Thursday, October 1, 2009

The Davy bluffer’s guide to GDP growth

Davy DAVY, the indigenous Irish stockbroker and wealth management advisor, in a report on the Irish economy, published on 29 September, opines that the economy will grow by 4% in 2011 “but the recovery will not be felt that strong on the ground”.  Reports of this nature ought to engender trust in the sponsor but there is precious little evidence to support this perspective on growth potential. 

Yesterday Standard & Poor placed AIB and Bank of Ireland on credit watch because they believe the Irish economy is expected to remain weak next year and unsupportive of bank profits.

This Davy Report is founded on:

  • Agriculture, industry and traded services expanding and creating an additional 2,600 jobs – a tall order for4 a sector that has been in the doldrums for the past five years and because commodity prices are so low.

    The pay component of Irish agriculture is €569 million for the 116,000 ~ €4,905 per person. Employment in the sector dropped by 2,700 between 2007 and 2008.
  • Retail sales recovering and creating 28,600 new jobs. But this sector has dropped 18,200 jobs in the last 12 months and is traumatised
  • Consumer spending increasing by 1.5% from 2010 –“but may grow by 3.8% as incomes recover and precautionary savings unwind somewhat”. Retail sales volume dropped by 15% in the 12 months to July 2009 and was 9.6% lower in Q1 2009 and 6.2% lower in Q2 2009. Further taxes are likely. Consumer debt is gigantic and credit flow is sclerotic. Where are the resources to come from to nurture growth?

Changes in employment envisaged in this Davy report

Changes in Employment Q4 2011
Agriculture, forestry and fisheries 2,600
Industry -10,000
Construction -16,400
Wholesale and retail 28,600
Transportation and storage 4,700
Accommodation and food services 14,900
Information and communications 2,700
Financial, insurance and real estate -1,100
Professional, scientific and technical 14,900
Administrative and support 8,100
Other NACE activities 9,100
Public Sector  
Public administration and defence 9,100
Education 3,000
Human health and social work 2,200
TOTAL 72,400

The Irish Hotels Federation recently proclaimed the industry to be in crisis and that the excess capacity is 12,000 of the sectors 60,729 bedrooms and that a massive restructuring of the sector is urgently needed. The hospitality sector has dropped 10,400 jobs as a consequence.

The Exchequer deficit at the end of August was €18.73 billion (87.6% of Government revenue in the 8 months to August 2009). The Davy Report suggests that the Government provided for 35,000 more unemployment claimants than was necessary and will thus ‘save’ €400 million. Welfare spending at the end of August was €118 million less than the €6,873 million projected

Household debt is approximately €170 billion – an outrageous level by any civilised standard and is attributable to the Irish allowing imbeciles, who craved for bonuses like baboons crave for peanuts, run its banks.

While 83% of this secured by mortgage the collateral in question has collapsed in value resulting in negative equity in 32% of the nation’s housing stock. The Report suggest that “households are now in debt payoff or debt write-off phase” and that because ratio of debt service to after-tax income has seemed to improve, that consumers are all set to gallop into the golden sunset once again. Rising interest rates and more prudent bank regulation will impede this gallop.

The contention that a “rising interest burden in 2011 will become more manageable as disposable incomes begin to grow at a faster pace (i.e. 2.7%) is difficult to fathom at a time when incomes are dropping like the proverbial stone. Did the IMF not categorically state that “further wage reductions will be required to restore competitiveness and growth prospects and that determined recovery efforts will require execution over several years”? The majority of Irish mortgages are on a variable interest rate.

Much is made by Davy of “an incredible spike in savings”. The National Income and Expenditure Account for 2008 actually indicates that net national savings dropped by 44% to €13 billion which contradicts the reports assertion that “personal savings jumped by €6.5 billion” and “it is not clear that all of the savings was rational. ” Well, well.

IMF Perspective

When the IMF reviewed the Irish economy last June they considered that Irish GDP will contract by 13% through 2010 and that when recovery comes it will be very modest and dependent on a banking system that is not loss making, fit for purpose, that NAMA proves itself and that the Irish banks are no longer controlled by imbeciles or any other dysfunctional, incompetent eunuchs.

ECB Perspective

The ECB is acutely aware of the need to rebalance the Irish economy, moderated public spending, reduce public deficit and return to compliance with the Stability and Growth Pact. Wage restraint would obviously be helpful as would taking account of competitiveness and local market conditions in a responsible and timely manner and other reforms that would enhance competitiveness.

Competitiveness is related to the external performance of the economy and is typically measured in terms of export growth, share of export markets and current account balances. Additional factors that impact on competitiveness include the degree of export specialisation in terms of the range and quality of products exported and the markets these are exported to. If Ireland were to export products with a higher quality or greater degree of sophistication and to find strongly growing markets for these – that would enhance competitiveness. This implies a capacity to generate a sufficient number of very productive firms.

The pattern of wage growth and exports does not reflect enhanced competitiveness:


Wage growth

Export growth




















Another indicator of competitiveness are the trends in Current Account balances, which in the case of Ireland have been:


Year Balance on Current Account, € Million
2003 -2
2004 -867
2005 -5,690
2006 -6,304
2007 -10,124
2008 -9,435

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