The recession may be over but this might be about as good as it gets
High debt levels and the prospect of future tax rises are enough to keep anybody out of the shops
People before Profit local election canditates Kim O’Donnell, Brid Smith, Paul Shields and Andrew Keegan protesting about water charges outside Dublin city council Offices. Photograph: Aidan Crawley
What is the connection between water charges and quantitative easing? Both are policies much talked about but with little known about the details. Both will have huge consequences for a typical Irish household but the one with the smallest effects will attract the most publicity. Arguably, both are already having a large impact, perhaps disproportionate, despite a complete absence of implementation.
Yesterday’s Irish retail sales numbers left most neutral observers thinking that recent trends remain utterly unchanged: consumer spending is bouncing along the bottom; no longer falling, increasing in some sectors, but not much of an overall recovery. If anything, the recent run of data suggests a consumer is more likely to pay down debt than to spend – something which shouldn’t surprise anybody. Hopes that the (largely unexpected) bounce in employment would quickly feed through into a sustained surge in consumer spending have been dashed. The Irish consumer, unsurprisingly, remains cautious.
The reasons for consumer reticence are fairly obvious: high debt levels and the prospect of future tax rises are enough to keep anybody out of the shops. The difficulty with the future is that it is always uncertain and the government is merely adding to the problem: an unknown cheque to be written for water charges (is it too old fashioned to call them rates?) is just one imponderable facing households. And we know that one way or another, plenty of new taxes – and tax hikes - are on the way.
The utterly absurd chatter about potential budget largesse to come flies in the face of what every consumer knows: the fiscal position is still precarious and can only be fixed by further tightening of one kind or another. Home owners also know that with each headline about rising property values comes, in a short while, a higher property tax bill. Uncertainty over future tax bills is not just about water charges.
In a slow burn sort of way, there is a new unknown entering the mix: pensions. It is slowly dawning on many people that the pension promises they have been made might not be kept. Neither the private nor the public sector have the financial clout to meet all of those promises and, in time, a train wreck looks more likely than not. How much money we have to spend in retirement may not be at the front of every consumer’s mind but it is a problem for many and will only grow over time.
One thing does seem certain: ECB interest rates will stay low for the foreseeable future and will probably be cut further. But all of the other policy options open to the ECB are still up in the air.
The ECB council, led by its president, Mario Draghi, enjoy talking about what they might do next but, again, do little to dispel the uncertainty. This week, Draghi has been reported as telling the German parliament that quantitative easing is not likely, a message perhaps crafted for a particular audience, but one that stands in stark contrast to what he has been saying elsewhere. It has not been called quantitative teasing for nothing. Is it any wonder that European consumer confidence has, in data released today, registered a drop?
More generally, it has been wisely said that Europhobes are waiting for the euro to fail while Europhiles are still waiting for it to work. It’s almost become boring. But it adds to the general malaise, a wider sense of uncertainty. Businesses and household react to all of this by sitting on their hands. The recession may be over but this might be about as good as it gets. At least until something changes.
The good news is that the UK economy, important to us in all sorts of ways, is gently accelerating and might even be displaying signs of balanced, sustainable growth. A year-over-year GDP growth rate of 3.1 per cent is to be envied, with manufacturing doing even better than the headline figure. That’s what a sensible central bank can do for you. The bad news is that the UK’s political situation is deteriorating with the upcoming Scottish independence referendum starting to look too close to call and the UK Independence Party polling at around one third of available votes.
If the current economic situation really is as good as it is going to get for the current cycle, the prudent policy maker will be laying down contingency plans for nasty surprises. The one thing the authorities should not be doing is adding to consumer uncertainty. From the Ukraine to Scotland there are plenty of candidates for potential external problems. In such circumstances, talk of tax cuts and public spending increases are downright dangerous.