Friday 18 January 2019

We've many reasons to be cheerful, but the Budget's not one

Despite an uncertain world, Ireland's economic prospects give us cause for cheer, writes Dan O'Brien

Donald Trump
Donald Trump
Dan O'Brien

Dan O'Brien

The holidays are over for most. It's back to the daily grind for many. The next 12 weeks will be the busiest stretch of the year for many people.

No better time, then, for a stocktake on the state of the economy, how economic (and other) developments are affecting people and businesses, and what it all means for the Government's budget sums. The good news is that the dashboard of economic indicators shows an economy doing well. Growth is solid-to-strong and mostly broad-based. Risks abound, but no warning lights are flashing.

Here are some of the biggest and most relevant recent developments.

Wages starting to rise

For many people, the most welcome economic news of late is on wages and salaries. The missing piece in the recovery over five years was very low overall pay growth. But that is now changing.

The most recent figures, published nine days ago, show average earnings across the economy growing at their fastest pace in a decade. In the second quarter of the year, they were up by around 2.5pc on the same period in 2016. Given that consumer prices didn't rise over that time, those decent pay increases weren't eroded by inflation. With real incomes rising solidly, more people are starting to feel a recovery.

Pay pressures may be problematic for some struggling businesses, but competitiveness gains have made economy-wide wage increases affordable (see the Business section).

Consumers spending more

More money in pockets and purses might normally be expected to lead to more spending. That is exactly what is happening. And spending growth is being bolstered by more people working and shorter dole queues.

Although the release of the latest jobs figures has been delayed, employment growth in the first months of the year was strong. Separate, more recent unemployment figures up to July show that the jobless share of the workforce has fallen to 6.4pc. The declining trend over half a decade has slowed recently, but that is probably because the workforce is expanding rather than less joblessness - the number of people collecting unemployment benefits, at 275,000 in July, is at its lowest since late 2008, and still falling fast.

Higher wages and more workers are leading to more cash being spent in shops, restaurants and other outlets. Growth in core retailing spend (which excludes cars) accelerated in the first half of the year. Foreign travel is also up. In the first seven months of the year, the number of trips abroad rose by 8pc on the same period in 2016.

State coffers looking better

Strong and broadly based economic growth should be generating lots of extra tax revenue. But, for reasons that are not entirely clear, that was not the case from the middle of last year until late spring. During that time revenues hardly grew at all. However, they bounced back in May, June and July, rising by almost a tenth on the same months in 2016.

If cash continues to gush into government coffers at this pace, there will be some easing of pressure on Minister of Finance, Paschal Donohoe, as he puts the finishing touches to his 2018 Budget over the next six weeks. But even if that rosy scenario materialises, nobody can expect to be much better off as a result of tax cuts or more spending. One way or another, there won't be much fiscal space next month.

Ireland sells to the world

As one of the most open economies on the planet, what happens abroad matters more to Ireland than most countries. Economically, most of the news remains good.

Continental Europe - our biggest trading partner - is growing at its fastest rate since before the Great Recession. That looks set to continue, as there is plenty of momentum in the European economy. The US last week revised upwards its most recent economic growth rate. Activity in America is buzzing along at its fastest pace since 2015.

Britain, which accounts for 15pc of Irish goods and services trade, continues to do well. Although some indicators across the water are reflecting uncertainties around Brexit, and domestic politics, the economy continues to grow and record numbers are at work.

Reflecting what's happening in our biggest markers, Irish goods exports in the first half of the year grew solidly, if not spectacularly. That was driven by stronger sales to the US and Germany, and an extraordinary doubling of exports to China, to €3bn.

Most surprisingly, sales of goods to the UK also compared well to last year, rising by €1bn to €8bn in the January-June period. This happened despite Sterling's competitiveness-sapping weakness. Which all suggests that many exporters are in a position to pass the exchange rate hit on to UK customers, rather than taking it themselves.

Brexit still drags

One could spend all one's waking hours following Brexit-related matters - studying official position papers, following the dynamics in Westminster, Brussels and the national capitals across the EU.

But despite a great deal going on, little has actually changed with regards potential outcomes. At one extreme, a breakdown in negotiations followed by an acrimonious and immediate exit remains possible. At the other extreme, no Brexit at all still cannot be ruled out. The final outcome will probably be somewhere between - but nobody knows what it'll look like.

Trump's threat

Last week the US president name-checked Ireland in a speech. Donald Trump, inset, made an economically illiterate connection between countries' corporation tax rates and their trade balances with the US. He wants to cut the US rate and stop countries selling more stuff to America than they buy. Actions on both fronts pose threats to Irish prosperity. Mercifully, those threats have receded.

When it comes to cutting taxes, Congress has much more say than the president. To date, Mr Trump has failed to persuade law-makers to agree to anything. He has an uphill battle on tax, which suits Ireland just fine.

On narrowing Ireland's whopping great trade surplus with the US, there are few conventional measures a US president can take. But Trump is not a conventional president. A bolt could still come from the blue.

The Asia connection

More than half of century into the age of intercontinental air travel, Ireland is getting its first ever direct flight to Asia. Last week Hong Kong airline Cathay Pacific announced that from next year it would run four flights a week between its hub and Dublin.

Connecting two ends of Eurasia for the first time is genuinely significant. It means that someone can do a day’s work in Ireland, go to the airport, fly to east Asia and be in meetings the following working day (currently, owing to stopovers and the time difference, a 6pm departure from Ireland means arriving no earlier than 6pm local time the following day).

As this column has argued before, the rise of China represents a big opportunity for Ireland. Chinese companies are going global. In the coming decades they are likely to expand their European presence massively. If Ireland can replicate with corporate China what it has achieved with Corporate America, a new source of structural strength will be added to the Irish economy. Direct flight connections can only help make that happen.

Sunday Independent

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