Tuesday 20 August 2019

This Government, not the consumer, is getting carried away with the feelgood factor

Dublin’s city centre is buzzing – but it’s not 2007 all over again
Dublin’s city centre is buzzing – but it’s not 2007 all over again
Richard Curran

Richard Curran

Fancy buying your significant other a really nice gift this Christmas? Brown Thomas is stocking a new Prada handbag that will sell for €29,000. And what's more, the luxury Grafton Street store expects it to sell out.

Add in the massive increase in new car sales this year and the increase in consumer spending on things like holidays, and you can certainly create the impression that not only is the economy growing but it is getting dangerously mad.

Has the economic recession turned into a boom that is getting "boomier?" Throw in the warnings of outgoing Central Bank governor Patrick Honohan.

He wrote to Michael Noonan cautioning him about a giveaway Budget that might be built on windfall tax receipts and overconfidence in planning for the future. Mr Honohan was worried that our GDP growth may be exaggerated by the role that multinationals play and he warned the minister about pursuing pro-cyclical fiscal policies.

There is certainly a feeling, even among business people, that things may be going a little "2007ish" all over again. You hear people comment on it all the time, even when they are in the midst of doing well on the back of the recent economic recovery.

There are two sides to this story, but it is important to look at the facts behind the comments. For example, Mr Honohan was not warning that the economy is overheating. He was warning the minister not to undermine the exchequer's financial position in the event that something might go wrong.

Clearly he feels the economy is performing well enough, that it doesn't need a fresh stimulus from a giveaway Budget. Yet he is conscious that major external factors could take the wind out of our sails and he wants the exchequer to be insulated from that.

A weak euro, low interest rates and cheap oil have given us an extra economic push, which could change. Worries about the wider global economy, China or a new financial crisis abroad are very real. To assess where we are in all of this, you have to look at the financial position of the exchequer and the financial position of the country's citizens and businesses as connected but still separate things.

Citizens and businesses are paying down debt. Household debt peaked at about €200bn in 2009 and stayed there until around late 2011. It has since fallen to around €160bn in the last four years.

So, we don't seem to be borrowing too much new money. Back in 2006 lending to Irish households was growing at 36pc per year. It has been in negative territory since 2009. The problem is that Irish households still owe around €160bn, which is three times what it was in 2004. So, households aren't doing the wrong things right now, but they remain vulnerable to a nasty shock.

The State, on the other hand, is still increasing its borrowing and will borrow money in 2016 to fund a €1.5bn Budget giveaway.

Take the car sales figures. In the first nine months of 2015 new private car sales amounted to 114,446. This was 27,552 more than in 2014. For example there were 4,717 new Audi cars and 4,130 new BMWs registered in the first nine months. So, somebody is making money and can afford these expensive new luxuries. In fact there were 51 new Porches registered in 2014. But that is still less than half the number of Porches sold in 2007. New car sales in 2015 will be at least 40,000 fewer than at the peak of the boom.

And furthermore, the average price of a new car in 2014 was 21pc lower than in 2007. But there are questions. Lots of banks offer Personal Contract Plans, which make it relatively easy for people to drive away in a spanking new motor but they can find that after three years they aren't much closer to owning it.

New car sales are a boom for the exchequer. If things slow down, people might not feel as good about buying a new car. Car sales fell off a cliff in 2009. Yet, in the first half of 2015 the exchequer took in €684m in VRT and Vat from new car registrations, up €143m on the same period in 2014.

So, 10pc of Michael Noonan's €1.5bn giveaway Budget was financed by additional tax on new car registrations in the first six months of 2015. What happens if these motor sales figures slowed down in a couple of years because of wider economic factors?

If you walk around the Grafton Street area in Dublin on a Friday evening or try to book a hotel in the city at a weekend, you will get a real sense of a place that is booming. Lots of people are spending money on entertainment, restaurants and bars. Again, it's as if the place has gone a bit mad all over again.

But take a closer look. A huge number of those out and about are visiting tourists. Between January and September this year, 1.2 million more tourists visited the country than in the same period two years earlier. We had 171,000 visitors per week to Ireland so far this year. This is great news for the economy.

Look at the age demographic of those who are out. Many of the non-tourists are people from abroad who have come here to work for multinational companies or to study in universities.

Others are Irish-born, working in reasonably well-paid jobs but possibly still living at home, because they were too young to get caught up in the last housing boom.

Their disposable income is relatively high. Their debts are relatively low. To what extent should we be worried that they are spending borrowed money?

During the madness of 2006 and 2007 people were dining out on credit cards which they felt comfortable about because of the equity they had built up in their homes. The evidence suggests that not a huge amount of the money being spent in Dublin City Centre at the weekends is borrowed. There are over 111,000 more people working in Ireland than four years ago. It is still around 132,000 fewer than at the height of the boom. Yet this year, our GDP will hit close to €200bn, or equal to where it was in 2007.

These are the kind of anomalies that Patrick Honohan may be warning about. He isn't warning of a crash or saying the economy isn't going well. He is more concerned about political decisions which appear to assume everything will keep going as it is.

Corporation Taxes from the profits of companies in the first nine months of this year were €1.2bn more than the Department of Finance budgeted for. We simply don't know why they were up so much and therefore cannot assume all of that money will be there next year. But it is pencilled in to be spent.

There is definitely more of a feelgood factor in the economy and there are solid reasons underpinning it. A feelgood factor, which encourages people who can afford it, to spend a little more is a good thing. It becomes bad when it encourages people who can't afford it to spend too. So far, the Government looks more guilty of spending money it doesn't have than consumers are.

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