Monday 24 October 2016

This recovery remains fragile and the State's finances are vulnerable

Ireland has been lucky, but that can change, so this is no time to spend, spend, spend

Published 29/05/2016 | 02:30

Men at work: Workers take a break from building the Dublin Port Tunnel in 2006. Construction, which was worst hit in the downturn, has recovered fastest and numbers are up 27pc since the trough Photo: Julien Behal/PA
Men at work: Workers take a break from building the Dublin Port Tunnel in 2006. Construction, which was worst hit in the downturn, has recovered fastest and numbers are up 27pc since the trough Photo: Julien Behal/PA

The economic recovery in Ireland continues to reduce unemployment at a rapid pace. Figures from the Central Statistics Office last week show that the overall unemployment rate has fallen below 8pc and has halved in just four years. The numbers are from the Quarterly National Household Survey (QNHS), a very large-scale data-gathering exercise and one of the best tools for monitoring economic trends.

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Unemployment rates during the bubble were under 5pc for an extended period but soared to 15pc when the bubble began to burst late in 2007. The unemployment rate is not the whole story and the recent improvement reflects a drop in labour force participation and a resumption of emigration.

The participation rate (the portion of adults working or seeking work) fell back sharply for males but has now stabilised at a lower level.

For females, the rate also fell but has recovered even more quickly and is back to the 2007 level. There appears to have been an enduring fall in participation in the younger age groups associated with higher commitment to full-time education. Net emigration returned with the crash but had fallen back to low levels by 2015.

These labour market improvements have been driven mainly by the robust expansion in employment, which has exceeded expectations and belied the fears of a jobless recovery. Numbers at work are 150,000 above the bottom reached four years ago.

While employment remains well below the bubble peak, this is a stronger performance than has been seen generally in the eurozone - back in the dark days in 2011, after the EU/IMF bailout, a jobs recovery at this pace did not seem likely and should remind people that economic forecasts are flimsy and tentative.

It has been repeatedly asserted that the jobs recovery has been confined to the Dublin area, notably by politicians from the Rural Alliance of independent TDs. The CSO figures have never reflected any such pattern since the recovery started and last week's figures are no different.

Nationally, employment has grown more than 8pc over the four years, with a stronger performance not only in Dublin but also in the Border, Midlands and South East regions. Only in the West has there been a static employment total. It is interesting that the Mid-East (Kildare, Meath and Wicklow) has seen only modest jobs growth - the emerging housing constraint in Dublin could see a spillover effect here if the recovery is sustained.

The employment recovery has also been well spread across economic sectors. Construction, worst hit in the downturn, has recovered fastest and numbers are up 27pc since the trough. There has also been an employment increase, albeit slower at 3.2pc, in the aggregate of the sectors covering public administration, social services, health and education, sectors employing public servants directly or largely reliant on direct or indirect public subvention. Total numbers have risen by 15,000 in the last four years. There is no evidence, aside from repeated assertion by politicians, that there are continuing cutbacks in staffing in these sectors.

This expansion in employment helps the public finances both through the generation of extra tax revenues and through the reduction of demands on the social protection budget. The declining deficits of recent years have been due to lower interest costs on government debt, which is a piece of good fortune, but also to these much-improved employment numbers.

Clearly, a continuation of these favourable trends would help to eliminate the budget deficit painlessly and would even facilitate the relaxation of spending constraints, the sincerest wish, it would appear, of all 158 Dail deputies.

Unfortunately, there are reasons for doubting that the positive trends can be counted on to persist. It is not possible for the unemployment rate to drop by another seven or eight points over the next few years - there is a zero lower bound. With luck, there could be a further fall, perhaps to 5pc or 6pc, but it would be tempting fate to expect much more than that.

The US Federal Reserve will hold a meeting on June 14 and 15, where it may well opt for a further increase in interest rates. This looked less likely a month or two back but the US recovery has firmed up and the Fed has been keen for two years now to get interest rates back towards normality.

There is no reason to expect the ECB to follow suit - they have been well behind the curve since the financial crisis struck - but where the Fed leads, the ECB will eventually follow.

Ireland's borrowing costs can hardly go much lower and the next move in Frankfurt, however long delayed, will be upwards. These two bonus factors, falling unemployment and falling interest rates, will not be making the same contribution to closing the budget gap as they have done in recent years.

Every economic expansion, and every bull market in asset prices, climbs a wall of worry. The QNHS figures confirm that the Irish economic recovery is real but the inherited debt burdens in both public and household sectors should serve as a caution against premature celebration of a success not yet secured. The list of things that could go wrong is a long one. The UK could be on the way out of the European Union, the eurozone common currency area remains, to be kind, a work in progress and there is no certainty that the international economy will thrive. There is an unavoidable exposure to events entirely beyond the control of domestic policy.

The recent reduction in the budget deficit owes much to the favourable impact of external events and not so much to policy actions by the outgoing Irish government. The public finances will continue to improve only if public spending control is maintained and there has been clear slippage, in the form of unbudgeted over-runs, especially in health.

With luck, the economy will grow at a decent rate over the next few years and the need for further borrowing will decline. But it is salutary to note that the State continues to borrow and the burden of public debt continues to rise. The flow of positive economic news cannot be presumed to be the permanent natural order. We have been here before and the lesson of Irish economic history is that a run of good luck should be a spur to caution in economic management.

Sunday Independent

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