Escape from recession not on the cards in 2013
THE ECONOMY:Modest growth in output and an end to the labour market shake-out is about the best we can hope for
Nobody – at home or abroad – believes that the Irish economy will bound out of recession in 2013. The best forecasters and observers dare to hope for is that output grows modestly and that the shake-out in the labour market comes to an end. However depressing, that’s about the best that can be expected given the multiple headwinds hindering recovery.
If there is very little upside risk to the economic outlook this year, even in the event of the most favourable arrangement being secured on the State’s bank debt (see panel), the downside risks remain big and worrying.
As has been the case for three years, a deterioration of the euro crisis remains the biggest foreseeable risk by some distance. That crisis is very far from being definitively resolved and the very existence of the single currency remains in question.
The crisis will inevitably flare up again over the course of the year, even if the probability of the currency collapsing over the next 12 months is limited thanks to the sovereign backstop arrangements put in place by the European Central Bank late last summer.
Reasons for optimism
Domestically, a good number of indicators are pointing in the right direction as the year begins. Surveys and anecdote point to stronger consumer and business confidence, and last week’s CSO figures on residential property prices (for November) provide further evidence that the stabilisation of that market, in evidence since the first half of last year, is holding.
Externally, the recession-proof nature of much of the exports of Ireland-based companies – such as pharmaceuticals – means the downturn in Europe has had limited impact on export earnings.
Moreover, if the mixed signals from the British economy shift in 2013, with more indicators pointing towards recovery and fewer towards recession, that important market could suck in more Irish exports.
Across the Atlantic, the US had its best year for job creation since the middle of the last decade in 2012 and, for the first time since 2006, the US residential property market perked up.
The massive and sustained fiscal-monetary easing there appears at last to be paying off, and, if recovery is not derailed by politicking in Washington, that economy too promises to import more goods and services from Ireland.
Many weaknesses remain
But for any positives that exist going into the new year, there are more negatives. As has long been the case, the biggest obstacle to recovery will be household and corporate debt. The very slow rebuilding of balance sheets, via the paying down of debt, will grind on in 2013 and well beyond – dampening consumer spending and companies’ ability to invest.
How the public finances evolve over the course of the year will be even more important than usual. They will be central in determining whether the State’s three-year international bailout ends on schedule in December.
On this score there is some cause for concern. Growth in tax revenues began to weaken in the spring of last year. If that trend continues into 2013, and if the sizeable overruns in health spending are not arrested, budget targets will be missed.
Other peripheral economies have not always been obliged to take additional budget measures when fiscal targets are missed owing to weaker economic growth.
On that basis, it seems unlikely that a mini-budget will come onto the agenda over the course of the year. But if targets are missed – for whatever reason – the probability of the Government exiting its EU-IMF bailout on schedule will fall.
Eyes on the bond market
Also vital to exiting the bailout will be private investors’ views on Irish public debt. Bond market indicators will be closely watched this year, as will the efforts of the National Treasury Management Agency (NTMA) in selling Irish debt.