Tuesday, November 21, 2017

Ireland’s capital stock continues to expand

The CSO have provided the 2016 update of Ireland’s fixed capital stock.  This has been affected in recent years by aircraft for leasing and intangible assets.  This continued in recent year.

Here is Ireland’s gross capital stock in 2015 prices.

Gross Capital Stock Constant Prices

This measure gives an estimate of the amount of fixed capital held at the end of each year.  Gross depreciation is not taken into account and the amounts reflect the value of the fixed assets (in 2015 prices) as if they were new.  Changes are the result of additions to the capital stock and obsolescence of existing fixed assets.

There have been a number of data suppressions in recent years which means that we only have a combined category for aircraft and R&D intangible assets.  There were increases in all categories of fixed assets though the largest contribution to the overall increase came from aircraft and IP.

Unsurprisingly it is estimated that there was a very small increase in the stock of dwellings, rising by just one per cent in 2016.  Other buildings and structures rose at an appreciably faster pace at 4.5 per cent.

Next is a net measure of the capital stock which accounts for depreciation.  This better reflects the value in use of fixed assets rather than their replacement cost.  Again we will consider this in constant prices to look at changes in the quantity of assets from year to year.

Net Capital Stock Constant Prices

We know there were large depreciation charges for aircraft and IP over the past few years (it is was it messing up the GNP and GNI figures) but we can see that even accounting for depreciation the stock of these assets increased by almost five per cent in 2016.  They are still arriving faster than the existing stock is depreciating.  Again on dwellings it is not surprising to not that our stock of dwellings barely changed in 2016, with a rise of just 0.5 per cent.

And finally, here are the change in the depreciation on these assets (again in constant prices)

Consumption of Fixed Capital

Although the increase in depreciation in 2016 was much lower than the huge-level shift that occurred in 2016 we can see that around three-quarters of the 2016 increase is due to aircraft and intellectual property.  This, of course, matches the first table where we saw that an equivalent amount of the increase in the gross capital stock was related to these assets which have few direct links to activities in Ireland.  The aircraft are flying all over the world and many of the products that are derived from the IP are made in other countries with the R&D behind it all also having being undertaken elsewhere.

The figures for “total ex. aircraft and IP” at the bottom of each of the tables give a better indication of the underlying changes in Ireland’s capital stock.

Monday, November 20, 2017

Non-Profit Institutions Serving Households

As well as giving a split of the non-financial corporate sector the 2016 institutional sector accounts also give a split for the household sector.  Up to now households (S.14) and non-profit institutions serving households (S.15) were combined.  We now have separate current and capital accounts for each.  Non-profit institutions serving households (NPISHs) are relatively small in the overall scheme of things (they are around two per cent of the combined sector) but we do get to see how they are funded and what, in rough terms, they spend the money on.

It should be noted that this doesn’t cover all charitable or voluntary organisations many of which are counted in the government sector given the nature of their links to the public sector.  As the CSO note:

Many charities, such as hospitals and social care providers, which receive most of their funding from government and which provide services under contract with government, are treated as part of the government sector (S.13) in national accounts, and not S.15.

Anyway here is the aggregate current account of those entities included in this sector.

NPISHs Sector Current Account 2012-2016

On the income side we can see that these institutions had around €3.3 billion of income in 2016.  Most of this came in the form of transfers with around €780 million raised from their own activities.  The CSO note:

The institutions in the NPISH sector get most of their income as transfers from households (for example donations, church collections, union dues or members' subscriptions) and also receive transfers from government.  They also earn profits on their market activities, such as charity shops and match tickets.  Relatively little of their income is from investments.

On the current expenditure side almost all goes on compensation of employees and final consumption expenditure which between them were €3.2 billion in 2016:

Their income is spent on final consumption expenditure and compensation of employees in a roughly 3:1 ratio. There are over 55,000 people in direct paid employment in the NPISH sector.

Expenditure on staff was €1.14 billion in 2016 which gives an average of €20,700 per person in direct employment.  We also get a capital account for the sector but there isn’t a whole lot going on there.

NPISHs Sector Capital Account 2012-2016

For the past few years the gross capital formation of the sector has been less than the gross saving from the current account and investment grants received shown here.  This has resulted in the sector being a net lender averaging around €45 million for the past three years.  The figures for net capital formation are positive which means that gross capital formation was lower than the consumption of fixed capital (depreciation).

Friday, November 17, 2017

New breakdown of Non-Financial Corporates in the Sector Accounts

An earlier post went into the gory details of the household sector.  Here we do something similar for the non-financial corporate sector and assess what can be learned from a new breakdown of this sector provided by the CSO.

There is lots going on in the current account of the non-financial corporate (NFC) sector but it is hard to tell what the underlying patterns are.  Here is the NFC current account since for the past five years from the 2016 institutional sector accounts.

NFC Sector Current Account 2012-2016

The big changes happened in 2015 when gross value added jumped by more than 50 per cent to reach €180 billion with an increase of a near similar scale showing for gross operating surplus.  We know this was the result of activities of foreign-owned MNCs and it probably wouldn’t be much of any issue if the pollution was limited to the estimates of GDP but we can see that after profit and interest distributions that gross national income in 2015 still jumped by almost €30 billion. 

So more than half of the increase in gross profits of the NFC sector in 2015 was attributed to Irish residents.  There was a bit of fumbling around when the figures first came out but now we have a fairly good handle on what happened.

Now the CSO are giving a further useful breakdown that allows us to see what happened by trying to isolate some of the distortions.  Figures have been provided for two sub-components of the NFC sector:

  • large foreign-owned NFCs
  • other NFCs

As the CSO say in the background notes:

Non-financial corporations are sub-divided into Large foreign-owned MNEs (S.11a) and the Other (S.11b) in these accounts. Large foreign-owned MNEs are those companies surveyed by the CSO's Large Cases Unit. This division is not prescribed in ESA2010 but is an additional level of detail provided because of the nature of the Irish economy. This sub-division is a step towards a full separation of domestic and foreign-owned corporations, and allows a more informed perspective on the purely domestic economy.

In the release they further say:

These 50 largest foreign MNEs (out of approximately 114,000 enterprises in S.11) are presented as a proxy for all the MNEs in this release. A more comprehensive account of foreign-owned enterprises is currently under development.

So what do we see if we split the current account into these 50 foreign-owned MNCs and the rest? Lots.  Here are their current accounts for the last three years.

NFC Sector Current Account 2012-2016 Divided

A wider table that also includes the overall totals is available here.  Breakdowns aren’t provided for all of the constituent parts of the current account but most of the important ones are included.  The panel on the right hand side is a huge step in giving us a view of the underlying trends in Ireland’s business sector.  Over the past three years we see that gross value added has been increasing (+7.3% in 2016), compensation of employees is growing (+6.3%) and gross operating surplus is rising (+8.3%). 

There may be a little bit of an issue with redomiciled PLCs or some other issue in the distribution of income account as gross national income recorded an increase of 17.9% in 2016 but all in all the new breakdown is very useful.  Corporation Tax payments from these companies rose a further 13.2% in 2016 to reach €3.55 billion (and up €1.3 billion on 2014).  Thus, the right panel presents a story of a business sector growing strongly. 

And that means that most, but not all, of the problems are corralled in the large, foreign-owned NFC subsector.  This is a small group of companies but ones which have a disproportionate, and distortionary, effect on Ireland’s national accounts.

The €50 billion jumps in gross value added and gross operating surplus that occurred in 2015 are obvious.  As stated above the problems really kick in after the distribution of income.

As these are foreign-owned companies we would expect their direct contribution to Irish gross national income to be minimal.  Their contribution would have been paid out to other sectors: buying goods and services in their intermediate consumption from domestic suppliers and wages paid to the household sector.  In fact by the time we get to gross national income all we would expect to be left is whatever is needed to cover their Irish Corporation Tax bill.  We would expect any remaining profits to be either distributed or attributed to the foreign shareholders.

But that is not the case.  The gross national income of the large, foreign-owned NFCs far exceeds their Corporation Tax payments and at the bottom we would expect their gross disposable income to be close to nil.  We can see that it was €3.1 billion in 2014, jumped hugely in 2015 and rose again in 2016 to stand at €31.2 billion.  This is counted as our income. It is not.

As an quick aside here are the Corporation Tax payments attributed to the subcategories of NFC and also to Financial Corporates over the past four years.

Corporation Tax by NFC and FC 2013-2016

Compared to 2014, Corporation Tax payments for 2016 are shown to be €2.9 billion or 57.6 per cent higher.  All the categories shown paid more but the small relative growth was for these large, foreign-owned NFCs which paid 53 per cent more Corporation Tax in 2016 compared to 2014.  For other NFCs the increase was 59.7 per cent and it was 60.4 per cent for financial corporations.  It should be noted though that these tax amounts are inclusive of the R&D tax credit (which as a payable tax credit related to capital spending (as research and development is now treated) is counted as an investment grant received).

Anyway, back to this huge level shift in GNI from foreign-owned NFCs in 2015.  The reason is because nearly €25 billion of profits of foreign-owned companies weren’t counted as a factor outflow.  There are two possible reasons:

  • The first is different treatment of certain items in the national accounts (where gross operating profit is estimated) and in the balance of payments (where factor outflows are derived).  We previously considered some issues around the treatment of spending on R&D service imports.
  • The second, and most significant, is that profit outflows are based on net operating surplus and there is now a huge amount of gross operating surplus that is consumed by depreciation.

We can see some things that point to the second issue in the capital account.

NFC Sector Capital Account 2012-2016 Divided

Unfortunately, both the capital accounts of both sub-groups are bit of a mess.  For the large, foreign-owned group the acquisition and depreciation of intangibles is throwing the numbers awry while for other NFCs it is likely that the acquisition and depreciation of aircraft are muddying the waters (not forgetting that gross savings is inflated by the net income of redomiciled PLCs).

For the group of large foreign-owned NFCs we can see the large changes that occurred in the depreciation charge.  Consumption of fixed capital for these 50 companies was €5.5 billion in 2014 and this surged to €29.4 billion in 2015 with a further increase to €32.8 billion in 2016.

In the National Income and Expenditure Accounts the CSO provided details of a modified measure of national income, GNI* and one of the adjustments made is for the depreciation on certain foreign-owned intellectual property assets.  This depreciation  went from €0.8 billion in 2014, to €25.0 billion in 2015 to €27.8 billion in 2016.  This is what has driven the changes in the consumption of fixed capital for the large, foreign-owned NFCs shown in the table above.

Although these companies have large amounts of gross savings their expenditure on gross capital formation is volatile and can exceed the level of gross savings.  The financial transactions account for the subcategories might throw some additional light in the thing but although great strides forward have been made we haven’t got that far – yet. For the large, foreign-owned NFCs we can surmise that some of these are running large surpluses to repay loans they assumed in the process of acquiring large amounts of intangible assets. 

At the same time other companies are borrowing to acquire intangibles so it is hard to tell what is happening.  So, in 2015 there was net lending available to repay debt (net lending of €10.7 billion) while in 2016 additional borrowing for intangibles swamped the repayments that some companies were making (resulting in net borrowing of €16.5 billion).

While we don’t have the financial transactions account we do, though, have the financial balance sheets of the two sub-groups.

NFC Sector Financial Balance Sheet Divided

Plenty of big numbers there.  Unfortunately the loans liability category is suppressed.  However, we do have total financial liabilities.  We can see that for the group of 50 large, foreign-owned NFCs this jumped from €198 billion at the end of 2014 to €516 billion at the end of 2015.  A year later and it was €519 billion.  This is vaguely supportive of the idea of some large loans being repaid while other, relatively smaller, loans are being taken out as part of the onshoring of intangibles.

The balance sheet of the Other NFCs category tells us nothing about the domestic business sector.  The numbers are huge.  By the end of 2016 these companies has €1.2 trillion of financial assets and €1.5 trillion of financial liabilities.  There’s still a bit of stripping out to do here.

None of this is straightforward but this latest release is another step along the way.  GNI* is a promising measure that will likely improve in subsequent rounds.  The current account of the balance of payments is still a bit of a mystery but maybe we know where we’d like to end up.  For the sector accounts we’d definitely like a foreign/domestic split for the NFCs.  The split provided here gives some reasonable growth measures for output in the current account but there’s still room for improvement on the income, capital and balance sheet side of things.

Some snapshots of the aggregate improvements in the household sector accounts

The last post went a bit heavy on the detail in the household sector accounts.  Here we try and pull out a few snapshots from the accounts that give visual pointers to the aggregate improvements over the past few years.  All the data here is nominal and is for the household sector combined with non-profit institutions serving household but the impact of these on the aggregates is relatively minor and they have almost no impact on the trends.

We’ll start with income and consumption and we have series for these that are showing steady growth for the past few years (with the series also having been extended back to 1995).

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Which combined give the following gross savings rate:

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Since 1995 this has averaged 8 per cent so the 2016 level is about a percentage point below that.

The increase in income has largely been driven by a rise in the compensation of employees received by the household sector which, in nominal aggregate terms, is back to the pre-crisis peak.

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Though tax and social contributions are now higher than they were pre-crisis:

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And, of course, rents are increasing.  The aggregate amount of actual rentals paid for housing exceeded €4 billion for the first time in 2016.

Household Sector Actual Rentals for Housing

It is from a very low base (compared to pre-crisis levels at any rate) but household sector capital formation is beginning to pick up:

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After a number of years where household spending (consumption plus capital formation) was less than total household income, the household sector has returned to being a net borrower in the past few years though no where near the levels that were seen pre-crisis.

Household Sector Net Lending

This pattern is reflected in household financial transactions with household transactions increasing both assets and liabilities up to 2008 and reducing them since.

Household Sector Financial Transactions

By and large net financial transactions from the financial transactions account and net (borrowing)/lending from the capital account track each other:

Household Sector Net Lending Net Financial Transactions

Here is the impact of these transactions on household deposits and loan liabilities:

Household Sector Deposits and Loans

After peaking at €203 billion in 2008, household loan liabilities have been steadily declining since then and had reduced to €143 billion by the end of 2016.  Household deposits have been relatively stable for the past decade but what is noticeable is that the level of household deposits almost matches the level of household loans for the fist time since 2002 – though these aggregate data tell is nothing about the distribution of these assets and liabilities.

Add in the impact of other financial assets and liabilities and we get the overall balance sheet position:

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The divergence of financial assets (rising) and financial liabilities (falling) since 2008 is clear. This has meant that the household net financial asset position has been increasing and stood at €210 billion at the end of 2016.  This compares to €130 billion at the end of 2006.

Finally, here is a measure of debt to income:

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This ratio of total financial liabilities to total disposable income has fallen from 220 per cent in 2011 to 160 per cent in 2016 and is now back near levels last seen in 2004.  The progress is understandably slow but we’re getting there.

Digging into the detail of the household sector accounts

The CSO have published the Institutional Sector Accounts, Non-Financial and Financial, for 2016.  These are very useful datasets and the sectors included have been further broken down.  For the household sector we now have separate account for households and non-profit institutions serving households while the non-financial corporate sector has been usefully split out in large, foreign-owned NFCs and other NFCs.  We will come back to these.  Here we will focus on developments in the household sector. 

First, here is the current account in all its gory glory.  Most of the figures come from the CSO release but some of the breakdowns are only available from Eurostat so will be updated for 2016 in due course.  Some of these breakdowns have been crudely adjusted to fit the revised total published by the CSO but the broad changes are correct.  Only figures with published outturns for 2016 are given an annual change in the final column. Click to enlarge and also get rid of the fuzziness it seems.

Household Sector Current Account 2012-2016a

An more palatable abridged version with only updated figures is reproduced here.  Gross disposable income is estimated to have grown by 3.9 per cent in 2016 to reach €92.6 billion with consumption expenditure rising a touch more at 4.1 per cent.  Both of these growth rates are largely unchanged from the preliminary estimates.  This means that the gross savings rate for 2016 was little changed from what it was in 2015 with the final row of the table showing figures of around 7 per cent for both years.

However, while the growth rates of income and consumption may be little changed, the level of gross savings of the household sector has been significantly revised down from the preliminary estimates.  The Q4 ISAs put it at €11,714 million and we can see above that it is now put at €6,386 million.

We examined these revisions here and note that the relate to the line right at the very top of the household current account: gross value added.  The level of output of the household sector, and in particular the self-employed, has been significantly revised down.  This means the estimate of the gross household savings rate for 2016 has gone from 11.5 per cent in the preliminary figures to 6.9 per cent now.  The savings rates have been revised down for all years since 2010.  There is no “right” savings rate but for 2016 these revisions seems to be a shift from one that seems a little high to one that seems a little low.  This has implications for forecasts of consumption growth relative to forecasts of income growth.

Anyway, that minor quibble aside the household current account is continuing to show solid improvement. We might have a new level but the output of households and the self-employed grew, in nominal terms, by 5.2 per cent in 2016 (though the extent that this is due to increases in imputed rentals for homeowners remains to be seen).  Compensation of employees received by the household sector grew by 5.4 per cent though there were declines in property income received. All in all gross national income of the household sector grew 4.9 per cent.

Taxes paid on income and wealth grew by 3.2 per cent while social contribution paid to the government (mainly PRSI and pension contributions by public sector employees) grew by 5.8%.  The lower growth of taxes on income reflects the impact of policy measures (primarily on USC) with PRSI growing in line with the increase in compensation of employees.  Social benefits received remained flat with €22.8 billion paid out by the government sector. 

Combine all these changes and we get to the 3.9 per cent increase is gross disposable income.  In line with this consumption grew by 4.1 per cent.  Consumption items growing by more than 10 per cent were the purchases of vehicles (+16%) and actual rents for housing (+13%).

All told, the household sector was left with gross savings of €6.4 billion in 2016 after all current items are accounted for.  We next turn to the capital account.

Household Sector Capital Accounts 2012-2016

In 2016 gross capital formation of the household sector was just under €8 billion which exceeds the gross savings that arose in the current account which means (after accounting for relatively minor amounts of capital taxes and transfers) that the household sector was a net borrower in 2016 of €1.4 billion.  This roughly means that household expenditure for current and capital purposes exceeded the income available to meet such expenditure.

We can see that this different significantly from 2012 when the household sector was a net lender to the tune of €4.8 billion.  The €6 billion change is roughly divided between a €3 billion reduction in gross savings from the current account and a €3 billion rise in gross capital formation in the capital account.  In order to cover its current and capital expenditure in 2016 the household sector was a net borrower.

We can try to get some insight into this shift from net lending to borrowing by looking at the financial transaction account.

Household Sector Financial Transaction Accounts 2012-2016

For most of the items the outcome of transactions over the past five years is what we would largely expect.  As the second last row shows over the past five years net financial transactions have increased household financial net worth by almost €16 billion.

In net terms, households have added nearly €11 billion to their deposits while net loan transaction (drawdowns minus repayments) have reduced loan liabilities by €27 billion.  We have continued to contribute a net two to three billion a year to insurance and pension reserves.

The standout figure is the minus €36 billion for equity transactions, of which €34 billion relates to unlisted shares.  It is these transactions that are hanging the financial account together.  In the final row of the table we can see that there are some differences between net financial transactions in the financial transaction account and net(borrowing)/lending in the capital account.  However, over then years these sum to less than €10 billion and are within the realms that they could be explained by re-valuations, write-offs or sales of non-financial assets to other sectors.

But without the minus €36 billion of equity transactions the plus €11 billion of net deposit transactions and minus €26 billion of net loan transactions would be hard to explain.  But how much of an explanation is it? What exactly was the €34 billion of unlisted shares that we sold (assuming that the minus figure for financial assets refers to their sale)?

Anyway, we can see how these transactions have impacted household net financial worth by looking at the financial balance sheet.  Click to enlarge.

Household Sector Financial Balance Sheet 2012-2016

The last line shows that the net financial worth of the household sector has increased by €76 billion over the past five years, rising from €133.8 billion at the end of 2012 to €209.9 billion at the end of 2016.  The final column shows that this is €60 billion more can be explained by net financial transactions (which as we saw were plus €16 billion).

Looking at the liability side of the balance sheet shows a fairly close comparison between changes in the stock of financial liabilities and net liability transactions.  Loan liabilities over the past five years fell by just over €30 billion so the minus €27 billion of transactions doesn’t leave much to be explained by re-valuations or write-offs.

But there seems to be lots going on on the financial asset side of the balance sheet.  The €10 billion rise in deposits closely matches the plus €11 billion of transactions.  However, insurance and pension reserves rose by €35.6 billion on the back of plus €12.8 billion of transactions.  The remaining €22.9 billion is due to revaluations which we can presume is linked is rising share and debt asset prices.

And again we turn to direct holdings of equity.  Over the last five years the value of the stock of equity assets held by the household sector has been largely unchanged: €46.4 billion in 2012 versus €46.8 billion in 2016.  Of course, we have just seen that there has also been minus €36 billion of transactions with assets in this category with almost all of this relating to unlisted shares..

The detailed table shows that the value of listed held by households rose from €9.9 billion in 2012 to €14.1 billion in 2016.  On the other hand the value of unlisted shares fell from €36.5 billion to €32.8 billion but a drop of just under €4 billion pales in comparison to the minus €34 billion of transactions.  We are left with a related question.  First, we didn’t know what the household sector was selling, now we have to wonder how the household sector sold €34 billion of an asset it had €36.5 billion to begin with and still be left with nearly €33 billion at the end.  That’s a pretty strong revaluation effect!

But this is nothing new for this category.  Since 2003 the net financial transactions of the household sector in unlisted shares sum to almost €60 billion yet in spite of these negative transactions the value has always been between €33 billion and €42 billion.  The top of that range was recorded in 2005 while 2016 gave rise to the bottom of the range.  It seems we’re creating the value almost as quick as we’re realising the value.

When the revisions of to household income and the savings rate were first published in the Q1 2017 ISAs we said the coherence that appeared in the last annual accounts was no more – what large net lending explaining most of the deleveraging by the household sector.  The 2016 annual accounts once again present a coherent story and though the household sector may now be a net borrower the continued reduction in debt liabilities (and accumulation of deposits) is balanced by negative transactions in unlisted equity.  We obviously don’t know the distribution of these transactions but they do add up in aggregate.

Anyway, after all that digging what are we left with?  We have a household sector that is showing improvement across the current, capital and financial accounts.  It is a hard slog but we are slowly working through the excess that built up in the run-up to 2008.  We will look at these improvements visually in the next post.

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