Wednesday 26 June 2019

Economy is motoring, but has not recovered fully from 2008 crisis

Lehman earthquake which heralded financial meltdown a decade ago caused destruction that is still evident

Traders on the floor of the New York Stock Exchange on September 15, 2008, after stocks plummeted on news of Merrill Lynch’s sale. Photo: Getty Images
Traders on the floor of the New York Stock Exchange on September 15, 2008, after stocks plummeted on news of Merrill Lynch’s sale. Photo: Getty Images
Dan O'Brien

Dan O'Brien

Last week the latest figures on both national income and national wealth were published. They show an economy in generally good health, but one that continues to carry too much debt weight.

The economy's continued long run of uninterrupted growth had led to two more recovery milestones being reached - both the size of the domestic economy and the net worth of households have just recently surpassed previous peaks of a decade ago.

Lets start with last Thursday's GDP figures. They were messy, as they usually are. Readers of these pages will be familiar with the problems posed for those measuring the economy's output by the presence in Ireland of large numbers of multinational companies. Suffice to say the headline rates of GDP growth can be ignored as meaningless.

But beneath the headlines, some components of the GDP figures are significant. Among the most eye-catching recent developments has been the acceleration in growth of the 'information and communications' sector over the past couple of years. In the second quarter of this year, it overtook the distribution and hospitality sector to become the economy's second-largest sector. Only the (pharma-dominated) industrial sector is bigger. The value of IT output, when inflation and seasonal factors are stripped out, grew by an astonishing 63pc in just 24 months.

There is no doubt that the tech sector is on fire at the moment, but these rates of output growth are becoming more distorted by the multinational factor. The recent surge in activity is likely to be related to the shifting of intellectual property assets to Ireland by the tech giants.

Whatever the reason, it means that the economy's two biggest sectors are dominated by foreign multinationals. That is not to say the economy is over-reliant on such companies, as is being suggested more and more these days, but it is a matter observers of the economy should remain aware of.

Having said that, let's now look at things from a different angle. GDP can be measured by adding up the output of the economy's different industries. It can also be measured by adding up different groupings' spending (statisticians use both measures).

The domestic economy (ie excluding imports and exports) is comprised of three big spending parts. The first, and largest, is consumer spending on goods and services. The second is government spending on goods and services. The last part is investment spending - on plant, machinery, roads, bridges and intangible assets such as computer software. Investment spending is dominated by the private sector in market economies, but governments contribute too via their infrastructure budgets.

Last week's GDP figures for the second quarter showed that the size of the domestic economy (as measured after statisticians strip out distorting globalisation effects) surpassed the previous peak of 10 years ago, marking yet another recovery milestone. It should be hastily added, however, that because there are around 400,000 more people in the country, the domestic economy has yet to return to past peaks on a per capita basis.

From a business perspective, the investment component of the GDP figures is among the most interesting. The construction sub-component is among the most topical.

Last week's figures show a still yawning gap between investment spend on residential and non-residential building, as the chart illustrates. The latter is now well above the bubble-era peak and grew by a further 10pc in the year to the second quarter. This raises concerns of overinvestment. Recent reports of plans to build multiple additional hotels in the capital - on top of the new ones recently opened or already being built - is one example of possible over-investment. The amounts being invested in new homes has been growing at an astonishing 30-40pc annually for the past three years, far higher than it ever got during the bubble. Yet because the home-building side of the industry is coming from such a low base, as the accompanying chart shows, it will take another few years of very strong growth before investment reaches levels needed to match demand. We are a very long way from worrying about over-investment in homes.

As pointed out above, spending by consumers on goods and services dominates modern domestic economies (when measured on expenditure basis). Happily, the way it is measured in the GDP figures is not at all distorted by multinationals. That makes it one of the most valuable series in telling us what's going on in the economy.

Last week's figures for the second quarter of 2018 show that consumer spending (or 'private consumption' in the jargon of national accounting) grew at its second-fastest rate since the crash on a year-on-year basis and at its fourth-fastest rate on a quarterly basis.

This is being driven by strong wage growth and more workers. The strength of employment was, as it happens, highlighted last week by the publication of the Europe-wide Labour Force Survey. It showed we had the sixth-highest rate of jobs growth in the EU in Q2 2018 (compared to the previous quarter). Year-on-year Ireland ranked fourth of the 28 economies.

Earlier in the week, the Central Bank published its quarterly figures on national wealth in the first three months of the year. These balance sheet data showed that household debt continues to fall. It came close to 130pc of the total disposable income of the economy's households in the first quarter. That is down from 210pc at peak.

If that's the good news, the bad news is that Irish households are still amongst the most indebted in the world. Across the Euro area, for example, household debt is below 100pc of annual disposable income.

The figures showed that deleveraging continues to contribute to the rebuilding of household balance sheets. But that it is not only a better liabilities side of the ledger that is putting people on a firmer financial footing.

Household assets values are rising. The aggregate value of all housing assets in the economy continues to rise in line with prices. That is also true in the case of financial assets.

These dynamics led to the net worth of Irish households surpassing the pre-crash peak at the end of last year. But, as with domestic demand, the picture changes considerably when we factor in population growth. On a per capita basis, the net worth of the average Irish resident stood at just over €150,000 in the first months of this year. It peaked at €165,000 more than a decade ago.

As the 10th anniversary of the collapse of Lehman Brothers is marked this weekend, the legacy remains. It will be at least a few more years yet before all economic indicators surpass past peaks.

  • Ergo will return next week

Sunday Indo Business

Also in Business