Sunday 15 September 2019

Jobs bounce shows Ireland Inc is getting back to work

Latest employment figures are further proof of our recovery, but there could be clouds on the horizon, writes Dan O'Brien

One factor strengthening the economy is the halving of oil prices in
the past year
One factor strengthening the economy is the halving of oil prices in the past year
Dan O'Brien

Dan O'Brien

Last week brought more genuinely good news on the economy. The best measure of activity - the numbers at work - continues to move strongly in the right direction. In the July-September months, the national payroll expanded by 11,000 compared with April-June. The new jobs were all full-time jobs. Six of the country's eight regions contributed to the increase in employment over the second and third quarters. Young and old benefited.

As Ireland enjoys some of the strongest rates of jobs growth anywhere in the developed world, the ranks of the unemployed continue to be whittled down. The State's statisticians last week estimated that the share of the labour force out of work fell below 9pc in October, the first time that has happened since the economy was haemorrhaging jobs in 2009. All told, there was a great deal that was positive in last Tuesday's jobs report and very little that was negative (for those interested, I analyse the numbers in greater depth in an accompanying column in today's business section).

The labour market indicators are being corroborated on an almost weekly basis by the many other indicators from across the economy. Although weaknesses of various kinds remain, among them lingering legacy issues from the crash, the pace and breadth of the recovery is not too far short of miraculous, particularly in the context of such weak growth in almost all of the advanced economies.

Of the recent data, nothing quite illustrates the manner in which growth is now being felt in the domestic economy like the number of new cars that are being driven off forecourts.

In the first 10 months of the year, almost 120,000 shiny new cars were sold in the Republic. That is an increase of 31pc on the same period in 2014. Growth in sales of big- ticket items of that magnitude is very unusual anywhere, at any time. For comparison, even during the heady days of the Celtic Tiger years that sort of increase was only registered once in 2000, when people lost their reason in order to have a new millennium-reg car.

There is no doubt that much of the huge increase in cars sales is due to pent-up demand following an extended period in which purchases were postponed (at the lowest post-crash point - 2009 - car sales were less than half their current level and around a quarter of the previous peak). But there is more to it than simply not being able to postpone trading in jalopies any longer. That people have the wherewithal and the confidence to buy again in such large numbers says a great deal about the recovery.

More positive still is that it is not only big-ticket items that have consumers spending again. Shop-sold goods of most types have been rebounding strongly. Retail sales excluding cars started taking off in 2013 after the post-crash low-point was reached in April of that year. In the 30 months since, they have grown by almost 15pc in volume terms, a strong rate of increase by any measure.

One factor accounting for the strengthening domestic economy has been the halving of oil prices over the past year, owing in large part to weaker demand in Asia. This has been hugely beneficial to countries such as Ireland, which import most of its energy needs (and Ireland is on the extreme end of the spectrum, with one of the highest import-dependency ratios in Europe).

Although prices for consumers don't move as much as the underlying price, thanks to very high energy taxes, prices at the pumps are down by around one-fifth on this time last year. That leaves more cash in consumers' pockets which can be spent on goods and services with more local content.

After the national trauma of the credit bubble and subsequent crash, there is a natural fear among many that a surging economy is a sign that people might be losing the run of themselves again.

But, happily, there is very little evidence of that. Borrowings are crucial in this regard. Sensibly, Irish households continue to pay back more debt than they are taking out in fresh borrowings. That is partly a supply of credit issue. The banks are still dealing with (or, perhaps more appropriately, not dealing with) the aftermath of the property crash - even now they have the second highest share of non-performing loans on their balance sheets in Europe. Only Greek banks are worse.

If the supply of credit is still impaired by an enfeebled banking system, the demand for fresh borrowings is being dampened by the still-high levels of debt. Irish household borrowings relative to disposable incomes are the second highest in the eurozone, with only the Dutch being more burdened.

This, it should be said, still poses a real, if medium-term, risk to the wider economy. Interest rates remain at very low levels by any historical standard. At some point, they will begin to normalise. When that eventually happens it will suck demand out of the economy as all those highly indebted households face higher servicing costs. It is therefore imperative that, over the next couple of years when interest rates look set to remain very low, people make every effort to reduce their borrowings to safer levels.

If there are still weaknesses in the Irish economy as a result of the crash, weakness in trading partners is having an effect here at home. Among the few economic indicators that are trending negatively at the moment are exports. Data from ports and airports around the country show that goods exports have fallen every month for six straight months.

This should not cause alarm bells to go off, but it is an indicator worth keeping a close eye on.

Irish goods exports tend to be very volatile, not least because they are dominated by a handful of companies, mostly in the pharmaceutical sector. That the level of exports remains high (despite the downward trend over the past half-year) is also reason not to fret excessively.

However, there is a lot of weakness around the world which will inevitably impact on an economy as open as Ireland's.

Growth in far-flung China is slowing. There are real concerns that the world's second largest economy could be headed for a hard landing after an Irish-style surge in credit since 2008. Across the Sea of Japan, the outlook in the world's third largest economy is poor, if for different reasons. Despite the massive experiments in money printing that the Bank of Japan has engaged in, the Land of the Rising Sun shows no signs of picking its economy off the floor.

As Ireland does relatively little business with the east, we can get away with not worrying too much about weak growth in Asia. But weakness in the world's largest economy is an entirely different matter.

A debate rages in the US about raising interest rates, from their current near-zero level. Some argue that it is too early to start dampening the economy with higher interest rates, given non-existent inflation and fragilities in the American recovery.

Others say that asset bubbles could be forming as a result of many years of historically cheap credit. The Federal Reserve has been putting off a rate hike, but it will come soon. We will finally know, one way or the other, who has been calling it correctly on where American rates should be.

Back on this side of the Atlantic, Britain has been doing well over the past few years and the short-term outlook doesn't give cause for concern. But with almost every indicator showing a modest slowdown this autumn and fears that George Osbourne's proposed tax changes could clobber lots of families next year, Britons in 2016 are likely to buy less from Ireland than in 2015. And finally, there is the Continent, Ireland's biggest export market.

Apart from Spain, which is rebounding from its housing crash, there is depressingly little that might be viewed as positive. The very tepid recovery in evidence in the eurozone since 2013 weakened further in the third quarter of the year and money printing by the European Central Bank is showing little sign of having the desired effect of perking up the economy (and inflation measures).

All told, weakness in the global economy is having a dampening effect here, and that is not likely to change much over the foreseeable future. But such is the momentum in the domestic economy, we should be able to weather the squall. If, however, the squall becomes something worse, all bets are off for 2016.

Sunday Independent

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