Wednesday, 14 November 2012

Firms' cash flows

3rd draft of the thesis is done! My supervisor is reading it over and I hope he will be all right with it. Will meet him in two weeks or so, until then, it's time I revive this blog a bit!

Statistics Iceland issued, not long time ago, new data covering the cash inflows of Icelandic firms, based on their VAT reports. The bottom line: the nominal value is back up above pre-crisis levels in 2008 but the real value is still lingering below. There is a steep spike in the real cash flows however so the firms-part of the economy is picking up pace.

This is the nominal value of firms' cash flows. The sample is smoothed out with a running average. Notice the stagnant period in 2001-2003 when nominal cash flows were hardly or not growing at all. That compares to the 10% drop in nominal cash flows in 2009. 

Firms' nominal cash flows

This real cash flows story is another one a bit more frightening. Suddenly, the drop in 2009 has stopped being violent and has turned into a battle for existence!

Firms' real cash flows, 2012 price level

What is curious is to see where the drop comes from. And the answer: from the burst of the housing bubble. On the graph below we can see how industries have rocketed upwards as a share of the firms' total cash flows. At the same time, cars and car repairs have trended downwards for a long time. Most notably however, we can see that after the housing bubble burst, the "construction" has basically disappeared.

Graph shows how firms' total cash flows are split based on what they're doing. The burst of the housing bubble is rather obvious

The burst of the housing bubble is even more blatant in the next graph. Since 1970, the construction of residential housing has never been as low. That is so even if Icelanders are now 319,000 compared to 204,000 in 1970.

Number of square meters in new residential houses and flats, begun and finished, in each year. If you're a carpenter looking for a job, don't come to Iceland!

Of course, we can see on the sectoral cash flow graph that it is the Industries (manufacturing) that have kept the economy alive since the implosion in 2008: total value sold of manufactured goods doubled between 2007 and 2011 (reaching 727 billion ISK in 2011). Most of this comes from manufacture of basic metals (the smelters) but food products and beverages (the fishing industry, we've also become producers of many different brands of beers!) have done their parts as well.

I don't think anyone will deny that the utter collapse in the value of the krona helped industries keeping the economy alive. At the same time, the strengthening of the krona during 2002-2007 can be blamed at least partially for the deterioration of those same industries in that period. In the meanwhile, the housing bubble and the credit mania kept the economy going while the krona was too strong.

Maybe next time I'll check out the data for e.g. France and Spain but both economies had/have a housing bubble (don't tell me Parisian house prices are sustainable!) and then an economic slowdown, Spain in particular of course. Ireland would be a nice comparison as well. Have industries in Spain, Ireland and even France refuelled the economy to the same extent as has been the case in Iceland after the implosion in the housing market? Based on the prominent discussion about the growing current account deficit in France, I'm going to doubt it in case of her - at least until I see the data.


  1. I'll save you some work.

    In Spain, it's the export sector that has saved the economy from a Greek outcome - particularly chemicals, capital and intermediate goods. But growth is pretty widespread throughout sectors, excluding consumer durables.

    With respect to the 2008 peak, the only large industrialized, non-resource economy that has topped Spain in % export growth is the US.

    Internal demand meanwhile is utterly miserable.

  2. Cheers Charles! You don't have a link to the data do you? If not, I'm sure I can dig them up somewhere (what would we do without the internet!)

  3. This should do it. Need help with language, leave a twit at @ibexsalad

  4. Thanks for your posts. Being a foreigner in Iceland, it is great to have your insightful posts to help me understand the Icelandic economy.

    / Klaus