Saturday 24 August 2019

Bright visions of a recovery must be turned into reality

Brendan Keenan

Brendan Keenan

"And faded through the brightening air."

Recent talk about Ireland's recovery - and whether there is one - brought to mind Yeats' description of the vision of the wandering Aengus.

The air is certainly brightening. The most recent official forecast - that of the EU Commission - was happy to accept that growth in the output of goods and services (GDP) might exceed 6pc this year.

Even more remarkably, it's forecast for national income (GNI), widely regarded as a better measure for the Irish economy, is for growth of 8pc. No wonder Brussels' statisticians took a benign view of October's jolly Budget. The troika, along with others, will express concern, but is there anything to be concerned about?

Unemployment continues to fall and tax revenues pour into the Government coffers. These easily-measured events have become more important as other figures - especially the international benchmark of GDP - become ever more difficult to interpret. But even they have their complications. There is, for instance, the unexpected €2bn in corporation tax receipts. No one seems to know where it came from; and certainly not whether it will last.

Those complications may be the source of the sense that, like the vision, it is all something of a chimera, however bright the air. One difficulty is that growth rate. It just seems too good to be true. That may not be entirely the case but is it too good to last?

During the recession one worried that recovery, if and when it came, would be disappointing compared with the spectacular growth in the boom, and peter out from lack of confidence. Instead, we have growth which matches those heady days but confidence has been slow to improve. The recovery is real enough, but some things about it are odd.

I gave the full definition of GDP because growth is a slippery concept. Comparing a situation with 12 months ago - which is what "growth" usually means in these cases - is a useful exercise but it has its limitations. In particular, it does not tell you anything about the actual situation last year and now - only the change.

That matters when it is a cyclical recovery - output picking itself up off the floor and dusting itself down after a fall. Growth can be quite spectacular in those circumstances but still leave firms short of what they could make and sell if they had the customers.

Much of the recovery has been cyclical in this way, which helps explain the muted raptures as the glorious statistics pour in. It is particularly true of personal consumption, which is not only the most important bit of the economy, but of politics as well.

Spending collapsed under the weight of unemployment, taxes, debt and fear. Last year was the first to record an upturn and this year's expected 3pc growth can be regarded as robust. But it still leaves the real volume of retail sales and services below their peak. A large number of firms went out of business and those that remain will be able to supply the anticipated demand for a few years yet.

That also helps explain the common complaint from people that they have not felt the recovery. Along with the fact that taxes now bring in €6bn more than in 2009, while average earnings have barely changed.

On the other hand, I have to remind myself that a large fraction of the adult population were not adults eight years ago. Their disposable income has not been devastated and, while many would love to get a mortgage, they are not in debt.

So there are many different recoveries taking place - or not, as the case may be. Growth will not help those whose wealth was lost, whether by some unwise property purchases, the collapse of supposedly safe bank shares, or cuts in "guaranteed" pensions. Rock bottom interest rates make it impossible to rebuild a nest egg safely.

Interest rates themselves are a great oddity. Ireland has been blessed that its orgy of debt has been followed by a fall in rates close to zero, oodles of cash from the ECB to support government borrowing in the market and generous terms on troika debt.

None of this was done for our benefit, of course, but it could have been otherwise. Some argue that low interest rates are here for ever and Bank of England governor Mark Carney (rather unhappily, I thought) has indicated 2017 at least for an increase. But beware "this time it's different". Dearer money, even in the medium term, is a threat to Ireland's households and government.

As for the business sector, in a talk to the Small Firms Association last week, departing Central Bank governor Patrick Honohan drew attention to the curiosity of a job-creating but credit-less recovery. Bank lending is still falling, even among performing loans.

Text books, along with experience, say credit-fuelled investment should lead recovery and employment should improve last. This one started with jobs, followed by investment, while credit growth has still to arrive.

That sounds great but the lack of growth in lending may yet pose risks. One obvious case is the failure of the construction industry to return to necessary levels of output. There are many reasons, but bank caution in lending to builders - with limits of 60pc loan-to-value in many cases - is one of them.

Dr Honohan sees more bank competition as the best answer, while recognising that too much competition between banks was a major cause of the bubble and burst. Subliminal doubts about recovery may have something to do with watching US venture and vulture funds buying assets at mouth-watering yields while bruised Irish and European banks shun the market. Their capacity to get every cycle wrong is a continuing source of wonder.

Delayed growth in construction might prove a bit of a godsend in the end - at least to the next government, if not to frustrated home buyers. All the plans envisage growth averaging almost 4pc a year over the next three years. It has to be the real deal too, giving employment increases of 1.5pc a year and related tax revenues.

It is a tall order for an economy whose previous peak was so artificial and which is already one of the richest and most expensive in the world. Even if it continues to surprise, though, the same plans show a need for restraint in public spending and limited scope for tax cuts.

Coping with these rules in the next Dail could persuade a lot more people that the recovery is an illusion. They might be wrong, but the real mistake would be to do an Aengus and go chasing after it.

Indo Business

Today's news headlines, directly to your inbox every morning.

Don't Miss