Friday 26 April 2019

The recovery has arrived - but nobody wants to say so

Stephen Byrne's illustration
Stephen Byrne's illustration
Brendan Keenan

Brendan Keenan

Back in the day, when things were still going well but people were starting to worry, some number cruncher discovered that one of the best ways to predict a recession was to count the number of times the word "recession" appeared in the media.

I wonder does it work the other way? Would the number of times "recovery" appears be a good guide as to whether recovery was really on the way? I suspect not.

Without actually trying to count, one has the impression that "recovery" is being used sparingly, in the media and elsewhere. Apart from anything else, commentators and analysts get into much more trouble for failing to forecast recession than they do for missing a recovery. Worry is always a more potent emotion than optimism.

And yet, by all the figures, recovery is already here, and has been for some time. In its quarterly commentary last week the ESRI (Economic and Social Research Institute), estimated that national income (GNP) will grow by 3.4pc this year, following 3.2pc last year. This did produce a spate of recovery stories, but a bit late in the day.

The caution with which most people approach the other "r" word may be coming to an end. One is still often asked, "Is there any sign of recovery?" I have yet to be asked, "How's the recovery going?" That is the more valid question, and one to which there are several possible answers.

By any reasonable standards, the ESRI forecasts of a 10.5pc increase in real national income from 2013-16 represents a substantial recovery. One of the many mental adjustments we will have to try to make is that the 40-year average of 4pc growth is a thing of the past. Most economists would be pleasantly surprised if growth averaged 3pc over the next ten years, given the country's high national income, even after the crash.

One can see why public discourse is finding it hard to reflect the upward path of output and employment. While these are good figures, there has been no spurt of above-average growth of the kind which often marks a recovery and convinces people it has arrived. Nor is there likely to be.

Financial recessions such as this one do not end that way. Recoveries are slow and uncertain. The ESRI joins the IMF (International Monetary Fund) in worrying about recovery petering out because of a shortage of bank credit.

Things are getting easier for the banks, with the rise in Dublin property prices in particular improving the value of the security on their dodgy loans, but there must be doubts about their capacity to increase lending to the levels necessary for any sustained recovery.

That, however, is a problem for the next few years, as is the inevitable turn in the interest rate cycle which I wrote about last week. There are other explanations for the lack of enthusiasm about the short-term situation.

One is the statistical fog which has descended upon Ireland and other countries, but particularly Ireland. Much is due to the hot topic of tax avoidance by multi-national companies, whether inverting, re-domiciling, or just shuffling profits around.

To this must be added the end of patents on blockbuster drugs, the forthcoming huge purchases of aircraft by Ryanair and the re-classification of aircraft leasing, a business as big as the Irish economy.

It all makes the conventional measure of output, GDP, both increasingly meaningless and erratic. For years, I hardly ever quoted it, and it wasn't as messed up then as it is now. But GDP is the international benchmark and the debt crisis meant it could not be avoided. From now on, though, I shall try to go back to the old way of using GNP.

Such complexities do not assist informed debate, but the main reason hardly anyone is talking about the recovery is that personal incomes are still falling; mainly due to higher taxes and government charges. There can be little enthusiasm for a recovery which does not add to personal income.

However, the prolonged period of steep falls should now be over. The ESRI assumes a €1bn adjustment in the October Budget. It will not be more and it could be less.

Were the Government to stick with its original deficit target of 2.9pc of (aargh!) GDP, it could achieve it with less than €1bn in taxes and spending cuts. I suspect it may worry about the effect on markets and EU institutions of doing that, but I also suspect that, one way or another, the actual hit in the course of 2015 will indeed be less.

It is likely to be 2016 before we get a neutral, or even an expansionary, budget but the easing of austerity is bound to have practical and psychological effects next year. The "nowcast" sees this year bringing the first rise in personal spending since the crash, with a €1.7bn increase this year followed by €2.6bn in 2015.

That is a long way from redressing the apocalyptic €12bn fall in personal consumption since 2008 but at least it stops the rot.

Business people should understand that, at best, it may be ten years before personal spending regains the 2008 level in real terms. The way inflation is going - or rather not going - it may take nearly as long to restore it to the same monetary value.

So how is the recovery doing? As well as could be expected seems to be the answer; maybe even better. In particular, there is the remarkable forecast that employment could be back to 2 million by 2016, even though real output or personal spending will not have returned to their value when employment was last at that level.

This is despite the dismal scene in continental Europe. The Irish recovery in the face of euro zone weakness again shows the importance of the UK and US economies. If, as some analysts think, the poor performance means a weaker euro, so much the better for Ireland.

And then there is the potential of property. Like all markets where the ignorant and the foolish like to play, there is either too much property when it is not needed, and not enough when it is. Here we are with a housing shortage in Dublin, creaking infrastructure and not enough capital, builders, efficient administration or confidence to do anything about it.

I confidently expect the Government to respond with tax incentives, but I wish they wouldn't. Construction could indeed provide the next stage of recovery. Better to achieve it by reforming the system and providing the finance rather than heading back down that primrose path of good intentions.

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