Michael Burke: The deflationary trends gripping the economy are a very serious threat to any recovery and a magnification of the crisis in government finances. Michael Taft has recently highlighted the problem of deflation in a recent posting here, arguing that, "Deflation comes with a very high price – one of them is that it increases the deficit and debt burden. A comparison of the Exchequer Balance in the first quarters of 2009 and 2010 highlights this:
• Q1 2009: -11.2 percent of GNP
• Q1 2010: -13 percent of GNP
The reason for the deterioration is not the amount of deficit but rather the falling value of GNP. If GNP nominal value remains sluggish throughout the year, we may find an ever increasing deficit and debt burden".
Meanwhile, from another angle the CPI out today confirms the deflationary trend. Prices have risen in the last 5 months, but are 0.9% below a year ago and 6.7% below the September 2008 level. The starting-point of deflation is significant as it coincides with the announcement of first government steps down the long path of fiscal 'austerity'.
That rebound is not part of some fantasy of economic recovery. Disgracefully, it is administered prices that are rising sharply. So, while furnishings and household equipment prices have fallen by 4.6% in the latest 12 months, food and non-alcoholic drink prices down 5.4% and clothing and footwear prices down 11.2%; energy prices are up 9.5%, and mortgage interest up 16.5%. Housing, water gas and electricity costs combined have risen by 4.3% in the last 3 months alone. Otherwise, deflation continues to grip all the non-administered consumer prices in the economy.
In effect these are government tax increases via price rises at state and semi-state utilities and they hit the poorest hardest because they disproportionately spend more of their incomes on basic utilities. They are combined with price-gouging by mortgage lenders where variable rates now range from 2.62% to 4.6%, even though the ECB base rate on which they generally rest is unchanged. As the mortgage website says the primary reason for that is fattening profit margins at the lenders, "However we expect the [interest] rate curve to continue upwards for the following reasons:
Increasing margins required by lenders (recent increases by Bank of Ireland for example)"
So the bulk of the economy is gripped by deflation. But there is significant inflation elsewhere through increases in indirect taxes, which hurt the poor, and through gouging by lenders.
The worst of both worlds.
5 comments:
The details of the DoF's technical update confirms your analysis, Michael. While many were being focusing on revisions in real growth rates (these are all in the range of independent forecasters) some items were overlooked:
'A more comprehensive measure of price changes in the economy is the GDP deflator. Quarterly national accounts figures show a sharp annual decline in this deflator in the opening three months of the year. As a result, this price measure is now likely to fall more rapidly than initially assumed, affecting the growth rate of nominal GDP. This is a significant factor in explaining why, notwithstanding the upward revision to the volume of GDP growth, tax revenue forecasts are unchanged (see below).'
So deflation has set in (they have revised HICP downwards for this year from 1.2 to 1.5 percent). They have also revised employment downwards - from 68,000 to 75,000 jobs lost. And they admit that, despite volume growth, tax revenue will be unchanged. So we have deflation, more jobs lost and (all things being equal) a deficit going in the wrong direction.
What a recovery.
And even the IMF has warned that, along with risks of renewed weakness in the US housing market, “Sovereign strains in Europe have become an increasing concern, potentially impacting the United States through financial markets and, in a tail risk scenario, trade links,” the fund said. “Tail risk” usually refers to an extreme scenario that may be more probable than standard assessments predict.
Price-gouging on electricity and gas! Surely not. We obviously need more of Michael Taft's "competition". Still I doubt it will do much to reduce the extra €500 million a year consumers are paying to keep the ESB and BGE in the style to which they have become accustomed. The CER this week issued its over-the-top electricity network revenue proposals for the next 5 years. But I'm not sure there's enough fat in there to help the ESB finance its acquisition of the Northern Ireland networks.
Ah, Paul H - I've missed your broadsides against public enterprise, in particular energy companies. To blame ESB for the high price of its products one has to ignore the fact that (a) both ESB staff and management have consistently called for the CER to reduce prices; (b) artificially high prices are maintained by the CER to woo private investment; (c) to create competition the Government thinks driving up prices to uncompetitive levels is a wise and sober policy; in other words, to attack ESB one has to ignore a whole number of facts of which these are just a few. Even so, while electricity prices are high by EU standards in nominal terms (with all that Government sponsored competitiveness how could it be otherwise?), prices are about average when living standards are factored in. No doubt, Paul, you'll want to tip your hat to public enterprise for achieving that feat in the face of state interference and constraints that no private company has to face.
But let's turn to gas prices, where the CER is playing fewer games. If, as a rule, public enterprises are price gougers, then we should expect Irish prices to be high as well. But what do we find? Eurostat tells us that (a) in nominal terms, household gas prices are slightly above EU-15 average; (b) industrial prices are below average; and (c) when living standards are factored in, gas prices plummet to the bottom - the 4th cheapest in the EU-27.
Still, it must be those overpaid, inefficient workers in the largely publicly-owned utilities sector. Except that the EU Klems shows Irish utilities labour costs to be 5% below Eurozone average (and that includes low-cost countries like Portugal and Greece) while our productivity levels are 6% above Eurozone levels. What are those public enterprise workers thinking - costing us less and producing more?
Profit gouging? Again, the EU Klems tells us that companies in the Eurozone utilities sector (which has a large penetration of private interests) take 69% of value-added in profit; in Ireland, public enterprise companies take 52%. Maybe we should start a European wide campaign to bring utility companies back into public control – to control profit gouging.
@Michael T,
Indeed. And you persist in misunderstanding the targets of my 'broadsides'. My focus is on successive governments who failed to inject any new money (when they had it) to finance huge demand for investment (and forced the regulator to extract the lion's share of investment financing from consumers by setting excessively high prices) and who over-zealously implemented the EU's failed model of electricity and gas liberalisation (again forcing the CER to set excessively high bulk prices).
It's difficult to fault the managements of the ESB and BGE for empire-building because that's what they do when government policy is supportive. And I have no problem with ESB and BGE staff pay. The staff perform skilled and important tasks. Cutting pay would damage productivity, performance and morale - and would have a negligible impact on final prices.
Wrt to your final observation, the Energy DG of the European Commission is conducting a public consultation on EU energy strategy for the next decade:
http://ec.europa.eu/energy/strategies/consultations/2010_07_02_energy_strategy_en.htm
I have made a submission which should appear eventually on its web-site. My focus is on the fundamental flaws of the current approach, the costs being imposed on consumers and on what needs to be done to remedy it. If, or when, you read it you may find we are not as far apart as you may think. (Alternatively, if you post an email address I can send it to you.)
Post a Comment