Monday, August 7, 2017

What happened to Net National Income?

Back when we were hit in the face by the 26 per cent growth rate for 2015 we concluded the following:

The best we can do to strip out all of this madness is probably to look at net national income which excludes the provision for depreciation from all assets and accounts for net factor income from abroad.

Net National Income at Market Prices grew by 6.5 per cent in 2015 which is probably somewhere around where “the Irish economy” grew at in 2015 rather than the 26.3 per cent that “the economy in Ireland” grew by.

And that is probably still in and around where we think “the Irish economy” grew by in 2015 and maybe also for 2016.  But that is not the story that Net National Income is now giving.  Here are the nominal growth rates of Net National Income from NIE 2015 and NIE 2016:

Nat National Income Growth RatesReal growth rates are not available but it is the revisions we are interested in.  For 2015 we can see that the nominal growth of NNP has been revised up from 6.5 per cent to 10.8 per cent with a figure above ten per cent also reported for 2016.

Net National Income is GDP plus net factor income from abroad (negative in Ireland’s case) less the total economy provision for depreciation and an adjustment EU taxes and subsidies.  It differs from the new GNI* in that depreciation of all assets in taken out (rather than just for foreign-owned IP and aircraft for leasing) and no adjustment is made in NNI for the net foreign income of redomiciled PLCs. 

Still the extent to which these differences affect the growth of each may not be that large.  And that is what we see.  From 2012 to 2016 the average annual growth of nominal NNI in the table above was 7.5 per cent.  Over the same period the average growth of the new GNI* was 7.6 per cent.  There are some differences each year but they track each other pretty well.

So why was the nominal growth of NNI in 2015 revised up from 6.5 per cent to 10.8 per cent?

Looking at Table 1 of the NIE this is almost entirely due to the net trading profits of corporations.  Here are the NIE 2015 and NIE 2016 versions of Table 1.  The final column gives the “change in the change”.  Click to enlarge.

Table 1 NIE 2015 Changes

Lots of detail but the key is the change in the change in item 4 – the domestic trading profits of companies.  The 2015 increase in this has been revised up by €10.4 billion.  Further down the table it shows that net factor income from abroad in 2015 has gone from -€53.2 billion in NIE 2015 to -€56.0 billion in NIE 2017.  So we have a €10.4 billion additional increase in the before-tax profits earned in Ireland but less than €3 billion of additional net outflows.  This €7 billion probably added between three and four percentage points to the (nominal!) growth of GNI* in 2015.

The increase in net trading profits of companies seems to be made up of an increase in Gross Value Added and a reduction in the provision for depreciation though this is not certain.  The 2015 increase in the provision for depreciation for the entire economy has been revised down from €30.7 billion to €27.3 billion and though we have a breakdown of this by sector in NIE2016 a breakdown was not published with NIE2015 as Table 2 was entirely suppressed. [The CSO should be given credit for publishing lots of information – and additional breakdowns – that was either suppressed or not provided in NIE 2015].

Although the figures above show revisions for 2015 it seems similar earnings arose in 2016. Domestic trading profits of companies were down €0.5 billion but net factor outflows were €7.2 billion less.  Lots of moving parts but again it seems like the profits generated by Irish companies increased significantly in 2016.  The net foreign income of redomiciled PLCs was up €1 billion without which net factor outflows would have been down by more than €7 billion.

And we also seem to see something similar for 2014.  The domestic trading profits of companies in 2014 was revised up by €4 billion (from €52.3 billion in NIE 2015 to €56.7 billion in NIE 2016) but the level of net factor outflows was unchanged (-€29.7 billion in both NIEs).

Anyway the conclusion is much the same.  Some companies in Ireland are earning lots of extra profit and this isn’t being distributed or attributed to foreign owners or being consumed by depreciation.  Is there a systematic reason for this?  It is hard to tell.  We could try looking in the revisions but that suggests it is a combination of factors rather than down to a single factor. 

Here are the revisions between NIE 2015 and NIE 2016 of a number of key components in the national accounts (again all in nominal terms). Click to enlarge.

Revisions to NIE 2015 v 2016

The recent large revisions to the domestic trading profits of companies [item 4] can be seen at the top.  These revisions seem to be due to three factors:

  • downward revision to wages and salaries paid [item 9]
  • downward revision to the provision for depreciation [item 28]
  • upward revision to gross value added [item 51]

The first two of these will be largely GDP-neutral as they affect the composition rather than the level of GDP.  The latter will cause GDP to rise.

For 2015, there is a €14.8 billion upward revision to the trading profits of companies before tax. Of this around €1.3 billion can be attributed to a downward revision in wages and salaries and maybe something around €4 billion to a downward revision in depreciation (the provision for depreciation in the table above is a whole economy measure rather than just for companies). These could have arisen in any sector.

The remaining part of the revision is largely due to an upward revision to output.  For 2015, this seems to correspond to an upward revision of net exports of €5.5 billion but looking at Gross Value Added by sector we see that the revision is spread across a number of sectors.  There was an upward revision of around €2 billion to the GVA from industry, from distribution, transport, software and communications and from public administration and other services.  This spread does not point to anything systematic (in the revisions at any rate).

The €6.1 billion revision to GVA corresponds to the €6.2 billion revision to GDP.  Again all these are nominal.  Revisions to the deflators mean that the upward revisions to nominal GDP in 2015 did not feed through to increases in real GDP growth. In fact real GDP growth was revised down from the infamous 26.3 per cent rate to 25.6 per cent.

For 2014, we have a €4.4 billion upward revision to profits (and no revision to net factor income).  Again there is a downward revision to wages and salaries and also a downward revision to the provision for depreciation.  Around one-third of the revision to profits could be due to an upward revision in the GVA from the industry sector but in this instance it is not accompanied by an upward revision to net exports.

So what do we conclude? The nominal growth rates of net national income have been revised up and these upward revisions are largely the result of increased profits.  Why have profits being revised up? Seems to be a number of factors (lower COE, lower depreciation, higher output) all pulling in the same direction. 

Who is earning these profits? The much smaller changes to net factor income mean the profits are staying in the economy.  Part of this will be increased Corporation Tax payments staying in the economy but a large part of it is profits accruing to Irish companies.  Are domestic companies really doing as well as these figures would suggest? Maybe.

Thursday, August 3, 2017

Major revisions to the savings rate mean the household sector is a net borrower. Really?

While a lot of attention will undoubtedly by on the business sector in the Institutional Sector Accounts and links to the new GNI* developments in the household sector are also worth a sconce.  In this instance it is not about what is there but what is no longer there – a savings rate above ten per cent.

Here’s the current account of the household sector account and looking at the numbers shows almost everything as one would expect.  Aggregate earnings are up, aggregate wages are up, aggregate disposable income is up.  All in all the income flows paint a pretty positive picture of our recovering household sector.

Household Sector Current Account 2011-2016

There is little in the income flows that gives cause for concern.  In 2016, mixed income (labelled Gross Operating Surplus) grew 4.9 per cent while aggregate wages grew 5.1 per cent with a 6.5 per cent rise in wages paid by non-financial companies.  Work though property income and interest, taxes and social contributions, and transfers and we get to the 3.8 per cent rise in Gross Disposable Income which is not put at €94.4 billion for the year.  All as we would expect.

While the growth rates may be in line with expectations, and have not been significantly revised (chart here), the levels have been revised – and revised down.  This means that the gap between income and consumption has fallen and now the savings rate is much lower than previously indicated.  Much lower.

Savings Rates - Old and Revised

The revision begins from Q1 2010 and has become even more pronounced recently.  The last estimate published in April gave a household savings rate that was reassuringly above ten per cent.  In the revised figures published this week the average savings rate shown above has only been above ten percent for one quarter since 2010 and dipped as low as five per cent last year.  This is not so reassuring.

So what has changed?  The savings rate has changed because Gross Disposable Income has been revised down. For example, the 2016 figure has been revised down from €99.5 billion to €94.4 billion.  That is why five or six percentage points have been knocked off the savings rate.

Why has Gross Disposable Income been revised down? It is pretty easy to spot from the household sector current account we looked at when the last set of figures were published.  The whole post gave a very coherent view of what we think is happening in the household sector.  Such coherence is absent now.

Anyway, the big change is in the very first line – Gross Domestic Product.  The value added produced by the household sector has been significantly revised down.  In the April figures this was put at €29.5 billion for 2016; in the current figures it is €25.8 billion.  Gross Disposable Income for 2016 has been revised down by €5 billion and nearly €4 billion of this is explained by a downward revision in the value added produced by the household sector.  It is much the same for the other years.  It is not clear why this revision was applied.  Maybe a chunk of activity has been reclassified from the household/self employed sector to the non-financial corporate sector which may explain part of that mystery.

Anyway, we can see the implications of this reduction in the savings rate in the capital account.

Household Capital Account 2011 2016

The recent rise in household gross capital formation means that household investment expenditure is now greater than household savings so the household sector is a net borrower – and as shown by the last line has been since 2014.  Between current consumption and capital investment Irish household’s spending exceeds their gross disposable income. So much for deleveraging.

Here are the current and previous estimates of household net lending.

Household Net Lending

Is the current estimate a flashing red light that have been largely absent as the Irish economy continues its rapid recovery?  Not particularly.  But maybe with the trend we should look at it as amber.  The trend is down but it is still a long, long way from the heady days of 2006 and 2007 when the household sector was a net borrower to the tune of €20 billion a year – and that was just for consumption and investment in new capital goods, the borrowing for second-hand houses was on top of that.

The revisions to the data are very significant.  Previous is was estimated that between 2010 and 2016 the household sector was a net lender to the tune of €27.4 billion.  Working through the financial account we were able to see how these funds were used to increase household deposits and, most notably, reduce household debts.

Now it is estimated that over the same six years the household sector was a net lender of just €6.9 billion.  Again this €20 billion revision corresponds the changed estimates of value added produced by the household sector which has been revised down by €20 billion.

The issue is that during a period when the household sector is now estimated to have been a net lender of €7 billion household deposits increased by €10 billion and household debts were reduced by €50 billion.  How did we do this with so little funds available from income?

Can asset sales, debt writedowns or other revaluations explain it?  The apparent coherence shown using the figures from April is no more.  Later in the year the CSO will publish updated financial accounts that will be consistent with these non-financial accounts and we will see what story emerges from those. 

Wednesday, August 2, 2017

So what does GNI* tell us about the Irish NFC sector?

A fortnight ago the CSO started the process of publishing adjusted national accounts which are intended to give a better view of developments in the Irish economy as those produced using the internationally-agreed standards become even more distorted by the activities of MNCs operating here. 

The new measures published (as well as the publication of previously suppressed figures) is undoubtedly a step in the right direction but there was some disquiet that the adjusted measure of national income, GNI*, recorded nominal growth of 9.4 per cent in 2016.  With deflators close to zero this implies a real growth rate also around nine per cent which does seem a little high.

Today, we get some insight into that growth figure with the publication of the Institutional Sector Accounts consistent with the figures in the National Income and Expenditure Accounts.  Here is the sectoral breakdown of GNI* for each year since 2010.

GNI star by sector

The overall growth of GNI* of 9.4 per cent can be seen and we can now see the sectors this arose in.  The growth of GNI for the households and government sectors of five per cent seems about right while the financial sector records a small drop the sector itself makes up a small proportion of the total and can be volatile.  The standout figure is the 22.5 per cent increase in the adjusted GNI of the non-financial corporate sector.

The adjusted NFC measure accounts for the net income of redomiciled PLCs and the depreciation of foreign-owned aircraft for leasing and intangible assets.  The NFC sector is the only sector to which adjustments are made.  The recent growth in the adjusted GNI for the NFC sector is remarkable.  It was €18.4 billion in 2011 and rose to €55.2 billion last year – an increase of 200 per cent.  So let’s dig a little deeper in the NFC sector. 

Here is the current account of the NFC sector since 2011.

NFC Sector Accounts 2010-2016

Is it possible to see how the 200 per cent rise over the past five years in GNI* for NFCs has come about? Not especially.  But we can see what is not in the €55 billion figure for 2016.

Starting with the €188 billion figure of GDP, or Gross Value Added, of the NFC sector in Ireland we see that:

  • €51.3 billion went on the compensation of employees, an increase of seven per cent on 2015.
  • around €49 billion accrued to other sectors through dividends paid or retained earnings owed with most of this likely to foreign direct investors in the rest of the world sector.
  • we need to add €14 billion for dividends received and retained earnings owed to entities in the Irish NFC sector from the rest of the world
  • and subtract the €6.5 billion of interest paid (after the FISIM adjustment)
  • and subtract the €5.8 billion of net income (dividends and retained earnings) which accrued to redomiciled PLCs from the rest of the world
  • and finally subtract the €33.8 billion of gross value added consumed by the depreciation of aircraft for leasing and foreign-owned intangible assets.

So, the increase is not the net profits of foreign direct investors, the gross profits from the aircraft or intangible assets that foreign-owned companies have located here, the net income of redomiciled PLCs.  Back in April we wondered if the Irish business sector is doing better than we think and maybe it is but the GNI* figures suggest it is doing remarkably well.  Here is adjusted GNI for the NFC sector for the entire time series available:


Hmmm. Celtic Tiger how are ya?  The adjusted and unadjusted measures are shown here.  Between 1999 and 2006 GNI* for NFCs grew by 128 per cent (the unadjusted measure grew 144 per cent). Pretty impressive.  Between 2009 and 2016 the same measure grew by 308 per cent (with 444 per cent growth in the unadjusted measure). 

There is no doubt the steps taken by the CSO are getting us closer to what is happening in the Irish economy but do we really believe the Gross National Income of Irish business sector is more than twice what it was at the peak of the bubble? It could be that there is still something in GNI* (and also the current account) that means we haven’t quite yet reached our destination.

What could it be?  Impossible to say.  Is there an issue with the treatment of redomiciled PLCs?  The adjustment takes a Balance of Payments approach but what about the profits these companies earn in Ireland?  For most foreign-owned companies these would be recorded as a factor outflow in the Balance of Payments but for companies that are Irish-headquartered their Irish-source profits are not counted as a outflow unless they are actually paid out to foreign shareholders as a dividend.  It is hard to know if this is even a significant factor. 

What else could it be? Foreign profits of Irish MNCs?  Is there anything to indicate that they are doing remarkably well outside of Ireland?  Maybe it's profit shifting but that would have offsetting effects on GNI (domestic valued added down, foreign income up).  Any other suggestions?

It must be remembered that what we have so far is just the first step.  If we look at the CSO response to the report of the ESRG we note that they say:

  • The CSO proposes to include in the annual Institutional Sector Accounts (ISA) publication a breakdown of the non-financial corporations (NFC) sector into two broadly-defined, foreign and domestic, sub-sectors. The NFC sector accounts for 5 most of the multinational enterprises (MNEs) operating in Ireland. Initially, the breakdown will be between the companies covered by the CSO’s Large Cases Unit, i.e. the largest and most complex MNEs, and the remainder.
  • This initial work is scheduled for publication at the time of the annual sector accounts results in October 2017, following which the CSO will investigate extending this analysis to a quarterly basis.
  • The breakdown by Large Cases firms and the remainder in the sector accounts is an initial step; during 2018, we will develop the basis for the breakdown by ownership into MNE and other sectors and we will review other possibilities such as the feasibility of implementing this foreign / domestic split in other presentations of the national accounts data.
  • In addition, we will explore the data classifications proposed in the FitzGerald (2016) and Honohan (2016) papers.
  • The publication of Table 1 of the QNA in current prices is a longer term project; it is dependent upon the work already underway on the calculation of an output-based annual estimate of GDP to complement the existing income and expenditure measures. The schedule for this work extends into 2018.

If we had the NFC table above on a foreign firms (including redomiciled) / domestic firms basis it would really shine a light on what is going on. Hopefully.

Monday, July 31, 2017

The extra-ordinary volatility in GNP

Here are the quarterly growth rates of GNP from the latest CSO figures.

Quarterly GNP Growth Rates

The largest quarterly growth rate in the series is the 12 per cent recorded in Q4 2016.  And this is followed by the largest quarterly fall – the 7 per cent drop recorded in Q1 2017.  The series have always been volatile but this is on a different scale altogether.

What is going on?  It is hard to know.  MNCs are undoubtedly having an effect and it could be that some of these distortions (intangibles, inversions etc.) are being amplified by the seasonal adjustment applied to quarterly data.  Do they wash out if we look an annual growth rates? Not really.

Annual GNP Growth Rates

There is little that can be learned from these headline figures.  The CSO are working on producing modified measures, such as GNI*, on a quarterly basis which should be provide a better indication of what is going on.

Saturday, July 29, 2017

Ireland’s Positive and Improving Underlying Net International Investment Position

The last post looked at flows in the current account and concluded that this may be a good indication of what is happening to the current account balance once some of the distorting effects of MNCs are removed.

Adjusted Modified Current Account Annual over GNI star

This post looks at the stock position and as is frequently the case with Irish macro statistics the starting position is heavily distorted.   The CSO publish figures that remove the impact of IFSC activities but some MNC distortions remain.  You can go through the detail if you want but here is where we end up – a measure of Ireland’s underlying net international investment position.

Underlying Net International Investment Position

As can be seen this has been improving pretty much consistently since the current data series began in 2012.  The underlying NIIP became positive in 2014 and had since continued to become even more so.  The rest of the post shows how we get to this measure starting with the the overall net international investment position (NIIP) which is the balance of foreign financial assets and liabilities:

NIIP Total

The impact of the IFSC is excluded from all the figures.  The impact of the IFSC on the net outcomes is relatively small but does have a massive impact on the gross figures with huge levels of financial assets offset by a similar level of financial liabilities.

In Q1 2017 our NIIP was minus –€375 billion. Ouch.  Even before the event which caused the level shift in Q1 2015 it was around –€180 billion and was improving at a very moderate rate.  But we need to go under the hood to get any idea of what is going on.  The first thing to do is look at the gross totals that give rise to the net figure shown above.  Here are our total foreign financial assets and liabilities.

Total Foreign Assets and Liabilities

Whoa!  By Q1 2017 we had €1.4 trillion of foreign liabilities and €1.0 trillion of foreign financial assets.  And this is excluding the effect of the IFSC – include that and the figures are €5.0 trillion and €4.5 trillion.

Anyway, let’s just take the non-IFSC figures which on their own seem completely oversized for the Irish economy. So who has external liabilities of €1.4 trillion?

Foreign Liabilities

And there is our pollutant.  Around 90 per cent of the foreign liabilities are due to the non-financial corporate sector.  Do Irish companies have €1.2 trillion of external liabilities?  No, but companies resident in Ireland do.  It is pretty safe to assume that almost of the external liabilities of the NFC sector arise through foreign-owned MNCs. 

The NFC numbers don’t tell us anything about the underlying position of the Irish economy.  There will be information in figures for the other four sectors shown above but the scale of the chart means it is hard to see what is going on.

There may be many factors driving the increase in MNC-related foreign liabilities but one will be the onshoring of intangible assets to Ireland.  The Irish-resident entity that onshores the intangible does so with money borrowed from another (offshore) entity within the MNC structure.

And we see much the same when we look at the €1 trillion of foreign financial assets.

Foreign Assets

Here nearly 80 per cent is due to the NFC sector.  Do Irish companies have €800 billion of foreign financial assets.  Again, no, but companies resident in Ireland do.  In this instance we are looking at liabilities owed to Irish-resident entities within foreign-owned MNC structures.  It is possible that this is related to redomiciled or inverted companies.  Again, the underlying position of the other sectors is hard to identify given the scale of the graph.

If we just isolate the external debt liabilities and assets associated with direct investment we see the following (there will also be equity liabilities and assets associated with direct investment).

Direct Investment Debt

They have got there by different paths but both the gross external debt and external debt assets related to direct investment were about €500 billion in Q1 2017.  As we have pointed out before these huge increases in direct investment debt liabilities and assets have not been reflected in increases in interest flows related to direct investment debts.

Direct Investment Income on Debt

Anyway, that’s for another day.  What we want to do here is assess Ireland’s underlying net international investment position.  What the above shows is that to do this we need to remove the impact of the NFC sector which through the activities of MNCs is distorting the overall position.  This does remove the cross-border positions of genuine Irish companies but these are unlikely to change to general picture that emerges – though we can’t forget this.

So what is our Net IIP excluding NFCs?

Net International Investment Position

Ah, that’s better.  The navy line gives our underlying Net IIP excluding NFCs (and also the IFSC).  This has shown steady improvement since the start of 2012 when the current data series begins.  It has gone from –€90 billion in Q1 2012 to +€80 billion in Q1 2017.  We have gone from a net liability position to a net asset position – we have more external financial assets than we have external financial liabilities.

Net International Investment Position by Sector

Most of the improvement has been effected through the financial system.  In the early years of the crisis many of the external creditors of the banks were repaid with liquidity from the Central Bank which itself generated a negative Target2 balance.  While the banks had a relative small net position in 2012 the net position of the Central Bank, i.e the monetary authority, was –€91 billion at that time.  Since then the banks have reduced their reliance on central bank funding and the external position of the Central Bank has improved with that and stood at +€9 billion in Q1 2017.

Of the remaining sectors, financial intermediaries have a NIIP position of +€190 billion.  This, in large part, reflects the foreign financial assets of Irish-owned investment and pension funds.  The government sector has a negative position of –€129 billion representing the international nature of much of the borrowing it undertook in the crisis.  Add up all those and you get our underlying net international investment position of +€80 billion – which excludes the impact of NFCs (mainly MNCs).

So it seems the stocks as well as the flows in the Balance of Payments data is a positive indicator that continues to move in that direction.

Wednesday, July 19, 2017

So, what’s going on with the Current Account?

Last week the CSO provided the first insight into the new * variables that will hopefully address some of the distortions in the National Accounts that have been created by PLCs who have redomiciled to Ireland and offshore activities relating to assets owned by Irish-resident companies linked to aircraft leasing and intangible assets. 

While much of what was published was a useful step in the right direction a clearer view of what is happening in the Current Account of the Balance of Payments was not provided.  The problems with the official measure of the Current Account are evident below.

Balance of Payments Current Account Annual

After moving into deficit in the period from 2004 to 2007 the current account began to improve in 2008 but the improvement in 2009 and 2010 was much greater than the underlying performance of the economy would suggest.  The recent volatility is clear and this largely relates to the impact of the onshoring of intangible assets to Ireland.

To improve things we have been provided with a modified Current Account, termed CA*, that makes a number of important adjustments.  Per the CSO:

CA* is the current account balance (CA) adjusted for the depreciation of capital assets sometimes held outside Ireland owned by Irish resident foreign-owned firms, e.g. Intellectual Property (IP) and Aircraft Leasing, alongside the repatriated global income of companies that moved their headquarters to Ireland (e.g. redomiciled firms or corporate inversions).

The impact of the factors on the current account are shown in this table.

Globalisation Impacts on the Irish Current Account

The rise in the income accruing the redomiciled PLCs which drove the rapid improvement in the current account in 2009 and 2010 can be seen while the huge jump in the depreciation related to MNC owned intangible assets that caused in the recent volatility in the Current Account is also readily seen.

So what happens if we exclude the income of redomiciled PLCs, or equivalently consider them to flow out as a factor outflow to their foreign shareholders, and treat the depreciation on certain IP and aircraft assets as an outflow as this arises from gross profits that accrues to non-residents and is linked to assets that may have no direct link with the Irish economy?  Making these adjustments gives us this:

Modified Current Account Annual

Hmmm.  That’s not very good at all.  Yes, we do see some moderation of the improvement in 2009 and 2010 but recent figures do not make sense.  We would possibly have expected continued improvement in the Current Account for the last few years while the huge drop to a deficit of almost €30 billion in 2016 is not reflective of any underlying trend in the Irish economy.

So what are we missing?  Or maybe more accurately was remains in the modified Current Account that continues to distort the figures?  Adjusting for the depreciation of certain IP and aircraft assets is correct but no adjustment is made for their acquisition. 

Sometimes this assets are added to Ireland’s capital stock through a balance-sheet relocation (which has no impact on the current account) but other times the assets are acquired by an Irish-resident company and this transaction is recorded as an outflow in the balance of payments.  There is little doubt that the deficits shown in the modified measures for recent years are, in whole or in part, due to these acquisitions. 

Making an adjustment for the depreciation on these assets is appropriate for when these assets are here but we should also make an adjustment for how those assets get here if that has an impact on the Current Account.  So we need the net outright purchases in the balance of payments of the assets we are making a depreciation adjustment for.

We can get this from new Annex 4C of the Quarterly National Accounts.  This gives a modified Gross Fixed Capital Formation (in nominal terms) where the GFCF excluded from the modified measure are aircraft related to leasing and the onshoring of IP assets.  For some years the split between the two isn’t provided (as some quarters are suppressed) but we have their sum from the difference between the official and modified versions of GFCF.

Investment related to Aircraft Leasing and Purchase of Intellectual Property Assets

We should get a better picture of the current account if we make an adjustment for the fact that all of this investment in aircraft for leasing and the purchase of IP assets will have required them to be imported and therefore counted as an outflow in the Balance of Payments.  Now, there may be some differences in how these transactions are valued for National Accounts versus Balance of Payments purposes but any differences won’t materially change the result. 

So lets make an adjustment to the modified Current Account published by the CSO last week to take account of the purchase of aircraft for leasing and certain IP assets.

Adjusted Modified Current Account Annual

That seems much better.  We have the deterioration from 2004 to 2007 and a fairly steady improvement before return to a small surplus in 2014.  The figures since then seem questionable with a rapid move to a large surplus with this measure showing a surplus of €13 billion in 2016.  If this is true then we are in a very strong position but it does seem implausibly large.

Here is this approach applied above to getting an underlying Current Account as a percentage of GNI*.

Adjusted Modified Current Account Annual over GNI star

Are we running a current account surplus of seven per cent of national income?  It’s seems high.  A Current Account measure that seems to fit the underlying performance of the Irish economy up to 2014 but doesn’t thereafter isn’t of much use.  We want to know what is happening now.

The improvement in 2015 is likely partly due to €2.3 billion increase in Corporation Tax receipts seen that year, of which around 80 per cent was due to MNCs.  Corporation Tax did not grow to the same extent in 2016 so that cannot explain the continued improvement shown in this version of the Current Account.

There may be something happening within the income flow figures.  For example, the retained earnings of direct equity investment attributed to Irish residents increased by almost €3 billion in 2016 (from €10.9 billion to €13.8 billion) but as shown in the first table above the net foreign income of redomiciled PLCs only increased by €1 billion in 2016.  The impact of this €2 billion difference on the Current Account balance produced here is unclear. 

The 9.4 per cent nominal growth rate for GNI* also seems a bit high but it is probably not that far out of the ballpark.  It could be that there is another distortion on the income side that we need to be made aware of or it could be that our current external balance (along with our national income) really is improving at the rapid rate shown here but at least we’re only quibbling over a couple of percentage points of national income.  The figures published last week by the CSO allow us to get closer to what is really going on and it is a step to be welcomed.  More please.

Thursday, July 6, 2017

Some other trends in government revenue

The last post looked at the question as to whether the slow down in the growth of Exchequer tax revenue is reflective of underlying trends in the economy.  The conclusion was that while there has been a slow down in the growth of tax revenue it is due to factors that do not reflect underlying trends in the economy such as the 2015 level-shift in Corporation tax, the 2016 spike in Excise Duty and €2.2 billion of revenue reducing measures over the past three budgets.  Any concerns about the slowdown in tax revenue growth should be limited to the impact on the public finances rather than what it might imply for the economy in general.

Of course, Exchequer tax revenue isn’t the only source of government revenue though for a variety of reasons it attracts the most attention.  A broader measure of government revenue would include PRSI, other appropriations in aid collected by government departments and Exchequer non-tax revenue such as the Central Bank surplus, semi-state dividends, capital resources and income related to banking measures such guarantee fees and interest and dividends from certain banking assets.  So what is happening to these?

Central Government PRSI and Other Revenue

We have a divergent picture.  PRSI receipts have been growing steadily and in June recorded growth on a 12-month basis of 8.4 per cent.  For the year-to-date PRSI is 2.5 per cent or €116 million above profile in contrast to Income Tax which is €214 million behind profile.

The sum of Exchequer non-tax revenue and other appropriations-in-aid has been declining since the final quarter of 2014.  In November 2014, the 12-month sum of these revenues was €7.5 billion while for June 2017 the total was €5.0 billion.

This is due to falls in most of the items that are included in the category.  The surplus from the Central Bank with a general government impact was €1.4 billion in 2014 but was less than €1 billion this year.  €420 million of bank guarantee fees were collected in the year to January 2014 while the current total is less than one-tenth of that.  Around €500 million of dividends were collected by the Exchequer in both 2014 and 2015, last year it was less than €200 million.  Capital resources were boosted in 2014 by the €335 million received from the sale of Aer Lingus shares.  Other appropriations-in-aid have fallen from €4 billion to €3 billion though it is not clear why this is so or how it is linked to the expenditure of those departments.

The takeout is that while Exchequer tax revenue and PRSI receipts are growing, Exchequer non-tax revenue is falling.  This is a not surprise though.  Exchequer non-tax revenue to the end of June was €1,309 million compared to a profiled amount of €1,310 million.  Other appropriations-in-aid are also down year-on-year but are in line with expectations.

An issue may be when the growth rate of net expenditure is compared to the growth rate of taxation when it is known that non-tax sources of revenue are falling.  Using broader measures of central government revenue and expenditure may capture more information.

Central Government Revenue and Primary Expenditure

Monday, July 3, 2017

Should we be concerned with the slowdown in tax revenue growth?

Exchequer tax revenue bottomed out in the middle of 2010 and has been on a fairly steady upward trend since then.

Exchequer Tax 12-Month Rolling

There has, however, been a bit of attention given to the “flattening out” that has occurred since the middle of 2016.  This is more apparent if we look at the annual changes in the moving sum depicted in the chart above:

Exchequer Tax 12-Month Rolling Annual Change

Here we can see that tax revenues recorded their fastest recent growth in early 2015 (13.6 per cent in February) and while it was still above 10 per cent in mid-2016 there has been a steep fall in the growth rate since then with growth down to 3.5 per cent in May 2017.  Should we be concerned about this fall in the growth rate of tax revenues?

There are three reasons that can serve to ameliorate our concerns:

  1. The level shift in Corporation Tax receipts in 2015,
  2. A spike in Excise Duty receipts in early 2016,
  3. The impact of €2.2 billion of revenue-reducing budgetary measures (of which €1.8 billion relate to Income Tax)

Corporation Tax revenues began to rise in the middle of 2014 but really ramped up in the second half of 2015. 

Exchequer Corporation Tax 12-Month Rolling

A level-shift from €4 billion to €7 billion occurred in a very short period of time and for the past 18 months or so receipts have been relatively stable at the new level.  This will obviously have had a dramatic impact on the annual growth rates.   The growth of Corporation Tax exceeded 50 per cent towards the end of 2015 and was still above 40 per cent in June 2016.  Since then the growth of Corporation Tax has fallen markedly as the rise to the new level washes out of the annual growth rates.

The other tax exhibiting a strange recent pattern is Excise Duty.  If we truncate the vertical axis we can highlight this.

Exchequer Excise Duty 12-Month Rolling

Excise duties rose unexpectedly in early 2016 and have returned to somewhere near where they might have been had the steady upward trend seen since the middle of 2013 continued at the same rate.  The reason given for the spike is that excise duty from cigarettes increased markedly in advance of the expected introduction of plain packaging legislation.  The pattern for new car sales will also have contributed to the Excise Duty outturn.  The nature of the spike in early 2016 means that the annual changes in Excise Duty have turned negative.

Here are the annual changes in 12-month rolling sums of Corporation Tax and Excise Duty receipts:

Exchequer CT and Excise 12-Month Rolling Annual Change

What we see is that the growth rate of both have been falling since the middle of 2016 though obviously much more markedly in the case of Corporation Tax.  It is likely that these are driving the similar trend we see in overall Exchequer Tax receipts.  So let’s look at the growth of Exchequer tax revenue excluding these Corporation Tax and Excise Duty (notwithstanding that they are two of the big four ‘tax heads’):

Exchequer All and Ex CT and Excise 12-Month Rolling Annual Change

The navy line is the pattern that has caused some recent concern.  The maroon line is the annual change excluding Corporation Tax and Excise Duty, and while this did fall during 2015 it has been relatively stable for the past 18 months or so, generally showing growth of between four and six per cent.  All the recent slowdown in the growth of Exchequer Tax revenue is due to Corporation Tax and Excise Duty.  Are the 2015 level-shift in Corporation Tax and the 2016 spike in Excise Duty reflective of underlying trends in the economy?

One tax that may reflect the underlying trends of the economy is Income Tax and this appears to have flat lined recently.  This was growing at between eight and ten per cent through 2015 and up to the end of 2016 but the improvement slowed in 2017 to less than half that amount.  The latest Fiscal Monitor shows that Income Tax to the end of May is only up 2.5 per cent on the same period of 2016.

May Exchequer Tax

One reason not to be concerned with this is that around €1.8 billion of measures reducing Income Tax were introduced across Budgets 2015, 2016 and 2017, of which the bulk related to the Universal Social Charge.  One way to assess this could be to compare the growth rate of PRSI (which hasn’t had significant policy changes from a revenue perspective in recent budgets) to the growth rate of Income Tax (which has). 

Income Tax v PRSI

We see a large gap opening up in the past six months or so.  PRSI receipts have grown between eight and nine per cent year-on-year.  Income Tax revenues were growing at close to that level up to late last year but the growth has fallen to around three per cent now.  If this drop was reflective of underlying trends in the economy we could expect both Income Tax and PRSI to be similarly affected. 

The fact that they are not points to something else and the eight per cent growth of PRSI receipts reflects the underlying strong growth in the economy.  And in replying to a PQ the former Minister for Finance indicated that the PAYE component of Income Tax was up eight per cent in the first third of the year compared to the same period of 2016.  Again, this is in line with what we see in the labour market.

On the other side, VAT seems to be growing a little stronger than the underlying trends in the economy would suggest.  It might be something we come back to. As shown below, the growth of VAT on a rolling 12-month basis jumped at the start of 2017 and is now growing at nearly ten per cent.  Although seemingly positive maybe this is the one we should be concerned about.

Exchequer VAT 12-Month Rolling Annual Change

Wednesday, June 21, 2017

Where are the vulture funds?

On the 20th of June, the Oireachtas Finance Committee held a meeting on the National Co-Op Housing Bill.  One of the proponents of the Bill is Edmund Honohan, the Master of the High Court.  A report on the meeting is available here.

Let’s just consider one extract:

Mr Honohan also said his “overwhelming impression anecdotally” was that individuals before the courts in relation to these matters were sub-prime borrowers “who should probably never have been given mortgages in the first place”.

Anything that is based on someone’s “overwhelming impression anecdotally” probably doesn’t have much going for it to begin with.  The piece later says:

Mr Honohan said the “flattish level” of repossessions at 150 per quarter until the beginning of 2014 “doubled overnight” to in excess of 300. “I can think of no significant factor which might account for this sudden change other than the sudden arrival of vulture funds into our distressed mortgage mess,” he said.

“If that is so, you must presume that if the banks are now proposing to finally sell off their huge numbers of deeply indebted loans to the private sector, perhaps increasing the non-bank proportion of non-performing housing loans fivefold from less than 10 per cent to over 50 per cent, we can expect a further significant jump in possession cases.”

We’ll come back to this one. But let’s start with the “overwhelming impression anecdotally” that it is borrowers from sub-prime lenders who are before the courts.

We can check the plaintiffs in civil possession cases in the legal diary notices published on the Courts Service website.  Most mortgage repossession cases are listed on the civil lists of the County Registrars in the Circuit Courts. 

As of today (21/06/2017) there are 45 County Registrar lists that contain cases involving mortgage repossession.  These are for various dates in May, June and July and cover all eight circuit court districts and almost all counties within each circuit.  In total, it was possible to identify almost 1,900 repossession cases on the legal diary for County Registrars.  This is not all repossession cases before the courts as cases not listed for a sitting around this time will not be on the legal diary.  There are probably 10,000 to 12,000 mortgage repossession cases ongoing.  So we have maybe one-fifth of them in the sample extracted today.

Here are two pieces of information on these 1,900 cases.  The year represents the year the proceedings were submitted to the court and the plaintiff is the entity taking the case and seeking the possession order.

Circuit Court Repossession Cases

The 1,874 cases are split into lenders and those who have acquired loans, i.e. vulture funds.  These funds make up 15 per cent of the cases in the lists extracted and the year in which these cases were initiated can also be seen.

Let’s consider another group taking repossession cases. Let’s include AIB, BOI, EBS, PTSB, KBS and Ulster Bank and make a bit of a leap that we can exclude them from the class of subprime lenders that the under the “overwhelming impression anecdotally” are bringing repossession matters before the courts.

Well, between them these six lenders have 76 per cent of the cases on the list.  I don’t know what an “overwhelming impression anecdotally” is but in this case it does not appear to be based on evidence.  It seems to be just a wild claim aimed to gather attention.  That it should be coming from the Master of the High Court is alarming. 

Where did I go to find the evidence to refute this wild claim? The Courts Service website.  Is the Master of the High Court familiar with the Legal Diary?  It only took a short while to gather the figures in the above table.  Surely it would be better to rely on evidence rather than an “overwhelming impression anecdotally”?  But the role of evidence in the ongoing mortgage arrears crisis was sidelined a long, long time ago.

Maybe vulture funds will lead to a big jump in mortgage repossessions.  If they want to execute repossessions they will have to get a court order first but so far there hasn’t been a surge of cases from vulture funds on the court lists.  If anything, they seem underrepresented given the proportion of long-term arrears mortgages they hold.  Where are the vulture funds?

At the end of Q1 2017 unregulated loan owners held 5,085 mortgage accounts that were more than two years in arrears.  The average balance on these accounts was €256,300 with average arrears of missed payments of €121,100. 

We have been told that a tsunami of repossessions has been on the way since at least 2010.  To date, there has been no evidence of its appearance and repeatedly warning of its impending arrival does not appear to be costly. 

These warnings have surely added unnecessary stress and worry to already stressed borrowers.  These warnings have been proved wrong time and time again.  Banks may have a issued thousands of proceedings seeking orders for possession but the Irish courts are not bent to granting them.  This is a fact borne out from observation of the process.  But hey, who needs evidence, let’s propose a multi-billion scheme on the basis of one’s “overwhelming impression anecdotally”.

Monday, June 12, 2017

Trade in cranes as an indicator

This table summarises exports and imports for SITC 744.34: Tower Cranes and the first quarter and full year outcomes since 2010.  The units are tonnes.

Tower Cranes

Back in 2010 we were exporting cranes with nearly 2,500 tonnes of them leaving the country.  These exports have fallen off in recent years and in the first three months of 2017 there have been no exports in this category.

On the other side there were limited imports up to 2010 but this began to picked up in 2015 and 2016 and for the first quarter of 2017 imports are up 50 per cent on the same period last year.

The amounts of money involved tend to be relatively small.  The average price involved is generally around €5,000/tonne but the nature of the changes is pretty clear.  Though we do remain a long way from this:

Cranes in Dublin

Tuesday, April 18, 2017

Is Ireland’s business sector doing better than we think?

After the previous post’s trawl through the household sector accounts, here we have a look at the non-financial corporate sector in the Q4 Institutional Sector Accounts released last week.  Of course, whatever caveats there are about revisions are even more pronounced for the NFC sector but there is likely to be value in the data, particularly if we can gain some insight into what is happening in the domestic business sector (by assuming that revisions are more likely from the MNC side). 

First, the current account:

NFC Sector Current Account

We should immediately be drawn to the 21.3 per cent rise in Gross National Income in 2016.  Working through the numbers we can try to see what the source of this increase was.

It doesn’t appear to be increased output or profits.  Gross Domestic Product (i.e. value added) of the NFC sector grew by 3.8 per cent in 2016 and with COE paid growing by double that amount at 7.5 per cent there was “only” a 2.2 per cent rise in Gross Operating Surplus (akin to EBITDA).

So if profits are up two per cent how is Gross National Income of the NFC sector up more than 20 per cent?  It may be down to who is earning those profits.  It is a well-worn path but we know that the net profits of foreign-MNC subsidiaries operating in Ireland are rightly attributed to their foreign parents.  This can be explicitly through the payment of dividends or implicitly through the attribution of any retained earnings to the foreign parent.  The split doesn’t really matter.  Their sum gives us an indication of net MNC profits earned in Ireland.

In 2015, dividends paid and retained earnings owed by the NFC sector summed to €57.7 billion.  For 2016, it is estimated that these summed to €49.9 billion, a drop of almost €8 billion.  So while NFC profits may have increased by €3 billion it appears that the performance of domestic companies was much stronger as MNC profits appear to have fallen by €8 billion.

Increased profits and reduced factor outflows explain most of the increase in GNI (accounting for €11 billion of the €14 billion increase).  The remainder is explained by increased factor inflows. 

It can be seen that retained earnings owed to Irish-resident NFCs grew by more than 40 per cent in 2016, a rise of nearly €4 billion.  Although these could be the foreign-source profits of Irish MNCs most of the changes in the item have recently being driven by the foreign profits of companies which have redomiciled their headquarters to Ireland.  It is clear that these companies had a good 2016 but these profits bring no benefit to Ireland.

And we have one further caveat to explore before coming down strong that the performance of domestic companies was strong in 2016: depreciation.  The above table gives gross measures.  It will be the case that some of this gross income will be absorbed by depreciation.  If there has been an increase in the amount of depreciation attributed to the Irish assets of foreign-owned companies then the changes in gross income will not be reflective of changes in domestic businesses.  We can try and get some insight from this in the capital account.

NFC Sector Capital Account

There is a good bit going on but our focus is on “consumption of fixed capital”.  We can see that this was relatively stable in 2016, showing growth of just 1.9 per cent.  This is in marked contrast to what happened in 2015 as shown below.

NFC Depreciation

The dramatic rise in depreciation is obviously related to mobile assets.  The two candidates are aircraft and intangibles.  The scale of the increase in the capital stock means intangibles are the culprit.  This is the onshoring of intangibles by MNCs.  A transaction involving c.€24 billion of intangibles occurred in Q4 2016 (as reflected in the quarterly national accounts described here) but the impact this had on depreciation was small relative to the hundreds of billions of intangibles that were on-shored in early 2015.

The acquisition of these assets will enable the companies to avail of capital allowances to offset the capital expenditure incurred against their trading profits.  Although the Revenue Commissioners have not yet published the aggregate Corporation Tax statistics for 2015 we can expect that they will show an increase in the capital allowances used by companies of something approaching €30 billion.

In 2015, the Gross Operating Surplus of the NFC sector increased by €53 billion.  The amount of Corporation Tax paid by the NFC sector increased by €1.8 billion.  This suggests an increase in Taxable Income of around €20 billion.  The reason a large part of the increased Gross Trading Profits did not translate into Net Taxable Income was because of the use of Capital Allowances.  If Capital Allowances were not available then one could surmise that CT receipts would have been around €2.5 billion higher again.  However, if the Capital Allowances were not available then the IP would not have come here in the first place.

And it is also because of Capital Allowances that the distinction between gross and net profits in the NFC sector is important and why we have to be careful about drawing implications about the domestic sector from gross measures.

Still, the three pieces of evidence we have point us in the direction of a strong performance of domestic enterprises in 2016:

  • the sum of outbound dividends paid and retained earnings fell by €8 billion;
  • depreciation was relatively stable  increasing by just €1 billion;
  • retained earnings of re-domiciled PLCs accounted for a little over a quarter of the rise in Gross National Income

It is these muddying features it is hoped that the proposed GNI* will throw some transparency on to allow us to see what is happening the domestic economy.  As we said before:

In rough terms GNI* will be the standard “GDP less net factor income from abroad” to get to GNP with the (positive) balance of EU taxes and subsidies used to get to GNI.  After that, additional adjustments will be made for the depreciation of intangibles that MNCs have located here and the net income earned by redomiciled PLCs.  With these adjustments we should get a better measure of aggregate income developments for Irish residents.

When the Q4 QNAs were released we suggested that:

It’s little more than a guess but, assuming some fall in MNC profits last year, a growth rate in 2016 for GNI* of somewhere around 6 to 7 per cent may not be too wide of the mark.

There was nothing in the institutional sector accounts to contradict that conclusion.  As shown here the evidence supports it.

Aggregate improvement in the household sector continues

The publication last week of the Q4 Institutional Sector Non-Financial Accounts gives us a preliminary view of the various sectors of the economy in 2016.   The figures are subject to revision but can still offer some useful insights.  We’ll start here with a look at the current, capital and financial account of the household sector. First the current account.  Click to enlarge.

Household Sector Current Accounts 2007-2016

The headline is towards the bottom and shows that (nominal) gross disposable income is estimated to have grown by 4.5 per cent in 2016.  With consumption expenditure growing at a slower 3.5 per cent this means the saving rate increased in 2016 – which it did from 11.0 per cent in 2015 to 11.8 per cent in 2016.

The path to this 4.5 per cent increase in gross disposable income shows a few interesting developments.  Compensation of employees from the non-financial corporate sector continued its strong recent performance in 2016 growing by 7.5 per cent and is now up a remarkable 31 per cent from the level recorded in 2011.  Although it is the smallest source of compensation of employees the fastest growth in COE was actually from the household sector itself (through unincorporated entities).

Employee Compensation Paid

Compensation of employees from the corporate sector (financial plus non-financial) is now eight per cent greater, in nominal terms, than the local maximum recorded at the end of 2007.   Most of this is due to the NFC sector as shown in the first table from which COE paid in Q4 2016 was up ten per cent on it end-2007 peak.  Here is compensation of employees received by the household sector since the series began in 1999.

Compensation of Employees Received since 1999

This increase in COE is reflected in higher taxes on income and social contributions paid by the household sector. Taxes on income paid by the household sector rose 3.4 per cent and social contributions paid to the government sector rose 7.8 per cent.   So working through these gives the 4.5 per cent increase in gross disposable income.

Another notable feature of the data, as pointed out above, is that disposable income is rising faster than consumption expenditure.  Here are the seasonally adjusted series provided by the CSO.

Income and Consumption - Seasonally Adjusted

The widening gap between income and consumption in 2016 is evident.  A couple of asides on the chart:

  1. Looking at the chart would appear to suggest as though the growth of consumption in 2016 was close to nil.  In fact the Q4 number is actually slightly below the Q1 number.  However, that does not mean the annual growth figure for consumption was close to zero.  We have already seen that consumption expenditure grew by 3.5 per cent in 2016 and the seasonally adjusted figures in the chart above correspond with that.  The growth is as a result of the “carryover effect”.  Consumption might have been flat in 2016 but because there was growth in 2015, the quarterly levels in 2016 were above those from 2015.  The fact that consumption ended 2015 higher than it began the year causes a “carryover effect” for growth in 2016 which will give an annual growth rate even if there is little quarter-on-quarter growth from that level in 2016.
  2. The measure of income in the chart is Total Disposable Income.  This is Gross Disposable Income plus the adjustment for pension funds.  This adjustment adds back in a deduction which is counted as a social contribution but is actually a form of savings, i.e. contributions to pension funds.  This money is being put aside to fund consumption in the future.  The adjustment for pension funds is the difference between social contributions paid to the financial sector and social benefits received from the household sector.  For example, in 2016 the household sector paid €5,538 million of social contributions to the financial sector.  The household sector received €2,980 million of social benefits from the financial sector.  The adjustment for pension funds at the bottom of the table of €2,558 million is the difference between these two numbers.

The widening gap between income and consumption means the savings rate has increased.  The savings rate is the gap as a percentage of Total Disposable Income.

Savings Rate - Seasonally Adjusted

What are people doing with these savings?  To answer that we need to look at the capital and financial accounts.

First, it could be that people are using the savings to fund investment expenditure.  We can look for evidence of this in the capital account.  As would be expected the 2016 capital account for the household sector is hugely different to its 2007 equivalent.

Household Sector Capital Accounts  2007-2016

In 2007, the household sector has gross savings of €6.3 billion and undertook €23.2 billion of gross capital formation.  Thus to fund consumption and investment expenditure the household sector was a net borrower in 2007 to the tune of €16.9 billion (overall borrowing was growing much faster but that was due to transactions – buying existing houses off each other). 

A decade later and the household sector has gross savings of €11.7 billion but only undertakes €8.6 billion of gross capital formation.  Capital spending by the household sector is rising (and grew 16.5 per cent in 2016) but remains below the level of gross savings.  Thus the household sector is a net lender, and this was at a level of €3.4 billion in 2016.

Net Lending-Borrowing

We can see how this borrowing in 2007 was funded and get some insight into where the  lending of recent years is going by looking at the financial account – and in particular the transactions of the financial account.  The 2016 update won’t be published until later in the year but we can see the general trends in the changes to 2015.  Of course, these are net figures with lots of underlying movements.  The household sector isn’t a homogenous group.  Some people are borrowing to fund expenditure now, others are saving to fund expenditure in the future and others are saving to repay previous while others may be buying or selling financial assets.

Household Sector Financial Transaction Accounts 2007-2016

The most significant change is predictably enough for transactions relating to loan liabilities.  Back in 2007 loan transactions increased household indebtedness by nearly €25 billion (drawdowns far exceeded repayments) while for the past few years loan transactions have reduced household indebtedness by between €5 billion and €9 billion (repayments have exceeded drawdowns).  We can expect this to have continued in 2016.

On the asset side there has generally been an increase in deposits while transactions with insurance and pension reserves have seen a steady inflow of funds.  The pension component of these transactions corresponds to the “adjustment for pension funds” seen in the current account, i.e. the difference between contributions to, and drawdowns from, certain private pensions.  The transactions account also shows that the household sector is generally a seller of equity with the bulk of this made up of unlisted shares (private companies).

Here is the turnaround in financial transactions over the full period for which data is available.  Net financial transactions was negative up to 2008 and has been positive since then.

Financial Transactions

Transactions are only one factor that affects the balance sheet which will also reflect the impact of reclassifications and revaluations.  These are unlikely to significantly effect items like currency and deposits but can be a big factor behind changes in equity and pension reserves.

Household Sector Financial Balance Sheets 2007-2016

The net financial wealth of the household sector almost doubled between 2007 and 2015.  This was due to three factors:

  • €18.3 billion increase in Currency/Deposits (€18.2 billion of transactions)
  • €37.9 billion increase in Insurance/Pension Reserves (€22.9 billion of transactions)
  • €44.7 billion reduction in Loan Liabilities (€35.7 billion of transactions)

Of the €101 billion improvement in these items €77 billion was due to transactions. Reclassifications and revaluations had little impact on the change in Currency and Deposits.  The increase in Insurance and Pension Reserves was €15 billion more than that explained by transactions while the reduction in loans was €9 billion greater than the reduction due to the transactions.  Pensions funds have benefitted from rising asset values and there has been some write-offs of household debt. 

The household sector’s financial balance sheet has been improving but around three-quarters of it has been the result of ongoing saving and debt reduction rather than revaluations.  The overall balance sheet will include real assets (such as property, land, valuables etc.) but they are not part of this data. 

Here are the aggregate financial assets and liabilities of the household sector since 2002.

Financial Balance Sheet

The gap between the two lines above represents household net financial wealth.  This passed €200 billion for the first time in 2015 and there is little doubt that this improvement is ongoing.

Net Financial Assets

If housing assets were included net wealth would still be below the level seen in 2007.  To conclude here is a measure of debt-to-income for the household sector.

Debt to Income