Ireland: an economic snapshot
It’s six months this weekend since we exited the bailout and said goodbye to the troika – until their next visit, anyway. ‘Irish Times’ journalists assess how we’re doing, with a graphical guide by Pamela Duncan
Economic governance: Klaus Masuch of the ECB with Istvan Szekely representing the EC and Ajai Chopra of the IMF. Photograph: Alan Betson
Six months ago the Government exited its three-year bailout programme on the crest of a wave. Employment was growing vigorously, consumer confidence was at a six-year high, and property prices were rising again. As the EU-ECB-IMF troika left town, Ministers spoke of economic sovereignty being restored and the yoke of austerity being lifted.
Six months on the exuberance has been tempered. With the Government battered in the recent local and European elections, and facing a marked slowdown in job creation and consumer confidence, the recovery story is under attack.
The most obvious reason is that, behind the headline economic numbers, real income is still falling, aggravated by new taxes and charges, most notably the property tax, and facing further erosion from the imminent water charges.
The Economic and Social Research Institute recently estimated that total disposable income in the economy had risen by 1.2 per cent in the previous 12 months. But the increase was down to the rise in employment, and masked a continued downward trajectory in household income.
Real wages have fallen each year since 2009, even accelerating last year on the back of a 1.6 per cent drop in the earnings of skilled workers.
So apart from those who have recently returned to the labour market, most people are finding it harder, not easier, to make ends meet, despite repeated assertions by the Government that the economy is motoring again.
So focus has shifted to the next budget and Minister for Finance Michael Noonan’s pledge to “do something” for middle-income earners. This process is likely to be one of the most critical phases of the Coalition’s tenure. Despite pressure from Brussels to hold the line on austerity, the Government knows another that tough budget could sink it politically.
Most commentators and State agencies, the Department of Finance included, believe that Noonan has little or no room for manoeuvre if next year’s deficit target of 3 per cent is to be achieved. Despite better than expected tax returns, he is facing mounting cost overruns in health, lower than expected revenue from water charges, and the phasing out of the private-pension levy, worth €600 million a year to the exchequer.
Even if the Government finds a path through this tricky process, Ireland’s consolidation journey is far from over. Under the excessive deficit rules, “post-programme” countries like Ireland will have to continue their belt-tightening until they balance the books. Based on its definition of the structural deficit, the European Commission believes this involves three further €2 billion adjustments, in 2016, 2017 and 2018.
Using a different definition of the structural deficit, the ESRI believes the target can be achieved with neutral or even slightly expansionary budgets, as long as tax returns and the wider economy continue to grow.
There is also Ireland’s commitment, under the terms of the EU fiscal compact treaty, to reduce its ratio of debt to gross domestic product from 124 per cent to 60 per cent. This was brought up recently by former taoiseach John Bruton, who predicted that Ireland could be facing another 10 years of austerity on the basis of this metric alone.
The Government spun the troika’s departure as a restoration of sovereignty when in fact it represented only a marginal reduction in the level of budgetary surveillance.
A backdrop to all this is the ongoing weakness of the banking sector; the high level of nonperforming loans and the lack of credit flowing to small and medium enterprises.
Standard & Poor’s recent upgrade of Ireland’s credit rating, from BBB+ to A-, was delivered along with a warning about the risk still posed by mortgage arrears, which it believes is taking too long resolve.
Further recovery will depend on strong growth, not just on the back of recovery abroad but on the re-emergence of domestic demand, which is still weak, despite a modest pickup in investment.
How all of this will ultimately pan out remains to be seen. What is clear, however, is that Ireland will remain in of financial straitjacket for several years to come.
Before the exit from the bailout the Government knew that there could be no real recovery unless consumers started spending money – and that consumers wouldn’t start spending until they sensed a real recovery.
Faced with this dilemma, it did what governments do. It spun. It focused on the positives of the exit and created the impression that the end of austerity was nigh. And to a large extent it worked, at least in the first part of the year.
Between November and May consumer confidence grew, reaching a seven-year high, of 87, in May, according to the KBC Bank Ireland/ESRI consumer sentiment index. Something has changed in recent weeks, however: in May the index fell to 79.4.
KBC’s chief economist, Austin Hughes, was surprised by the scale of the decline. “In the context of widely held expectations of a marked improvement in the fortunes of the domestic Irish economy through 2014, this would represent something of a setback,” he said.
He suggested explanations. “Our sense is [that] an intense if understandable focus on the difficulties still facing the Irish economy in the lead-up to the end-of-May elections led consumers to downgrade their assessment of their current circumstances.”
Water charges and a medical-card shambles “may also have contributed”, and “pressures on personal finances . . . may have been seen as a deeper and longer-lasting problem”.
Aside from this recent slump, things have been looking good. Figures published earlier this week show that the grocery market is expanding after years of contraction. Retail sales were up 6.8 per cent in April compared with the same month last year.
The sale of new cars climbed dramatically. Just under 60,000 were licensed in the first five months of the year – up nearly 30 per cent year on year. In the same period 7,600 new goods vehicles were licensed – a rise of 43 per cent.
The exchequer says the Government had a surplus of €446 million at the end of May, derived from a combination of higher tax returns and further spending cuts.
Despite the good numbers, there seems to be broad recognition that the recovery remains shaky. It wouldn’t take a lot to derail it.
“We spent an awful lot of time getting our freedom and getting the authority to run our own affairs. There’s not much point in having political freedom if you do not have economic and financial freedom.”
Those were the noble words spoken by Minister for Finance Michael Noonan on the threshold of the European Council building in Brussels last December as Ireland announced it would leave its three-year bailout programme without a precautionary credit line.
But, behind the romantic rhetoric, has Ireland really got its economic sovereignty back? To an extent, yes: Ireland was obliged to follow a strict plan of economic targets and policy measures under its bailout programme, monitored strictly through regular troika visits to Dublin.
The decision not to take a precautionary credit line from the euro zone’s ESM fund – hotly disputed at the time – also allowed the Government to avoid a further layer of EU oversight.
But Ireland still has responsibilities to its lenders until most of the bailout money is paid back, a process that could take decades. So Ireland will be subject to two post-programme surveillance visits by the troika each year. This is a separate process from the regular visits the European Commission makes to check up on countries’ finances.
One outcome of the euro-zone crisis is that the EU has taken much more power over national economies, particularly in the euro zone. Countries must now give Brussels their annual budgets for scrutiny each year. This is why Ireland had to switch its budget to October.
“Economic governance” is the new watchword at the European Commission, with countries now obliged to adhere to strict deficit and debt targets, under “two-pack” and “six-pack” rules. While heavy hitters such as France and Italy are pushing back against Brussels’ intrusion into their finances, our post-programme status makes it harder for Ireland to resist.
A major ceding of national supervisory powers to Frankfurt is also imminent, as the ECB prepares to assume direct supervisory control of the euro zone’s biggest banks, including Bank of Ireland and AIB, by the end of the year.
The European Commission’s announcement of a probe into Ireland’s tax arrangements with Apple this week indicates a potential new front in the EU’s oversight of our financial affairs. Olli Rehn, the EU commissioner for economic and monetary affairs, told a European Movement Ireland event in Brussels this week that the fight against multinational tax avoidance would be a key focus of the next European Parliament.
From a political perspective, the departure of the troika has been a little like parents going away for the weekend and leaving their teenage children in charge of the house.
It would be a stretch to say the house has been trashed, but there has been a sense all year of drift, sloppiness and a breaking down of the order (no matter how much it was despised). The paradox is that at the moment of greatest economic stability, when most indicators are pointing in the right direction, citizens are feeling neither secure nor content.
There are two main reasons. One is Irish politicians’ capacity to shoot themselves in the feet. Take your pick from Alan Shatter, James Reilly and Phil Hogan, whose political scrapes and controversies have gouged away at the Coalition in its first six months of autonomy.
The Coalition had a relatively good story to tell. The troika had gone. Ireland had returned to the market. The promissory-note deal (despite arguments about its true value) was generally seen as a win. Jobless figures were falling, and the number employed was rising (although there have been disputes about that, too). And the economy looks as if it’s coming out of the trough it has been in since 2008. But they are, to use the cliche, only green shoots.
The second reason is that many citizens have not felt the effects of these improvements. Large numbers of people are still out of work, many of those in work have taken considerable pay cuts, and there has been a slew of new taxes and big tax hikes.
The two charges that gave rise to the most recent public anger have been the property tax and water charges. The Government has been clumsy in its handling of the water charges and paid a huge price for it in the local election. This was particularly true for Labour, which made pre-election promises it could not possibly keep.
So, although the economy looks relatively stable, the political landscape is volatile and potentially troublesome. How a government might form after the next general election seems problematic, with dangers of a return to the instability of the early 1980s or the onset of Italian-style political gridlock.
The rate at which Ireland’s convalescent economy is creating jobs has outstripped even the most optimistic projections. The ESRI estimates almost 100,000 were created in the seven quarters between late 2012 and the middle of this year.
That growth has clawed back about a quarter of the jobs lost during the crisis and returns the labour market to employment levels last seen before 2004.
Employment grew in 10 of the 14 sectors of the economy last year, according to the Central Statistics Office, with large increases in agriculture, accommodation and food services, as well as professional, scientific and technical activities. Unemployment has dropped from its 2012 peak of 15.1 per cent to 12 per cent this year.
All of which suggests a broad-based recovery. But, puzzlingly, the turnaround in employment coincides with a fall in GDP of 0.3 per cent last year. The Central Bank of Ireland is perplexed by this “growthless jobs” situation.
One possible explanation is that, in the aftermath of a recession, employment can lag behind demand, as firms expand operations but remain cautious about hiring staff. This happened in Ireland in the early 1990s. What we are experiencing is this process in reverse: an acceleration in employment in the absence of a meaningful surge in domestic demand.
Another factor could be the expiry of patents in the pharmaceutical sector, which has led to unpredictable and erratic swings in our GDP.
Minister for Finance Michael Noonan has said several times that underlying trends are at odds with GDP numbers and that the key metric is employment.
If this rate of job creation continues, unemployment could fall to 10 per cent next year and return to equilibrium or full employment by the end of the decade. But will it continue?
The latest quarterly national household survey detected a slowdown in the rate of job creation in the first quarter of 2014 compared with the previous five quarters. This could be just a pause or the beginning of a new phase; it’s too early to pinpoint a trend.
One school of thought suggests that firms may have shed staff rapidly from 2008 to 2010 and that last year’s surge in hiring was a correction in response to a moderate pickup in demand. If this is true, the employment rate may no longer grow so fast.
The most negative legacy of the crisis is the huge rise in long-term unemployment, a phenomenon that has been notoriously difficult to reverse in the past even when overall employment has started to grow again. More than 183,000 people, accounting for 47 per cent of the jobless total, are long-term unemployed.
The State approach to unemployment has been to offer basic training and skills courses, often to people who are already qualified. This will have to be augmented if the problem is to be tackled.
Reform is always a more alluring concept for an opposition party than it is for a government. Fine Gael and Labour are not the first political parties to experience a withering of their reformist zeal once in government. Although the Coalition has arguably effected more reform than any other government of the past three decades, it has hardly delivered the democratic revolution the Programme for Government promised with such fanfare.
Reform was meant to cover three areas. There was reform of the Dáil and Seanad and the way they do their business. There was reform of the administration of government and its departments, to make its work more efficient. And then there was the governance part: making government and all its institutions more transparent, open and accountable.
There have been mixed results in all three. Some of the Dáil reforms have been cosmetic and far more modest than promised. Legislation has trundled through at the gentle pace of yesteryear. Legislation has been “guillotined” almost as often as before. The extra days, longer hours and more streamlined committees have not really worked out. The proposed abolition of the Seanad was a flop.
Administrative reform in the public sector has been better. Minister for Public Expenditure and Reform Brendan Howlin has brought in huge changes and efficiencies, including comprehensive spending reviews, new procurement procedures and new ways of recruiting. Involving considerable use of information technology, much of the work has been very technical. But the process has not been helped by Howlin and his department tending to explain it all in impenetrable language.
In terms of governance, Howlin has made it happen, but excruciatingly slowly. After the setback of the parliamentary inquiry referendum he has brought in legislation that will allow a form of such investigation. (The banking inquiry will be its first real test.) He has also slowly brought forward transformative legislation on Freedom of Information, whistleblowers and the regulation of lobbyists. He will need to see them enacted before leaving office if his efforts are to be viewed as a success.
History tells us two things about economic forecasts: most tend to say the same thing, and nearly all are wrong. So a growing consensus that the Irish economy will grow by about 2 per cent this year and by 2.5 per cent in 2015 – which would make Ireland the fastest-growing economy in the euro zone – needs to be viewed with a little scepticism.
The Department of Finance’s projection of 1.3 per cent growth last year was turned on its head when the real economy contracted by 0.3 per cent.
Economies are full of surprises. One that has re-emerged in the past year is a housing-supply problem – a bitter irony in a country that built too many houses in the boom and has hundreds of thousands of empty homes, just not where people need them.
The housing shortage is causing rocketing rents and rising house prices and homelessness. The Government and the ESRI agree that about 25,000 houses need to be built each year to satisfy current demographic trends, substantially more than the 10,000 currently planned.
A report this week highlighted the serious problems posed to those on low incomes by rising rents, a shortage of homes and a lack of security in tenancies. The cost of renting a home rose more than 20 times faster than inflation in the past year. Almost 90,000 households are now on the waiting list for social housing.
It’s not only a lack of availability that’s causing the homeless problem. There are also financial barriers to the private rental sector. The number of Irish people living in “consistent poverty” almost doubled from 4.2 per cent of the population in 2007 to 7.7 per cent in 2012.
In the wider context, the IMF has identified deflation as one of the biggest threats to economic recovery across Europe. Although annual price growth in Ireland edged up to 0.4 per cent in May, the IMF predicts that Irish inflation will be just 0.6 per cent for the year, below the euro-area average of 0.9 per cent and well inside the ECB’s inflation target of 2 per cent.
A prolonged period of falling prices would have serious repercussions for indebted businesses and households, as it increases the relative costs of servicing debt. It also makes consumers hold on to cash and delay purchases in case they can buy goods more cheaply in the future. This would further stymie domestic demand, which, most analysts agree, would harm the next stage of recovery.