Monday 23 April 2018

Ireland will lag behind as world crawls out of recession

But Germany and Japan's early emergence from the economic doldrums offers hopeful signs for us

WITH countries around the world from Germany to Japan coming out of recession, it looks as if Ireland may be paddy last.

The good news, though, is that the global pick -up should mean we hit bottom sooner rather than later, providing some small respite from the pervasive doom and gloom.

Countries around the globe from Germany and France to Japan have all emerged from the gloom into the bright lights of economic growth. The growth rates may be anaemic -- France and Germany grew by 0.3 per cent in the quarter -- but they have beaten the UK and the US out of recession. Both of these are expected to make the announcement in about three months' time. But Ireland is lagging far behind, with growth reversing at a massive 8.5 per cent in the first quarter.

Yet compared with the feeling a year ago that the world may cave in, this is a great result, says Alan Barrett, the man in charge of the ESRI's quarterly commentary. The good news, he says, is this may feed through to Ireland in the early part of next year rather than later in the year. He is now expecting Ireland to reach the bottom in the first few months of next year.

So how have the rest managed to turn the corner already? Part of the answer is, of course, the billions that governments from the US to China poured into their economies to stimulate them. But there are also real signs of economic growth.

Consumer spending in Germany has picked up, boosted by subsidies for car sales. But crucially, exports have also picked up and orders for German manufacturers are increasing, helped in part by China's state-sponsored investment boom.

But, of course, it is not all unalloyed good news and the outlook for the eurozone as a whole is far from rosy. Italy and Spain are still in recession. Italy's GDP fell by 0.5 per cent in the second quarter while Spain's economy, hammered by a massive house price collapse which can almost compete with Ireland, shrank by around 1 per cent in the same period.

Although, as Philip Lane, professor of economics at TCD, points out, the good news is the momentum in emerging markets and China in particular. It is growing at around 10 per cent and is likely to be a major motor for global growth.

The markets certainly believe the hype and have been pricing in a recovery for quite some time and over the past four to five months equity markets are up almost 50 per cent from the bottom, notes Rossa White, chief economist at Davy Stockbrokers.

But caution is warranted. Jim Power, chief economist at Friends First, argues that while technically the downward momentum has been arrested and is levelling out, this does not mean any serious pick-up is on the way. "We may have hit bottom in Europe but there is scant evidence that activity is picking up in any appreciable way."

There are threats from every corner. Some worry that inflation could re-emerge in larger countries, bringing closer the day when the European Central Bank will once again start raising interest rates. If that happens when Ireland is still in the doldrums it will further delay a recovery.

Recovering demand also means that oil prices are on the way back up. Already Irish consumers can see this at the petrol pumps and, says Power, it is possible that prices could once again rise above $100 a barrel. Rising interest rates and oil prices would come at exactly the wrong time for the Irish economy.

Some critics had feared that the stimulatory packages poured into other countries to get them going would backfire. For now, however, they appear to be working. The one fear is that withdrawing the stimulus too early could have destabilising effects, says Lane. Others fret about the growing bubble in Chinese house prices and the consequences for its banking sector. Still others worry about war with Iran and/or North Korea, H1N1...

"The list of threats is a long one," admits Professor Ron Davies of TCD. "But it always was and always has been. What has changed is our perception of it. A good analogy is how we feel about letting our kids wander the neighbourhood alone. The dangers that lead us to keep a much closer eye on them than our parents did were always there, we're just more aware of them."

Overall, however, according to White, we have reached inflection point in the global economy and this will benefit Ireland in time. The consensus is that this will happen next year. The ESRI's Barrett is now looking towards the first part of next year as the point when the Irish economy should stop declining.

The single biggest problem, says Lane, is that the recession here is a home-grown phenomenon. The dire state of the public finances, the mire in the banking system and the lack of competitiveness and overhang of personal debt will all conspire to hold back the recovery.

However, the fact that the rest of the world is coming out of recession is good news. "The threat of Armageddon is dissipating, the world economy is stabilising and that is good for everyone."

The problem is it will not be obvious to many of us. Davies warns that the ranks of the unemployed will continue to swell. "Combine this with the political fact that the recent cutbacks at government level are unlikely to be reversed any time soon, then for the man on the street the hardship is going to last a long time."

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