Saturday 25 November 2017

Alan McQuaid: Reasons to be cheerful with glorious weather and upgrade from S&P

Michael Noonan
Michael Noonan

Following yesterday’s news that consumer confidence rose in June to its highest level since October 2007, there was more reason for Irish people to be happy this morning.

Apart from the glorious sunshine, Standard & Poor’s (S&P) has upgraded the country’s credit outlook.

While this may be of little relevance to the ordinary man and woman on the street, it is hugely important in terms of Ireland’s ability to exit its EU/IMF/ECB bailout on schedule at the end of the year.

Interestingly the upgrade on the country’s credit outlook to positive from neutral comes after the disappointing first quarter GDP figures which showed that the economy performed a lot worse than expected in the first three months of 2013 and technically went back into recession in the final quarter of 2012.

No matter, S&P believes Ireland’s debt may fall faster than previously thought.

And it will in my view if economic growth holds up.

I don’t expect much improvement in the second quarter GDP data, but things should get better in the second half of 2013, particularly as the outlook for both the US and UK economies, key trading partners of Ireland, appears brighter.

Although the GDP figures have been weak in recent quarters, there are clear signs of improvement in the Irish housing market and in the labour market.

Furthermore, “core” retail sales (i.e. excluding car sales) have been up on a year-on-year comparison for the past three quarters.

The “strong consensus” among the country’s political parties, helped by the mature and welcome attitude of the public-sector trade unions despite the difficult circumstances for their members, has also contributed to the ratings agency’s rosier view of the country.

Indeed, S&P said it saw a more than one-in-three probability it would raise Ireland’s credit rating during the next two years.

Such a move would reduce Ireland’s borrowing costs on the bond markets, a welcome development for everyone.

From a technical perspective, what Ireland needs now is for Moody’s, the only major credit rating agency that effectively rates Irish government bonds as non-investment grade or “junk”, to change its stance on the country.

The S&P move will only heap more pressure on Moody’s to take a more optimistic view of Ireland.

And like many other economists, I think it is only a matter of when it happens, not if.

The reality is that Ireland has managed to weather the financial/economic storm better than the other bailout countries Greece, Portugal and Cyprus.

The country’s flexible, open economy and favourable demographics put it in a better position than most to avail of the global economic upturn when it comes.

I don’t believe the prospect of the country exiting its bailout programme at the end of the year will be put in jeopardy by the weak Q1 GDP data or indeed the negative fall-out from the “DrummBowe” tapes scandal.

At the end of the day it will be a political decision and very much dependent on financial market conditions at the time.

But as of now, I expect Ireland to exit on time, especially after this latest S&P development.

And Finance Minister Michael Noonan is already in negotiations with Europe and the IMF over how that can best be achieved.

Being able to stand on our own two feet without the shackles of the “troika” should hopefully point to better economic times ahead for all.

Alan McQuaid is chief economist at Merrion Stockbrokers.

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