Wednesday 21 February 2018

Unemployment is falling but we're not out of the woods yet

Colm Kelpie

Colm Kelpie

Many readers of this newspaper may have questioned the upbeat pronouncements by government ministers and experts about Ireland's staggering growth figures last year.

They may very well have wondered why they weren't feeling the surging recovery. One possibility is that part of the dramatic rise in GDP last year wasn't actual growth at all. It was just phantom growth.

Accounting anomalies in the counting of exports and involving just a handful of companies skewed the data, and once again showed just how unreliable and volatile Irish GDP data can be.

The Fiscal Advisory Council - the state's budgetary watchdog - drew attention to this back in November when its chief Professor John McHale said the GDP figure for the year should be "taken with a pinch of salt". The Council reckoned that about half of the growth recorded in the first half of last year wasn't really growth at all, but was attributed to so-called contract manufacturing.

This is where a company in Ireland engages a manufacturer abroad to produce a good for supply to a customer overseas. The ultimate sale of the good is recorded as a goods export here, because it was contracted by the Irish-resident firm, but none of the activity took place in Ireland.

The Central Bank, Central Statistics Office, and, most recently, the International Monetary Fund have all been flagging up this issue, and have all been questioning the strength of the Irish recovery. Even credit ratings giant Moody's got in on the game yesterday.

The good news is that experts believe these anomalies will be flushed through and will not reoccur this year. And while it may have flattered GDP, the underlying data shows that the recovery remains strong.

A much better gauge of what's taking place in the economy is the fall in unemployment, and even better again, the rise in domestic demand. Domestic demand contributed to grow last year for the first time since the crisis.

The Central Bank yesterday upgraded its growth forecast for this year on the back of predictions domestic demand will strengthen further. The latest Exchequer returns released yesterday - the first for the year - show that VAT returns in January, which reflect the level of spending during the busy Christmas trading period in November and December, were €225m or 12.9pc higher, than the same period the previous year.

Income tax receipts in January were €58m higher in January than January of 2014, reflecting the rising number of people in work.

But, to quote Central Bank chief economist Gabriel Fagan, we're not out of the woods yet. Debt levels remain considerably high at an estimated 111pc of GDP last year.

The Government opted for a softer Budget this year rather than cut debt quicker. With an election, promises of further tax cuts and public pay talks on the horizon, budgetary and debt pressures are only going to increase.

Irish Independent

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