Signs of recovery are enough to excite even a central banker

Patrick Honohan has sounded an optimistic note on the economy – and with good reason

Patrick Honohan, governor of the Central Bank of Ireland: “the recovery in economic activity is showing a somewhat stronger trend overall than previously signalled”. Photograph: Dara Mac Dónaill

Patrick Honohan, governor of the Central Bank of Ireland: “the recovery in economic activity is showing a somewhat stronger trend overall than previously signalled”. Photograph: Dara Mac Dónaill


The language used by central bankers is usually terse, always reserved and, for the most part, cautious. Lucrative financial market career paths lie in store for those who can successfully interpret the words used by Mario Draghi and his counterparts around the world.

The Irish Central Bank is no different, so the opening lines of its most recent quarterly bulletin caught the eye: “. . . the ongoing recovery in economic activity is showing a somewhat stronger trend overall than previously signalled”. It is tempting to suggest that governor Patrick Honohan may be getting rather excited about our near-term economic prospects.

There are lots of reasons for this, one of which is both arcane and important: our economic past has been rewritten. The economy is now thought to have grown in 2013, by a very small amount, rather than shrinking slightly as had previously been shown by the numbers.

Exports have been stronger, both this year and last – concerns over pharmaceutical patent expiries may have been somewhat overblown. In addition, our international trading performance looks to have benefited from US and UK economic recovery. Economic momentum as we came into 2013 was modestly stronger than we previously thought.

The central bank now expects the economy to grow by 2.5 per cent this year and 3.3 per cent next. I suspect that it thinks the numbers could be even better than this. One well-known economist suggested to me this week that we could see 4 per cent-plus growth next year.

In part, this optimism stems from the emerging data around tax receipts and the numbers of people in employment. Income tax and VAT are ahead of forecasts – not by much, admittedly, but heading in the right direction. Overall, tax receipts at the half-way point of 2013 were €221 million, or 1.2 per cent, ahead of target.

If, as seems likely, the economy has been gently accelerating through the first half of the year, we can expect some further improvements in the exchequer finances. Of course, this has sparked off a debate about the upcoming fiscal “adjustment”, one that will only grow louder if things continue to improve.

Unemployment rate

Live Register unemployment numbers always need to be handled with care, but this week’s further fall in the standardised unemployment rate to 11.5 per cent (from 13 per cent a year ago) is also consistent with a gradually improving economy. We have less up-to-date information on the numbers in employment but it seems highly probable that these have been getting better as well.

Nobody should be surprised that previous forecasts for the economy have been wrong – that is always the case. But we don’t really know why, all of a sudden, some forecasters have become more optimistic. It would be an unusual business cycle that didn’t see some bounce-back from the extraordinary recession that we experienced: perhaps the economic pendulum just swings both ways. Given what is happening in the euro zone economy (not very much) we should be appreciative of the sharp bounce-back in the US in the recent quarter and the mini-miracle that is the UK economy.

The conventional response to all of this is to describe a two-tier Irish economy: the international sector is doing reasonably well while anything exposed to domestic activity is merely bouncing along the bottom. This is certainly an accurate description of the recent past but things might just be changing. Dublin’s skyline is starting to acquire cranes and the tone of the anecdotal evidence from the construction sector has taken a turn for the better.

Every cloud has a silver lining and while sharply higher Dublin house prices might be a signal of fundamental supply/demand imbalances that are going to take years to fix, the problem of negative equity is, as the ESRI reports today, somewhat eased. The numbers are actually quite large: from a peak of 314,000 negative equity mortgages at the end of 2012, the ESRI now suggests that this might fall to 179,000 by the end of this year. This still represents a lot of distress – and a headwind for consumer spending – but it is suggestive of a problem that is now easing, perhaps even rapidly.

Reduced household debt and higher employment are essential if a recovery in the domestic part of the economy is to become a sustainable reality. There are encouraging signs from the data and from the rhetoric emanating from our conservative central bank masters. A proper recovery may have started.

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