Monday 16 September 2019

Dan O'Brien: 'It's been a good year for the economy - but figures from the Border may point to the Brexit threat we are facing'

Seven years of uninterrupted expansion has benefited most people. That is to be seen in almost every measure of economic activity - from earnings and wealth to consumer prices and jobs. Stock Image
Seven years of uninterrupted expansion has benefited most people. That is to be seen in almost every measure of economic activity - from earnings and wealth to consumer prices and jobs. Stock Image
Dan O'Brien

Dan O'Brien

It may be a little early to pen a review of the year, but it can be said with certainty, even at this juncture, that 2018 has been another good year for the Irish economy. Despite the extreme uncertainties that have been generated by Brexit, Donald Trump's trade conflicts and the coming to power of a Trumpian government in one of our currency area's biggest economies (Italy), near boom conditions have continued in Ireland over the course of the year.

In many ways, the economy is enjoying something of a Goldilocks moment - it's neither too hot nor too cold. Sure, accommodation prices are too hot to handle for many people, most particularly those renting in urban areas. At the other extreme, it is still a cold house for those with low skills trying to get ahead in the jobs market.

But seven years of uninterrupted expansion has benefited most people. That is to be seen in almost every measure of economic activity - from earnings and wealth to consumer prices and jobs.

On Tuesday morning the most important indicator of what is happening in the economy was released.

The quarterly jobs figures were good, but they were not spectacular.

Positively, they showed the economy continued to generate jobs in late summer and early autumn.

Less positively, the economy added "just" 10,000 jobs in July-September compared to the April-June period (adjusted for seasonal variability).

That was not just a smaller increase than has been the norm over more than half a decade, it represented the third straight month in which the size of employment gains shrank.

This slowdown may be little more than ebb and flow. Economic activity usually bumps up and down. It is rarely smooth and steady.

One explanation for the easing of jobs growth is there are simply fewer people to hire as Ireland moves towards full employment. This argument sounds plausible, as the rate of joblessness nears 5pc, but it doesn't really stack up, for two reasons.

First, there is still some slack in the labour market. The absolute number of people at work may be at all-time highs, but it is the proportion of adults at work which really tells whether an economy is at full employment. By that measure the economy is not even back to 2007 levels, never mind at the sort of levels currently being recorded in Britain, Germany and Sweden. If they can have three-quarters of their adults at work, there is no reason why Ireland can't.

A second reason not to be too concerned about labour shortages choking off economic growth just yet is Ireland's openness to foreign talent.

Around 40pc of the net increase in employment over the past year has been accounted for by non-nationals. Whatever the claims about housing shortages and high rents being a turn-off for mobile workers, it is not showing up in the jobs numbers.

Despite the openness of the labour market, which might be expected to keep wage growth in check, earnings have picked up strongly over the past couple of years. Pay packets are growing by close to 3pc annually at the moment, something that is benefiting most of those at work.

These pay hikes have been made more meaningful by the fact that prices for many essentials are falling. In October, food prices were 2pc down on the same month a year earlier. Across most of the rest of Europe, food is going up in price and no other country in the EU is experiencing the sort of falls that have been happening for a good number of years (take a bow German discounters).

Prices for other essentials also continue to fall.

Clothing and footwear, for instance, cost 15pc less in October than five years earlier, one of the biggest falls in Europe.

These developments are doing much to offset the sharp increases in some prices, such as rents, which were rising at one of the fastest rates of any of the 28 members of the EU.

Overall, the full basket of consumer prices in October was just 1pc higher than a year earlier (the third lowest inflation rate in the EU). This means that pay increases of 3pc are being eroded by inflation much less than at almost any time in living memory.

Central to whether jobs and pay growth can be sustained is the competitiveness of the economy. For a small economy that imports most of what it consumes, paying our way in the world means selling lots of stuff to foreigners. If the goods and services produced here become overpriced and don't sell abroad, then the wheels will come off the economy.

But that is not happening. On the contrary, 2018 has been another good year for Irish exports. The volume of goods - from pharmaceuticals to food - shipped abroad rose by around a 10th in the first nine months of the year. If that is sustained in the final months of the year, 2018 will clock up one of the fastest rates of merchandise export growth since early in the last decade.

ALMOST as important for the Irish economy these days are the services sold to the rest of the world. Ireland-based tech companies, banks, insurers and other businesses earned a record-breaking €160bn from international services exports last year. Although figures are only available for the first months of 2018, they point to yet another record being broken this year, even if growth rates are looking to be considerably lower than in recent times.

So what of the bad news? Apart from future risks, there isn't much in the way of negatives at the moment, with one exception. Regionally, the latest jobs figures show an unusual pattern.

Since the recovery began, every region has seen double-digit growth in jobs numbers. Over the past year, however, differences between the regions have been unusually big. At one extreme the midlands recorded a blistering 7pc rate of jobs growth in the year to the third quarter. At the other was the Border region. Despite doing well once the recovery began, its jobs engine ran out of steam in 2016. In the year to the third quarter of 2018 the numbers at work in Border counties fell.

It is too early to say whether this is related to Brexit, but it could be a sign businesses along the Border are already cutting investment in anticipation of a shock. That is one to watch in the coming months.

Irish Independent

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