Monday, August 23, 2010

Ireland's flawed smart economy strategy

Last week, we heard yet more about the government’s goal of creating a ‘smart economy’, this time in relation to the Leaving Cert maths and science results.

However, the government’s faith-based strategy will not provide an engine of  growth, and its approach is reminiscent of the fatal sense of infallibility it had about construction as a builder of prosperity.

We need to smarten up, fast
- -  article by Finfacts editor Michael Hennigan, published in The Sunday Business Post, Sun, Aug, 22, 2010.

SEE also Cowen's Innovation Fund Ireland, jobs, Irish start-ups and failed entrepreneurs - -  related articles at lower end of page.

Markets News Monday: Kingspan reports return to growth

Shares in building materials group Kingspan rose today more than 9% after it announced its first increase in operating profits in three years. It also said it will resume paying dividends.

Kingspan (Buy, Closing Price €5.08); Growth / dividend back on the agenda: Goodbody analyst, Robert Eason, commented -- "Kingspan has reported EBIT of €33.1m (+9% yoy) for the first half. This is significantly ahead of forecasts of €28m and management’s guidance in May for a decline of 'approximately 10%'. The variance reflects better top-line across all divisions (mainly outside the UK), which translated into stronger profits, particularly in insulation. EPS is further ahead due to a lower effective tax charge (16.5% versus 19%). The key takeaway from the results is the strong momentum given that sales were down 6% in Jan-Apr, but finished the period up 1.1% (-4% lfl). Management note that June was particularly strong. Order intake in most regions has also “trended positively throughout the period, and was substantially up in the Insulated Panel businesses globally” (order intake +15% UK and +14% in CEMEI). As a result, underlying profits grew for the first time in three years.

While management recognises the more cautious macro indicators recently, this has not been evident in either activity levels or pipelines ('order books across the business are as firm as they’ve been for some time' with order intake continuing to 'outpace 2009 albeit at a slower rate' than H1). Furthermore, it indicates that the improvements seen in Q2 have flowed through into Q3, all of which underpin a 'robust sales performance across the Group in the second half.' While short-term challenges will be managing rising input costs and pricing pressure in some markets, the Board has the confidence to reinstate the dividend (4c), which is 6 months ahead of our time frame. Given the better than expected H1 and positive outlook, we envisage increasing FY10 forecasts by over 10% to 27-28c but will be leaving subsequent years largely unchanged. These changes reflect our caution on top-line progression in the construction sector and the impact of higher raw material costs. Overall, the results demonstrate to us why Kingspan can outperform the wider construction sector (structural growth plus one of the strongest balance sheets in the sector) and why, therefore, the stock continues to offer value in the medium term."

Results detail

The German Ifo index due out this week could show a turning point for the economy, believes Rainer Gunterman, Eurozone Economist at Commerzbank. He shares his outlook with CNBC's Maithreyi Seetharaman, Yousef Gamal El-Din and Chloe Cho:

DCC plc, the business support services group, today announced conditional agreement to acquire Comtrade SA, a French distributor of consumer electronic and audio visual products to the retail sector in France. Comtrade is based in Paris and has 65 employees. The acquisition is subject to clearance from the French competition authorities.

Goodbody's Dan Cavanagh comments: "DCC has announced the acquisition of Comtrade, a leading distributor of consumer electronic products to the French retail sector. Based on the year to Dec 2009, Comtrade had revenues of €65m and operating profits of €3m. Initial consideration of €11.4m will be paid in cash for a 74% stake, rising to a maximum of €21.2m for the remaining interest over the next three years, on the completion of certain stringent earn out clauses. This places the deal, which is expected to close in October, at around 5-6x historical earnings. In terms of forecasts, this is unlikely to have any material impact to the current year’s numbers, but could add 2-3c (c.1-2%) to FY12. This deal is highly complimentary to the existing Banque Magentique business in France, which will: (i) extend SerCom’s footprint in the French retail distribution sector; and, (ii) offer integration savings on the back office and logistic functions of the combined business. At a group level, this bolt-on deal brings the total acquisition spend YTD to c.€50m, leaving plenty of head room for further deals as the year progresses."

ECB mindful of financial fragility; loose policy set to continue past year-end: Davy's Aidan Corcoran comments: "Axel Weber, the likely successor to Jean-Claude Trichet as governor of the European Central Bank (ECB), gave some guidance for a return to normal monetary policy on Friday. The Bundesbank president and former University of Cologne professor has ear-marked Q1 2011 as the likely time for an unwinding of the exceptional financing arrangements implemented in 2008.
The advance warning was clearly intended to avoid spooking markets. However, the softly-softly tone did not prevent a fall in the value of the euro of more than one US cent, to $1.27. With stimulus measures staying in place until year-end, the interest rate hike that would lead to a strengthening euro may be somewhat more distant than many commentators had expected.

The unusually loose monetary policy stance is good news for the Irish economy. Divergent inflation pressures within the 16-member euro-zone would pose a major problem for the ECB, which could be forced to undermine the peripheral recovery in order to keep prices in check. In this context, Weber's words provide some reassurance that the recovery, which is largely export driven, will be fostered.

Supporting the view that inflation concerns remain of secondary importance from the European standpoint, Irish Central Bank governor Patrick Honohan told reporters in Tokyo that 'inflation expectations are steady' and that he sees a 'stronger tone' to the European economy. Official data due for release tomorrow are expected to confirm strong export growth in Germany, while the Irish trade balance, due on Friday, should likewise show a recovering export sector."

The business community can live with a coalition or labor government, says Australia, Greg Bundy vice chairman of AIMS Finance. However, he warns CNBC’s Chloe Cho, Maithreyi Seetharaman & Yousef Gamal El-Din that if the government “lurches to the left”, markets will be unnerved.

Asia Markets

The MSCI Asia Pacific Index rose 0.1% on Monday.

The Nikkei dropped 0.68%; China's Shanghai Composite added 0.39%; Australia's S&P/ASX 200 Index fell 0.04%  and India's Sensex Index gained 0.16%.

In Europe, the Dow  Jones Stoxx 600 rose 0.49% Monday.

The ISEQ has declined 0.32% in Dublin.

CRH is upf 3.13%; Elan has added 1.82%; AIB has gained 3.58% and Bank of Ireland is up 3.57%.

European Benchmarks

Irish Share Prices


The euro is trading at $1.2695 and at £0.8163.

For live currency updates, check the right-hand column of the Finfacts home page.

The US dollar fell to $1.6038 per euro on Tuesday, July 15, 2008 - an-all time record.


The Baltic Dry Index, a measure of shipping costs for dry commodities, hit an all-time High of 11,771 on the 21st of May, 2008. From that time it reversed and on the 5th of December, 2008 it hit a low of 663 - - close to a 1986 low.
The BDI closed at 3,005 on Thursday, Dec 31st - - a rise of 289% in 2009. The index averaged 59% lower in 2009 than a year earlier.
On Thursday, July 15, 2010, the index  fell for the 35th straight session, by 9 points, or 0.537%, to 1,700 points,

On Friday July16th, the BDI rose 20 points or 1.12% to 1,700 to break the 35-session losing streak; on Friday last week, the BDI rose 112 points or 4.24% to 2,756.

Crude oil for September 2010 delivery is currently trading on the Chicago York Mercantile Exchange (CME/Nymex) at $74.12 per barrel up 30 cents from Friday's close. In London, Brent for October delivery is trading on the International Commodities Exchange at $74.68.

The spot price of an oz of gold is trading in New York at $1,226.20, down $1.80 from Friday's close.

Eurozone recovery loses only slight momentum in August; Growth remained dependent on Germany and France

The Markit Flash Eurozone Composite Output Index, based on around 85% of usual monthly survey replies, fell to 56.1 in August, down from 56.7 in July, to signal only a slight loss in growth momentum over the month. The reading was still consistent with a robust rate of expansion and combined manufacturing and service sector output has now risen for thirteen consecutive months.

However, the solid outcome at the headline level masked worrying divergences between the national economies, as growth remained particularly dependent on the big-two of Germany and France. Eurozone manufacturers and service providers both reported increases in output during August, with manufacturing again leading the way. Although the pace of expansion eased in both sectors, their respective average growth rates so far in Q3 2010 are only slightly below those for Q2.

The deceleration in business activity growth was mirrored by an easing in the rate of expansion of new business. Manufacturers reported the faster increase in new orders, despite growth easing to the slowest of the year so far. Service providers saw a slight pick up in the rate of increase in new business. This suggested that growth again reflected improving domestic market conditions, especially given that manufacturing new export orders rose at the slowest pace since January and service sector business confidence hit a four-month high.

Output prices rose negligibly for the first time in four months, as higher factory gate prices offset a drop in service sector charges. However, the rate of inflation at manufacturers eased to its slowest in the current five-month period of increase, whereas the decline in service charges was the weakest since tariffs first fell in November 2008.

Commenting on the flash PMI data, Chris Williamson, Chief Economist at Markit said: "The recovery lost only slight momentum compared to the bumper growth seen in the second quarter, with the flash Eurozone PMI for August consistent with gross domestic product for the region growing at a quarterly rate of 0.7%. However, the robust headline number masks some worrying developments.

"Of greatest concern, the upturn continued to be all-too dependent upon France and Germany. Growth in the rest of the euro area slowed to near stagnation, and services even contracted again as austerity measures bite. There is little evidence here to suggest that buoyant business conditions in the region's core nations are spilling over to the benefit of the periphery, meaning an increasing divergence in the euro area's two-speed recovery.

"Furthermore, manufacturing exports showed the smallest rise since January, meaning the stimulus to the recovery from global trade is waning as economic growth slows in important trading partners around the world. This could therefore lead to slower growth in the Eurozone's core in coming months."

The Eurozone PMI (Purchasing Managers' Index) is produced by Markit and is based on original survey data collected from a representative panel of around 4500 companies based in the euro area manufacturing and service sectors. The flash estimate is typically based on approximately 85%–90% of total PMI survey responses each month and is designed to provide an accurate advance indication of the final PMI data.

We are adding news stories to the blog system as  we await a glitch in the news database to be rectified  on Mon, Aug 23rd.

News stories up to Friday Aug 20th are accessible from here:

Finfacts News Home Page

Eurozone stories and Related list at bottom of the page accessible here.

Monday Newspaper Review - Irish Business News and International Stories - - August 23, 2010

The Irish Independent reports that record numbers of applicants have pushed up the entry points for the majority of college courses this year.

Points have risen for a massive 700 courses, while remaining the same or dropping for the other 560.  And the figures reveal there is intense competition for courses that are tipped to secure the jobs of the future.

Some of the biggest point surges are in science and computing, reflecting higher student demand, in response to the advice that these will provide the skills needed to
secure employment after college. Medicine is also much harder to get into this year than last -- and, for the first time, a nursing course hit the 500-point mark.

The rising points for medicine will renew controversy over the Health Professionals Admission Test, which, instead of creating a more level playing pitch, appears to have
created new distortions.

Points for key courses in agriculture are also up this year.

But areas such as law, construction and business experienced a downward drift in points in key courses. Among the 851 honours degree courses, points increased for 462, while points fell in 216 and remained the same for 61.

The three Dublin universities all reported more point increases than decreases, as did NUI Galway and NUI Maynooth.

However, the position was reversed in the two Munster universities, with a decline in points for many courses in both UCC and the University of Limerick.

Points for degrees at UCD almost universally increased -- reflecting the first-preference popularity of its degrees.

Analysis shows that of the 428 higher-certificate and ordinary-degree courses, 233 experienced a points increase, while points fell in 93 and remained the same for 50 courses.


While some CAO applicants will be disappointed this year with the point increases, there were never so many offers.

It has been a record year all around for college applications, offers and acceptances, so far.

There were more than 77,000 applicants and more than 56,000 of those have received at least one offer, either for an honours degree course or an ordinary-degree/higher-certificate course.

More than 7,000 applicants have accepted a place on earlier rounds, up 12pc on last year.

Last year, 45,000 college places were filled at the end of the CAO offer season, which was the biggest number ever.This year, as well as the 45,485 students who sat the Leaving Cert and applied to the CAO, there were a further 20,000 applicants who sat the Leaving in previous years.

 Many of these 20,000 applications came from people who were in the workforce and had lost their jobs or wanted to improve their career prospects.

And in engineering, some courses experienced an increase in demand and higher points.

Many students are automatically ruled out of engineering because they don't have the necessary "honour" in maths.

Only 16pc of Leaving Cert students take maths at higher level -- a figure that worries the Government. Students who are offered places in science, engineering and maths were urged last night to take them.

The Irish Independent also reports that some debt holders in Eircom could receive as little as 10 cent in the euro if the telecoms company defaults on its €3.6bn of debts, according to an analysis by a leading ratings agency.

Standard & Poor's (S&;P) has done a 'recovery analysis' on the debt held by the parent companies that own Eircom.

While senior secured debt is likely to have recovery rates of between 90 and 100pc in the event of a default, debt holders further down the credit list could be facing big haircuts.

The second-lien loan, known as loan D, is only likely to leave holders with a recovery of between 10pc and 30pc of their principal.

The holders of a €425m payment in kind (PIK) loan would be facing the most severe haircuts. "The recovery rating on this debt is six, indicating our expectation of negligible recovery (0pc to 10pc) in the event of a payment default,'' state the company's analysts.

Eircom strongly rejects any suggestion that it could default on its debt load. However, speculators in the market who hold bond insurance -- known as credit default swaps (CDS) -- take a different view and this has sent the value of CDS contracts soaring in recent months.

S&P gives Eircom a valuation of €3bn in a distressed environment. It says that while Eircom has leading market positions and a "satisfactory business risk profile'', a default from excessive leverage cannot be ruled out entirely.


While Eircom is not in default on any loans, the pressure is building because the company's revenues and earnings are falling, potentially triggering a breach of its loan covenants.

S&P says: "We think revenues will continue to fall in the coming quarters as difficult economic conditions are likely to continue. This will compound structural declines in fixed telephony revenues."

Offsetting this is Eircom's ambitious cost-reduction programme, which has been noted by the ratings agencies.

The pension deficit at the company has also been tackled in recent months, but this has had little impact on the debt ratios, the agency points out.

"Eircom's cash-generating ability is likely to remain constrained because of its high interest burden, a difficult operating and competitive environment,
restructuring payments and significant capital expenditures,''
said the latest note.

While the company is facing a serious debt headache, the liquidity position of the company is strong, states the agency.

Eircom has €267m of unrestricted cash to call on in case of emergencies and another €123m in an undrawn credit facility. The debt problems facing the company are more long term, the agency accepts.

It points out that the undrawn facilities and cash cover "modest debt maturities'' of €44m in the next financial year and €88m in financial year 2012. Eircom's financial year ends in June each year.

The company seems unlikely to get any relief from the ratings agencies in the foreseeable future. S&P concludes: "At this stage, we deem the chances of a higher rating in the future to be remote, as this would likely require the removal of covenant pressure on a sustained basis."

The Irish Times reports that State toxic assets agency Nama has written to bank chief executives asking them to step up their efforts in providing it with full information about the loans that it is buying from them.

Nama will this week complete the takeover of loans with a nominal value of €8 billion from State-owned Anglo Irish Bank, whose reckless lending during the boom left it with a severely damaged loan book.

The agency will pay the bank slightly less than €4.8 billion for the loans, as it is applying a discount of just over 60 per cent to the value of the debts. The latest estimates of the cost of saving Anglo run to €25 billion.

According to bank sources, Nama chief executive Brendan McDonagh has written to his opposite numbers at Anglo, AIB, Bank of Ireland, Irish Nationwide and the EBS asking them to step up their efforts in providing due diligence on the loans that they are transferring to the agency.

Mr McDonagh’s letter also says that the agency has appointed Deloitte as its internal auditor and states that the firm will have the power to scrutinise the banks’ own processes for dealing with Nama.

Mr McDonagh has also told the bank bosses that after Nama has taken over the third tranche of loans from the five institutions, it will change how it times its purchases of their debts.

For the first and second tranche, the agency waited until all the institutions were ready to begin transferring their loans before it began taking them over.

It will continue with this approach for the third tranche, which it will begin buying next month. However, for the fourth, fifth and sixth tranches, which it will be taking over in October, November and December, it will begin taking over the
loans as each individual institution is ready to hand them over rather than waiting until all of them are ready.

To date, Nama has bought loans with a nominal value of €28 billion from the five banks, which is around 35 per cent of the €80 billion total that it is due to buy. It has paid less than half what the loans were originally worth.

Nama has already revealed that the banks originally misled the agency on the real value of their loan books and on how many of the debts were actually producing an income.

The result is that the discounts at which Nama is buying the loans are a lot bigger than what was originally expected. Nama completed the takeover of the second tranche of loans from all participating institutions except Anglo last month.

It took over €5.2 billion worth of debts from the other four banks, paying an average discount of 48 per cent.

It took longer for Anglo to transfer its loans as there were more of them and the total amount of money involved was higher than that owed to the other four put together.

The 60 per cent discount it is applying to the €8 billion worth of Anglo loans is far higher than the average discount applied to the debts owed to the other banks.

Nama is taking over all property-related loans worth more than €5 million owed to the five banks involved. It has pledged to pursue the developers involved for the full amount due.

The Irish Times also reports that the organisation set up five years ago to collect and recycle the Republic’s old TVs and washing machines is now a profitable exporting business with substantial cash reserves in the bank.

Waste Electrical and Electronic Equipment (WEEE), the industry-backed body that collects and recycles electrical and electronic goods, just reached its fifth anniversary this month.

The not-for-profit company’s chief executive, Leo Donovan, says it is one of the best performers in its league in Europe, because Irish people recycle more electrical goods than their fellow EU citizens.

The average across the EU is 4kg per person, but Irish people recycle 9kg per person. Their enthusiasm for recycling has turned into solid business that reuses and exports most of the material it collects.

Since it was set up in 2005 in response to a Brussels directive, it has collected and recycled more than 33 million units, which includes everything from dishwashers and TVs down to energy-saving lightbulbs.

Its brief covers everything that has either a battery or a plug.

That material included enough TVs and monitors to go around the M50 14 times. The metal contained in all the small household appliances it has collected since 2005 comes to six times the weight of the steel used in the construction of the new stadium at Lansdowne Road. It has collected enough fridges, washing machines and dishwashers to fill Croke Park 14 times.

WEEE is funded through industry membership fees and producer recycling charges, which are passed on to the consumer.

The material it collects falls into three basic categories: large goods, such as washing machines, fridges and dishwashers, TVs and monitors, and small household appliances.

The large goods are sent for initial processing to a plant in the north, from where they are then sent to Britain. There the material is broken down further and baled and sold as a commodity.

The TVs and monitors are 100 per cent recyclable, according to Donovan. They are processed in Ireland, and the glass is separated out and sold for reuse in new TV screens and monitors.

The smaller household appliances are processed in Ireland, where the material is prepared for reuse and exported.

“Overall, around 75 per cent of what we collect is exported and sold as raw material on world markets,” he says. The company’s export business is worth around €3 million a year, and supports jobs in collection and processing.

WEEE costs around €8 million a year to run and it generates a surplus on its activities. The company uses this to ensure that it maintains reserves.

The cost of collecting and recycling equipment is paid up front, before it is used or reaches the end of its useful life. The company has to maintain reserves against what it is paid up front.

WEEE has built up about three years of reserves, or €24 million, at this stage.

“So, if everything stopped tomorrow, we would still be able to meet our commitments to collect and recycle the goods that people have already paid for,” Mr Donovan says.

In a new development, the company has begun to target batteries used in consumer goods.

The Irish Examiner reports that Finance Minister Brian Lenihan said he understands the public "incomprehension and anger" at the vast sums of money being pumped into the banking sector, particularly Anglo Irish Bank.

Delivering the keynote speech at the annual Michael Collins commemoration ceremony in Béal na mBláth yesterday, Mr Lenihan said fury was "a quite reasonable response to the incredible recklessness and incompetence" that fuelled the banking crisis and that "like others, I hope that anyone who broke the law will face its full rigours". Defending Government support of the banks, Mr Lenihan said its decision was based on expert advice that it needed to stand behind the banks to ensure a sustainable financial system is established.

"And, in the case of Anglo, to ensure that the resolution of debts does not damage Ireland’s international credit-worthiness and end up costing us even more than we must now pay," Mr Lenihan said.

The minister said neither the bond markets nor our EU partners would tolerate any slippage and this meant, inevitably, that the next budgets will continue to have strict control of expenditure.

"What I can promise is that as minister I will try to ensure that the burden is borne by those who can best afford it," he said.

Speaking to reporters after the ceremony, Mr Lenihan said research had shown that those who were in the most exposed position had suffered the least in the recession.

He said he and the Governor of the Central Bank, Professor Patrick Honohan, agreed matters concerning the banks needed to be resolved quickly and that whatever solution was found "must keep the cost to the taxpayer to an absolute minimum" and must also secure the approval of European authorities.

Mr Lenihan said his department was in discussions with European officials to bring matters to a speedy conclusion.

He also said he did not believe his health was impairing his capacity to do his job. The minister, who is suffering from pancreatic cancer, said he had been to every cabinet meeting since January with the exception of a couple he missed while on European business. He also said he had not shirked participation in Dáil question time or avoided his legislative duties while completing various treatments.

The minister, who made history as the first Fianna Fáil party member to deliver the keynote oration at Béal na mBláth, called on all in public life to let the spirit of Michael Collins inspire them through the current economic crisis

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Editor's Picks:

Gillard to push for minority coalition
- - Australia set for hung parliament as elections deliver blow to PM.

Brokers face fines over role in flash crash   -- US watchdog clamps down on risk-management controls; The Financial Industry Regulatory Association is undertaking a “sweep” of broker-dealers that offer market access to high-frequency traders to find out if they allowed these firms to run computerised trading programs – algorithms – without undertaking proper risk-management controls.

Bonuses furore hits banking chiefs’ pay  -- Average chief executive pay dropped to $6m in 2009.

Tax clouds gather over Greek high earners  -- Yachts go up for sale as authorities launch probe; Last week the Finance Ministry set a target of collecting at least €2.5bn this year in fines and back taxes owed by thousands of Greeks who “forgot” to declare ownership of yachts, swimming pools and luxury cars on their annual tax return.

Suppliers collapse as contracts go on hold - - With billions of pounds in UK government orders cancelled or put on hold, insolvencies have surged among businesses in health, social services, education and defence.

Pessimism remains over UK economy  -- Almost half of UK households polled expected finances to worsen in the next year, while a quarterly survey of business professionals revealed weakening confidence in the recovery

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Editor's Picks:

Housing Fades as a Means to Build Wealth, Analysts Say - - “There is no iron law that real estate must appreciate,” said Stan Humphries, chief economist for the real estate site Zillow. “All those theories advanced during the boom about why housing is special — that more people are choosing to spend more on housing, that more people are moving to the coasts, that we were running out of usable land — didn’t hold up.”

Now That’s Rich - - Paul Krugman says Republicans and conservative Democrats are eager to give hundreds of billions of dollars to the 120,000 richest people in America.

Proposed Restrictions on the News Media Cause Alarm in South Africa - - The Protection of Information Bill and a plan for a media tribunal have come amid increasing hostility between the governing African National Congress and the

Students, Welcome to College; Parents, Go Home  - - Faced with parents who have a hard time saying goodbye to their freshmen, colleges are formalizing the split; As the latest wave of superinvolved parents delivers its children to college, institutions are building into the day, normally one of high emotion, activities meant to punctuate and speed the separation. It is part of an increasingly complex process, in the age of Skype and twice-daily texts home, in which colleges are urging “Velcro parents” to back off so students can develop independence.

Stock Swing Still Baffles, With an Ominous Tone  -- Months later, analysts are still seeking the cause of a quick and mysterious plunge of the stock markets; some suspect a conspiracy; At a Washington hearing on the flash crash last week, Kevin Cronin, director of global equity trading at Invesco, a big fund manager, warned about “improper or manipulative activity” in the stock market.

World counts on Chinese consumers to spend more but new survey suggests they will remain cautious

Chinese Premier Wen Jiabao stands on the Chengjiang Bridge to inspect floodwater of the barrier lake as machines dredge the channel of the Bailongjiang River in landslide-hit Zhouqu County, Gannan Tibetan Autonomous Prefecture in northwest China's Gansu Province, Aug. 22, 2010. Wen made an inspection tour in Zhouqu on Aug. 21-22.  Photo: Xinhua

Rural consumers remain focused on education for children; even well-off  urbanites continue to save a high proportion of incomes

Chinese consumers, both urban and  rural, although optimistic about the future, remain big savers and cautious spenders, despite their government’s concerted effort to stimulate domestic demand according to a survey by the Economist Intelligence Unit (EIU).

Since the global financial crisis began in 2008 China has activated a Rmb4trn (US$590bn) stimulus package and in 2009 it began offering vouchers for discounts on appliances, furniture and even cars to encourage consumers to open their wallets. Most recently, China ended export tax rebates for certain sectors and eased the renminbi’s peg to the US dollar – all part of a strategy to reduce reliance on exports and shift the focus to domestic consumption. These efforts have been effective in supporting the economy: China’s GDP growth had recovered to 11.9% on an annualised basis in the first quarter of 2010 from a low of 6.2% in the same period of the previous year. The government’s role in steering the economy through the hazards of the global financial crisis has no doubt helped to maintain confidence within the country. On a household level, many consumers certainly aspire to obtain property, cars and other symbols of rising affluence, but concerns about healthcare, education and retirement continue to restrain consumption.

These are among the findings of A better life? The wants and worries of China’s consumers , a new report from the Economist Intelligence Unit, sponsored by Bayer.

The report, commissioned to coincide with the Shanghai Expo, is based on two wide-ranging surveys of urban and rural consumers (1,650 and 1,001 households, respectively; see details below) aimed at gauging their confidence and consumption priorities.

It assumes that in order for Chinese consumption to be truly unleashed, consumers need to feel confident that life is getting better. If they are worried about basic needs such as healthcare and education, they will be less likely to spend.

Other findings of the report include the following:

  • Optimism, even among relatively poor farmers, is high ... Across both of the survey samples, 91% of respondents said they are optimistic about the future. This confidence should translate into expenditures: among the relatively well-off urban dwellers surveyed, only 17% said they were reluctant to spend money.
  • … But even the well-off remain big savers. In theory, wealthier consumers should be more confident and more willing to spend. Although our urban survey respondents are relatively well-off financially, are well-educated and have good jobs, we found their reported savings rates to be quite high. In tier 1 cities such as Shanghai and Beijing, 67% of respondents said they saved one-quarter or more of their household income, and 33% said they saved 35% or more. (The Swiss, by comparison, had a savings rate last year of 14.8%.) In less-developed tier 2, 3 and 4 cities, the figures were even higher. Children’s education was the top reason for saving, followed by retirement and medical emergencies, rather than for purchase of consumer goods.
  • …And hesitant borrowers. In tier 1 cities, 75% of respondents said they had relied on their own earnings or on family and friends to finance the purchase of the home where they lived (all respondents were homeowners). In tier 4 cities, that figure rose to 83%. This thinking appears to be deeply ingrained. Although 61% of urban respondents plan to buy a new home, they do not plan to borrow much to finance it. Respondents in tier 1 cities seemed more willing than others to take on debt—47% said they would borrow between 30% and 50% of the price of a new home. But 23% said they would borrow nothing.
  • Everyone wants a car—but many are also worried about pollution. At 61%, car ownership among the relatively well-off urban consumers surveyed is much higher than the overall penetration rate for cars of 28 per 1,000 people in China. Not surprisingly, many more of our respondents plan to buy a car. At the same time, however, concern over air pollution is pronounced—54% cited it as the thing they would most like to change about the area in which they live, and 53% cited it as one of their greatest concerns about the future.
  • The passion for property will continue, but focus could shift to quality. The relatively well-off urban survey respondents are playing a significant part in China’s booming property market—42% already own two or more properties, and 61% plan to buy a new home in future. While these consumers will undoubtedly continue to use property as an investment vehicle, they will also be looking to upgrade their own living conditions. Many already live in newer homes, but new does not necessarily mean good quality. Asked what they would like to change about their living conditions, slightly more than two-thirds of respondents said they wanted to make their homes more comfortable by having such things as better temperature control.
  • Healthcare is the number one concern of both urban and rural consumers, but for different reasons. With the national healthcare reform programme still being rolled out, it is not surprising that health is a big concern. Among rural respondents, 84% cited health as their greatest concern for the future, and they were most worried about the cost of healthcare: 61% cited cost as the biggest healthcare issue facing their household. Of the relatively well-off urban survey respondents, 60% said they were concerned about health in the future. But their concerns were the opposite of those in the countryside—49% cited the quality of doctors and hospitals as their biggest health-related challenge, with only one-third concerned about cost.
  • To encourage rural consumption, more needs to be done to address basic concerns. The farming households surveyed showed a  relatively weak inclination to consume—few were planning to upgrade the goods they already owned, or to make more expensive purchases in the near term. More than 40% of the rural survey respondents said their greatest desire for the next ten years was to see their children go to university. This ranked far ahead of a new home (22%) or any other desire. This finding reflects our rural respondents' vision of the future: only 21% want to give up farming, but a staggering 95% said they did not expect their children to be farmers. Moreover, 72% said they planned to rely on their children financially in old age. Overall, this suggests that more needs to be done to address rural respondents’ broader concerns about the future before programmes aimed at stimulating consumer demand can be more effective.
The surveys, conducted between December 2009 and March 2010, spoke to two very different groups of consumers, encompassing some (but by no means all) of the diversity within China. In one group are relatively well-off urbanites (1,650 households across 50 cities). In income terms, the sample falls in the top 21% of the population in cities. The respondents all have white collar jobs, own at least one property and have at least one-third of their income available for discretionary spending. With fairly secure finances, high education levels and few material wants, this group should be feeling very confident. In the other group are relatively low-income farming households. The 1,001 rural households surveyed largely make their living selling agricultural products, not from working in a factory or on a construction site. While relatively poor compared to the urban sample, the rural consumers who participated in our survey are no less important. They have been the focus of efforts by the government to reduce the gap between urban and rural living standards, and are also the target of stimulus programmes specifically aimed at encouraging more private consumption by rural households.

We are adding news stories to the blog system as  we await a glitch in the news database to be rectified  on Mon, Aug 23rd. News stories up to Friday Aug 20th are accessible from here:

Asia stories and Related list at bottom of the page accessible here.

Latest German 2010 forecast is for growth of 3.4%; Sweden raises forecast to 4.5%; French 2010 growth forecast at 1.4% - - 2011 downgraded

The latest German forecast is for growth in 2010 of 3.4%. Sweden has raised its forecast to 4.5% while French growth in 2010 is forecast at 1.4% and 2011 has been downgraded.

The German Chamber of Commerce and Industry (DIHK) is forecasting that the German economy will grow by a record 3.4% this year, its head, Martin Wansleben, said on Saturday. Last Thursday, the Deutsche Bundesbank, Germany's central bank, revised up its 2010 forecast to 3% after the economy grew at an annualised rate of almost 9% in the second quarter..

"The recovery is expanding,"
Wansleben said in an interview with the news magazine Der Spiegel, which is to
due to be published on Monday. Businesses are investing again and "even consumption is accelerating thanks to favourable developments in the labour market," he added.

German Finance Minister Wolfgang Schäuble said in an interview with the Rheinische Post regional newspaper, that was published at the weekend, that the budget deficit in 2010 may fall from a previously expected level of €65bn to €60bn.

The central bank said on Thursday that the budget deficit would be below 5% of GDP (gross domestic product) in 2010.

Sweden’s centre right government, which is facing an election on September 19th, raised its economic growth forecast on Friday to 4.5% in 2010, up from an early July prediction of 3.8%.

“Gross domestic product growth is high,” Finance Minister Anders Borg said in a statement. “But the risks are still high, especially if one looks at the world around us where many countries have very big problems with their public finances. The government therefore wants to continue to be careful. Returning to
surpluses is our highest priority to defend Sweden against new threats.” 

Sweden's 2010 budget deficit is forecast to be the lowest in the European Union this year at 2.1% of GDP.

French President Nicolas Sarkozy on Friday announced a reduced growth forecast after a meeting of ministers to discuss the economy.

The government kept its target growth  rate of 1.4% this year and cut its 2011 forecast from 2.5% to 2.0%.

Sarkozy confirmed the goal to meet the 2011 deficit target of 6.0% but he ruled out any income tax increases.

To meet its 2011 budget target, the government plans to cut  €10bn in tax breaks to offset slower growth.

We are adding news stories to the blog system as  we await a glitch in the news database to be rectified  on Mon, Aug 23rd.

News stories up to Friday Aug 20th are accessible from here:

Finfacts News Home Page

Sunday, August 22, 2010

Card and Debit Card Scam: $10m in bogus charges made on more than 1m accounts with amounts ranging from 20 cents to $10

Last week Finfacts reported on US justice targeting Eastern European hackers of credit card processing systems. This week, we report on a new angle where $10m in bogus charges on more than 1m consumers’ credit and debit card were made, with amounts ranging from 20-cents to $10.

We were alerted to this story by Randall Stross, an author based in Silicon Valley and a professor of business at San José State University, who writes a column for the New York Times.

Last March, at the request of the Federal Trade Commission, a federal court halted the elaborate international scheme that used identity theft to place more than $10m in bogus charges on consumers’ credit and debit cards, pending a trial. More than a million consumers were hit with one-time charges of $10 or less, and their payments were routed through dummy corporations in the United States to bank accounts in Eastern Europe and Central Asia.

The defendants, using phony company names resembling real companies, and
information taken from identity theft victims in the United States, opened more than 100 merchant accounts with companies that process charges to consumers’credit and debit card accounts, according to the FTC complaint. The FTC believes the defendants may have run credit checks on the identity theft victims first, to be sure they were creditworthy. The defendants also cloaked each fake merchant with a virtual office address near a real merchant’s location, a phone number, a home phone number for the “owner,” a web site pretending to sell products, a toll-free number consumers could call, and a real company’s tax number found on the Internet.

The FTC alleged that with spam e-mail, the defendants recruited at least 14 “money mules” - - people in the United States they paid to form 16 dummy corporations, open associated bank accounts to receive the card payments, and transfer the money overseas. The defendants used debit cards linked to these bank accounts to set up telephone service, virtual addresses, and web sites that helped deceive the card processors, according to the complaint.

The “money mules” responded to spam e-mail pretending to seek a US finance manager for an international financial services company. The FTC has not determined how the defendants obtained the stolen identities or consumers’
credit and debit account numbers. Consumers’ payments were sent to bank accounts in Lithuania, Estonia, Latvia, Bulgaria, Cyprus, and Kyrgyzstan.

None of the consumers affected by the scam had contact with any of the defendants. Most consumers either didn’t notice the charges on their bills or didn’t seek chargebacks because of the small amounts – charges ranged from 20 cents to $10. Consumers who called the toll-free numbers that appeared on their bills either found them disconnected or heard recorded messages instructing them to leave a message, but no calls were returned.

“One thing that the banks can do a better job at is vetting merchants much more carefully,” said Avivah Litan, an analyst at Gartner Research, to The New York Times. “That’s been a weak spot for many years.”

Stross says Wells Fargo Bank deserves credit for checking merchant references that helped uncover the problem. He says the monthly statements’ description of each transaction — the “merchant descriptor”— is frustratingly brief.

Visa and MasterCard's computer systems only allow 26-28 characters.

Steven M. Wernikoff, an FTC lawyer, said maybe the scammers should have stuck with $9: “There were more complaints about the 20-cent charges because they looked really odd,” he said.

Finfacts article: Aug 17, 2010; US justice targets Eastern European credit card system hackers

We are adding news stories to the blog system as  we await a glitch in the news database to be rectified  on Mon, Aug 23rd.

News stories up to Friday Aug 20th are accessible from here:

Finfacts News Home Page

Saturday, August 14, 2010

Christopher Hitchens

In July, the controversial American-based British journalist and author, Christopher Hitchens, 61, announced that he had esophageal cancer.

The disease kills 14,530 Americans a year and one type is associated with smoking and drinking, habits Hitchens himself has often drawn attention to.

"It tends to be an aggressive cancer," said Dr. Richard Battafarano, chief of thoracic surgery at the University of Maryland, told ABC News. "By the time a person knows he has esophageal cancer, it's already moved to stage 3 or 4. By the time people go to the doctor because their voice has changed or their swallowing has changed, the tumour has advanced."

Jeffrey Goldberg, a national correspondent for The Atlantic, earlier this month met Hitch as he is called.

"How am I? I am dying," he says at the start of the conversation, recorded at his own home in Washington DC with his "dearest friend" Martin Amis, the novelist, appearing midway through it, a bottle of beer in hand. "Everybody is, but the process has suddenly accelerated on me."

The interview ranged from the the Middle East, good vs. evil, the existence or non-existence of God. Here's a short video of our discussion about sickness and theology.

Tuesday, August 10, 2010

Economic Growth Miracles since 1950

This is a contribution to After catch-up, a thread on the Irish economy blog on what what sort of growth rates Ireland can reasonably be expected to achieve over the next decade or two.

Prof. Michael Spence’s Commission on Growth & Development has said that since 1950, 13 economies have grown at  an average rate of 7% a year or more for 25 years or longer. At that pace of expansion, an economy almost doubles in size every  decade.

Growth of 7% a year, sustained over 25 years, was unheard of before the latter half of the 20th century. It is possible only  because the world economy is now more open and integrated. Each and every one of these growth miracles had an export sector as a driver  of growth and an increasing share of trade in GDP. There are no

These countries are: Botswana, Brazil, China, Hong Kong (China), Indonesia, Japan, Korea, Malaysia, Malta, Oman, Singapore, Taiwan, and Thailand.

Ireland’s growth did not last 25 years as FDI and exports stalled just as the property bubble had enough self-sustaining propulsion, with the aid of the euro and foreign bank lending to keep the bubble fuelled until the rocket headed for earth.

The Commission said some 55% of China’s population is rural and 73% of India’s is rural. So there is still much room for development.

According to Deutsche Bank, the working-age population in India will increase by a stunning 240m (equivalent to four times the total population of the UK) over the next 20 years, compared with 10m in China.

The issue of demographics can of course be exaggerated give the advances in technology; I wouldn’t expect an ageing Germany to become moribund given its tremendous engineering reputation across
the globe.

Prof. Frank Barry’s paper: "These different perspectives also have different implications for the future. If the convergence view is correct, it suggests that we can now rest on our laurels: as long as we do not introduce inappropriate policies we are unlikely to fall behind average EU living standards. If the regional view is correct however, it suggests that external shocks to our ability to attract FDI might have serious long-term consequences for the economy. Foremost among these possible shocks would be a diminution of US FDI."

A country like Ireland, dependent on foreign firms for 90% of its tradable exports is of course very exposed.

Foreign firms are responsible for about 90% of China’s electronic exports and over 50% of exports overall.

However, the difference with Ireland is that the Chinese domestic market is important to multinationals and they have little choice but to accept China’s policy of linking FDI with development of its own indigenous sectors.

Commission on Growth & Development Report: 13 countries had sustained high growth - defined as 7% per year or more for 25 years or longer; Highlights four sets of countries where growth has stalled