Category Archives: National accounts

2/9/16: Investment in Italy: Banks, Capital and Firms Structures

In my course on the enterprise and financial risk last semester, we talked about the peculiar (or idiosyncratic) nature of Italian firms across a number of matters:

Relationship banking;
Firm governance: family ownership, equity distribution and aspects of firm strategy and operations;
Firm capital structure (leverage risks in particular);
Firm dividend policy choices, etc.

Now, let’s add to that literature something new. A recent paper from the Banca d’Italia, titled “Investment and investment financing in Italy: some evidence at the macro level” by Claire Giordano, Marco Marinucci and Andrea Silvestrini (Banca d’Italia Occasional paper Number 307 – February 2016) looks at the evolution of the Global Financial Crisis and the Great Recession across the Italian economy in terms of credit fundamentals.

As noted by the authors, “following the outbreak of the global financial crisis, the euro area experienced a large fall in gross fixed capital formation, both in 2008-09 and during the sovereign debt crisis. This drop was dramatic in the countries more exposed to tensions in government bond markets. In Italy, in particular, total real investment has suffered a loss of around 30 per cent since 2007, the pre-crisis peak, reverting to its lowest levels since the mid-1990s. Weak investment also remained a key drag on GDP growth in 2014, although more recent quarterly data on capital accumulation point to a slight increase over the first three quarters of 2015 relative to the corresponding period in 2014.”

In a typical European fashion, investment in Italy must equal debt. In part, as I usually cover in my courses on risk and corporate financial strategies, this is tied to the reluctance of the family-owned firms to release equity. And in part, it is a part of a broader European debt disease. Independent of the reasons, per authors, the worthy corner to check for key investment-crises interlinkages is the credit supply.

“The depressed growth of investment is in contrast with the substantially muted aggregate financing costs, which stem from the low interest rate environment resulting from the strongly expansionary stance of monetary policy in the euro area. In this context, one scenario is that investment demand will remain too low to absorb financial savings, inducing a persistent state of an excess supply of funds in capital markets.” In other words, Italians are discovering secular stagnation: interest rates are too low because investment is too low (and may be, also the other way around).

With that in mind, the authors proceed to show that “medium-term gross fixed capital formation trends in Italy may be summarised along the following lines”:

Pre–2007 capital expansion “was broad-based, both across institutional sectors and asset categories, although less marked for households”, and Post-2007 “exceptional downturn …affected all sectors and components, yet to a different extent. In particular, focusing on the most recent period, the decline in general government and non-financial corporations’ expenditure, cumulatively undertaking about two thirds of total investment in Italy, was sizeable (approximately 25 per cent), yet slightly more contained than the concurrent drop in household investment spending.”

Overall, “the total-economy investment rate in Italy currently stands at its lowest levels since data became available in the mid-1990s; current government and non-financial corporation investment rates are comparable only to those recorded in 1995; the household rate is even lower. From the asset side, in recent years construction investment, in both residential dwellings and non-residential buildings, which represents half of total expenditure, was the hardest-hit item, excluding transport equipment expenditure (small and volatile), whereas ICT investment and the accumulation of intangible assets weathered the recent double-dip recession better.”

But the age of lower interest rates is having another impact on Italian credit markets. This impact is aggressive rolling over of maturing loans amidst deteriorating credit quality of borrowers. As the result, two things can be documented in Italian credit market experience since 2008 bust:

Firstly, overall, the trend toward longer debt maturity is present in household, corporate and government debt sectors (charts below). Secondly, this is doing nothing to repair credit quality on banks balance sheets.

Which is rocking, for now, as low interest rates are keeping debt burden down and allowing leverage to rise. But the problem is that with longer maturity of debt, we are looking at higher long term susceptibility to debt servicing costs. Last time that happened, Italy became on of the PIIGS. Next time it will happen… oh, ok… we shall just wait and hope Mario Draghi says true to his Italian roots long enough for the miracle to happen.

1/8/15: Irish 1Q 2015 Growth: The Real Economy Side

Having previously looked at

now, let's take a peek at the Domestic Demand component of GDP - the bit that covers Private Consumption, Government Current Expenditures and Gross Fixed Capital Formation.

Looking at real data, not seasonally adjusted:

Personal Expenditure on Goods and Services by Irish households posted 3.78% growth year-on-year in 1Q 2015. This is faster than 4Q 2014 growth of 3.00% and faster than 1Q 2014 y/y growth of 1.56%. The rate of growth is also faster than four-quarters' average of 2.54%. So this is good news. In fact, this is the fastest rate of growth in Personal Expenditure since Q1 2008 and fifth consecutive quarter of y/y growth.

Net Expenditure by Central and Local Government on Current Goods and Services was up 5.91% y/y in 1Q 2015, which is slower than 9.54% y/y growth reordered in 4Q 2014, but faster than 1.46% growth in 1Q 2014. Current rate of growth in Government spending is slightly ahead of the four quarters average of 5.65%.

This is the second fastest rate of Government spending growth since 2Q 2007 and marks 8th consecutive quarter of positive growth in spending, full three quarters longer positive run than for Personal Expenditure. To compare the two series: austerity from 1Q 2013 on implies a rise in Government current (ex-investment) spending of 7.5%, while recovery in the economy means Personal Consumption rising by 5.4% over the same period.

Gross Domestic Fixed Capital Formation (aka a proxy for Investment - proxy because it includes questionable stuff, like aircraft, as well as some of the MNCs-valued investments) was up 4.03% y/y in 1Q 2015 which is miles lower than 20.3% growth registered in 4Q 2014 when scores of punters rushed out to buy property, and when REITs continued to replace vultures in doing the same. Over the last 4 quarters, average rate of growth in Fixed Capital Formation was 12.77% and even back in 1Q 2014 this activity expanded by 10%, so 1Q 2015 was a major slowdown in activity, albeit it remained positive. This might be a healthy sign of structural normalisation in what has been becoming a somewhat overhyped property market, but it can also be a short-term blip. Overall, 1Q 2015 was the slowest y/y growth quarter since the onset of the 'recovery' in the investment markets here in 3Q 2013 and the first quarter in the period when growth rates fell below 10% mark (albeit 1Q 2014 actual expansion was 9.979%).

With the above, Final Domestic Demand (probably the closest we have in the National Accounts to a realist measure of our economic performance) posted a healthy y/y expansion:

As the above chart shows, Final Domestic Demand rose 4.22% y/y in 1Q 2015, slower than 7.51% growth recorded in 4Q 2014 but faster than 3.61% growth in 1Q 2014. Over the last 12 months, average annual rate of growth in the Domestic Demand was 5.31% which makes 1Q 2015 performance relatively less spectacular. Still, 4.22% growth rate is a healthy one.

And it is consistent with the longer term trends:

As chart above shows, upturn in the Final Domestic Demand took place (on trend) around 3Q 2013 and it is gaining some momentum. However, unlike the GDP series - posting full recovery (on rolling 12mo basis) to pre-crisis peak back in Q3 2014, Final Domestic Demand (domestic economy proxy) is still 11% below the pre-crisis peak. So while our MNCs-inclusive economic performance has regained pre-crisis peak, our domestic economy remains quite below the pre-crisis levels of activity.

Table below summarises source of growth in real GNP:

As shown above, single largest contributor to growth in GNP in 1Q 2015 (annual rate of growth) was Net Trade Balance (Exports less Imports) growth in which accounted for 33.81% of the total expansion in GNP. Personal Expenditure was the second largest contributor to growth with 28.83% share. Overall, growth in Final Domestic Demand (domestic economy proxy) was responsible for 55.4% of total growth in GNP over 1Q 2015 compared to 1Q 2014. Interestingly, inventories (Value of Changes in Stocks) accounted for almost 1/5th of total growth in GNP.

1/8/15: Irish 1Q 2015 Growth: The Real Economy Side

Having previously looked at

With the above, Final Domestic Demand (probably the closest we have in the National Accounts to a realist measure of our economic performance) posted a healthy y/y expansion:

31/7/15: Irish 1Q 2015 Growth: Quarterly Growth in GDP and GNP

Having looked at sectoral growth contributions for 1Q 2015 and trends in annual (y/y) growth rates in GDP and GNP, let's take a look at quarterly (q/q) growth rates.

On a quarterly basis:

GDP at constant prices was up 1.365% q/q in 1Q 2015, which is up on 1.235% growth recorded in 4Q 2014 and on 1.206% growth in 1Q 2014. So we have acceleration in quarterly growth in GDP. We now have five consecutive quarters of positive GDP growth with rates of growth all statistically above zero. Good news.
GNP, however, posted a decline in q/q growth of -0.762% in 1Q 2015, which contrasts with 3.43% growth q/q in 4Q 2014 and with 1.554% growth q/q in 1Q 2014. This is the first negative growth quarter for GNP after four consecutive quarters of expansion.

Chart above also shows how dramatically higher volatility in GNP growth figures has been in recent years. Over the entire history of the current series (from 1Q 1997), quarterly GDP growth volatility (measured by standard deviation) stood at 2.0076. This fell to 1.42225 over the period from 1Q 2011. So volatility in GDP growth declined over the recent period compered to historical. The opposite happened with GNP, which had historical volatility of 2.24441 and volatility since 1Q 2011 of 2.6658. So volatility increased for GNP.

Let's look at business cycle data. First, chart below shows contractions and expansions based on GDP q/q growth figures alone:

Next, using both GDP and GNP figures:

The two charts above reinforce the argument that we do indeed have a pretty robust recovery, with 4-5 out of the last 5 quarters on solid expansion trend based on both GDP and GNP, five on basis of GDP alone.

So on the net, the results on a quarterly basis are weaker than on the annual basis, with GNP posting an outright contraction. One consolation is that GNP decline of 0.762% q/q in 1Q 2015 is much shallower than Q4 and Q2 2013, as well as all other cases of declines from Q3 2008 on.

However, negative growth in GNP is worth looking closer at, which I shall do in subsequent posts, so stay tuned.

31/7/15: Irish 1Q 2015 Growth: Annual Growth in GDP and GNP

As promised in yesterday's post, I am continuing to cover the latest data on Irish National Accounts for 1Q 2015. In the first post, I looked at GDP at Factor Cost - the sectoral activity feeding into GDP headline numbers.

This time around, let's take a look at real GDP and GNP trends.

First - y/y growth rates:

Sectoral activity (measured by the GDP at Factor Cost) added some EUR2.47 billion to the real GDP increase in 1Q 2015 compared to 1Q 2014. This resulted in total real GDP growth of 6.51% y/y in 1Q 2015, up marginally on 4Q 2014 annual rate of growth of 5.98% and significantly higher than 1Q 2014 annual rate of growth of 4.13%. This is strong performance and the good news.
From the top headline number, we now have third consecutive quarter (from 3Q 2014) when 4 quarters cumulative output is in excess of pre-crisis peak levels in real (inflation-adjusted) terms. Which is very good news too. Ironically, on GNP side, we now have four consecutive quarters of cumulated 4Q output in excess of pre-crisis peak. Overall, 1Q 2014 marks the seventh consecutive quarter of positive y/y GDP growth.
Meanwhile, GNP posted 7.27% growth y/y in 1Q 2015, which was, imagine that, slower than 9.00% expansion recorded in 4Q 2014, but faster than 4.30% growth in 1Q 2014.
Normally, we would be exceptionally happy with this rate of GNP growth, but since 2013, GNP figures carry substantial 'pollution' from accelerated tax optimisation schemes known collectively as contract manufacturing. Still, faster growth in GNP than GDP suggests that a lot of growth this quarter is coming from organic, real growth on the ground, although we cannot tell how much exactly.
Overall, we now have the seventh consecutive quarter of y/y growth in GNP, which is good.

As long-term trends go, the chart below illustrates ongoing recovery in GDP and GNP

As far as the obvious point goes: there is a strong trend recovery in both series, which (sadly, I have to repeat this) is good news. One interesting thing to note is that trend for GNP recovery leads trend for GDP recovery. The reason for this is less pleasant than we like to think: instead of increasing contribution to activity from domestic economy, much of this lead is driven by changes in MNCs tax optimisation schemes, under which:

External activity is being booked into Ireland under 'contract manufacturing' schemes; and
Many profit-generative activities by MNCs are turning into cost-centre activities (booking higher costs into Ireland).

The latter point can be seen by looking at the relationship between GDP and net factor payments abroad, illustrated below in the form of declining share of GDP accounted for by profits & royalties repatriation abroad. This trend is likely to continue and accelerate as MNCs get to more aggressively use our latest tax 'innovation' - the knowledge development box.

Thus, the chart above gives us some, very indirect, indication of how dodgy are our GNP statistics becoming. Though, more on that in subsequent posts.

In addition to the net income outflows, the chart above shows the trend of declining GDP/GNP gap. Current 1Q 2015 GDP/GNP gap is at 18.07%, against the average over 2013-present of 17.28% and a 3mo average of 15.58%, which suggests two driving factors: higher GDP activity and increased outflow of booked profits, alongside exchange rates effects. The latter factor is important as it further compounds multiple distortions in the data from the MNCs.

In summary, evidence continues to show strong growth performance both in GDP and GNP in real terms, with some lingering questions as to the nature of this growth in relation to the MNCs activities here.

Stay tuned for quarterly growth analysis.