Monday 24 October 2016

More reason for economic optimism, but beware - Brexit is just a vote away

The recovery continues apace and some, but not all, of the risks of derailment from abroad are subsiding, writes Dan O'Brien in Shanghai

Published 29/05/2016 | 02:30

Stock photo: Irochka - Fotolia
Stock photo: Irochka - Fotolia

If there is any city that epitomises how the world is changing it is the business capital of China. It is hard to be in Shanghai and not be infected by the pulsing sense of progress that tingles through every sinew of this city.

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But even before departing Dublin in the middle of last week, there was plenty to be optimistic about on the home front. On Tuesday, the latest jobs report was published. Whereas five years ago the sheaves of statistics in the quarterly employment report contained a near infinite amount of things to cause despair, now nearly all the numbers give reason to be upbeat about Ireland's economy.

The figures showed that in the first three months of this year, the numbers at work rose at one of the strongest rates recorded since the recovery began. It brings to three-and-a-half years the duration of almost uninterrupted jobs growth.

Putting that in a historical perspective helps illustrate just what has happened recently: since the middle of 2012, when the economy turned that long-sought after corner, more jobs have been created in net terms than in the 70 years after the first post-independence census was taken in 1926. While plenty of problems remain, the near across-the-board growth in employment - regionally, sectorally, and by age and skills level - points to lots of momentum in the recovery.

If those who are getting back to work have reason to be cheerful, those already at work have something to feel better about too. On Thursday the State's statisticians published wage data. They showed that earnings in the first three months of the year hit their highest level since 2009. While the figures do not suggest wages are soaring, they do point to solid growth. That, in an environment of zero inflation, means that the real purchasing power of the average income is on the rise.

The continued good news on the home front has been matched by some better international news. Most notably, the prospects of the Irish recovery being derailed by a slump in the world economy appear to be receding almost by the day.

In the first weeks of the year panic broke out in many quarters about the prospects for the global economy. Many analysts believed the world was sliding back into recession. Some commentators even saw parallels with the run-up to the great crash of 2008.

In January most of the focus was on China, and its slowdown from the stratospheric rates of expansion it had been experiencing for so long. It was feared then that the world's second-biggest economy was not just slowing but going over the edge of a cliff, and that a Chinese crash would carry everyone else into the same abyss.

Things have calmed a great deal since, and for good reason - the panic in the early weeks of the year was always overblown, in the short run at least. Then, those making most noise about a looming catastrophe were financial market types. Those of us on the economics side were less worried. In this instance, we data-watching dismalists appear to have been more correct than the jittery financiers who take their cues from often hyper-volatile market movements.

While there are question marks over the reliability of many Chinese economic indicators, most signs are pointing to something of a stabilisation. Industry and services sectors continue to grow, if at a slower pace, and even the white-hot property market is showing signs of calming, rather than crashing.

The value of Irish goods sold to China in the first three months of the year grew by 34pc over the same period a year earlier (and to see how strong that was, one only has to consider that growth of total Irish exports barely grew at all).

Further positive signs come from European export data. In the first two months of this year, our continent's companies continued to sell more stuff to the Chinese. The value of all goods shipped to China from the EU rose by 2pc. That European exports are growing hardly points to an on-going China crisis.

But none of that is to say that there are no risks. The reason some financiers have been so worried is because they see better than most what's going on the inside Chinese finance. And, by all accounts, it is not a pretty picture. That gives cause for concern, and not just to communist party apparatchiks and the money men.

The world's second-largest economy has been experiencing the sort of credit boom that almost always ends in bust. Private borrowing, particularly by companies, has gone through the roof. Relative to the country's GDP, accumulated debts of the private sector are now greater than those in the US in 2008 just before its economy crashed.

Nor is there much doubt that many of loans made during the credit boom of the past eight years were bad. The big question is how many of them have now soured. As we Irish know only too well, even a seemingly strong banking system will come down if the prices of the assets backing its loans fall far enough.

If things look less shaky in Asia now than a few months ago, the long-underperforming European economy is doing better than it has done for almost a decade. In the first quarter of the year, the eurozone economy expanded at one of the fastest rates in eight years and job creation is bouncing back strongly. Last week, a closely watched early indicator of economic performance suggested that growth in the current quarter would be decent too.

But that is where the good news ends. Last week the umpteenth deal was reached with Greece on its never-ending bailout. That there is no end in sight to the Greek malaise shows just how fragile the euro edifice is.

Nor is the bigger EU construct looking terribly solid. Brexit is 25 days and one vote away. For a major power to pull out of the European state system entirely would have consequences of historical proportions. It also amounts to the biggest short-term risk to the Irish economy.

In recent days polls (however unreliable) and the bookies have been suggesting that Britons are less likely to take a lonely leap out into the north Atlantic. That is good news for Ireland because a floundering UK would inevitably drag us into the mire such are the number of ties between the two economies. The vote is still too close to call.

The other big concern at the beginning of the year was domestic political instability. Despite having had an extended period without a government and then a very weak one finally emerging, there is little sign that the economy has been affected negatively.

That is certainly good news. But political weakness sooner or later causes economic weakness. If the out-of-the-blue abandoning of plans to change bin charges and the gesture politics of the Oireachtas giving the Central Bank powers it doesn't want are straws in the wind, then the outlook is bad.

The fact, as mentioned earlier, that employment in the Irish economy hardly grew at all decade on decade during most of the last century was in good part the result of poor political leadership. Even if the international outlook remains benign, there is plenty of scope to blow it all on our own.

Sunday Independent

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