Saturday 17 February 2018

Alan McQuaid: Mixed economic signals but focus must be on growth

data suggests stability on the ground
data suggests stability on the ground

Data on the Irish economy released in recent days were very mixed to say the least.

The latest Quarterly National Accounts showed that Ireland technically re-entered a recession in the final quarter of 2012 and is still stuck there now, though it must be said it doesn’t feel that way on the ground.

Anecdotal evidence would suggest that things have stabilised on the domestic front, and the main reason for our disappointing GDP numbers in recent quarters has been the poor performance of our export sector.

As an open economy, Ireland is very dependent on our exporters to generate growth, but the problem is that they are at the mercy of conditions mostly outside their control.

There are a number of reasons for Ireland’s poor first-quarter GDP numbers including weak external demand, a sluggish world economy, particularly in the key export markets of Euroland and the UK, as well as a generally sluggish British pound.

Poor weather conditions here at home also impacted negatively on consumer spending.

However, it does look as though the first quarter will be the worst of it, and there are already signs that things are improving on both the international and domestic fronts.

Official retail sales figures point to stronger personal expenditure in the second quarter.

Meanwhile, the construction sector should get a boost over the remainder of the year from the likes of the N7 and N11 motorway upgrade projects.

The other good news is that the residential property market continues to improve, with prices up for the second month running in May.

Furthermore, Dublin house prices have been up on a year-on-year comparison for each month so far of 2013, and the overall annual drop of 1.1pc in property prices in May was the lowest since prices started to fall on a year-on-year basis at the beginning of 2008.

That said, consumer confidence regarding the housing market still remains fragile, with the ending of mortgage interest relief and lack of credit availability depressing activity.

The weak labour market is also weighing negatively on house prices, though recent signs of improvement on the employment front should boost demand for property as the year goes on.

The figures on credit demand remain a cause for concern, though.

The data for May released on Friday by the central bank showed the annual rate of decrease in household loan demand rising from the previous month.

And unfortunately the lack of available credit will severely hamper the overall recovery prospects for the housing market and the Irish economy as a whole, and keep the unemployment rate higher than it would otherwise be.

The banks remain the “bad guys” in the whole economic/financial meltdown of recent years, and the Anglo Irish tapes will do little to boost the confidence of the ordinary man and woman in the street as regards the sector.

Rather belatedly it appears that European taxpayers are gradually being insulated from the risks taken on by their banks.

The agreement reached on June 27 by European Union finance ministers means that future bailouts will be financed to a greater extent by bank shareholders and creditors, who will be first in the queue to take losses if their institutions need more capital going forward, rather than via public money.

That represents significant progress, though it will probably be of little consolation to Irish taxpayers.

The goal for Ireland now is to exit its EU/IMF bailout on schedule come year-end. Some doomsayers are saying our poor GDP figures for the first quarter and/or the negativity generated overseas from the Anglo Irish tapes will jeopardise our chances of leaving on time.

But I don’t see it that way.

On the basis of the GDP numbers for January-March, it is hard to see the economy posting positive growth this year, which in turn will have negative implications for Ireland’s budgetary position.

However, the National Treasury Management Agency has built up strong cash balances and I don’t think the prospect of the country exiting its bailout programme at the end of the year will be put in jeopardy. At the end of the day it will be a political decision and very much dependent on financial market conditions at the time.

And despite the poor first quarter GDP figures, I still believe that Ireland is better placed than most to benefit from the upturn in the world economy when it does come.

The immediate focus turns to Tuesday’s release of the Exchequer Returns for the January-June period.

The Minister for Finance, Michael Noonan, has intimated that the tax receipts for the first half of 2013 point to Ireland meeting its budgetary targets for this year, which should limit the amount of fiscal austerity in Budget 2014.

Upping the ante on fiscal austerity is not the answer in my view, and as we’ve seen from the performance of Eurozone economies in recent times, it simply doesn’t work.

The onus must be on generating growth and boosting employment.

And while the economic picture appears to have darkened in the past few days, all is not yet lost.


Alan McQuaid is an economist at Merrion Stockbrokers.

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