Thursday 27 April 2017

2015 was our best year since the crash - but how do we rate globally?

Employment in IDA-assisted companies
Employment in IDA-assisted companies
Dan O'Brien

Dan O'Brien

Stock-taking time has rolled around again. With the year fast drawing to a close, how did the economies of Ireland, its closest partners and the rest of the world fare during 2015?

Let's start with a survey of the international picture.

Across the Eurozone, the modest recovery in evidence since 2013 continued. But it remains fragile and some economies are still suffering. Finland was one of only two economies in the EU to be smaller in the third quarter of this year than a year earlier and although Italy is just about experiencing growth, it remains profoundly weak.

Greece remained, well... Greece. Its GDP performance was the worst of the EU 28 in the year to the third quarter, and, as in every year over the past half decade, 2015 brought a Grexit scare. That came within a whisker last summer - and if there is a certain bet for 2016 it is that there will be another bout of Grexit fever in the year to come.

More positively, the Iberian economies continued to recover, with Spain in particular registering a strengthening rebound from its Ireland-style property/construction crash.

The Franco-German core of the zone performed decently - if not spectacularly - with both economies growing at similar modest rates over the first nine months of the year.

Leaving the Eurozone and coming closer to home, the British economy is closer than most to a return to pre-2008 normality - as illustrated not least by the unemployment rate dropping to a tad above 5pc according to the latest data (and that is about as close to full employment as a modern economy gets).

With demand across the water growing healthily and the euro weak vis-a-vis sterling, Irish exporters focused on the UK market had another good year.

Of the advanced economies, the US has come closest of the big developed economies to something resembling a return to normality, as evidenced by the first interest rate hike in nine years last Wednesday. The pace at which rates rise back towards more normal levels will say a great deal about the degree to which the western economies have really recovered from the finance-induced crisis that erupted in 2007-08.

Beyond the western world, the myth of the BRICs finally came to an end, as big differences emerged among the major developing/emerging economies.

Brazil collapsed into a deep recession, while China continued to record rapid, if slightly slower growth, at least according official statistics. The crash that many feared was coming after financial market volatility during the summer never materialised - but the possibility that China's borrowing binge ends in tears further down the line cannot be ruled out.

If the world economy in 2015 was as much of a mixed bag as usual, Ireland was certainly at the better end of the performance spectrum.

In the first nine months of the year, employment levels were 2.7pc higher than the same period in 2014. By rich world standards, that is very a strong rate of expansion. Although it is much lower than the increasingly unreliable GDP indicator, which is showing a fantastical 7pc rate of growth, it better reflects what is happening in the real economy (as discussed in detail here last week).

Consumer confidence continued to soar during 2015, returning to pre-crisis levels, and in November the KBC/ESRI index hit a level that had not been recorded since early 2006.

A pick-up in wage growth was undoubtedly a big part of the reason for that. Other factors included (gradually) falling household debt and stronger asset prices, including property prices. Taken together, these factors meant that the net worth of the average household rose. As people feel wealthier they feel financially stronger, and usually spend more of their incomes.

The slow repairing of household balance sheets lessens one of the big legacies of the crash - but that process remains a long way from completion. The still-high level of household debt in Ireland compared to peer countries means that a vulnerability to a change in the interest rate environment is considerable (although that is not in store in 2016 given the state of the Eurozone economy and persistently low inflation).

Another legacy of the bubble and crash is to be seen in the banking system. Although progress was made in 2015, the proportion of non-performing loans on the Irish banks' balance sheets remains the second highest in the Eurozone after Greece. For all the better news on the state of the banks, they are still a distance from being fully returned to health. Much of the blame for the grindingly slow pace of dealing with the bad loan issue lies with the Central Bank and the Government.

With an election around the corner, the question of how much credit the Government deserves for the broader economy's better performance is more pertinent than usual.

While it's relatively easy to assess a government's performance on a specific issue - such as reducing bad loans in largely state-owned banks - it is always far harder to measure for economic performance in the round. That is because there are so many factors at play, and it is well-nigh impossible to disentangle them all.

On the fiscal side, the Government has continued meeting the strictures of Brussels and as such contributed to keeping bond yields at or near historic lows over the course of the year. That has been important in containing debt-servicing costs.

But the Government's pulling of a quite astonishing stroke in the days before the budget is cause for concern. Not only did it prove that the instinct of the political class to take risks with the public finances is alive and well, it leaves the fiscal position more vulnerable to something going wrong, either at home or - more likely in the short-term - abroad.

Taking on interest groups is not what this administration has been about - as has been seen in everything from the slow evisceration of the Legal Services Bill, to the caving in to public sector unions by agreeing pay increases that will be well above any private sector increases.

All that said, the Coalition has held things steady for the most part and some ministers have done plenty of valuable (if politically less contentious) things.

Chief among the achievements has been the continued success at attracting foreign direct investment in 2015. The companies that have been the big traditional sources of investment - such as Apple - continued to give a vote of confidence in the Irish economy by adding to their capacity here. And there were successes, too, in attracting high-quality investment from the likes of India (Infosys) and China (Huawei).

Though the IDA will not publish figures on this year until 2016, there is every reason to believe that the growth in employment in the firms it assists continued on the same upward trend of the past five years. As the chart shows, the increase in employment over that period has been the strongest since the Celtic Tiger period of the 1990s. If the flow of jobs announcements over the course of the past year are anything to go by, 2015 will be another record year.

This column will return in two weeks' time with an extended analysis of the prospects for the year ahead. In the meantime, I'd like to wish readers a very happy Christmas break.

Sunday Indo Business

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