independent

Thursday 17 April 2014

There's good news and bad news as we exit the bailout

While there are more people at work and tax figures are up, there is almost no growth and people aren't spending

Excellent Exchequer numbers and booming job creation but virtually no growth and flat retail sales: That's the confusing picture that's emerging from the Irish economy as we get ready to formally exit the bailout next weekend.

Good news: Tax revenues were 3.1 per cent ahead of target in November, traditionally one of the most important months of the year for the Exchequer as this is the month when the self-employed file their tax returns.

All of the major tax headings performed well during the month with income tax 2.4 per cent ahead of target, VAT 5.2 per cent, excise duty 22 per cent and stamp duty 11.2 per cent.

Bad news: November's excellent Exchequer returns still don't compensate for what has been a pretty disappointing year for the taxman with income tax receipts running 0.5 per cent behind target for the first 11 months of the year and the VAT take 1 per cent behind target.

Good news: Employment creation is back to levels not seen since the Celtic Tiger days with almost 30,000 new jobs being created in the third quarter.

This is also feeding through into shorter dole queues with the numbers on the live register falling to 406,000 in November, its lowest level since June 2009. The official unemployment rate now stands at "only" 12.5 per cent, down from a peak of 15 per cent in the second quarter of 2012.

Bad news: These new jobs are paying less. The latest CSO figures show that average earnings fell by 2.4 per cent in the year to the third quarter.

This is almost certainly one of the main reasons why the increased numbers of people at work aren't translating into higher levels of consumer confidence or retail spending.

The most recent index of consumer confidence reveals that sentiment dipped sharply last month in the wake of the Budget. This would have come as no surprise to the country's retailers with the value of non-retail sales having fallen by 2.5 per cent during the year to October.

Last week's grim figures from Tesco, which revealed that third quarter sales at its Irish subsidiary had fallen by a massive 8 per cent, merely underscored just how tough things are out there on the main streets and in the shopping centres.

Good news: The Irish economy will grow in 2014. The OECD is predicting GDP growth of 1.9 per cent next year while the Government's favourite think-tank, the ESRI, is forecasting 2.6 per cent GDP growth next year – and, even more importantly, GNP growth of 2.7 per cent.

It might not be the dizzying heights of the mid-noughties but it's surely a heck of a lot better than what we have endured since 2008.

Bad news: There will be virtually no economic growth this year with the OECD forecasting a minuscule expansion of just 0.1 per cent in GDP for 2013. It might not be a good idea to set too much store by those optimistic 2014 forecasts either.

Ever since the Celtic Tiger bubble burst in 2008, the history of Irish economic forecasts has generally been one of future optimism gradually dashed by the inevitably disappointing actual outturn.

Will 2014 be any different?

Good news: Property prices have finally bottomed out with a 6.1 per cent increase being recorded nationally for the 12 months to the end of October.

Bad news: The property price recovery is based on tiny transaction volumes with just 18,000 properties changing hands in the first nine months of the year. This compares with a total of almost two million houses and apartments nationwide.

These tiny volumes are the direct result of the mortgage famine with likely mortgage lending of less than €2.6bn, down over 93 per cent on the 2006 peak. So scarce are mortgages that at least one-third of all housing transactions are now cash deals.

Even after the recent recovery, average house prices are still down by at least 47 per cent on peak values. It will take a lot more than the recent modest recovery to lift most of the more than 50 per cent of mortgage borrowers stuck in negative equity out of the mire.

Good news: The Government received a €2.05bn payday when it offloaded its Bank of Ireland preference shares last week. It still retains a 14 per cent equity stake in the bank worth a further €1.08bn. This leaves the State well-positioned to make a profit on its Bank of Ireland investment.

Bad news: Bank of Ireland is very much the best of the Irish-owned banks, into which the taxpayer has pumped €64bn since 2008. The €35bn which went into Anglo and Irish Nationwide is gone, never to return, while the almost €21bn which has gone into AIB/EBS is now worth only a fraction of this amount.

The most recent mortgage arrears statistics from the Central Bank, which show that €46bn of mortgages – a third of the total – are either in arrears and/or have been restructured, point to further trouble ahead for all of the Irish banks who between them have provided just €9bn of capital against mortgage losses in a "worst case" scenario.

Sunday Independent

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