Tuesday 24 April 2018

There are many types of recovery so let's hope we get the one we need

Of course, it all depends on what one thinks that word
Of course, it all depends on what one thinks that word "recovery" means...
If it walks and quacks like a duck, it probably is a duck, the old saying goes...
Brendan Keenan

Brendan Keenan

IF it walks and quacks like a duck, it probably is a duck, the old saying goes. But what if it doesn't do either of those things? In the last few weeks, even days, there have been much clearer signs of downy feathers, and even a few quacks. Perhaps it is a recovery after all.

In their forecast this week, the analysts at the employers' body IBEC think that by the end of the year we will have an indisputably plump Barbary to feast upon. But it won't be an Aylesbury duck.

There is more than one kind of duck, and there is more than one kind of recovery. IBEC sees the rarer kind that comes after a crash, led by investment, not personal spending. Its 3pc growth incorporates a 20pc rise in investment and just 1pc in consumption.

Of course, it all depends on what one thinks that word "recovery" means. The most basic definition is that recovery begins when decline comes to an end. On that basis, the recovery has been under way since 2012, when most economic indicators stopped falling. On the other hand, they have largely been flat-lining ever since, which is not the general idea of a recovery.

Not that one should under-estimate the importance of things ceasing to contract, even if they are not growing to any great extent. It is a general observation that from unemployment, to taxation, to house prices, what bothers people is not the actual level but whether they are getting better or worse. The Coalition must hope that the observation holds this time.

One indicator still flat-lining is consumer prices. This is one of many peculiarities in the present situation. Alongside its deflated bailout partners, Ireland has the lowest inflation in Europe, and the rate has been half that in Britain for some years.

Hardly anybody now alive has experienced such a thing. Reactions are hard to predict.

Minuscule inflation has been a godsend to savers, whose wealth has been raided by taxes and levies to offset public and private debt. But they may just save harder rather than spend, while those who want to spend may well hang on for better bargains. Christmas and New Year certainly showed that people are looking for bargains.

This kind of psychology seems to be the best explanation for another enigma – the sharp rise in house prices in certain favoured areas. While prices were falling, even those who could buy sat on their wallets. As soon as it looked like they had stopped falling, cash buyers emerged, hunting for properties whose long-term values should stand the test of time.

Low inflation has rewarded the early movers with spectacular real gains. The puzzle is, what happens next?

In the USA, housing sales are buoyant again, but at prices 16pc below their peak. In Ireland, something similar is happening with commercial property, to the great relief of the Government, NAMA and the liquidators of IBRC (formerly Anglo).

That undoubtedly classifies as recovery but the housing market is more difficult. The expected shortage of mortgage credit and the pressure on incomes from restrained wage growth and, eventually, higher interest rates will limit buyers' purchasing power. The shortage of accommodation in many areas because of the collapse in construction, and the desire of sellers to get prices close to 2008 levels, may keep upward pressure on prices.

Into this tug of war steps the Government, with its plan to finance builders through the strategic investment fund. This will be a popular announcement, but houses take so long to build, and the shortage is so acute, that there may be little long-term political gain. With certain terms and conditions, though, it may well be the right thing to do.

It is all about jobs in the end. The oddest thing about the recovery, as this column mused a few weeks ago, is that it has been led by jobs. So odd that it has been difficult to believe.

The IBEC forecast of more than 100,000 new jobs over 2013-14 implies a fall in productivity, since the rise in output has been much more anaemic than the growth in employment.

But Irish output is becoming almost impossible to measure, what with American royalties and British brass plates, so there was quite a bit of cheer in official circles over last week's Exchequer returns. Behind the headline improvement, a 7pc rise in social security levies began to confirm the CSO survey results of growing employment. Income tax did too, but suggested that, even though the survey finds most of the new jobs are full-time, they are not particularly well-paid.

It would not be a surprise if most are below the top-rate entry point of some €38,000 a year. Irish employers reacted to the crash by cutting jobs rather than wages. They may well have overdone it and are already seeking to replace some of those lost jobs – quite probably at lower wages than the ones that were lost.

Not everyone will like it but, if hindsight shows that something like this is happening, it will be a powerful argument for easy hiring and firing – precisely the issue that is so politically toxic in countries like Italy and Spain.

As for construction, Merrion Street will have been watching Downing Street, where the recovery seems to be fired to a significant degree by policies to encourage house building and purchases. This looks alarmingly like a "hair of the dog" cure for a hangover, but one must also be wary of the military mistake of fighting the last war.

The trouble with governments – especially Irish governments – is that they keep rushing in where they are not needed; which nearly always makes things worse. Right now, though, they may be needed. The market will struggle to broaden what is undoubtedly the early stages of recovery. It will require an increase in investment, both in construction, machinery and human skills, but both banks and companies are financially stretched.

So is the Government, but it has scope to give the recovery pump a good priming. It does not, however, have scope to prime everything. Choices will have to be made. An investment-driven recovery may not be all that politically popular. The votes are in consumption.

At two-thirds of the economy, any increase in personal spending does indeed have a major impact. The uncomfortable truth, though, is that it may have to fall, not rise, as a proportion of economic output in the kind of recovery we need.

Flushed with success, the Government is promising both. Ambitious targets for construction, industry and services employment jostle with promises of personal tax cuts and hints of a reversal of wage restraint. It may be a strange recovery, but talk like that conjures up another kind of waddle and quack – one that is all too painfully familiar.

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