One of the primary economic head-scratchers of recent months has been the resilience of labour markets, consumer spending and headline growth in the face of 10 consecutive interest rate hikes from the European Central Bank, the biggest ever monetary policy tightening exercise undertaken by Frankfurt.
Ireland is a prime example. We have more people at work than ever before, 2.64 million, according to the most recent Labour Force Survey compiled by the Central Statistics Office (CSO); and a level of unemployment that equates to full employment. We also have relatively strong consumer spending and an exchequer that’s awash with tax receipts, which is itself a reflection of strong employment and consumer spending and, of course, corporate tax.
All this while the monetary chess board has been flipped on its head. Monetary policy works by choking off demand, which should in turn play out as weaker employment and growth. The fact that a 450 basis point hike in interest rates hasn’t made more of a dent in employment and growth here and elsewhere is puzzling analysts. Might this be the quiet before the storm?
“Monetary policy acts in a slow-burner manner: it works its way through to real economic activity with a lag, and these cumulative pipeline effects of policy tightening are set to dampen demand in Ireland in the near term,” the Department of Finance said in its latest economic and fiscal outlook, published alongside the budget on Tuesday.
“Indeed, incoming data suggest that this cumulative tightening may already be weighing on euro area activity; GDP in the euro area, for instance, has lost momentum in recent quarters on foot of tighter and more costly credit conditions,” it said.
The department seems to be suggesting that the worst of the monetary squeeze is still ahead us. Lenders here have also been slow to hike up mortgage rates.
“As inflation loses its grip, the real disposable income of households is set to recover which, in turn, should support consumer spending,” it said. “One important sting in the tail is the impact of monetary policy tightening, which will continue to weigh on disposable income of households and to dampen investment spending by firms, especially small- and medium-sized firms,” it said.
