Prospects for economy improve amid signs of growth in Europe

TENTATIVE SIGNS of economic stabilisation emerged yesterday as new figures showed improved consumer spending and, abroad, Europe’s two largest economies reported surprise growth.

The latest data from the Central Statistics Office (CSO) showed retail sales, a strong indicator of consumer behaviour, climbed in June for the first time in four months. The increase, while small at 2 per cent, gave rise to some optimism.

Economists at stockbroker NCB were prompted to raise their forecasts for economic growth, citing a range of recent data, including the latest sales numbers.

They said their “economic activity index” is now signalling a halving in the pace of economic decline since February.

They still expect the economy to shrink this year, changing their projected pace of decline from 8.1 per cent to 7.6 per cent. For next year, they now expect the economy to contract by 2 per cent, having previously pencilled in a drop of 3.1 per cent. Any bottoming out will not come, they say, before the first half of next year.

The upgrade, which reflects data including exports and industrial production, came as both France and Germany shocked the markets by saying their economies grew in the second three months of the year.

The 0.3 per cent growth technically ends recessions in both countries. Their performance meant that the euro zone economy shrank only slightly in the second quarter, leading some to expect average growth for the region this autumn.

The numbers also boosted stockmarkets across Europe, including the Iseq in Dublin, which rose by 2 per cent.

One Dublin dealer said the index was “eyeballing” the 3,000 mark last reached in November 2008. US stocks rose for the second day, following the Federal Reserve’s statement on Wednesday that the recession was easing.

Ulster Bank said it believes the recession is easing a little in the North, as the worst of the downturn in housebuilding has passed.

Separate figures released by the CSO showed that the rate of price declines quickened last month, with the cost of living almost 6 per cent lower than a year ago and likely to fall further. Summer sales helped drive down clothing and footwear prices by 11.2 per cent.

The cost of food was 4.2 per cent lower and housing costs were 27 per cent lower, as lower interest rates fed into mortgage repayments and rents.

The flipside is that the public finances could come under more pressure as falling prices lead to lower VAT returns. Already the Department of Finance has said VAT returns for April to July were €448 million short of its projections.

Business group Ibec said this “window of deflation” should be used to boost competitiveness, while fellow business body Isme called on the Government to reduce the cost of public services.

Fine Gael’s Richard Bruton said Government-controlled prices were “soaring” against a negative trend.