Mixed economic signals for 2014
More new jobs, shorter dole queues, stronger tax revenues, a return to the bond markets, a property market recovery and predictions of growth in 2014, all make for positive economic news. That said, it's not quite time to break out the Champagne and party just yet, writes Dan White
Print13 December 2013
The economic outlook for 2014 is decidedly mixed with rising employment and apparently excellent exchequer figures failing to translate into retail sales or economic growth. Recovery, if that’s what it is, remains in the very early stages.
For the optimists, the second half of 2013 provided plenty of evidence that the worst of the economic crisis we have endured since 2008 is behind us. The return to job creation is by far the strongest argument in the optimists’ favour.
Employment levels improving
One of the most severe impacts of the post-Celtic Tiger bust was the collapse in employment. From a peak of 2.146 million in the third quarter of 2007 the number of people at work in Ireland fell by 321,000 or 15% to just 1.825 million in the second quarter of 2012.
Since then employment levels have begun to recover, and at an accelerating rate. By the third quarter of 2013 the numbers of those at work had grown by 74,000 to 1.899 million with 29,400 jobs being added in the third quarter alone, up from the 25,400 new jobs recorded in the second quarter.
The return to job creation has fed through into shorter dole queues with the numbers on the live register falling to 406,000 in November, its lowest level since June 2009. The official unemployment rate now stands at "only" 12.5%.
Exiting the bailout
The return to employment growth isn’t the only argument in the optimists’ favour. On 15 December 2013, Ireland formally exited the EU/IMF bailout and, in theory at least, we regained ultimate control over our economic destiny. Even before15 December, Ireland had returned to the international bond markets with the NTMA raising €7.5bn from the sale of five and ten-year Irish government bonds in 2013.
Most analysts are also predicting strong economic growth in 2014 with the OECD forecasting GDP growth of 1.9%. The ESRI, the government’s favourite think-tank, is even more optimistic, pencilling GDP growth of 2.6% in 2014 and 2.7% GNP growth. Given that GNP excludes repatriated multinational profits, most analysts believe that it paints a more accurate picture of Ireland’s underlying performance.
Taxes ahead of target
The November exchequer returns also gave the optimists reason to cheer, with tax revenues for the month – one of the most important of the tax year because the self-employed file their returns in November – 3.1% ahead of target. All of the major tax categories performed strongly in November with income tax 2.4% ahead of target, VAT 5.2%, excise duty 22% and stamp duty 11.2%.
Oh, and the property market also seems to have at least bottomed out with a 6.1% increase in average house prices being recorded in the 12 months to October.
Premature optimism
Yet while all of the economic news may no longer be bad, there are still more than enough clouds on the horizon to caution against premature optimism.
Unfortunately there is less to the return to jobs growth than meets the eye. Yes, we have been creating new jobs but those new jobs are paying less. The latest CSO figures show that average earnings fell by 2.4% in the year to the third quarter of 2013. This is almost certainly one of the main reasons why the increased numbers of people at work aren’t translating into higher levels of consumer confidence or retail spending.
The November index of consumer confidence revealed that sentiment dipped sharply in the wake of the budget. This would have come as no surprise to the country’s retailers with the value of non-retail sales having fallen by 2.5% during the year to October 2013. The grim figures from Tesco, which revealed that third quarter sales at its Irish subsidiary had fallen by a massive 8%, merely underscored just how tough things are out there on the main streets and in the shopping centres.
Virtually no growth in 2013
Whatever about predicted economic growth in 2014, there will be virtually no economic growth in 2013 with the OECD forecasting a miniscule expansion of just 0.1% in GDP. It might not be a good idea to set too much store by those optimistic 2014 forecasts either. Ever since the Celtic Tiger bubble burst in 2008 the history of Irish economic forecasts has generally been one of future optimism gradually dashed by the inevitably disappointing actual outturn. Will 2014 be any different?
The apparent improvement in tax revenues also fails to stand up to close scrutiny. November’s excellent exchequer returns still didn’t compensate for what was a pretty disappointing year for the taxman with income tax receipts running 0.5% behind target for the first 11 months of the year and the VAT take being 1% behind target.
Fragile property recovery
The property price recovery also looks very fragile. Even after recent rises, average house prices are still 47% down on peak levels. There is also the fact that the banks are effectively out of the new mortgage market with 2013 lending down by at least 93% on the €40bn lent in 2006. Over a third of all deals are now cash transactions.
The exit from the bailout also needs to be seen in context. We will still be under close EU and ECB supervision as we owe the troika €55bn. In addition there is also the danger of a second bailout if any of the Irish banks fail the 2014 ECB stress tests. With €46bn of mortgages, a third of the total, either in arrears and/or having been restructured as well as oodles of other distressed loans that is unfortunately far from being an unlikely possibility.
Add it all up and it is clear that, while there have been some positive developments, these have, so far at least, largely failed to feed through into the wider economy. Will this change in 2014? Hard-pressed retailers and consumers can only hope that they do.
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