News Analysis

Monday 15 September 2014

Marc Coleman: How to recognise an Irish recovery when it arrives

Optimistic predictions for the economy will only harm our chances of actually 'turning a corner'

Published 13/01/2013 | 05:00

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All of us have heard about the boy who cried wolf. But have you heard about the boy who cried "recovery"?

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In the late Nineties and Noughties predictions titillated our interest and sold books and newspapers. But the warnings were issued too early and were based on hype and sensationalism rather than facts and figures. For years no wolf came and by the time we finally needed to hear it, it had lost its power to make us listen.

Now we face the reverse risk. Ireland's potential to recover has always been stressed by this column. We cannot only recover but also reach new heights of prosperity. But can is not the same as will. With the phrases "we are turning the corner" and "the worst is over" increasingly on the lips of pundits and politicians, we need to be sure the evidence is there to back it up. In economics, confidence in the future is crucial to recovery. But if, like the boy who cried wolf, the message of recovery is debased by spin it could dent public confidence in a recovery when it finally does come.

So what are the facts? Is the worst over? Have we turned the corner?

As the CSO's latest national accounts show, the "worst" has in fact been over since the end of 2009. After falling by 1.8 per cent and 8.1 per cent respectively in 2008 and 2009, GNP grew 0.8 per cent in 2010. The declines of 2008 and 2009 were inflicted by a mix of global economic developments and domestic economic mismanagement. But by the end of 2009 we had recovered. Then we inflicted two more avoidable and serious policy mistakes that caused a relapse: The Croke park deal agreed in March 2010 necessitated a shift back from a growth-enhancing policy of cutting spending and leaving taxes alone – a policy which led to the brief GNP recovery of 2010 – to a growth-destroying austerity of raising taxes. And then there was the promissory note.

The current Government hopes to make significant progress on attaining a reduction or amelioration of the latter mistake by the summer. In reality, significant progress must mean a substantive write-off of debt rather than a restructuring.

Nor is selling off bank shares at bargain-basement prices a desirable solution. But even if secured, a debt write-off just reduces our debt. It does nothing to stop the continual bleeding of the productive economy to feed a level of current spending that remains excessive.

There was much talk of "record" Christmas sales this year. But budget tax increases – and November retail sales figures – make that unlikely. November retail data points to a 1.1 per cent monthly decline in sales volumes. Pat Rabbitte argued that this was due to the purchase of Saorview boxes. But the comparison with November 2011 – a number unaffected by developments in October – are also down 0.5 per cent and retail sales in November 2012 were the lowest for 10 years.

The Exchequer tax take for the year showed that while the VAT was up year on year, it was up by less than the proportionate rise in the VAT rate effected a year before in the December 2011 budget. This implies that while the VAT rate might boost government coffers, it is doing so at the cost of falling retail activity.

On Christmas Eve one headline exulted that December sales were "the best in several years". But comparing volume indices from the CSO database, sales last December would have to have risen by 25 per cent on the previous month's levels to attain even the levels of December 2011. Given that Friday's KBC consumer sentiment index showed a fall in December, that doesn't look likely.

Last week Eamon Gilmore held out the prospect of turning the corner by the end of the year. There is some evidence that bank credit may improve by then. Permanent TSB has announced a significant increase in mortgage lending. International developments are also encouraging: A week ago, global heads of banking supervision relaxed capital adequacy rules for banks, enabling a greater flow of international credit.

And on Thursday ECB President Mario Draghi gave more encouraging signs. By making several references to falling bond prices, he signalled that the ECB is growing more confident about the future. And while the deal on the fiscal cliff has done nothing to halt the rise of America's spending and debt, it has at least averted a financial crisis for the time being. Isme has also pointed to signs of stabilisation in the SME sector.

But a stabilisation is not a recovery and should never be confused with one. Moreoever any stabilisation based on near-zero interest rates is artificial and the idea that the US economy is "recovering" because it is growing by just over 2 per cent is nonsense: On the back of a €786bn injection by the US Fed, that growth is disappointing. The truth is that "growth" based on monetary morphine is not real growth. Only when monetary conditions have normalised – interest rates of 3 per cent and an absence of artificial injections – will we know if the recovery is real or not.

Meantime the IDA and Ireland's exporters continue to work wonders in a challenging climate. The Irish Exporters' Association reported last week that our exports grew last year at 5 per cent, or twice the rate of growth in global trade. Last year also saw the IDA's hard work restore employment levels to pre-crisis levels.

But these merely create the conditions for a recovery in the domestic economy. So long as the Croke Park deal remains in place and until a substantive write-off occurs on our bank debt, the real sustained recovery we need – GNP growth of at least 3 per cent a year – will remain elusive.

Marc Coleman presents 'Coleman at Large' each Tuesday and Wednesday from 10pm on Newstalk 106-108fm

Sunday Independent

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