.

Wednesday, August 26, 2015

Recovery in employment continues

The Quarterly National Household Survey (QNHS) has assumed a greater role in providing information about the performance of the economy in recent years.  This is not because of any improvements in the QNHS (indeed the results of Census 2011 show that caution to some of the QNHS estimates must be exercised) but because of difficulties in untangling all the caveats associated with Ireland’s national accounts data.

Employment Total

After slowing down through most of 2014 it now appears that employment growth re-accelerated in the first half of 2015.

Employment Growth

If we do a simple arithmetic projection of employment excluding the construction sector then the pre-crisis peak of employment (excluding construction) would be regained by the middle of next year.

Employment ex Construction

Almost all of the recent employment growth is in full-time rather than part-time employment.

Full Time and Part Time Employment

Though amongst part-time employees it should be noted that the drop in those who consider themselves to be “underemployed” has not continued into 2015.

Part-time underemployed

This is also reflected in the broad unemployment rate which includes potential labour supply (those marginally attached to the labour force and those who are willing to work more).  Note both unemployment rates here are not seasonally adjusted.

Unemployment Rates

Recent employment growth has mainly been in employees rather than in the self-employed.

Employee and Self Employed

And among employees there has been a drop in public sector employee numbers and a rise in private sector employees. Again these series are not seasonally adjusted.

Pub and Priv Employee Numbers

It can be seen that employee numbers in the private sector have been growing since early 2011.  Overall employment did not grow in 2011 as there were falls in self and public sector employment but private sector employee numbers have been growing for four years.

The regional data show that the employment growth is not Dublin-centric.  Over the past 12 months there was a 41,900 increase in employment outside Dublin compared to 15,400 in Dublin.  In growth terms Dublin had only the sixth fastest increase in annual employment of the eight regions.

Regional Employment

Thursday, August 6, 2015

Are there 60 home repossession orders being made every week?

Here is part of the front page of The Irish Times today.

Irish Times 06-08-2015

Our attention here is drawn to the story on the right hand side and, in particular the headline.  Are there 60 repossessions orders for homes being made each week?

Hmmm. No.  To be fair the text of the article does not say this even if the figures are presented in a slightly equivocal way.  So lets see what the figures say.  The article says that:

A total of 900 repossession orders were granted in the State’s 26 Circuit Courts between January and June

There were 26 weeks between January and June so this would seem to give a weekly average of 35.  However we are told:

The number of dwellings against which repossession orders were granted averaged 58 per week during the first quarter sittings. This rose to 62 per week in the second quarter.

The 900 repossession orders spread across the 15 weeks that the courts sat for is indeed 60 per week but the headline does not say “courts order 60 repossessions of homes each week they sit”; it just says each week.

The headline makes a reference to “homes” and quote above refers to “dwellings” but possession orders can be granted under one of three headings (with number granted by Circuit Court in first half of 2015 in brackets):

  • principal primary residences (616)
  • buy-to-let residential investment properties (126)
  • other including land, sites, farms and commercial premises (158)

If the focus is just on “dwellings” then the average number of repossession orders granted per sitting week is 50 rather than 60.  For primary homes the equivalent average is 41.

And the 616 orders for primary homes across 26 weeks gives a weekly average of 24 in the first half of 2015 or 29 if including BTLs.

The sittings in Cork get special mention for having the highest number of orders in the country:

The highest number was at Cork Circuit Court, where 123 repossession orders were granted – 91 for primary homes and 32 for buy-to-lets and others.

The figures from the Courts Service show that the there were 91 PPRs, 4 BTL and 28 non-residential properties in the 123 orders granted.

Of the 95 orders granted against residential properties 60 were in the first quarter and 35 were in the second quarter.  Of these 35 order, 30 were granted at sittings of the County Registrar (which I have attended) while five were granted by judges at full sittings of the Circuit Court (I went once – it is a circus).

Here is a summary of the six sittings that saw the 30 orders granted by the County Registrar in Cork in the second quarter.

Repossessions Hearings - Easter Term

More details of the 30 orders granted are below the fold.  It can be seen that around one-quarter of the orders are for BTL properties while around one-third are for properties that are vacant.  These two categories account for nearly 60 per cent of all orders granted in Cork.

If there is an average of 29 possession orders for dwellings being granted across the country each week then it is likely that around 17 of them are for BTL or Vacant properties.  That means we are left with “courts order 12 repossessions of homes each week”.  But that doesn’t make for a good front page headline.