Thursday, September 21, 2017

21/9/17: Another reminder: Financial Crises are becoming more frequent & more disruptive

As recently noted by Holger Zschaepitz @Schuldensuehner, new research from Deutsche Bank shows that "Post Bretton Woods (1971-) system vulnerable to crises. Frequency of Financial Crises increased since then. Growth of finance encouraged trend".

Of course, readers of this blog would have known as much by now.  Almost 2.5 years ago I wrote about research by Claudio Borio of BIS on the same topic (see and Borio's findings are linked to his own earlier work on excess financial elasticity hypothesis (see

So while the DB 'research' simply replicates the findings of others who paved the way, it does present a nice picture of the amplified nature of financial crises in recent decades, both in terms of timing/frequency and in terms of impact.

Tuesday, September 12, 2017

12/9/17: Asymmetric Conflicts and U.S. 'Learning Curve'

'Asymmetric warfare' or more aptly, 'asymmetric conflict' involves a confrontation between two sets of agents in which one set possesses vastly greater resources. In more recent time, the notion of 'asymmetric conflicts' involved the less endowed agents winning against more endowed ones. And the degree of asymmetries has grown significantly over time:

  • In Vietnam War, vastly outgunned Vietnamese forces literally defeated vastly over-equipped French and U.S. military machines;
  • In the Cold War confrontation, significantly less resourced Warsaw Pact managed to sustain relative long-term parity with much more resourced Western counterparts (including Nato);
  • In post-USSR years, vastly under-resourced Russia, compared to vastly over-resourced U.S. has been able to achieve quite a few 'wins' in geopolitical arena; 
  • Isis - with barely any resources, has managed to achieve huge gains against a range of much better equipped counterparties;
  • In Afghanistan, Taliban - with military expenditure of just a few million per annum, is successfully holding the line against both the Afghan state and its backers; and of course,
  • The 'rust-bucket' North Korea has just outplayed the U.S. in its race for nukes as a deterrent.
In summary, thus: spending does not secure reduction of risks in the age of asymmetric conflicts.

Now, consider the two key sources of 'existential' threats to the U.S. geopolitical positioning in the world: Russia and China. Illustrating asymmetric conflict:

And despite this obvious lack of connection between volume of spend and outruns in terms of geopolitical achievements, the prevalent consensus in Washington remains the same: more funds for Pentagon is the only way to assure preservation of the U.S. geopolitical positioning. 

Learning, anyone?

12/9/17: U.S. Median Household Income: The Myths of Recovery

The U.S. Census Bureau published some data on household incomes today. Off the top, the figures are encouraging:

The excitement of some analysts reporting these as a major breakthrough along the trend is understandable, notionally, 2016 U.S. median household income has finally surpassed the previous peak, recorded in 1999. Back then, median household income (adjusted for official inflation) stood at USD58,665 and at the end of 2016 it registered USD59,039. Note: italics denote points of importance, relevant to the analysis below.

As this chart from Marketwatch ( clearly illustrates, notionally, we are in the ‘new historical peak’ territory:

Alas, notional is not the same as tangible. And here are the reason why the tangible matters probably more than the notional:

1) Consider the following simple timing observation: real incomes took 17 years to recover from the 2000-2012 collapse. And the Great Recession, officially, accounted for only USD 4,031 in total decline of the total peak-to-trough drop of USD 5,334. Which puts things into a different framework altogether: the stagnation of real incomes from 1999 through today is structural, not cyclical. The ‘good news’ today are really of little consolation for people who endured almost two decades of zero growth in real incomes: their life-cycle incomes, pensions, wealth are permanently damaged and cannot be repaired within their lifetimes.

2) The Census Bureau data shows that bulk of the gains in real income in 2016 has been down to one factor: higher employment. In other words, hours worked rose, but wages did not. American median householders are working harder at more jobs to earn an increase in wages. Which would be ok, were it not down to the fact that working harder means higher expenditure on income-related necessities, such as commuting costs, childcare costs, costs for caring for the dependents, etc. In other words, to earn that extra income, households today have to spend more money than they did back in the 1990s. Now, I don’t know about you, but for my household, if we have to spend more money to earn more money, I would be looking at net increases from that spending, not gross. Census Bureau does not adjust for this. There is an added caveat to this: caring for children and dependents has become excruciatingly more expensive over the years, since 1999. Inflation figures reflect that, but real income deflator takes the average/median basket of consumers in calculating inflation adjustment. However, households gaining new additional jobs are not average/median households to begin with. And most certainly not in 2016, when labour markets were tight. In other words, median household today is more impacted by higher inflation costs pertaining to necessary non-discretionary expenditures than median household in 1999. Without adjusting for this, notional Census Bureau figures misstate (to the upside) current income gains.

3) In 1999, the Census Bureau data on household incomes used different methodology than it does today. The methodology changed in 2013, at which point in time, the Census Bureau estimated that 2013 median income was about USD1,700 higher based on new methodology than under pre-2013 methodology. Since then, we had no updates on this adjustment, so the gap could have actually increased. Today’s number show that median household income at the end of 2016 was only USD374 higher than in 1999. In other words, it was most likely around USD1,330 or so lower not higher, under pre-2013 methodology. Taking a very simplistic (most likely inaccurate, but somewhat indicative) adjustment for 2013-pre-post differences in methodologies, current 2016 reading is roughly 1.6 percent lower than 2007 local peak, and roughly 2.3 percent lower than 1999-2000 level.

4) Costs and taxes do matter, but they do not figure in the Census Bureau statistic. Quite frankly, it is idiotic to assume that gross median income matters to anyone. What matters is after-tax income net of the cost of necessities required to earn that income. Now, consider a simple fact: in 1999, majority of jobs in the U.S. were normal working hours contracts. Today, huge number are zero hours and GIG-economy jobs. The former implied regular and often subsidised demand for transport, childcare, food associated with work etc. The latter implies irregular (including peak hours) transport, childcare, food and other services demand. The former was cheaper. The latter is costlier. To earn the same dollar in traditional employment is not the same as to earn a dollar in the GIG-economy. Worse, taxes are asymmetric across two types of jobs too. GIG-economy adds to this problem yet another dimension. Many GIG-economy earners (e.g. Uber drivers, delivery & messenger services workers, or AirBnB hosts) sue income to purchase assets they use in generating income. These are not reflected in the Census Bureau earnings, as the official figures do not net out cost of employment.

5) Finally, related to the above, there is higher degree of volatility in job-related earnings today than in 1999. And there is longer duration of unemployment spells in today’s economy than in the 1990s. Which means that risk-adjusted dollar earned today requires more unadjusted dollars earned than in 1999. Guess what: Census Bureau statistic shows not-risk-adjusted earnings. You might think of this as an ‘academic’ argument, but we routinely accept (require) risk-adjusted returns in analyzing investment prospects. Why do we ignore tangible risk costs in labor income?

Key point here is that any direct comparison between 1999 and 2016 in terms of median incomes is problematic at best. It is problematic in technical terms (methodological changes and CPI deflator changes), and it is problematic in incidence terms (composition of work earnings, risks, incidences of costs and taxes). My advice: don’t ever do it without thinking about all important caveats.

Materially, U.S. households' disposable risk-adjusted incomes are lower today than they were in 1999. That explains why American households are drowning in debt: the demand for income vastly exceeds the supply of income, even as official median household size shrinks and cost of housing is being deflated by children staying in parents homes for decades after college. The rosy times are not upon us, folks.

12/9/17: Partisan Gap in Consumers' Perception of the U.S. Economy Explodes

A quick post, H/T @profsufi. Here is a chart from the U of Michigan consumer survey showing an explosion in partisan gap between Democrats and Republicans when it comes to self-reported consumer sentiment:

As Sufi stated in his tweet, "Rise in partisan bias in economic expectations according to Michigan Survey of Consumers data". Notably,

  1. Democrats negative perceptions are not at extraordinarily low levels. Similar applied for the Republicans during Obama 1 Administration and Carter Administration, and for Democrats in Carter Administration and Bush W2 Administration. So negative perceptions are not the key driver of the gap dramatic rise.
  2. Republican's optimism during the Trump Administration [short so far] tenure is the main driver of the partisan gap. 
  3. Current partisan gap reflects data that barely touches Trump Administration, with majority of economic performance figures still impacted heavily by the inertia inherent from the Obama Administration days. 
This has to fly in the face of anyone presenting Trump Presidency as the 'minority Republican' thing. Adjusting for the lags in data is impossible without looking at specific monthly series and down weighing observations closer to Obama tenure (I suggest authors do that), but it is clear that the true extent of Trump-specific gap has to reflect also some share of the Republican's perceptions of Obama 2 economic conditions. Which will most likely make the current gap even larger. 

Another point worth making is that the data above clearly shows just how subjective and unreliable (from the point of view of revealing actual quality of underlying economic conditions) the measures of Consumer Confidence are. 

Friday, September 8, 2017

8/9/17: Euro complicates ECB's decision space

My pre-Council meeting analysis of the ECB monetary policy space was published in Sunday Business Post yesterday:  It turned out to be pretty much on the money, focusing on euro FX rates constraints and QE normalisation path...

Thursday, September 7, 2017

7/9/17: Millennials’ Support for Liberal Democracy is Failing: A Deep Uncertainty Perspective

We just posted three new research papers on SSRN covering a range of research topics.

The third paper is "Millennials’ Support for Liberal Democracy is Failing: A Deep Uncertainty Perspective" and it is available here:

Recent data on electoral dynamics and sociopolitical preferences present evidence of declining popular support for the values and institutions of traditional liberal democracy across some western societies. This decrease is more pronounced within the younger cohort of voters, especially the Millennials. Key drivers for the younger generations’ scepticism toward liberal democratic values are domestic intergenerational political and socioeconomic imbalances that engender the environment of deeper uncertainty. Policy and institutional responses to democratic volatility are inconsistent with those necessary to address rising deep uncertainty and may exacerbate and accelerate the negative fallout from the pressures on liberal democratic institutions.

7/9/17: What the Hack: Systematic Risk Contagion from Cyber Events

We just posted three new research papers on SSRN covering a range of research topics.

The second paper is "What the Hack: Systematic Risk Contagion from Cyber Events", available here:


This paper examines the impact of cybercrime and hacking events on equity market volatility across publicly traded corporations. The volatility influence of these cybercrime events is shown to be dependent on the number of clients exposed across all sectors and the type of the cyber security breach event, with significantly large volatility effects presented for companies who find themselves exposed to cybercrime in the form of hacking. Evidence is presented to suggest that corporations with large data breaches are punished substantially in the form of stock market volatility and significantly reduced abnormal stock returns. Companies with lower levels of market capitalisation are found to be most susceptible. In an environment where corporate data protection should be paramount, minor breaches appear to be relatively unpunished by the stock market. We also show that there is a growing importance in the contagion channel from cyber security breaches to markets volatility. Overall, our results support the proposition that acting in a controlled capacity from within a ring-fenced incentives system, hackers may in fact provide the appropriate mechanism for discovery and deterrence of weak corporate cyber security practices. This mechanism can help alleviate the systemic weaknesses in the existent mechanisms for cyber security oversight and enforcement.

7/9/17: Long-Term Stock Market Volatility & the Influence of Terrorist Attacks

We just posted three new research papers on SSRN covering a range of research topics.

The first paper is "Long-Term Stock Market Volatility and the Influence of Terrorist Attacks in Europe", available here:


This paper examines the influence of domestic and international terrorist attacks on the volatility of domestic European stock markets. In the past decade, terrorism fears remained relatively subdued as groups such as Euskadi Ta Askatasuna (ETA) and the Irish Republican Army (IRA) relinquished their arms. However, Europe now faces renewed fear and elevated threats in the form of Middle Eastern and religious extremism sourced in the growth of the Islamic State of Iraq and Levant (ISIL), who remain firmly focused on maximising casualty and collateral damage utilising minimal resources. Our results indicate that acts of domestic terrorism significantly increase domestic stock market volatility, however international acts of terrorism within Europe does not present significant stock market volatility in Ireland and Spain. Secondly, bombings and explosions within Europe present evidence of stock market volatility across all exchanges, whereas infrastructure attacks, hijackings and hostage events do not generate widespread volatility effects. Finally, the growth of ISIL-inspired terror since 2011 is found to be directly influencing stock market volatility in France, Germany, Greece, Italy and the UK.

7/9/17: Deutsche Mark Euro?.. ECB, Taylor rule and monetary policy

In our Economics course @MIIS, we are covering the technological innovation contribution to the break down in the wage inflation, unemployment, and general inflation (Lecture 2). Here is fresh from the press data showing the divergence between actual monetary policy and the Taylor rule in Germany:

Wednesday, August 23, 2017

23/8/17: Ireland: A Haven for SPVs?

Ireland scored another ‘first’ in the league tables relating to tax optimisation and avoidance, staying at the top of the Euro area rankings as a Special Purpose Vehicles (SPVs) destination: (featuring my comment, amongst others).

As my comment in the article linked above alludes, there is a combination of factors that is driving Ireland’s ‘competitiveness’ in this area. Some are positive for the economy and non-zero-game in relation to our trading partners, e.g. 
- Ireland providing a functional access to the European markets via regulatory and markets infrastructure arrangements that facilitate trading from Dublin into the rest of the EEC;
- Ireland offering a strong platform for on-shoring human capital, a much more functional platform than any other EU nation, due to greater openness to skills-based migration, English language, common law and open culture;
- Ireland serves as a clustering centre for a range of financial services functions, making it more attractive than traditional tax havens for conducting real business.

Over the recent decades, Irish Governments and business organisations have been aggressive (or better said - active) in positioning the country as a platform for inward investment. The first waves of this strategy involved emphasis on pure tax optimisation (e.g. during the 1990s), with subsequent efforts (often less successful and slower to develop) involving building specialist niches of financial services activities in Ireland (e.g. funds management in the 2000s and focus on specialist listings, such as debt and SPVs, in the 2000s-2010s).

On the other hand, aggressive positioning achieved by Ireland in tax optimisation-driven FDI and tax-focused corporate inversions has become a significant drag on the country’s reputation as a functional (as opposed to post-box) business centre. In addition, the Financial Crisis has introduced new dimensions to this reputational erosion: in addition to the G20-initiated push for greater tax transparency and harmonisation, Ireland also - mistakenly - pursued tax-based incentives for vulture funds acquiring distressed Irish properties from the likes of Nama and IBRC. A combination of growing tax inversions, BEPS reviews and reforms, vulture funds aggressive use of the tax structures has resulted in a more recent tightening of the SPVs regulations and oversight. 

Striking a balance between real economic incentives and egregious tax optimisation is a hard target to hit for a small open economy that, like Ireland, faces very tangible and aggressive international competition. The bad news is that we are yet to find a ‘golden ratio’ for proper regulation and supervision regimes that can allow us to retain a competitive edge, while rebuilding positive reputation with our trading partners and investors as a place for doing functional/tangible business. The good news is that we are becoming more aware of the need to strike such a balance.

Tuesday, August 22, 2017

22/8/17: Focus Economics on Refugees Integration Challenge

Focus Economics posted a neat and timely blog post on the topic of potential economic impacts of mass forced migration that has been sweeping across Europe in recent years, driven by the civil war in Syria and botched 'democratization' efforts in Iraq and Afghanistan, as well as the less-discussed dismantling of Libya.

The link to the post is here:

In my opinion, the key here is the following issues:

"In the longer term, the picture becomes far murkier. This isn’t just because little is known about the current cohort of refugees, such as their average level of education or how long they will remain in their host countries. It is also because the long-term economic impact of refugees rests largely on how successful countries are at weaving them into the economic fabric of their societies."

Yes, long term viability of all positive assessments of the current migration crisis is questionable. And the problem rests on both sides, the migrants' quality of human capital, and the host countries quality of labor markets.

End result, so far, is that history offers only ominous assessments of the success rates that can be achieved in integrating refugees into active members in the host societies. "If past experience is anything to go by, the full economic integration of refugees will prove an arduous task. Studies from many developed countries have repeatedly shown that refugees tend to earn less, have worse employment prospects and hold lower occupational status than native workers or economic migrants. Even in Sweden, a country with a relatively strong track record of integrating refugees, a study of those arriving between 1997 and 2010 found that fewer than 20% had found employment after one year. Ten years down the line, only between 50% and 60% were working, significantly below the corresponding figure for Swedish natives."

This is not to say that attempts to integrate refugees are a waste of scarce resources. Quite to the contrary, both humanitarian and socio-economic dimensions of the current crisis suggest that we should be doing more (and doing it better) to develop policies and institutions to provide refugees with more open and more efficient access to work-related training, language skills acquisition and general education, including avenues to complete unfinished degrees and pursue higher degrees. As the  Focus Economics post stresses, positive incentives and pro-active systems for engagement should be put forward. One question, however, remains unasked and unanswered, as is common with this analysis: what should be done to identify early and correct any negative choices that some of the refugees might make following their arrival in the host societies. While we have an idea as to how we can help those who want to integrate (note: having an idea is yet to translate into deploying actual policies), we don't really have a good understanding as to how we can prevent adverse choices.

Wednesday, August 16, 2017

16/8/17: Year Eight of the Great American Recovery: Household Debt

U.S. data for household debt for 2Q 2017 is out at last, and the likes of Reuters and there best of the official business media are shouting over each other about the ‘record debt levels’ warnings. As if the ‘record debt levels’ is something so refreshingly new, that no one noticed them in 1Q 2017.

So with that much hoopla in your favourite media pages, what’s the data really telling us?

Quite a bit, folks. Quite a bit.

Let’s start from the top:

Debt levels are up. Almost +4.5% y/y. All debt categories are up, save for HE Revolving debt (down 5.44% y/y). Increases are led by Auto Loans (+7.89% y/y) and Credit Cards (+7.54%). High growth is also in Student Loans (+6.75%). Mortgages debt is rising much slower, as consistent with lack of purchasing power amongst the younger generation of buyers.

As you know, I look at this debt from another perspective, slightly different from the rest of the media pack. That is, I am interested in what is happening with assets-backed debt and asset-free debt. So here it is:

Yes, debt is up again. Mortgages debt share of total household debt has shrunk (it is now at 67.7%) and unsecured debt share is up (32.3%). Unsecured debt was $3.925 trillion in 2016 Q2 and it is now $4.148 trillion. Why this matters? Because although cars can be repossessed and student loans are non-defaultable even in bankruptcy, in reality, good luck collecting many quarters on that debt. Housing debt is different, because with recent lending being a little less mad than in 2004-2007, there is more equity in the system so repossessions can at least recover meaningful amounts of loans. So here’s the thing: low recovery debt is booming. While mortgages debt is still some $600 billion odd below the pre-crisis peak levels.

On the surface, mortgages originations are improving in terms of credit scores. In practice, of course, credit scores are superficially being inflated by all the debt being taken out. Yes, that’s the perverse nature of the American credit ratings system: if you have zero debt, your credit rating is shit, if you are drowning in debt, you are rocking…

Still, here is the kicker: mortgages credit ratings at origination are getting slightly stronger. Total debt written to those with a credit score <660 2016.="" 2016="" 2017="" 2q.="" 2q="" also="" auto="" billion="" buyers="" class="Apple-converted-space" credit="" down="" fell="" from="" good="" improving:="" in="" is="" issuance="" loans="" news.="" origination="" quality="" score="" span="" sub-660="" to="" which=""> 

Bad news:

Severely Derogatory and 120+ delinquent loans are still accounting for 3% of total loans, same as in 2Q 2016 and well above the pre-crisis average of 2.1%. Total share of delinquent loans is at 4.77%, slightly below 1Q 2017 (4.83%) and on par with 4.79% a year ago. So little change in delinquencies as a result of improving credit standards at origination, thus. Which suggests that improving standards are at least in part… err… superficial.

And things are not getting better across majority of categories of delinquent loans:

As the above clearly shows, transition from lesser delinquency to serious delinquency is up for Credit Cards, Student Loans and Auto Loans. And confirming that the problem of reading Credit Scores as improvement in quality of borrowers are the figures for foreclosures and bankruptcies. These stood at 308,840 households in 2Q 2017, up on 294,100 in 1Q 2017 and on 307,260 in 2Q 2016. Now, give it a thought: over the crisis period, many new mortgages issued went to households with better credit ratings, against properties with lower prices that appreciated since issuance, and under the covenants involving lower LTVs. In other words, we should not be seeing rising foreclosures, because voluntary sales should have been more sufficient to cover the outstanding amounts on loans. And that would be especially true, were credit quality of borrowing households improving. In other words, how does one get better credit scores of the borrowers, rising property prices, stricter lending controls AND simultaneously rising foreclosures?

Reinforcing this is the data on third party debt collections: in 2Q 2017, 12.5% of all consumers had outstanding debt collection action against them, virtually flat on 2Q 2016 figure of 12.6%. 

In simple terms, in this Great Recovery Year Eight, one in eight Americans are so far into debt, they are getting debt collectors visits and phone calls. And as a proportion of consumers facing debt collection action stagnates, their cumulative debts subject to collection are rising. 

Things are really going MAGA all around American households, just in time for the Fed to hike cost of credit (and thus tank credit affordability) some more. 

Tuesday, August 15, 2017

15/8/17: A Great Recovery or a Great Stagnation?

Value-added is one measure of economic activity that links the production side to consumption/ demand side (using inputs of say $X value to produce a good that sells for $Y generates $Y-$X in Gross Value Added). Adjusted for inflation, this returns Real Gross Value Added (RGVA) in the economy. Taken across two key sectors that comprise the private sector economy: households & institutions serving the households, and private businesses (including or excluding farming sector), these provide a measure of the economic activity in the private economy (i.e. excluding Government).

Since the end of WW2, negative q/q growth rates in the private sectors RGVA have pretty accurately tracked evolution of economic growth (as measured, usually, by growth rates in GDP). Only in the mid-1950s did the private sector RGVA growth turn negative without triggering associated official recession on two occasions, and even then the negative growth rates signalled upcoming late-1950s recession.

Which brings us to the current period of Great Recovery.

Consider the chart below, computed based on the data from the Fred database:

The first thing that jumps out in the above data is that since the end of the Great Recession, the period of the Great Recovery has been associated with two episodes of sub-zero growth in the private sector RGVA. This is unprecedented for any period of recovery post-recession, except for the period between two closely-spaced 1950s recessions: July 1953-April 1954 and August 1957-March 1958.

The second thing that stands out in the data is the average growth rate in RGVA during the current recovery. At 0.579% q/q, this rate is the lowest on the record for any recovery period since the end of WW2. Worse, it is not statistically within 95% confidence interval bands for average growth rate in post-recovery periods for the entire history of the U.S. economy between January 1948 and October 2007. In other words, the Great Recovery is, statistically, not a recovery at all.

The third matter worth noting is that current non-recovery Great Recovery period is the third consecutive period of post-recession growth with declining average growth rates.

The fourth point that becomes apparent when looking at the data is that the current Great Recovery produced only two quarters with RGVA growth statistically above the average rate of growth for a 'normal' or average recovery. This is another historical record low (on per-annum-of-recovery basis) when compared across all other periods of economic recoveries.

All of the above observations combine to define one really dire aftermath of the Great Recession: despite all the talk about the Great Recovery sloshing around, the U.S. economy has never recovered from the crisis of 2007-2009. Omitting the years of the official recession from the data, the chart below shows two trends in the RGVA for the private sector economy in the U.S.

Based on quadratic trends for January 1948-June 2007 (pre-crisis trend) and for July 2009 - present (post-crisis trend), current recovery period growth is not sufficient to return the U.S. to its pre-crisis long term trend path. This is yet another historical first produced by the data. And worse, looking at the slopes of the two trend lines, the current recovery is failing to catch up with pre-crisis trend not because of the sharp decline in real economic activity during the peak recession years, but because the rate of growth post-Great Recession has been so anaemic. In other words, the current trend is drawing real value added in the U.S. economy further away from the pre-crisis trend.

The Great Recovery, folks, is really a Great (near) Stagnation.

Sunday, August 13, 2017

12/8/17: Some growth optimism from the Russian regional data

An interesting note on the latest data updates for the Russian economy via Bofit.

Per Bofit: "Industrial output in Russian regions rises, while consumption gradually recovers." This is important, because regional recovery has been quite spotty and overall economic recovery has been dominated by a handful of regions and bigger urban centres.

"Industrial output growth continued in the first half of this year in all of Russia’s eight federal districts," with production up 1.5–2% y/y in the Northwest, Central and Volga Federal Districts, as well as in the Moscow city and region. St. Petersburg regional output rose 3-4% y/y.

An interesting observation is that during the recent recession, there has been no contraction in manufacturing and industrial output. Per Bofit: "Over the past couple of years, neither industrial output overall nor manufacturing overall has not contracted in any of Russia’s federal districts. Industrial output has even increased briskly in 2015–16 and this year in the Southern Federal
District due to high growth in manufacturing and in the Far East Federal District driven by growth in the mineral extraction industries."

This is striking, until you consider the nature of the 2014-2016 crisis: a negative shock of collapsing oil and raw materials prices was mitigated by rapid devaluation of the ruble. This cushioned domestic production costs and shifted more demand into imports substitutes. While investment drop off was sharp and negative on demand side for industrial equipment and machinery, it was offset by cost mitigation and improved price competitiveness in the domestic and exports markets.

Another aspect of this week's report is that Russian retail sales continue to slowly inch upward. Retail sales have been lagging industrial production during the first 12 months of the recovery. This is a latent factor that still offers significant upside to future growth in the later stages of the recovery, with investment lagging behind consumer demand.

Now, "retail sales have turned to growth, albeit slowly, in six [out of eight] federal districts."

Here is why these news matter. As I noted above, the recovery in Russian economy has three phases (coincident with three key areas of potential economic activity): industrial production, consumption and investment. The first stage - the industrial production growth stage - is on-going at a moderate pace. The 0.4-0.6 percent annual growth rate contribution to GDP from industrial production and manufacturing can be sustained without a major boom in investment. The second stage - delayed due to ruble devaluation taking a bite from the household real incomes - is just starting. This can add 0.5-1 percent in annual growth, implying that second stage of recovery can see growth of around 2 percent per annum. The next stage of recovery will involve investment re-start (and this requires first and foremost Central Bank support). Investment re-start can add another 0.2-0.3 percentage points to industrial production and a whole 1 percent or so to GDP growth on its own. Which means that with a shift toward monetary accommodation and some moderate reforms and incentives, Russian economy's growth potential should be closer to 3.3 percent per annum once the third stage of recovery kicks in and assuming the other two stages continue running at sustainable capacity levels.

However, until that happens, the economy will be stuck at around the rates of growth below 2 percent.

Saturday, August 12, 2017

12/8/17: Are Irish Property Prices on a Sustainable Path?

Some of the readers of this blog have been asking me to revisit (as I used to do more regularly in the past) the analysis of Irish property prices in relation to the ‘sustainability trend’. With updated CSO data on RPPI, here is the outrun.

The charts below show current National and Dublin property price indices in relation to the trends computed on the basis of the following CORE assumptions:
  • Starting period: January 2005
  • Starting index ‘sustainability’ positions: National = 82.0 (implying that long-term sustainable market valuations were around 18 percentage points below market price levels at January 2005 or at the levels comparable to Q4 2010); Dublin = 83.0 (implying 17 percentage points discount on January 2005).

Charts above use the following SPECIFIC trend assumptions:
  • Linear (simplistic) trend at 2% inflation target + 0.5 percentage points margin. This implies that under this trend, property prices should have evolved broadly-speaking at inflation, plus small margin (close to tracker mortgage rate margin).

In all cases, current markets valuations are well below the long-term sustainability target and there is significant room for further appreciation relative to these trends (see details of target under-shooting in the summary table below).

Chart above shows tow series sustainability targets computed on the basis of different specific assumptions, while retaining same core assumptions:
  • I assume that property prices should be sustainably anchored to weekly earnings. 

Using only weekly earnings evolution over January 2005-present, as shown in the above chart, both Dublin and National house prices are currently statistically at the levels matching sustainability criteria. There is no statistical overshooting of the sustainability bounds, yet.

Chart above again modifies specific assumptions, while retaining the same core assumptions. Specifically:
  • I assume that both earnings and interest rates (using Euribor 12 months rate as a dynamic gauge) co-determine sustainable house prices. In a away, this allows us to reflect on both income and cost of debt drivers for house prices.

As the chart above clearly shows, both National and Dublin property markets are still well underpriced compared to the long term sustainability targets, defined based on a combination of earnings and interest rates. Note: correcting this chart for evolution of unemployment brings sustainability benchmarks roughly half of the way closer to current prices, but does not fully erase the gap.

Summary table below:

So, overall, the above exercise - imperfect as it may be - suggests no evidence of excessive pricing in Irish residential property at this point in time. There are many caveats that apply, of course. Some important ones: I do not account for higher taxes; and I do not factor in difficulties in obtaining mortgages. These are material, but I am not sure they are material enough to bring the above gaps to zero or to trigger overpricing. Most likely, the national residential prices are somewhere around 5-7 percent below their sustainability bounds, while Dublin prices are around 7-10 percent below these bounds. Which means we have a short window of time to bring the markets to the sustainable price dynamics path by dramatically altering supply dynamics in the property sector. A window of 12-18 months, by my estimates.

Thursday, August 10, 2017

10/8/17: 2Q Start Ups Funding Data: Big Lessons Coming

2Q 2017 figures for seed funding and startups capital rounds is in, and the slow bleeding of the Silicon Dreams appears to be entering a new, accelerated stage. 

Seed funding posted continuous declines over the last two years, falling some 40 percent on 3Q 2015 peak in terms of number of transactions and down 24 percent in volume. 

Source: PitchBook Inc

Combined seed and angel investment deals numbered just 900 on 2Q 2017, down 200 on same period in 2016 and well below ca 1,500 deals completed in 2Q 2015. In volume terms, 2Q 2017 came in with total investment of $1.65 billion, down on $1.75 billion in 2Q 2016 and $2.19 billion in 2Q 2015. Masking these falls somewhat, terms of investments have tightened significantly over the last two years, meaning that actual in-hand capital allocations have fallen more than the headline volume figures suggest.

There are some reasons for this decline. Firstly, recent tech IPOs signal Wall Street’s growing scepticism over unicorns valuations of tech companies. Secondly, the quality of new deals coming into the market is slipping: if two years ago everyone was chasing mushrooming sector of ‘Uber-for-X’ companies, today the ‘disruption’ pitch is getting old and the focus might be shifting on later stage financing of already existent companies.Thirdly, investment funds are facing internal problems - the classical allocation dilemmas. As funds under management rise in the angel and VC investment outfits, it becomes harder and harder for them to meaningfully allocate small investments to smaller start ups. They become more dependent on ‘finding the next Uber’. As a result, the funds are shifting their cash to already existent early stage companies, away from angel and seed finance. 

To see the latter two points, consider the median seed deal size. Two years ago, that stood at around $500,000. Today, it is at around $1.5 million. 

There is also the issue of timing. Boom in seed funding in tech sector is now good decade long. And it is time to count the proverbial chickens. As the industry pursued the investment model of ’spray the cash around and pray for a return somewhere’, a range of seed finance funds are closing down and posting poor returns. This, in turn, makes new investors more cautious.

Why this is significant? Because many tech start ups generate no meaningful revenues and, even at later stages of development, once revenues ramp up, they tend to run huge losses. The reason behind this is that many tech start ups (especially the larger ones) pursue business models based on aggressive expansion of market share in markets (e.g. taxis and food deliveries) where traditional business margins are already thin. In other words, by pursuing volume, not profit, the start ups must use increasing injections of capital and large capital allocations up front to stay afloat. 

This, of course, is not a sustainable model for business development. But tell that to the politicians and business leaders and investors, all of whom tend to chase size before understanding that business needs to make profits before it can raise employment and build brand dominance.

So for the future, folks: stop chasing pre-revenue, business plan (or tech platform)-based funding. Focus on generating your first sales and showing these to have margin potential. Remember, corporate finance matters not so much on the capital budgeting side, but on the cash flow spreadsheet. 

Wednesday, August 9, 2017

9/8/17: Global Debt Bubble 2002-2017

A nice chart showing evolution of global debt levels since 2002 via Reuters:


9/8/17: Euro Area Banks Bailouts: The Legacy Still Hangs Over Our Heads

The Financial Times has published a very neat visualisation of the global banks bailouts net impact to-date:

And the snapshot magnifying European states impact:

None of the Euro area states have recovered all funds deployed in bailing out the banks. And the worst performer of all states is Ireland.

Note: the chart references bailouts as a share of GDP. Of course, in the case of Ireland and Cyprus, GDP is by a mile (in the case of Ireland, by about one third) is unrepresentative of the actual national income available to sustain these.

Another note: the three worst-hit countries, Ireland, Greece and Cyprus, all remain deeply under water when it comes to recovering funds spent in the bailouts, even though the three had, on the surface, different bailout regimes applied. Specifically, Cyprus (and to a lesser extent, Greece) was supposed to be a model bailout, serving as the basis for the future bailouts across the Euro area (including structured bail-ins of private depositors).

So much for the hope of the Euro area 'reforms' working... And so much for the end of the Crisis...

8/8/17: Did Irish Household Spending Fully Recover from the Crisis?

I have recently seen several research notes claiming that in 1Q 2017, Ireland has finally fully recovered from the shock of the Great Recession. These claims were based on consumer demand regaining its pre-crisis peak.

What do the facts tell us about this claim? That it is a half-truth.

Consider the following chart plotting consumer demand (consumer expenditure on goods and services) computed on an aggregate 4 quarters running basis. I use official CSO data for both expenditure figures and population figures. And I compute per-capita expenditure on the basis of these statistics.

In 1Q 2017, aggregate household expenditure on goods and services stood at EUR96.16 billion against pre-crisis peak of EUR94.118, using constant prices to account for official inflation. Incidentally, there is nothing new in the claim of recovery on that basis, because Irish households' aggregate spending on goods and services has surpassed pre-crisis peak in 2Q 2016.

The problem with the aggregate expenditure figure is that population changes. So the chart above also shows per-capita real expenditure, expressed in 1,000s of constant euros. Here, the matters are a bit less impressive. Per capita household expenditure on goods and services in Ireland peaked pre-crisis at EUR21,508.75. At the end of 1Q 2017, this figure was EUR 20,574.71.

There is another problem with analysts' celebrations of the 'end of the lost decade'. Aggregate household expenditure peaked (pre-crisis) in 1Q 2008, so it took 32 quarters to recover that peak. Per-capita household expenditure peaked in 2Q 2008, which means we are 35 quarters into the crisis and counting. Neither comes up to a full decade.

Finally, there is a really big problem. This one relates to what a 'recovery from the crisis' really means. In the above, we implicitly assume that a recovery from the crisis is return to pre-crisis peak. But there is a major problem with that, because our current state of life-cycle incomes, savings and debt in part reflect decisions made under the assumptions that operated back in the pre-crisis period. In other words, our income, savings, investment, career choice and debt carry a 'memory' of the times when (pre-crisis) trends did not incorporate any expectation of the crisis.

What does this mean? It means that psychologically, materially and even economically, the end of the crisis is when the economy returns to where it should have been were the pre-crisis trend extended into the present. To make this comparative more robust, we should also recognise that, in part, the pre-crisis trend should have omitted at least some of the most egregious excesses of the bubble years.

Let's do that exercise, then. Let's take pre-crisis trend in household expenditure (aggregate and per-capita) for year 3Q 2000-2004 (eliminating the explosive years of 1997-2000 and 2005-2007) and see where we are today, compared to that trend.

On trend, our aggregate personal expenditure should have been around EUR111.7 billion marker in 1Q 2017. It was EUR96.16 billion. This hardly reflects a recovery to the pre-crisis trend.

Also on trend, our per capita expenditure should have been around EUR24,140 in 1Q 2017. It was EUR20,575. This hardly reflects a recovery to the pre-crisis trend.

As some of my friends in Irish stuffbrokerages have been known to remark in private: "Shit! Damn numbers." Indeed... the recovery will have to wait... but, lads, you know you can do these calculations yourselves, right? You are paid six figure salaries and bonuses to do them. Or may be you are not. May be, you are paid six figure salaries and bonuses not to do these calculations...

Tuesday, August 8, 2017

8/8/17: Irish Taxpayers Face a New Nama Bill

Ireland has spent tens of billions to prop up schemes, like Nama and IBRC. These organisations pursued developers with a sole purpose: to bring them down, irrespective of the optimal return strategy from the taxpayers perspective and regardless of optimal recovery strategies for asset recovery. We know as much because we have plenty of evidence - that runs contrary to Nama and IBRC relentless push for secrecy on their assets sales - that value has been destroyed during their workout and asset sales phases. We know as much, because leaders of Nama have gone on the record claiming that developers are, effectively speculators, 'good for nothing else, but attending Galway races', and add no value to construction projects.

Now, having demolished experienced developers and their professional teams, having dumped land and development sites into the hands of vulture investors, who have no expertise nor incentives to develop these sites, the State has unrolled a massive subsidy scheme to aid vultures in developing the sites they bought on the State-sponsored firesales.

As an aside, this June, Nama officially acknowledged the fact that majority of its sales of land resulted in no subsequent development. What Nama did not say is that the 'developers' hoarding land are the vulture funds that bought that land from Nama, just as Nama continued to insist that its operations are helping the construction and development markets.

Why? Because Nama was set up with an explicit mandate to 'help the economy recover' and to drive 'markets to restart functioning again', and to aid social housing crisis (remember when in 2012 - five years ago - Nama decided to 'get serious' about social housing?). And Nama has achieved its objectives so spectacularly, Ireland is now in the grips of a housing crisis, a rental market crisis and a cost-of-living crisis.

Read and weep:
Irish taxpayers are now paying the third round of costs of the very same crisis: first round of payments went to Nama et al, second to the banks, and now to the 'developers' who were hand-picked by Nama and IBRC to do the job they failed to do, for which Nama was created in the first place.

Oh, and because you will ask me when the fourth round of payments by taxpayers will come due, why, it is already in works. That round of payments will cover emergency housing provision for people bankrupted by the banks and Nama-supported vultures. That too is on taxpayers shoulders, folks...

Friday, August 4, 2017

3/8/17: New research: the Great Recession is still with us

Here is the most important chart I have seen in some months now. The chart shows the 'new normal' post-2007 crisis in terms of per capita real GDP for the U.S.


The key matters highlighted by this chart are:

  1. The Great Recession was unprecedented in terms of severity of its impact and duration of that impact for any period since 1947.
  2. The Great Recession is the only period in the U.S. modern history when the long term (trend) path of real GDP per capita shifted permanently below historical trend/
  3. The Great Recession is the only period in the U.S. modern history when the long term trend growth in GDP per capita substantially and permanently fell below historical trend.
As the result, as the Roosevelt Institute research note states, " output remains a full 15 percent below the pre-2007 trend line, a gap that is getting wider, not narrower, over time".

The dramatic nature of the current output trend (post-2007) departure from the past historical trend is highlighted by the fact that pre-crisis models for forecasting growth have produced massive misses compared to actual outrun and that over time, as new trend establishes more firmly in the data, the models are slowly catching up with the reality:

Source: ibid

Finally, confirming the thesis of secular stagnation (supply side), the research note presents evidence on structural decline in labor productivity growth, alongside the evidence that this decline is inconsistent with pre-2007 trends:

On the net, the effects of the Great Recession in terms of potential output, actual output growth trends, labor productivity and wages appear to be permanent in nature. In other words, the New Normal of post-2007 'recovery' implies permanently lower output and income. 

3/8/17: BRIC Composite PMIs: July

Having covered BRIC Manufacturing PMIs in the previous post (, and Services PMIs (, here is the analysis of the Composite PMIs.

Table below summaries current shorter term (monthly) trends in Composite PMIs:

Brazil has slipped into a new sub-50 Composite PMI trend in 2Q 2017 and, as of July, remains in the slump, although at 49.4, July Composite PMI reading signals much weaker rate of economic activity contraction than the June reading of 48.5. The problem for Latin America’s largest economy is that the hopes for an extremely weak recovery, set in 50.4 readings in April and May are now gone. In fact, 2Q 2017 average Composite PMI for Brazil stood at 49.8, which was stronger than July reading and marked the strongest performance for the economy since 3Q 2014. All in, July marked the start of the 14th consecutive quarter of Composite PMIs signalling economic recession.

Russia Composite PMI at the end of July stood at 53.4, a respectably strong number, signalling good growth prospects for the economy, but down from 54.8 in June and 56.0 in May. In fact, July reading was the lowest in 9 months. Given the economy’s performance in 1Q 2017, set against composite PMIs, the July and 1-2Q readings suggest that Russia is on track to record 1.0-1.5% growth this year, but not quite 2.0% or higher as expected by the Government. We will need to see 3Q and 4Q averages closer to 56-57 range to have a shot at above 1.5% growth.

China posted 2Q 2017 Composite PMI at 51.3, which is below July 51.9 reading. Still, July improvement is yet to be confirmed across the rest of 3Q 2017. China’s Composite PMI slowed from a recent peak of 53.1 in 4Q 2016 to 42.3 in  1Q 2017 and 51.3 in 2Q 2017.

India’s Composite PMI reflected wide-ranging weakening in the economy struck by both botched de-monetisation ‘reform’ and equally bizarre tax reforms. Sinking from appreciably strong 52.2 in 2Q 2017 to 46.0 in July, this fall marked the lowest PMI reading since 1Q 2009 and the second lowest reading on record. India’s economy has been in a weak state since 3Q 2016 when Composite PMI averaged 53.1. The PMI fell to 50.7 and 50.8 in 4Q 2016 and 1Q 2017 before recovering in 2Q 2017. This recovery is now in severe doubt. We will need to see August and September readings to confirm an outright PMI recession, but the signs from July reading are quite poor.

All in, in July, Russia was the only BRIC economy that came close (at 53.4) to Global Composite PMI reading of 53.5. Two BRIC economies posted a sub-50 reading. In 2Q 2017, Global Composite PMI was 53.7, with Russia Composite PMI at 55.4 being the only BRIC economy that supported global economic growth to the upside. In fact, Russia lead Global Composite PMIs in every quarter since  2Q 2016.

3/8/17: The tale of Irish tax receipts tails

My article for the Sunday Business Post  on the latest trend in the Irish Exchequer receipts and how it stacks up against Budget 2018 prospects for tax cuts. Link here:

Thursday, August 3, 2017

3/8/17: BRIC Services PMI: July

Having covered BRIC Manufacturing PMIs in the previous post (, here is the analysis of the Services Sector PMIs.

Brazil Services PMI continued trending below 50.0 mark for the third month in a row, hitting 48.8 in July, after reaching 47.4 in June. While the rate of contraction in the sector slowed down, it remains statistically significant. This puts an end to the hope for a recovery in the sector, with Brazil Services PMIs now posting only two above-50 (nominal, one statistically) readings since October 2014.

Russian Services PMI also moderated in July, although the reading remains statistically above 50.0. July reading of 52.6 signals slower growth than 55.5 reading in June. The Services sector PMIs are now 18 months above 50.0 marker, continuing to confirm relatively sustained and robust (compared to Manufacturing sector) expansion.

China Services PMI remained in the statistical doldrums, posting 51.5 in July gayer 51.6 in June. The indicator has never reached below 50.0 in nominal terms in its history, so 51.5 reading is statistically not significant, given PMIs volatility and positive skew. Overall, this is second consecutive month of PMIs falling below statical significance marker, implying ongoing weakness in the Services economy in China.

India’s Services PMIs followed Manufacturing sector indicator and tanked in July, hitting 45.9 (sharp contraction), having previous posted statistically significant reading for expansion at 53.1 in June. Volatility in India’s Services indicator is striking.

Table and chart below summarise short term movements:

Looking at quarterly comparatives, July was a poor month for Brazil Services sector, with July reading of 48.8 coming in weaker than already poor 49.0 indicator for 2Q 2017. In Brazil’s case, current recession in Services is now reaching into 12th consecutive quarter in nominal terms and into 15ht consecutive quarter in statistical terms. Russia Services PMI also moderated at the start of 3Q 2017 (52.6 in July) having posted average 2Q 2017 PMI of 56.0. Russia Services sector expansion is now into its 6th consecutive quarter (statistically) and seventh consecutive quarter nominally. The same, albeit less pronounced, trend is also evident in China (July PMI at 51.5 against 2Q 2017 PMI of 52.0). India Services PMI was under water in 4Q 2016, followed by weak (zero statistically) growth in 1Q 2017 and somewhat stronger growth in 2Q 2017. The start of 3Q 2017 has been marked by a sharp, statistically significant negative growth signal.

With Global Services PMI hitting 53.7 in July, against 53.8 average for 2Q 2017 and 53.6 average in 1Q 2017, BRIC economies overall are severely underperforming global growth conditions (BRIC Services PMI is now below Global Services PMI in 3 quarters running and this trend is confirmed at the start of 3Q 2017).

3/8/17: BRIC Manufacturing PMIs: July

BRIC PMIs for July 2017 are out, so here are the headline numbers and some analysis. 

Top level summary of monthly readings for BRIC Manufacturing PMIs is provided in the Table below:

Of interest here are:
  • Changes in Brazil Manufacturing PMI signalled weakening in the economy in June that was sustained into July. Manufacturing PMI for Brazil has now fallen from 52.0 in May to 50.5 in June and to 50.0 in July. This suggests that any recovery momentum was short lived. 
  • Russian Manufacturing PMI, meanwhile, powered up to 52.7 in July from 50.3 in June, rising to the highest level in 6 months. Good news: Russian manufacturing sector has now posted above-50 nominal readings in 12 consecutive months. Less bright news: Russian Manufacturing PMIs have signalled weak rate of recovery in 5 months to July and July reading was not quite as impressive as for the period of November 2016 - January 2017. Nonetheless, if confirmed in August-September, slight acceleration in Manufacturing sector can provide upward support for the economy in 3Q 2017, support that will be critical as to whether the economy will meet Government expectations for ~2% full year economic expansion.
  • Chinese manufacturing PMI gained slightly in July (51.1) compared to weak May (49.6) and June (504.), but growth remains weak. Last time Chinese Manufacturing posted PMI statistically above 50.0 (zero growth) marker was January 2013. This flies in the face of official growth figures coming from China.
  • India’s Manufacturing PMI fell off the cliff in July (47.9) compered to already weak growth recorded in June (50.9). Over the last 3 months, India’s Manufacturing sector has gone from weak growth, to statistically zero growth to an outright contraction.

Overall, GDP-weighted BRIC Manufacturing PMI stood at extremely weak 50.4 in July 2017, down from equally weak 50.6 in 2Q 2017. In both periods, BRIC Manufacturing sector grossly underperformed Global Manufacturing PMI dynamics (52.7 in July and 52.6 in 2Q 2017). Russia is the only country in the BRIC group with Manufacturing PMI matching Global Manufacturing PMI performance in July. Russian Manufacturing PMI was below Global Manufacturing PMI in 2Q 2017.

Net outrun: BRIC Manufacturing sector currently acts as a drag on global manufacturing growth, with both India and Brazil providing momentum to the downside for the BRIC Manufacturing PMIs.

2/8/17: Role of Clusters in empowering Human Capital: GCTV

My comment to GCTV on the importance of clusters in creating support base for human capital:

Saturday, July 29, 2017

28/7/17: 1H Marker: Russia on Track to a Weak Recovery in 2017

A quick top level update on the Russian economy from Bofit and Fitch Ratings.

Fitch Ratings today: “The recovery in Russia continues to gain traction. Domestic demand is responding to greater confidence in the economic policy framework, particularly as the inflation-targeting regime becomes entrenched. Activity in Turkey has bounced back rapidly from the coup attempt, with growth hitting 5% yoy in 1Q17. Momentum was supported by government incentives, including temporary fiscal measures and a jump in the Treasury commitment to the fund that backs lending to SMEs.”

Chart from BOFIT confirms the above:

Overall, the recovery is still on track, and remains gradual at best, posing elevated risks of reversals. For example, industrial output, having previously posted gains in January-May 2017, contracted in June 2017 on a quarterly basis. Still, industrial output was up 2% in 1H 2017 y/y.  Despite the U.S. and European sanctions, and generally adverse trends in the commodities sectors, mineral extraction sector expanded 3% y/y in 1H 2017 according to BOFIT. Oil output was up 2% and gas output was up 13%. The above figures imply that higher value added manufacturing posted sub-1% y/y growth in 1H 2017.

Agricultural production was basically flat - due, in part, to poor weather conditions, rising only 0.2% y/y in 1H 2017 and unlikely to post significant growth for FY2017 as crops reports are coming in relatively weak. That said, 2015-2016 saw record crops and very strong growth in agricultural output, so barring a major decline this year, agricultural sector activity will remain robust. Food production sector was the fourth highest growth sector over 2013- 1H 2017 period across the entire Russian economy, rising cumulative 17%  in 1H 2017 compared to 1H 2013 in real (inflation-adjusted) terms.

Construction sector posted a robust 4-5 percent expansion in 1H 2017 compered to 1H 2016, a rather positive sign of improving investment.

Pharmaceuticals (+36%), plastics (+25%), Chemical industry (+22%), paper industry (+19%) were the main sectors of positive growth over 2013-2017 period, according to data compiled by Rossstat.

Really good news is that household demand is now recovering. Retail sales by volume were up ca 1% y/y on a seasonally-adjusted basis and real disposable household income rose from the cycle lows to the levels last seen in May-June 2016. Bad news is that with income growth slower than retail sales and even slower than actual household consumption (which grew faster than domestic retail sales due to accelerating purchases abroad), Russian households are dipping into savings and credit to fund consumption increases.

We shall wait until July 2017 PMI figures come out over the next few days to see more current trends in the Russian economy, but overall all signs point to a moderate 1H and 3Q (ongoing) expansion in the economy, consistent with 1.2-1.3% real growth. The Economy Ministry recently reiterated its view that Russian GDP will expand at more than 2% rate in 2017. Achieving this will clearly require a large and accelerated cut in the Central Bank rate from current 9% to below 8%. Even with this, it is hard to see how above-2% growth can be achieved.

Agricultural and food production are quite significant variable in the growth equation. In 2016, Russia became number one exporter of wheat in the world, with annual production tipping 120 million tons - historical record. Bad weather conditions in 2017 mean that current expected output is estimated at around 17% below 2016 levels. Russia consumes 70 percent of its wheat output internally, so cuts to exports are likely to be on the magnitude of 1/2 or more in 2017. Domestically, food prices inflation is rising this year, threatening overall Central Bank target and putting pressure on CBR to stay out of cutting the key policy rate. Inflation rose in June to 4.4% - moderate by historical standards, but above 4% CBR target.