Tuesday 27 September 2016

Some signs of softness, but recovery continues apace

Published 06/03/2016 | 02:30

Spending in retail outlets accounts for just under half of all private spending on consumer items. (Stock picture)
Spending in retail outlets accounts for just under half of all private spending on consumer items. (Stock picture)

Last week brought a blizzard of new information on the state of the economy. In a week in which a new era of Irish politics began - one which has the potential to derail the recovery - it is more than timely to look at what the latest indicators say about the state of the recovery.

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On Monday morning, all eyes were on the government bond market to see how investors would react to an election result that produced even more fragmentation than expected, thereby reducing the chance of stable government, at least in the short term.

Remarkably, bond investors hardly batted an eyelid in response. Nor, as the week progressed and the result sank in, did traders change their pre-election assessment of the risk profile of the Irish sovereign.

For what it's worth, I think the market has not priced political risk correctly. If that is so, then the probability of a sudden destabilising correction has increased.

But let's park bond market developments there and look at the real economy numbers that were published last week.

First up: tax revenue data for February. The Government's Exchequer Returns figures are useless for the most part and should be scrapped - they can easily mislead owing to the archaic way in which they are compiled and their understating of the size of the State because of what they omit.

Having said that, there is one aspect of the returns which is worth looking at - the tax revenue data.

In the first two months of the year, the growth rate of exchequer revenues (which exclude huge PRSI receipts) slowed somewhat on 2015, with VAT slowing quite sharply. But as that reflects a temporary-looking easing in retail sales value growth in the final few months of last year, it is probably nothing to be concerned about. Overall, the figures point to the economy continuing to grow at a good clip.

Below, retail sales, industrial production, unemployment and property prices are analysed individually. Taking the four indicators together along with tax revenues, the five series collectively point to a still solid recovery, albeit with some signs of softening.

If the domestic economy gives only limited cause for concern, the international picture is somewhat more worrying.

There are more signs of slowdown in the UK, Europe and the US, and a lot more talk of recessionary risks.

Although a sharp global slowdown is far from certain, weaker international demand combined with greater domestic political risk could easily combine to push the Irish outlook into more negative territory over the next six months.

Retail sales

Spending in retail outlets accounts for just under half of all private spending on consumer items. Last week, the first indicator of footfall for 2016 was published. It will have brought relief to retailers.

The amount of product shifted in January surged, when compared either to the previous month or the same month last year. The volume of retail sales is now just 3pc off the all-time peak recorded before the crash. It is up a massive 30pc from its low point in 2009 (as discussed here recently, the recovery in the value of retail sales has been much more subdued owing to quite phenomenal deflationary pressures in the sector).

As has been the case in recent years, the huge numbers of new vehicles being driven off forecourts explains the spending splurge in January.

During the recession, people put off replacing their cars either out of choice or because they simply couldn't afford to do so. That has changed with the recovery and vehicle purchases are rapidly moving back to pre-crisis levels, even if it will be another year or so before that happens.

Industrial production

Ireland's manufacturing sector is one of the largest in the developed world relative to the size of the economy. What makes it really unusual is its enormous pharmaceutical sector, which churns out gargantuan quantities of the western world's pills and potions - the sector's exports were valued at €64bn last year.

Because this one sector accounts for more output than the rest of the manufacturing sector combined, when one analyses what is going on among Ireland's widget makers, it needs particular attention.

Pharmachem dominates the "modern sector" shown in the graphic. In January, output in the sector hit an all-time record high, growing by - wait for it - 102pc on the same month in 2015. The sector is going from strength to strength, and fears about the patent cliff of a couple of years ago are distant memories.

In very stark contrast, output in the "traditional" sector, which is mostly indigenous manufacturers focused on the home and UK markets, has been contracting in recent months after putting in a strong performance over the previous two years. The recent fall in sterling could be part of the explanation. The risk of a further deprecation in the run up to the June Brexit referendum must be a real cause for concern among Irish owned exporters.


If February proved a cruel month for the outgoing Coalition, there was further good news for the jobless. The numbers on the dole continue to fall steadily. Last month there were 321,000 people claiming jobless benefits, down by 130,000 since peak.

The numbers formally and fully out of work fell to 190,000 last month, which is 140,000 below the high point just over four years ago (the difference between the two measures is largely explained by people who work a small number of hours a week. They are not formally unemployed, but are sufficiently underemployed to qualify for benefits).

While all this is very good news, the rate at which joblessness has been declining is easing in line with a slower pace of job creation since the middle of last year.

The group that makes up more than half of the unemployment - men aged 25 and over - has stabilised at around 100,000 since the middle of last year. This is worrying in that it could point to a hard core of males who have limited employability.

More positive is the fact that the number of jobless women in the over 25 years grouping continues to fall steadily. In February, it was down to just over 50,000.

The rate of decline in unemployment of young people eased (under 25s), but with the total of both sexes now down to 35,000, it is considerably better than it was only recently.

Property prices

Like it or loathe it, but property prices matter for the wider economy. Last week's first reading on prices in 2016 painted a mixed picture.

Outside Dublin, the rebound in prices over the past two years showed continued signs of moderating. In January, prices were flat month on month. Since October, the rate of increase has been considerably more modest than over the previous two years.

Last week this column focused on jobs data which, among other things, prove the recovery is not a Dublin-centred phenomenon. The house price data reinforce that view.

Quite simply, the price of an average home outside the capital would not have risen by 22pc in 24 months if the economy outside the pale was the post-apocalyptic wasteland that is sometimes portrayed.

Prices in the capital have followed a very different pattern in recent times. January marked the third consecutive month of decline.

Over a 15 month period, they have effectively been treading water and that is despite the supply shortage in Dublin.

There can be little doubt that the Central Bank's tightening of mortgage lending, which only really effects urban areas where prices are high, is containing increases.

The bank is due to report on how its own rules are working later in the year. That report is more eagerly anticipated than ever.


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