Saturday 14 December 2019

Brendan Keenan: Christmas shopping forces rethink on economic trend

HERE'S a confident prediction. This year will be better than the current forecasts suggest. Or worse.

The most unlikely scenario is that it will turn out pretty much like last year: growth of less than 1pc and another, albeit smaller, reduction in personal spending.

This is the general consensus, with very narrow differences between optimists and pessimists. The optimists are led by the Department of Finance in the Budget (the ESRI is also in this camp) with a forecast that output (GDP) will grow by 1.5pc and national income (GNP) by 0.9pc.

The Budget is based on these forecasts, although the IMF is a bit less bullish – if one can use such a word in this context – forecasting a GDP rise of 1.1pc. Other forecasts range from a 0.5pc to 1pc, but everyone is less optimistic than they were in late summer, because of weak data in the autumn.

The one figure which seems to appear everywhere is that personal spending will fall by 0.5pc in volume this year. The unanimity is probably based on the fact that everyone knew the size of the Budget corrections – €3.5bn – and have the same formula for the impact on personal spending.

Then came Christmas and the new year sales, after the Budget and its various recriminations. This was not in the script. But apart from that surprise, too much is happening, and too much is changing, for a 12-month forecast to have much credibility.

As for personal spending, it was pretty clear in the streets of Dublin from about October (and perhaps in other towns), that it was going to be a better shopping season than 2011.

By December, it was clear that many shop, bars and restaurants did not have enough staff. And who could blame them?


After all, last year's Budget took another few billion in spending money out of customer's pockets. There were almost 4,000 fewer wage earners at the end of the year than at the start. Interest rates were going up wherever the banks were able to put them up. Not much of a recipe for a merry Christmas.

Yet retailers say it was probably the best since 2007, when purchasing power was about €20bn greater than it is now.

It looked, from a visit a few months ago, as if Belfast was going to post a similar record, until the lunacy of the flag dispute. Fleeing Northern shoppers contributed something to the Dublin spree.

Of course, it was nothing like the mania of the mid-2000s, but the result still seems surprising.

It has to be an example of what the economist Keynes called "animal spirits" – the psychological attitudes which economists find so difficult to put into their mathematical models for making forecasts.

In non-mathematical language, people get used to anything, and remarkably quickly too. The shock of the crash, which came out of a clear blue sky for most people, is beginning to wear off.

Once that happens, it matters more whether or not things are improving, rather than how they actually are. The annual Budget takeaway does not help – and there are at least a couple more to come – but other things, especially the news from Europe has been encouraging, to put it no higher.

This is the stuff which makes the economic cycle turn. Unfortunately, there is no known model which tells when it will turn. History is the only guide.


There are patterns, but with differences of several years when it comes to longer cycles like stock markets, property prices or financial recessions of the kind we face now.

Indeed, if 2012 does turn out to mark the bottom of the Great Contraction, it will, at just under five years, be a pretty average one in terms of duration, if not in severity, where it is one of the worst on record.

I am not so bold as to say that 2013 will be the turning point, but one can draw a scenario where it might. Even so, despite Christmas sales increases of up to 20pc, it will not be a consumer-led recovery.

The prospects for disposable income are too poor. Retailers have noted the falls in average spend per shopper. There were just more shoppers. Recovery might start with consumers though, and then spread into investment in both business and property.

A very great deal depends on Europe. As far as Ireland goes, a March agreement on the Anglo-Irish Bank promissory notes, while it won't put much in people's pockets, should help that green shoot of confidence.

Such a deal now seems more likely than not. Apart from anything else – such as the wholehearted IMF support for some arrangement – the prospect of the country holding the EU presidency huffing, puffing and complaining as it hands over €3bn to the central bank seems pretty improbable politics. Maybe we got lucky with the timing.

Europe will have to do more than that of course. The moves towards a banking union and some collective responsibility for bank financing have slowed, but they have not stopped.

Provided they do not stop or, worse, go into reverse, market and consumer confidence on the future of the euro should continue to improve.

Over in the US, one is still trying to get one's head around the Federal Reserve promise to keep interest rates close to zero until unemployment is below 7pc.

What an extraordinary mandate for a central bank to take on. Money supply? Milton Friedman? Never heard of them.

No one has jumped off the fiscal cliff either, so nothing much will be done about the deficit. One sees the outline of an inflationary cliff looming up but, in the meantime, everyone will benefit from American insouciance, while the euro might even escape the worst of any inflation.

It also follows that, if things do not work out like this in Europe and the US, the consensus forecast could turn out to be too optimistic and recession will loom again in 2013.

But, to use a nasty piece of jargon, on the grounds that it hasn't been heard for quite a few years, the risks appear to be on the upside.

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