The economic recovery is most visible in the labour market
Opinion: Government should resist the temptation to try to stimulate consumer spending by bringing the programme of fiscal adjustment to a premature end in the budget
‘It is clear that the political system will not be able to tolerate the full €2 billion in adjustments previously pencilled in. A political crisis followed by a general election in the next few months is not in this country’s economic interest.’ Above, Minister for Finance Michael Noonan and Brendan Howlin Minister for Public Expenditure and Reform at Government Buildings before delivering last October’s Budget to the House. Photograph: Bryan O’Brien / THE IRISH TIMES
With recent evidence pointing unmistakably to an improvement in the Irish economy, three important questions arise.
What is driving the revival in economic growth? Are there grounds for optimism that the recovery can be sustained? And what do improving economic prospects mean for economic policy, especially for the next budget?
The economic recovery that is gathering momentum in Ireland is most visible in the labour market. Gains in employment averaged about 4,000 per month over the past year, corresponding to one of the fastest rates of job creation in Europe. It is worth recalling that the economy lost nearly 8,000 full-time jobs per week in early 2009, as the construction and other property-related sectors collapsed. At the current pace of growth, employment is expected to approach the 2 million mark by the end of next year. The unemployment rate, though still at elevated levels, has fallen more than 1½ percentage points over the past year to 11.6 per cent in June and is down about 3 percentage points from its peak in 2012.
Other indicators are also pointing to recovery. Growth in the volume of retail sales (excluding motor vehicles) averaged nearly 3½ per cent over the first six months of this year and recent surveys have recorded strong increases in consumer confidence. New car sales are booming. Asset prices, including house prices in our main cities, have risen sharply. The export sector continues to expand and is expected to remain the engine of growth for the Irish economy of the next few years.
The recovery is being driven by three main factors.
First, the performance of the Irish economy over the past decade was dominated by the boom and bust in the property market. Other sectors of the economy, where Ireland has long-established real strengths at a global level, were less visible in the economic statistics. With the bottoming out of the construction industry and property market, these underlying economic strengths have come to the fore. Sectors such as Med-tech, Information and Communications Technology, Pharmaceutical, Agri-food, and Tourism are now driving recovery. Generally speaking, these were the export-oriented sectors that propelled the economy during the genuine “Celtic Tiger” era in the second half of the 1990s, before the property bubble and related excesses in banking activities came to dominate. Growth in these sectors has been supported by improvements in Ireland’s international cost competitiveness and by revivals in economic growth in the UK and US. The strengthening of sterling against the euro on foreign exchange markets over the past year has also boosted our exports to Britain.
As always, there is considerable uncertainty surrounding any forecast for growth. Recent geopolitical events abroad remind us of the significant risks to the economic outlook. That said, it is reasonable to project that exports should continue to grow at a solid pace and employment in export sectors should continue to expand. Moreover, the shortage of housing in Dublin (and to a lesser extent in Cork and Galway) creates the potential for an increase in activity in the depressed construction sector.