June 28, 2011
Walking around Dublin these days, it appears that everyone is on the phone.
It is impossible to stand in a queue or in a public space and not be amazed by the amount of gadgetry and texting and chatting that is going on.
This communication business continues to grow in all sorts of unanticipated ways as more and more people all over the world get connected.
For example, did you know that every minute of every day, 35hours of content are uploaded to YouTube?
It is important for those of us who watch the economy to be aware of what is going on in mobile phone companies.
Reading the economic tea leaves is a crucial part of the economics profession, and most economists have a favourite set of figures.
Mine is mobile phone company results.
Details in a mobile phone company’s accounts tell us more about what is going on in an economy than other more commonly used leading indicators. Looking at the right figures to predict the next moves in the economy is crucial because after all what use are economists if they can’t tell you what is likely to happen in the future?
You’d be pretty dismissive of a doctor who couldn’t diagnose you in advance, but could tell you on your deathbed that you had a fatal disease.
Similarly, economists who can tell you what happened yesterday but can’t tell you what is likely to happen tomorrow are hardly worthy of the title ‘economist’.
What makes the difference between economists? It is not, as economists who didn’t foresee the bust might claim, between celebrity economists and others, but between economists with foresight and economists with hindsight.
As well as a bit of theory, a few rules of thumb, a bit of common sense and some experience, one of the crucial parts of an economist’s armoury is the choice of figures he or she looks at.
For me the mobile company accounts are for fairly obvious reasons important because what is going on today deep inside a phone company will only be picked up by official data a few quarters from now.
By the time that official figure is published, it will be too late to react.
A few weeks ago, Vodafone, the world’s biggest mobile phone company, published its results. (They can be seen on the company’s website.) If the phone company is doing well here now, we are likely to see a pick-up in the economy in the months ahead. If the phone company is doing well here, we are likely to be in a position to pay back some of the money we owe. In fact, maybe we could go so far as saying that if the phone company is doing well here, the IMF/EU deal will succeed.
Unfortunately, this is not the case. Vodafone’s operating profit in Ireland is down significantly because Vodafone has just massively increased its impairment losses in this country to â‚¬1 billion for this year alone.
This is a huge figure and it means that Vodafone is now degrading the value of its own business in Ireland so that it doesn’t get a nasty surprise in the quarters ahead.
From a European perspective, the Vodafone results also shed light on why Europe is in danger of splitting in two, between the debtor nations, which are faltering, and the creditor nations, which are doing fine. In fact, the Vodafone results mirror the bailouts and tell us what current EU policy will do to the performance of the periphery.
Here is a quote from the Vodafone results: ‘‘Impairment losses totalling â‚¬6,150millionwere recorded relating to our businesses in Spain (â‚¬2,950million), Italy (â‚¬1,050million), Ireland (â‚¬1,000 million),Greece (â‚¬800 million) and Portugal (â‚¬350million), primarily resulting from increased discount rates as a result of increases in government bond rates together with lower cashflows within business plans, reflecting weaker country level macroeconomic environments.
The impairment loss in the prior year was â‚¬2,100 million.”
What Vodafone is telling us is the polar opposite of what the European Central Bank (ECB) is telling us. The ECB is telling us that if the patient takes the medicine, it will recover.
What Vodafone is telling us is that as a result of the medicine, the patient is getting weaker and weaker. Look at the countries where Vodafone is tripling its impairment overall losses: Portugal, Ireland, Italy, Greece and Spain – the PIIGs – the very countries in difficulty.
Who do you believe about the likely next phase of the economic cycle, the ECB or Vodafone?
Now let’s take a closer look at the numbers. If we break down the absolute level of impairment by national population, we can get a sense of just how bad the collapse on domestic demand can be expected to be.
Here Ireland comes out very badly, much worse than Greece. Vodafone has taken a per head impairment in Greece equivalent to e0.71; in Italy the figure is e0.17, in Spain it is e0.64 and in Portugal it is e0.35. In Ireland, the level of impairment is an enormous â‚¬2.27 per head.
This is three and a half times worse than even Greece.
I doubt Vodafone has ever raised the level of impairment this high in any country and it is a measure of how it regards the level of activity in Ireland and the resulting collapse in the value of its business here.
Companies like Vodafone don’t see things getting better; they see things getting worse and a country where impairments are rising is not the type of country that can service mounting debts.
The reason why Vodafone is important is because it is at the heart of the economy. Using the mobile phone and the communicating in general is what people do every day, all the time.
The trends spotted by Vodafone now will manifest themselves in published figures for domestic demand early next year.
Significantly, this describes the GNP element of the economy, the one that matters, not the GDP measure of the economy – the one that distorts to deceive.
While GDP grew in the first quarter of this year, GNP fell at the fastest rate ever recorded.
The Vodafone snapshot paints a picture of the world as it is, not as officialdom would like it to be.
As a result of current policy, this economy will get weaker and weaker as the banks cease to be banks and become nothing more than glorified safety deposit boxes for the ECB.
The more we save, the more this money gets stuck in the dysfunctional banks and the less activity there is to generate taxes.
Like the Greeks, we will miss our bailout targets and as the day when the IMF leaves gets closer, the sense of panic will increase, causing capital flight and further asset prices falls.
The Vodafone figures, as well as everything we can see on our TV screens, show that Europe is now split into two camps.
This is hardly the enhanced European solidarity which the ECB was set up to ensure in the first place.
David McWilliams has set up an economic consultancy offering independent advice. www.economicsclinic.ie