Thursday 23 January 2020

Dan O'Brien: 'Expect your pay packet to get bigger as the economy continues to hit the sweet spot'

'The Irish economy is still in a sweet spot. Most of its problems – such as skills shortages and pricey housing – are the result of strong, solid and sustained economic growth' (stock photo)
'The Irish economy is still in a sweet spot. Most of its problems – such as skills shortages and pricey housing – are the result of strong, solid and sustained economic growth' (stock photo)
Dan O'Brien

Dan O'Brien

Will you get a pay rise in 2020? How is the jobs market for those thinking of moving on this year? Is the cost of living going to change much? Will housing become more affordable?

These are the sorts of questions people most often ask economists.

These days it is nice to be able to respond positively to almost all of them. That is because almost all of the indicators on the economy's dashboard are pointing in the right direction.

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The Irish economy is still in a sweet spot. Most of its problems - such as skills shortages and pricey housing - are the result of strong, solid and sustained economic growth.

Although economists are rubbish at forecasting, it can be said with a fair degree of confidence that the expansion will continue well into the new year, at the very least, such is the amount of oomph currently in the economy.

That, in turn and among other things, means that it will be a sellers' market when it comes to labour. Low unemployment and plentiful jobs growth will give workers opportunities aplenty to change job this year, and more clout when bargaining over pay with their bosses and prospective bosses.

The latest figures show that average earnings in the economy are growing by 4pc annually, and that this rate has been accelerating strongly over a three-year period. With the labour market now as tight as a drum, there is every reason to believe that pay growth will head even higher in 2020.

What about the cost of living? Normally, strong economic growth and full employment would see inflation take off.

But we are not living in normal times. The basket of consumer prices in Ireland (and across the rest of the euro area) is rising by around 1pc.

Economists are scratching their heads trying to understand why inflation across the world has been so low for so long, but there is little sign of it taking off.

As Ireland imports most of the goods we consume, prices here are determined more by international developments than demand levels in the economy. Cheap imports are pushing down the cost of putting clothes on our backs, furnishing our homes and buying new phones.

To the chagrin of farmers, consumers continue to pay less for food, as competition in the grocery trade remains intense.

The picture for services prices, such as health insurance and restaurants, is different. Currently, services prices are rising by around 3pc annually.

That might be a bit higher than is healthy, but it is not a sign that the economy is about to blow a gasket.

The cost of housing - whether one is buying or renting - has been the inflationary exception in recent years, causing a real squeeze for many.

For renters, the outlook for 2020 is not so great. The best that can be said is that as rent inflation has eased and pay growth has risen, the two are now broadly in line. That means the share of income going on rent has stabilised, albeit at a high level.

With more homes being built, rents in 2020 should rise by less than in the recent past and there is a good chance that, with higher wage growth, affordability will improve.

For those buying homes, there is an even better chance that affordability will improve in 2020. House prices stabilised last year. A combination of more supply and Central Bank rules on mortgage lending should keep things that way. With higher incomes, more people should be able to get on the housing ladder. Housing issues and a strong domestic economy have caused concerns that Ireland could lose competitiveness, as it did during the property bubble era. Yesterday's news from the State agency tasked with luring globalised companies to Ireland shows little sign of that happening.

The numbers employed in export-focused foreign multinational companies grew by 7pc last year compared to 2018, according to IDA Ireland.

That is in line with the sort of increases that have been clocked over the past half decade. It is multiples of the rate of jobs growth in the rest of the economy.

Almost a quarter of a million people now work in the multinational sector - more than one in 10 jobs.

So 2020 is off to a good start, and all indicators point to continued expansion of the course of the year. But that is not guaranteed. Things could go pear-shaped, for many reasons.

Both of the western world's 21st-century recessions were caused by financiers mis-investing oceans of money in dodgy assets. In recent years prices of financial assets of almost every kind, including many dodgy-looking ones, have soared. If what happened in 2000 and 2009 happens again in 2020, the year will end less rosily than it began.

And then there are the common or garden slumps. Just a few months ago, there was feverish speculation that the world was about to plunge into recession. Today, the mood has changed, reflecting data pointing to stabilisation rather than a slide towards recession.

But the on-going global manufacturing recession could yet infect other sectors. That is another risk in 2020.

Yet another potential downside comes from the poor state of trade relations between the two sides of the Atlantic.

US President Donald Trump believes that the EU makes it harder for American companies to sell into Europe than the US makes it for European companies to sell into the American market. He has already slapped punitive taxes (tariffs) on goods from Ireland and the rest of the EU entering the US.

As there are a range of ongoing EU-US trade disputes - on issues ranging from subsidising aircraft manufacturing to taxing the tech giants - the risk that Trump will widen the use of such tariffs is real.

The European side is dragging out talks on these issues in the hope that Americans choose someone else to be their president when they go to the polls in November.

If, in the meantime, Trump escalates the trade war, Irish businesses could be priced out of their biggest export market.

But the risks remain risks, which hopefully will not materialise. The momentum in the economy is real.

If it continues in 2020, it will help raise more boats.

Irish Independent

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