Thursday 22 August 2019

Even if economy is picking up pace it could still come off rails

Dan O'Brien

Dan O'Brien

Yesterday's report by the ESRI paints a quite rosy economic picture for 2017. Next year the Irish economy will grow strongly, the institute's economists reckon, and at a much faster pace than almost every other developed economy.

They predict that there will be more jobs and less joblessness. Their crystal ball tells them that in 2017 the Government will take in more revenue than it spends, something which, if proved correct, will be the first time the State's books have been in balance in a decade.

Although one can only hope that the ESRI's predictions turn out to be correct, they seem just a tad too rosy given all that is happening at home and abroad.

It should be said as a starting point, and in fairness to the ESRI economists, that forecasting economic activity is difficult (I spent a decade doing it). The most difficult time to predict the future is at turning points. There are some signs that the Irish economy could be at a turning point right now.

One area of concern is how individuals and households are spending and how confident they are about the economy.

Consumer spending on goods and services is the most important element of economic activity. Over the course of this year there have been mixed signals from the different indicators of consumer activity and confidence.

Last Friday, the widest measure of consumer spending showed a rebound in the July-September period. This would appear consistent with employment and earnings figures - more people are working and earnings are rising (albeit modestly).

As a result, the combined incomes of all consumers are up. That gives them the financial wherewithal to spend more.

But other indicators are less positive. Sales in shops are stagnating according to the four major indicators of retail activity. In October all four were down on earlier high points in 2016.

Consumer confidence is also down. The ESRI's own survey of people's level of confidence in the economy shows that the index has declined by 10pc since the start of the year. In the latest survey, taken in October, sentiment was at its lowest level in almost two years.

As the institute's economists rightly note, the overall level of confidence is still high compared with most of the post-crash period, but their comment that it has remained "relatively static since the start of the year" with only a "slight decline noticeable in recent months" is a very benign interpretation of the data.

More importantly, given how it has evolved and given the patterns in retail spending, it is hard to understand why the ESRI folk are quite so bullish about consumer activity next year.

The same could be said about their public finances analysis and forecasts. The report talks of "the ongoing strength of the Exchequer tax receipts observed so far this year". This seems curious.

While November exchequer tax receipts did grow strongly compared with the same month last year, there was a marked weakness in the previous three months. Moreover, if highly volatile corporation tax revenues are excluded, exchequer tax receipts in the first 11 months of the year were actually below what the Department of Finance had budgeted for.

The picture for social insurance contributions is worse, and it is not clear if the ESRI people factored this revenue stream into their calculations (pay-related social insurance - PRSI - contributions go to the Department of Social Protection and are thus not included in the traditional exchequer tax figures). Not only were these down on official projections over the first 11 months of the year, they were lower in cash terms too.

None of this means that the public finances are heading south, but there are at least some questions about the momentum behind revenue trends as we face into a new year.

Also of some concern is the increase in government borrowing costs, which have more than doubled over the past three months. The ESRI does not mention the development, perhaps because the interest rate the Government pays - around 1pc annually on 10-year borrowings - remains very low by historical standards. But that is showing signs of changing.

Some context is needed here. The Irish state has been able to borrow at very low interest rates over the past couple of years. That has happened not because it suddenly became more creditworthy, but because the European Central Bank in Frankfurt has been printing money to buy Eurozone government bonds (that pushed effective interest rates down). The Irish government has also benefited from a wider international trend in financial markets which have had at least some characteristics of a bubble.

But two big things have happened recently which suggest that the era of ultra-cheap money for governments may be drawing to a close. Last week the ECB announced it would print less money next year. That promises to restore something resembling normality to the market for government debt.

The second change was the election of Donald Trump. As he is promising to spend more and tax less, the US government will have to borrow more to fill the gap. That has caused financial markets to push up borrowing costs for governments.

On Tuesday, the agency that manages the Irish state's €200bn debt mountain - the NTMA - said it would need to borrow up to €13bn next year (most of which will be used to repay old debts). If the trends of recent weeks do mark a turning point, raising this money will be more expensive than the Government has budgeted for.

Again, this is not a matter that should cause panic. But it is one of the many uncertainties and risks that the economy faces as the year ends.

The ESRI has in the past missed some big risks that ended up materialising, including the property crash and Brexit. Let us hope that its benign evaluation of the risks for 2017 proves correct.

Irish Independent

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

Don't Miss