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Brendan Keenan: 'Times are good for jobs and wages, but caution is needed'

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IT was the best of times. The famous words from Charles Dickens's 'A Tale of Two Cities' are part of a fetching Christmas ad on British television, but they come to mind with this month's data on the Irish economy.

Where earnings are concerned, it certainly looks like the best of times - or at least the best for quite a while. According to the quarterly survey from the Central Statistics Office (CSO), average hourly earnings grew by 4pc in the 12 months to September.

That was the fastest rate in more than a decade. It was also good to see the traditionally lower-paid sectors enjoying the biggest increases. Goodbody chief economist Dermot O'Leary used a four-quarter moving average basis to smooth out volatility and found that earnings in the transport sector grew 6pc, while there was a 5pc increase in wholesale and retail.

A somewhat longer view was provided by a new set of figures based on tax returns, which by definition give a far bigger, wider sample than the normal statistical surveys (accurate though they are).

The headline was that median weekly earnings - not the average but the most common - for all employees last year were €592.60, just under €31,000 in a full year.

This may come as a surprise in a country where, as was once put to me on a radio programme, €25,000 p.a. for a newly qualified Garda is regarded as a starvation wage.

The figures show that roughly a third of workers earn less than €21,000 a year, and the next third between that and €40,000.

Fewer than one in 10 earn more than €80,000 a year. I don't know which country our debates on taxation refer to, but it is not Ireland.

We are on firmer ground when it comes to changes in earnings. The data here shows the pattern of recovery clearly, and the fairly textbook response of wages.

One should, of course, separate males and females when it comes to total earnings, with 17pc of women earning less than €400 a week, against 11pc of men.

Women's earnings increased faster, by 7.8pc, from 2011-18, while male wages were up by 7pc.

But the bulk of the increases have been in the past three years, with earnings lagging the growth in output.

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Workers in the information and communications technology (ICT) sector had the highest median weekly earnings last year, of €991 per week. The lowest, at €313, was the accommodation and food services business - now enjoying the biggest increases, while ICT slows down.

The figures point to an economy powering ahead, and one where the labour market is working. That was endorsed by the employment figures published a few days before. There had been speculation that the rapid growth in jobs might be slackening, after the 2pc increase recorded for the second three months of the year. But that rebounded to 2.4pc in the following three months.

Another recovery milestone was passed when the unemployment rate fell below 5pc during the third quarter, after seasonal factors were discounted, taking the economy to what would generally be regarded as full employment for the first time since the crash.

The number unemployed fell by a remarkable 11pc, or 16,000 people, over the 12 months. It is all the more impressive because the numbers in the labour force - working or looking for work - rose by 38,000 in the same period.

Simon Barry at Ulster Bank noted that this performance was well ahead of the major economies, with employment up 1pc in the eurozone and UK, and by 1.5pc in the US. They are expanding, however, which does a bit to explain the resilience of the Irish economy in the face of the well-publicised global risks such as Brexit, trade tensions and concerns about the financial system.

One risk - a sharp fall in sterling - has already happened. Once, it would have been widely thought that levels such as the present €1.17, just 10 cent above parity with the old Irish pound, would have caused serious difficulties, but the economy has shrugged it off.

It is in the golden circle where exports are healthy and rising incomes are boosting consumption, the main driver of the domestic economy. This is all very satisfactory: employment growing first, wages following, and then accelerating as workers become in short supply.

The invisible hand is doing its stuff. Except that this is the point at which things get tricky - the famous example of the party in full swing and the punch bowl still circulating.

In Ireland, the bowl has been replenished by the need for more construction and lavish recycling of growing revenues in the form of Government spending.

This has prompted the widespread worry among economists of 'over-heating' - where what appears to be a market-led recovery is not followed by a market-led orderly slowdown, as higher pay and prices curb growth. Instead, the recovery continues to feed on itself, fuelled by immigration, private sector foreign borrowing and, of course, more foreign billions in the form of corporation tax revenues from the big multinationals.

Besides, even the recovery was not just a market phenomenon. It was accompanied by massive state intervention as central banks created money and pumped it into the financial system. Without doubt, ultra-low interest rates have been a key factor in the past five years. The doubt is to what extent central bank policies caused them.

They did save the financial system from complete sclerosis and there would have been no recovery worth the name without that. But the picture now is of a mature recovery accompanied by interest rates which seem more suited to a deep depression. Any attempt to return to historical norms seems to bring with it the threat of recession.

Hence the fear that some worse times could be on the way. There was a sense of what that might mean in the annual statement of the Irish Fiscal Advisory Council (IFAC) last week.

For a start, it is not convinced that the Government estimates of the effect of a hard Brexit are gloomy enough.

They had national output declining slightly in the year after such an exit and returning to trend growth over the following three years. As required by law, IFAC endorsed the short-term forecasts, but that means they are seen as plausible, rather than being entirely satisfactory so far as the council is concerned.

It makes the point that history shows the speed at which Irish conditions can change, both for better or worse.

Significant falls in consumer spending, investment, wages and employment - all the things which have grown so strongly - can be expected to be part of any general downturn.

Surveys suggest consumers have one hand on the exit handle. Spending is still growing, although some of that is due to the thousands more at work since 2016.

As for the rest, consumer confidence is weak, and sensitive to bad news on Brexit. There is a clear risk of a sudden stoppage of spending if things go wrong.

We shall know more next week after the UK election. The chances of a no-deal Brexit do seem to have receded. Even in these strange times, it is hard to see a government with an overall majority plunging over that cliff edge, while any likely coalition will tend to favour a deal.

Nothing can be taken for granted though. Hard-line unionists were willing to have a no-deal Brexit to put distance between themselves and the Republic, but hard-line Scottish nationalists need one to have a chance of securing an independence referendum. Whether they would take such a gamble is hard to say.

Consumers may be ready to respond to bad news but IFAC is worried that the Government is not. Its response should be the opposite - to counteract any reduction in spending and investment - but it may not have the wherewithal to do so.

The council reckons that public spending growth is at the limit of what is tolerable. More pertinently, it is not under firm control. At €4.5bn, Exchequer and non-Exchequer spending next year will grow at more than twice the pace outlined in the budget strategy paper in April.

A no-deal Brexit would add another billion to that. With the sixth highest debt in the 28-member OECD, it is easy to see that a double whammy of an international recession and Brexit could create unsustainable deficits, requiring cutbacks in the downturn. That does awaken uncomfortable memories of the worst of times.

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