Saturday, February 28, 2009

House prices continue to fall

New figures show that the pace of the fall in house prices accelerated in January. Average house prices dropped by 1.4% in the month, according to the house price index compiled by Permanent TSB and the ESRI. This compares with a 0.9% fall in December and 0.5% in November. Over 12 months, the decline was 9.8%. The average price paid for a house in January was €258,006.

However, these findings are not a true reflection of the current situation in Ireland. Dermot O'Leary, Chief Economist of Goodbody Stockbrokers, said in November 2007, that three reasons can be cited for a discrepancy between its expectations of house price falls and the permanent tsb / ESRI House Price Index:

1. The data are reflective of prices at the mortgage payment stage of the house-buying process. This can be some 3-4 months after a sales price is agreed, and, in a slower market, this lag could get extended further. Therefore, there is a significant lag between market prices and the official house price data.

2. The type of properties in the ptsb database may be concentrated towards the lower price range in the market. While recognising the fact that the ptsb data takes account of the different characteristics of the house, the average price in the country is well below the estimates contained in the dataset from the Department of the Environment.

3. Price incentives, which have become common for new scheme developments, would not get reflected in the data.

Wednesday, February 18, 2009

Bord Gáis enters the electricity market

Bord Gáis has announced that it is entering the residential electricity market later today, with a guarantee to customers that its prices will be at least 10% lower than the ESB for the next three years. The company's chief executive, John Mullins, said it would be a simple process for ESB customers to switch to Bord Gáis, and this would be open to all 1.8 million registered households who use electricity.

This announcement amounts to a huge shake-up of the residential electricity market and, Bord Gáis claims it will result in immediate and substantial savings for customers. From midday today, any ESB customer will be able to switch over and get their electricity from Bord Gáis by either phoning the company or going online. It hopes to expand its customer base to more than a million people in three years, by promising its bills will always be at least 10% lower that the ESB. On gas prices, Mr Mullins said he believed that they would go down considerably this year - with prices more than 25% lower next December than they are today.

Domino's to get a bigger pizza the action!

Recessions are not bad for everyone. Some industries thrive in a downturn. Many qualms and quibbles go out the window as needs triumph over desires. Fast-food outlets are a case in point. Their food is generally seen as being 'recession-proof'.

Yesterday, the London-listed arm of Domino's Pizza announced it is planning a sizeable investment in Ireland in order to cope with growing demand for its products here. The company's plans include 10 new Irish stores in 2009. This follows on its seven new outlets last year. Each new store creates an average of 30 jobs.

The company, which operates the franchise for the global brand in the UK and Ireland, currently has a commissary facility in Naas, Co Kildare. It was built for €15m and produces and distributes pizza bases and other products to the chain's stores across Ireland.

Domino's Pizza UK & Ireland said yesterday that full-year sales jumped 18.4pc last year to £350.8m (€397m), while pre-tax profit rose 24.7pc to £23.4m (€26.5m). Like-for-like sales in 450 outlets were up 10pc. At the end of December, the firm had 553 stores between the UK and Ireland, with 41 in the Republic of Ireland and 13 in Northern Ireland. Its store in Tallaght is one of the busiest Domino's outlets in the world.

Four Star Pizza, the wholly Irish owned franchise based pizza company, announced last month it will create 200 jobs over 2009, with the opening of ten new franchise locations here.

Sunday, February 15, 2009

It'll be the debt of us!

Fears are mounting that Ireland could default on its soaring national debt pile, amid continuing worries about the troubled banking sector.

The cost of buying insurance against our government bonds rose to record highs on Friday. Debt-market investors now rank us as the most troubled economy in Europe. Pledges made by the Government to support the banking sector now amount to 220% of our annual economic output. The total loans held in Irish banks are more than 11 times the size of our economy.

Following the scandal at Anglo Irish Bank over undisclosed loans, the market fears there are more hidden problems that could ultimately fall to the state to resolve. With the Government set to borrow an additional €15 billion (£13.4 billion) this year, the national debt pile will hit €70 billion. The cost of insuring Irish debt hit 350 basis points on Friday, meaning that for every €100 of debt, it would cost €3.50 to insure against default. A year ago it would have cost 10cent to insure every €100 of our debt.

One possible solution might see Germany buy billions of euros of Irish government debt through a fund set up by the European Central Bank.

Football's Richlist

Manchester United have come second in the list of the world's richest clubs, while Real Madrid stay top for the fourth year in a row. Deloitte's Football Money League, based on financial information for the 2007/08 season, features seven English clubs in the top 20 positions. The authors said that United would have been top of the Money League if the pound was still at June 2007 levels. Chelsea, Arsenal and Liverpool are fifth, sixth and seventh respectively.

"If the exchange rate value of the pound had not depreciated, there would have been nine, rather than seven English clubs in the top 20 and Manchester United would have topped the Money League ahead of Real Madrid," said Dan Jones, partner in the Sports Business Group at Deloitte.

United won the English Premier League and UEFA Champions League in 2008, posting a significant 21% pound-denominated revenue growth. The list had been headed by Manchester United for eight years until Real Madrid deposed them. "Whilst Real Madrid's 4% revenue growth in 2007/08 is more modest than recent years, the club has now doubled its revenues since 2002 and enjoys a lead of 41m euros [£32.5m] over Manchester United," said Mr Jones. "With the club having announced that it is budgeting for revenues of 400m euros in 2008/09, it will be difficult for rivals to replace Real at the top of the Money League next year."

The other English clubs in the top 20 are Tottenham Hotspur (14th), Newcastle United (17th) and Manchester City (20th). All the top 20 clubs represent Europe. Germany and Italy have four clubs each in the top 20, Spain and France have two clubs each.
Fenerbahce became the first Turkish club to enter the top 20 since the creation of the list of the world's richest clubs in 1996/97.

WORLD'S WEALTHIEST CLUBS BY REVENUE:
1) Real Madrid: £289.6m
2) Man Utd: £257.1m
3) Barcelona: £244.4m
4) Bayern Munich: £233.8m
5) Chelsea: £212.9m
6) Arsenal: £209.3m
7) Liverpool: £167m
8) AC Milan: £165.8m
9) AS Roma: £138.9m
10) Inter Milan: £136.9m
Source: Deloitte: 2007/8

Monday, February 9, 2009

New corporate logos for the recession?


What is an economic depression?

The London Times is running regular briefings to coincide with Target Two Point Zero, the Bank of England's contest for sixth-formers in the UK run in conjunction with the newspaper. The competition challenges students to play the role of the Bank's Monetary Policy Committee (MPC) and recommend the best level for interest rates. This week: After Gordon Brown talked of a new Depression, they explain the phenomenon.

How is an economic depression different from a recession? First of all, it is important to understand that there is no precise or agreed definition of a depression. Even now, 70 years after the last experience of the 1930s economic slump that became know as the Great Depression, the world's leading economists are still wrangling over what caused it and what it meant. Defining the term is made more difficult since the last experience of anything like a depression was in this period, more than seven decades ago, which is well beyond many people's living memory. In general, it is accepted by most commentators and experts that a depression is a very severe form of recession: one involving a deeper decline in GDP and most other measures of economic welfare, including employment, and which probably lasts for significantly longer than the typical recessions experienced in modern times.

How different is the scale of a depression from a recession?
Very different. In modern times, the typical experience of recession in big Western economies has been a period of declining GDP that has lasted perhaps three to six quarters, and the typical fall in GDP over the period of recession has been in the order of 1 to 3 per cent. Some recessions have been even briefer and less deep, but all of these have still been bad enough to cause considerable hardship and to alter the business landscape significantly. By contrast, the Great Depression in the United States stretched from 1929 to 1933, and involved a collapse in the economy that saw national output and income shrink by 29.6per cent. GDP dropped by 8.6per cent in 1930 alone, by 6.4 per cent in 1931 and by 13 per cent in 1932. Recovery in 1934 to 1937 was followed by a relapse into recession. It was only the huge rise in industrial production in the US war economy of the early Forties that ended this profound period of economic woes in America.

What was the toll from this slump?
The impact was brutal. The proportion of the workforce without jobs surged from 2 per cent to a quarter of those of working age. Output from US factories was halved, consumer prices fell by a quarter as the economy slid into deflation, four-fifths of the value of the US stock market was wiped out, from the Wall Street crash onwards, and house prices fell by nearly a third.

What about Britain in the Depression?
Britain's experience of the Thirties was grim and painful, but far from as searing as that of the US. British GDP plunged by about 5 per cent, compared with the 2.9 per cent drop suffered in the worst modern recession in the early Eighties. During the early Thirties, British unemployment doubled from 7 to 15per cent of the workforce. However, this experience was much less severe than the slump that the UK suffered in the early Twenties. Although that is not part of what we know as “the Great Depression”, it clearly was a depression on the same scale. In the wake of the First World War, UK GDP plummeted by 23 per cent, mirroring the experience of America a decade later.

www.timesonline.co.uk/economics
www.timesonline.co.uk/targettwopointzero
www.bankofengland.co.uk/education/targettwopointzero

Sunday, February 8, 2009

Increased unemployment lowers oil prices even further

Oil prices have fallen by more than $1 a barrel as rising US unemployment has led to further fears of weakening demand for oil among US consumers. US light, sweet crude settled down $1 at $40.17 a barrel while London Brent slipped 25 cents to $46.21.

The US unemployment rate rose to 7.6% in January, up from 7.2% in December, according to official figures - the highest level since 1992. The rapid rise in unemployment suggests the US recession is deepening. Companies as well as individuals are cutting back on spending.

Officials from the producers cartel, the Organization of the Petroleum Exporting Countries (Opec) have said that current price level is too low for its members to make enough revenue or encourage investment in new supply.

P0rn Again

Despite NBC banning sexually explicit ad content from the Super Bowl broadcast, Comcast somehow goofed with 2:47 left in the game and broadcast a 30-second, X-rated clip—from the adult channel Club Jenna—to about 80,000 subscribers watching the game in the Tucson area. According to The Huffington Post, Comcast suspects the work of hackers.

The company is paying each of its affected customers a $10 refund. Freakonomics asks “How did they decide $10 was the correct amount?”

Furthermore, if $10 is Comcast’s estimation of the damage 30 seconds of porn incurred on the average viewer, should it have paid more to families watching the game with small children, or — since the porn clip interrupted the game right after Larry Fitzgerald’s last touchdown in the game — Cardinals fans? And most importantly, what about the people who enjoy porn? Should they send back the refund — perhaps with an extra dollar or two? :o)

Increased disposable income to go into savings?

David Smith, Economics Editor with the Sunday Times has a well written article today dealing with how the reduction in interest rates amongst other factors will mean an increase in consumers' disposable income - which people will save rather than spend.
(I have abridged the article slightly).

Wandering round Poundland, as one does, is a bit different from the rarefied atmosphere of Davos but is an experience to be recommended. In this Aladdin's cave, which has everything from the latest Rupert annual, six-packs of rare incandescent light bulbs and mini tool kits to household goods, toiletries and non-perishable foods, there is a sense of wonder that anybody can make this stuff for £1, let alone sell it.

The Poundland effect underlines how tough things are for higher-priced retailers, which is why it is expanding while many of them are shrinking. That, however, is not the only message. Just down the road is a 99p shop and, unless my eyes were deceiving me, it was busier. To economists, if not to Poundland, that is gratifying. It shows price signals work, even at low prices and that the fashionable "left digit effect" is alive and well.

This is the effect that makes us more likely to buy at £9.99 than £10. By the same token, 99p is more appealing than £1. I am tempted to open a 98p shop, though experts say that to make a real difference you might have to go to 89p, if not 49p. The real point is that one of the stories of 2009 will be that consumers can buy cheaply, if they choose to, and not just at the discounters. We are moving into a period where inflation will be negligible, and for periods negative, in spite of sterling's fall.

This, and what will be a very gloomy economic forecast, prompted the Bank to cut interest rates from 1.5% to 1%. As I wrote last week, I would not have done so at this time. But how strange it is that such low rates have become almost commonplace. Low rates are providing a bonus for borrowers, bringing big reductions in mortgage payments. More generally, low inflation — helped by the government's temporary Vat cut — will provide a boost to real income growth. Just how big was underlined by the National Institute of Economic and Social Research in its latest review.

It predicts real household disposable income will jump 3.3% this year, well up on last year's increase of 1.5% and 2007's zero growth. If this is right, it will be the best year for income growth since 2001. We will not have had it so good for a long time. The question is: what will people do with it? Simon Kirby and Ray Barrell, economists at the institute, are pretty sure they will not spend it. Alongside that 3.3% rise in incomes they predict a 3.8% slump in consumer spending. Saving, not spending, will be the watchword this year, they say, with the saving ratio predicted to jump from 1.3% last year to 7.1% this year.

It is an interesting forecast and a brave one. Lots of unprecedented things are happening but that would be an unprecedented divergence between income growth and spending. Barrell points out that something similar happened in the early 1990s, but spread over three years. This time, he said, the effects were coming through much quicker, with falling housing wealth and lack of availability of credit being the two main factors pushing spending lower.

...

Surely, you will say, this recession is all about households deleveraging — paying off debt — and a sharp drop in consumer spending will be a natural consequence of that. But, as I have pointed out before, consumer spending has been rising at a slower rate in recent years and was, in any case, mainly financed out of income growth.

...

There will be a two-way debt battle in the coming months, rising unemployment making it hard for a minority to service their home loans, while lower interest rates will make it easier for the majority.

Where will this leave spending? Nationwide's consumer confidence index is at a record low, though the proportion of people saying now is a good time for a big purchase has risen again. That is important. Official figures show retail sales held up pretty well through to the end of last year, but that spending on big-ticket items was very weak. Ask any car dealer.

In the end, confidence is the key. Consumer recessions are not caused by people cutting back who have to. They happen when those who are not badly squeezed decide it is prudent not to spend. This is Keynes's paradox of thrift; we would like a higher level of savings but not right now.

It could go either way. But if the institute is right in its calculation of the rise in real incomes this year, I would be quite surprised if it is also right on spending.

Wednesday, February 4, 2009

Live register hits 9.2%

Official figures have confirmed that the number of people on the Live Register hit a record high of almost 328,000 in January. The Central Statistics Office said the numbers signing on rose by almost 36,500 from December to 327,861. The Taoiseach told the Dáil this morning unemployment could reach 400,000 by the end of the year.

The Live Register figure has now surged by more than 80% over the past 12 months. The seasonally adjusted figure rose by 33,000 to 326,100, while the unemployment rate jumped to 9.2%. up from 8.3% in December.

Bloxham's Alan McQuaid described the data as 'horrendous', and underlined the fact that the Irish economy was now in crisis mode. 'Apart from the sharp fall in construction employment, other sectors like manufacturing, retail, transport, and financial services are starting to significantly feel the pinch too,' he added. Davy said welfare payments would rise by at least €350m based on the last month alone, though the Government will get some of this back through taxes as that money is spent. The stockbroker expects the unemployment rate to reach 13% by the end of 2010.

The current 9.2% rate is the highest rate since December 1997. This is up from a low of 3.7% in February 2001, but remains below the average unemployment rate of 16% in the eighties.

Given that we expect the weakness in the labour force will accelerate in coming months, double-digit rates of unemployment will likely come sooner than we previously thought, and we now see the rate hitting 10% in coming months. This estimate takes into account a downward revision to the Live Register estimate of unemployment when the official unemployment figures are released in the Q4 Quarterly National Household Survey, as this measure does not include part-time workers who are eligible for unemployment benefits.