Irish manufacturing shrinks at fastest rate in 19 months

Deteriorating economic conditions weaken orders for goods at home and abroad

Irish manufacturing shrank at its fastest rate in 19 months in April as sluggish orders both at home and from abroad led to the sharpest contraction in output since August 2009, a survey has shown.

The NCB Manufacturing Purchasing Managers’ Index, which fell below the 50 line dividing growth from contraction for the first time in more than a year in March, dropped further to 48.0 in April from 48.6 in the previous month.

The poor PMI data adds to the less positive tone of recent data releases as the recession hitting much of the rest of Europe eats into export growth and a still-struggling domestic economy hurts retail sales.

“On the evidence of today’s report, Q2 has gotten off to an uninspiring start for the Irish manufacturing sector,” said Philip O’Sullivan, chief economist at NCB Stockbrokers.

“Panellists cited weakening market demand, fuelled by deteriorating economic conditions in Ireland and across Europe, as a key factor behind this softer reading. The sluggish new orders, new export orders and stocks of purchases readings suggest that a near-term recovery in output is unlikely.”

The Government expects the economy to grow modestly for the third year in a row this year, but trimmed its forecast for growth yesterday after the economy contracted in the third quarter of 2012 and was flat in the fourth.

Manufacturing accounts for about a quarter of Ireland’s gross domestic product, according to World Bank figures.

The sub-index measuring output, which stood at 54.4 just six months ago, fell to 46.5 in April from 48.1 in March. It was the lowest reading since August 2009, more than a year before Ireland was forced to seek an €85 billion bailout.

Reuters

Banks will not be allowed 'micro-manage' finances insists new insolvency service

Minimum income guidelines not set 'anywhere close' to subsistence level

Minimum income guidelines for people entering the State’s new insolvency process have not been set in stone or at “subsistence level living or anywhere close to that”, the head of the agency overseeing the process has said.

Lorcan O’Connor of the Insolvency Service of Ireland (ISI) said the new guidelines would be flexible and would not see people’s finances being “micro-managed” by banks or new Personal Insolvency Practitioners (PIPS) but he admitted many people would be forced to give up private health insurance, cars and holidays.

The guidelines on a “reasonable standard of living” for insolvent debtors and “reasonable living expenses” are central to the insolvency regime as they set out how much money people will be allowed to spend within any deal which is agreed with their creditors.

It include limits on expenditure on items such as food and basic medicine.

Under the guidelines a single adult with no car will be permitted expenditure of €898.96 in set cost over and above any mortgage or rent payments. The set costs will rise to €1,030 if that adult has a a car. They will be given €126 a month – or €29 a week to cover social inclusion. An allowance of €204.88 is to made for each child of primary school going age.

The Minister for Justice Alan Shatter unveiled details of how the new insolvency process would work this afternoon in Government Buildings as the service launched an information campaign. Guides to debt settlements have been published along with a website and an information line for queries.

Mr O’Connor told The Irish Times that childcare costs would come under the microscope but he denied that people would forced to give up work if their earnings were less than the cost of that childcare.

He said PIPs would have to “ensure that the child care costs are reasonable” but expressed the view that “it would be completely counter intuitive to ask anyone to give up a job. It makes sense for people to remain in their jobs and while there may be some people who have childcare costs in excess of their income there may be reasons for this.”

He said some of the guidelines including those referring to childcare costs had been redrafted in recent weeks to make it clearer that people would not be forced to give up work.

He said such a redraft was needed because he felt that the flexibility “which is so enshrined” in the ISI’s intentions had not been sufficiently outlined in early drafts. While the wording of the guidelines had changed in recent weeks, he said the numbers had not, Mr O’Connor said.

The ISI has relied heavily on work carried out by the Vincentian Partnership for Social Justice on income guidelines and have been “sense-checked” with both the CSO and theCentral Bank as well as the personal insolvency service in the UK counterparts. Mr O’Connor said the VP study had been done “in a very scientific way” and its figures were “based on needs rather than wants. I certainly wouldn’t describe the Vincentians as being pro-bank”.

The UK does not makes its spending guidelines available to the public but they are known with the industry and according to Mr O’Connor the levels of expenditure in the Republic will be higher than in the UK. “That is not to say we are being more generous because the cost of living here is higher but it does give us comfort that our figures are not off the wall.

“I could have said that an adult had a spending limit of €1,000 a month but the guidelines – which are for information purposes only – are trying to bring transparency to the process. This is a stepping stone to get unsustainable debt written off and it is hugely positive. But again these are just guidelines and it will be for the PIPs to use them as a starting point. Debtors have been signing up to arrangement with their banks which have set expenditure too low.”

He said that as a starting point “health insurance is not included” and claimed that this “was not an easy decision to make”. However he said there would be flexibility . “If you have a pre-existing condition that requires ongoing health care then that will be looked at or if you are of an age where getting insurance after allowing it to lapse would be difficult you will be allowed to retain it.”

Mr O’Connor said the figures included allowances for “social inclusion” to help people remain part of society. That has been set at €125.97 a month for an adult or €28.97 a week. There is a provision for a basic television subscriptions but Mr O’Connor denied that people would be forced to surrender premium television subscriptions such as Sky Sports as part of any arrangement and he said there would be “no micro-management of finances”

People could see the amounts they are allowed spend each month increase as the process goes on and according to Mr O’Connor PIPs will be given the flexibility to allow people an additional €100 in the second year of the process and a further €100 in the third year.

He said that “there are very few people in Ireland who could claim to be experts in personal insolvency” and he highlighted that PIPs would have to a legal or financial background and would also require “the intangible which are the negotiating skills needed to bring opposing sides together”.

Those with a financial or legal background who have successfully completed an approved insolvency course will be able to apply to become a PIP. “We need this to happen by June and we have been talking to various professional bodies for several months.” The Law Society will start a course which has been signed off on by the ISI tomorrow while another course for accountants will begin in May.

Conor Pope, Irish Times

Construction sector free-fall gathers pace

The construction sector's woes are getting worse and worse.

The sector endured it sharpest decline in activity so far this year in March, according to the latest Ulster Bank Construction Purchasing Managers' Index. Last month's drop was the 70th straight fall.

The latest index shows the rate of decline is accelerating, with activity, new orders and employment all decreasing at faster rates. The index fell to 43.1 in March from 45.3 in February.

"Conditions deteriorated across the housing, commercial and civil engineering sub-sectors," Ulster Bank economist Simon Barry said.

The steepest decline was again seen in the civil engineering sector. Housing activity also fell markedly, but continued to post the weakest reduction in activity of the three sectors.

Anecdotal evidence suggested that falling new orders had contributed to the drop in activity, Ulster Bank said. In turn, a lack of available projects led new business to decrease. New orders fell at the sharpest pace in three months.

Construction firms responded to lower workloads by reducing employment for the 71st successive month.

Thomas Molloy, Irish Independent

Irish Liquidations

Household disposable income up 2.5%

CSO figures show wages are higher and profits of the self-employed have increased

The disposable income of Irish households rose by 2.5 per cent last year as a result of higher wages and increased profits of the self-employed.

Figures published by the Central Statistics Office (CSO) today show households’ gross disposable income rose to €86.27 billion last year, up from €84.19 billion in 2011.

The institutional sector accounts, which bring together information on the financial activities of households, businesses and the Government, show household expenditure increased by €424 million to €77.92 billion in 2012.

Household savings, which are primarily used to pay down debt and fund property investment, rose by €1.77 billion to €11.1 billion.

The derived gross savings ratio, which expresses savings as a percentage of gross disposable income, increased from 10.7 per cent in 2011 to 12.5 per cent in 2012 as a result.

Meanwhile, the gross savings deficit of the Government fell by €1.73 billion to €8.55 billion in 2012. This is mainly due to an increase in taxes on income and wealth, which rose by €1.85 billion to €20.9 billion last year, the CSO said.

Capital investment by the Government amounted to €4 billion in 2012, according to the figures. When combined with the savings deficit, this pushes the net Government borrowing requirement for 2012 up to €12 billion.

The gross savings of non-financial corporations rose to €16.38 billion, an increase of by €1.7 billion compared with the 2011 figure.

Financial corporations, including banks, insurance companies and pension providers, had gross savings of €7.67 billion in 2012, up from €6.46 billion in 2011.

The net borrowing by the rest of the world from Ireland amounted to €6.04 billion, compared to €1.52 billion in 2011. This increase is explained by higher levels of gross savings in the economy, the CSO said.

Ciara Kenny, Irish Times

Irish Liquidations

Businesses deliberately loaded with debt rob the country of future tax income

It is extraordinary the extent to which the banking sector is behind so many of the woes that litter the business pages of newspapers across the Western world.

The issue of increased taxation is a similarly prominent story, not least because so many people are incensed at having to shoulder more tax so as to pay off the cost to society of the perfidious banking sector.

Benjamin Franklin said the only certain things in life are death and taxes but people could be forgiven these days for tweaking the quote.

Debt as equity
What is particularly interesting about the issues of debt and taxes is how they are connected by the way a business can use its finance costs to reduce its tax bill. TheFinancial Times commentator, Martin Wolf, has proposed that debt should be treated like equity, by which he means – as I understand it – that you should pay your bank interest from your after-tax profits.

People in charge of large, successful cash-generating businesses can be tempted to load them up with debt.

By doing this, they can take the future profits of a company out now, (and bank them), and leave it to the business to pay off the debt that it has been assigned.

The risk that is associated with the business is in this way switched from the owner to the lender.

The owner has already banked the future profits and, if unforeseen events lead the business to crash, it is the bank that will take the hit. So the owner of the business gets his future profits, the bank executive who processes the loan gets his fees and the risk is left floating somewhere in the international banking system which, as we have seen, can be viewed as being the responsibility of the general population.

All of this may sound somewhat academic, but consider the history of Telecom Éireann/Eircom.

The following paragraph is from the 2002 accounts of Valentia Telecommunications Ltd: “Under the terms of the €2.4 billion facilities entered into between Valentia Telecommunications Ltd and Goldman Sachs International, Deutsche Bank AG London,Barclays Capital, The Governor and Company of the Bank of Ireland, and Allied Irish Banks plc and pursuant to which Valentia Telecommunications Ltd had financed its acquisition of the shares in Eircom, Valentia Telecommunications Ltd agreed to procure that Eircom would enter into an accession agreement pursuant to which Eircom would agree to become an additional borrower and a guarantor under the Facilities Agreement.”

Valentia’s annual return for 2002 includes shareholders based in some of the world’s best-known offshore locations. Sir Anthony O’Reilly’s Lionheart Ventures had an address in the Irish Towers, Nicosia, Cyprus. Other shareholders were in the Cayman Islands and Bermuda.

Such is often the case with large companies involved in such transactions. The companies’ profits, which formerly were taxed, now go towards servicing debts, while dividend and capital gains income goes to owners who have organised their affairs so they pay little or no tax.

The point this column would like to focus on is the loss of tax involved. The sale of Telecom Éireann in 1999 netted the State €6.3 billion.

But in the years since then, the eventually unsustainable levels of debt placed on its shoulders meant that the State’s largest telecoms operator, which was otherwise a profitable operation, paid very little tax.

The State’s plan for dealing with the current crisis includes the intended sale of State assets with a view to raising €3 billion.

It is not hard to imagine the type of corporate and financial structures that will lie behind any such purchase. An offshore entity buys a valuable State asset using a large amount of bank debt which is placed upon the shoulders of the asset purchased.

Struggling to survive
Untaxed income by way of dividends or capital gains accrues to the offshore entity or entities behind the purchase, while the actual business struggles to survive under the burden of its debt and all but ceases making any bookable profits that can be taxed by the State.

No one is asking Enda Kenny’s Government to redesign the way the world works, but in deciding to sell off valuable assets, it should include in its calculus not just the loss of future profit but also the inevitable loss of future taxation that will arise.

Colm Keena, Irish Times

Irish Liquidations