Tuesday 25 October 2016

Dan O'Brien: Good economic news has slipped under the radar

Irish households are rebuilding their wealth, but exporters to the UK are being squeezed, writes Dan O'Brien

Published 21/08/2016 | 02:30

CLOSER TO HOME: While the nation was transfixed by the events unfolding in Rio last week, positive news about our own economy went unnoticed.
CLOSER TO HOME: While the nation was transfixed by the events unfolding in Rio last week, positive news about our own economy went unnoticed.

As the nation was transfixed by the bizarre events in faraway Rio de Janeiro last week, a good deal of things were happening almost unnoticed closer to home that will have a much bigger impact on people's lives. With Budget 2017 now less than eight weeks away, most of the news on the economy and its prospects last week was good, unlike the scandal-riddled news from Brazil.

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First off, the Central Bank reported last Thursday that we are getting richer. This, thankfully, has nothing to do with the "leprechaun economics" GDP figures which are supposed to measure our collective income - compiling those numbers is the job of the State's statisticians at the CSO. An entirely different crowd of number-crunchers at the Central Bank are tasked with adding up the nation's debts and the value of everything we own to calculate Irish wealth (it can be helpful to think of income as a flow, much like a river, and wealth as stock, or the lake into which the income/river ends up and accumulates).

The most relevant component of these wealth numbers relates to households (Dame Street's boffins also calculate the net worth of the government and businesses). Thursday's household wealth figures were good, showing that collectively debt is being ground down and the value of properties, pensions and other assets continues to rise. In other words, people's collective wealth is growing.

In the first months of the year, when everything that is owed is subtracted from the value of all assets, the average person in Ireland was worth €132,000. As with most other indicators of economic well-being, this is below the pre-crash peak - or €30,000 below 2007 levels, to be more precise.

If there is any consolation it is that per person wealth has increased by about €20,000 since the post-crash low point of four years ago. And, as last Thursday's figures show, the wealth recovering continues.

In a country that has been blighted by debt for so long, the liability side of the figures are among the most interesting. Since things went wallop, Irish households have been paying back debt at a more rapid pace than they have been taking it on. Over the past eight years they have reduced their collective indebtedness by €57bn (it now stands at just under €160bn). This is good progress. But to put it in perspective, it took less than two years to add that same amount of debt in the final, crazy couple of years of the bubble.

When Irish households are compared with others across the eurozone, we remain the third most indebted. What we owe equals 1.5 years of our total disposable income. That is more than 50pc higher than the average and three times more than the thrifty Italians.

Given how slowly the process of debt reduction has been, it will take another eight years to bring our levels to the current eurozone average.

Among other things, that means that the economy faces a considerable risk in the medium term. That risk relates to interest rates rising from the historically unprecedented lows at which they have languished since the Great Recession.

It is important to start this discussion with some reassurance for those struggling with debt - it is almost inconceivable that the European Central Bank in Frankfurt will raise rates over the short term, for example, two years or so. That is because the European economy remains weak. It is also because inflation is as dead as a Monty Python parrot.

Just last week the latest continent-wide inflation figures were published by the EU's statisticians. They showed prices actually falling in July compared with June and not a single sign that the three-year period of zero inflation in the eurozone is about to come to an end.

All that said, this situation is unlikely to persist indefinitely. Once inflation picks up, interest rates will follow. There is a good probability that this will happen in the medium term - say the next five years. Given how much of Irish household debt is on variable interest rates, and that there is simply more of it than in most other countries, a move upwards from Frankfurt would have a disproportionate impact on the Irish economy. As such, it is imperative that the ongoing deleveraging process continues before debt servicing becomes a much bigger problem as a result of higher interest rates.

The very painful lesson from all of this is that grinding down debt, and, more generally, rebuilding personal balance sheets, takes an agonisingly long time.

Now let's turn to last week's bad news - a slump in sales of stuff to our nearest neighbours.

Exports of goods to the UK have weakened uninterruptedly since last autumn. CSO figures for June released last week show the value of products sold to Britain and Northern Ireland fell by more than one-tenth on the same month a year earlier. That represents the biggest monthly fall in three years.

And it wasn't only June that exports have been weak. There has not been a single month this year in which the value of goods exports to the UK grew on a year earlier.

There are two probable causes of this. The first is the exchange rate. The downward trend in sales to the UK very much coincides with the weakening of sterling since last autumn. Given that the British currency crashed after the Brexit referendum in late June, and last week it hit its lowest level against the euro in three years, there is more pain to come for Irish exporters via squeezed margins.

The second factor impacting those same exporters is the strength of demand in the UK economy. Brexit uncertainty has meant less investment in machines, equipment and premises by British companies. There are surveys aplenty which point to continued weakness on that front. But last week brought the best news since the referendum on the UK economy.

The most eagerly anticipated economic indicator since the vote showed that British consumers have continued to spend since voting themselves out of Europe.

UK retail sales in July not only failed to slow, as many economists had predicted, but actually grew quite strongly compared with June. That suggests that there has been little or no initial shock effect for the average British Joe. That is important because consumer activity is, by a distance, the most important part of any economy.

But that does not mean that those with an interest in the UK economy, including Irish exporters, can breathe a sigh of relief. A range of other indicators, particularly those related to certain business sectors, have shown a marked downturn since the Brexit vote. That will only start hitting the jobs market with a time lag. When that happens, most likely towards the end of this year, consumer spending will be hit.

It is unlikely, however, that developments in the British economy will be so marked as to derail the Irish economy, which continues to recover well by almost every measure. As we face into the autumn and Budget 2017, there remains more reason for optimism than pessimism.


On Tuesday, official estimates of emigration and immigration levels over the past year will be published alongside the latest employment figures. I will be tweeting analysis and comment on the data from late morning at @danobrien20.

Sunday Independent

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