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Worries ahead, but pace of our economic recovery so far is little short of amazing


Although some very threatening clouds lurk on the horizon, the widening breadth and accelerating pace of the recovery is now not far short of amazing

Although some very threatening clouds lurk on the horizon, the widening breadth and accelerating pace of the recovery is now not far short of amazing

Although some very threatening clouds lurk on the horizon, the widening breadth and accelerating pace of the recovery is now not far short of amazing

Every so often it is useful to do a 360 degree assessment of the state of the economy. It is particularly useful now as the government finalises the 2015 Budget. What, when all available indicators are assessed, does a comprehensive analysis of all available indicators say about the state of the economy?

In contrast to most of the past seven years, surveying the numbers reveals an increasingly pleasing vista. Although some very threatening clouds lurk on the horizon, the widening breadth and accelerating pace of the recovery is now not far short of amazing.

The national accounts: Although Irish GDP and GNP numbers can be infuriatingly volatile and subject to big revisions, all the major components have been pointing towards growth. Even domestic demand, which remains around one sixth below 2007 levels, has been showing signs of life despite the dampening effect of continued budgetary retrenchment.

Consumer spending: Since the spring of 2013, the recovery in retail spending has been widening and strengthening. The upswing in spending in shops and other outlets over the 16 months to August of this year has been the strongest and most sustained since the crash.

Business investment: The surge in commercial vehicle sales in the first eight months of the year is among the most timely and the most positive of those indicators. After such a protracted period of low investment, the recent uptick provides a short term demand boost and a longer term boost to productive capacity.

Services sector: Services account for more than two thirds of all economic activity. The monthly survey of the sector published by the CSO, which goes back to 2009, reached yet another record high in August.

Following a period for much of last year when this indicator was soft and giving cause for concern, it has surged almost 8pc in just eight months.

Industrial production: Thanks to the presence of so many foreign multinationals, particularly in the pharmaceutical sector, the manufacturing sector accounts for more output in Ireland than almost any other European economy. Data over the past year show that the pharma "patent cliff" did not impact as much as feared and output has surged recently (although it probably owes to one-off factors).

The "traditional" manufacturing sector, which is mostly indigenously-owned and labour intensive, in July registered its second highest monthly level of output on record.

Construction: No industry had a worse recession, largely because it had become so bloated. But following a dramatic shake out, in which almost two out of three people in the industry lost their jobs, building has turned the elusive corner, with output in the industry reaching its highest level in four years at the beginning of 2014 (the latest available data). A more timely survey of the sector carried out by Ulster Bank finds that activity strengthened for the 12th month in a row in August.

Agriculture: Although it accounts for only a tiny fraction of total Irish output, it is important, not least as a mainstay activity in many rural areas and as an input into food processing, the most important indigenous export sector. In the first half of the year the value of food and drink sold abroad reached another record high.

Employment growth: Increases in the numbers at work were small in the first half of 2014, according to the quarterly survey of households, following very strong growth in the previous 18 months or so. With that survey having a large sample size one might have thought it would be very reliable, but there is reason to suspect that it may be underestimating employment growth in 2014 (after overestimating it in 2013). Both income tax data and the numbers claiming unemployment benefit are pointing to more robust growth in 2014 (and less robust growth in 2013). Given this, and the other indicators giving a rosier picture, there is reason for cautious optimism on jobs.

Household balance sheets: The hole blown in balance sheets by the property crash is being repaired, even if household net worth is still far below 2007 levels. With debt being paid down and the value of financial and property assets trending upwards, households were €72bn better off in the first quarter of the year compared to the post-crash trough.

But it is not all good news. Some indicators are either flat or still going in the wrong direction.

Credit: One negative factor in the decline in indebtedness is the shortage of fresh credit owing to the weakness of the banking system, which, though healing itself, is still bedevilled by large numbers of non-performing loans.

Wage growth: The overall national wage rate has remained remarkably stable since the crash. This has contributed to winning back some of the competitiveness lost during the bubble and its negative effects on living standards have been lessened due to low inflation, but it has been a drag on the recovery in demand.

With unemployment still in double digits, labour's bargaining power is set to remain weak. Apart from the sectors of the economy where skills gaps exist, it will probably be some time before wage growth returns.

But when the full spectrum of indications are examined, nearly all of them point to growth. It should be said that economies are very unpredictable, so there is no guarantee that the recovery will not run out of steam - as has happened all too frequently in the developed world in the post 2008 era. Nor can it be ruled out that Eurozone problems - in the real economy and the financial sector - could derail the recovery.

But at this juncture, given the momentum in the economy and what we know of the condition of the public finances, it appears as if the government in a month's time could prudently introduce its first non-contractionary budget since 2008.

Irish Independent