Business Week: Leprechaun economics, Brexit, company news
The Irish economy was a worldwide talking point this week and not for the right reasons
Stefan Gerlach: “While there are a lot of very serious politicians in Ireland, I am worried that people will look at the figures and ask why there is a need for any austerity.” Photograph: Eric Luke / The Irish Times
The Central Statistics Office (CSO) found a big pot of gold lying around this week, when it revised the Republic’s GDP growth rate last year up to 26.3 per cent. That’s four times the rate of China.
“Leprechaun economics,” was what Nobel Prize winning economist Paul Krugman said, while the Financial Times sarcastically lauded the Republic for producing yet another “notable work of fiction” to go with the works of James Joyce and Flann O’Brien.
The truth is the figure was hugely affected by a number of one-off factors, including activity in the aircraft leasing sector and restructuring by multinational companies involving the movement of patents and tax driven mergers.
The bad news for Government is that, in effect, with Michael Noonan creeping through the long grass in the hope nobody will pay too much attention to the State’s corporate tax practices, the CSO has come up behind him, blasted a foghorn, and drawn all eyes back to Ireland.
There is now likely to be increased scrutiny of how the Republic does its business with multinationals, and, while Noonan initially seemed to brush it off as a sign the economy was “continuing to grow”, he later smiled sheepishly at reporters and said the figure would not affect Budget calculations.
Taoiseach Enda Kenny took to his feet in the Dáil to further clarify that the Government realises the figure is not representative of the real economy. The Department of Finance’s figure for economic growth last year was in the region of 3.5 per cent to 4 per cent, he said.
This “more normal growth rate’’ was the basis for a Budget kitty amounting to about €600 million for new spending, €250 million for capital spending, and less than €350 million for tax cuts.
Central Bank governor Philip Lane was unimpressed with the episode however and met the CSO to voice his concerns. The statisticians later said they would convene a meeting of high-level officials to examine how they might provide more accurate measures of economic performance going forward.
A former deputy in the Central Bank was equally unimpressed. Stefan Gerlach, hired to help stabilise the financial system during the crisis, expressed fears the figure might be taken seriously.
“Economic growth is not like a soccer game – a higher score isn’t necessarily better,” he said. “While there are a lot of very serious politicians in Ireland, I am worried that people will look at the figures and ask why there is a need for any austerity.”
Fears about the reputational damage to the State were underlined when Moody’s, one of the world’s three main credit ratings agencies, said the highly volatile economic performance was one of its main concerns about the Republic’s creditworthiness.
“We caution that the revision...was heavily distorted by the transactions of a number of multinational entities, which have a limited impact on the domestic economy and the government’s repayment capacity,” said its lead analyst on the Republic.
“I was the future once,” declared a wistful David Cameron to the House of Commons in his final speech as prime minister on Wednesday, but it’s a very different vista facing Britain now. With new Prime Minister Theresa May firmly ensconced in Number 10, it’s full speed ahead for Brexit.
The speedy nature of the Conservatives’ leadership election helped to calm some of the nerves in financial markets - at least for the moment. And sterling leapt after the Bank of England left interest rates unchanged at 0.5 per cent.
This was despite widespread expectations of a rate cut to soften the economic impact of the vote. The British currency later eased back from its two-week high on the belief that a cut would happen soon. It had soared as high as $1.3480 after the rate announcement, up more than 2 per cent on the day and its strongest since June 30th.
British consumer confidence fell sharply however following the vote to leave, in one of the first indicators to capture the post-referendum mood. The Thomson Reuters/Ipsos Primary Consumer Sentiment Index fell to 49.4 from 51.2.
Ulster Bank chief economist Richard Ramsey said economists had slashed their growth forecasts for the UK economy, and warned that the UK and Northern Ireland could be headed into recession.
“The consensus opinion is for marginal rates of growth next year, with an increasing number of economists expecting the UK economy to enter recession,” he said. “Given its reliance on Great Britain, Northern Ireland would be very likely to follow suit.”
House prices in the Northern last month were hit by the uncertainty as buyers and sellers got cold feet. The Royal Institution of Chartered Surveyors (RICS) and Ulster Bank Residential Market Survey showed a “downshift in sentiment” in June as a result of both the EU referendum vote and the impact of a higher stamp duty in place on investment property sales.
In Dublin, the National Treasury Management Agency said it would take its time in properly assessing the long-term impact of Brexit on Ireland’s bonds, as the ECB continues to provide massive support for euro zone government debt.
The implications of the vote are starting to be felt in the Republic, and Bank of Ireland said the referendum had led it to increase its pension deficit. The bank said the impact on foreign exchange rates and interest rates had pushed the deficit for its defined benefit pension scheme from €740 million in December last year to €1.2 billion at the end of June.
AIB warned that the UK’s vote could have “a material impact” on its business. “The nature, timing and impact of a UK exit from the EU on the UK economy and trade is not fully known but may have negative consequences for the group,” it said.
Separately, a study of almost 1,000 Irish small and medium enterprises found that 60 per cent of them expect a negative reaction from Brexit.
There were decreases in 10 out of the 12 economic indicators tracked for the lobby group Isme’s quarterly business trends survey. The study was conducted by Isme in the first week after the Brexit vote, while businesses were still processing the shock.
In company news, UK property group Hammerson became one of the biggest players in the Irish retail sector after securing ownership of Dundrum Town Centre, as well as laying plans to take ownership of 50 per cent stakes in both the Ilac and Pavilions shopping centres in Dublin.
Brown Thomas then moved quickly to begin talks with Hammerson on increasing the size of its BT2 store at Dundrum Town shopping centre. Managing director Stephen Sealey said the store had been “doing very, very well”.
Founder and chairman of JD Wetherspoon’s, Tim Martin, said the “dream is over” in terms of having a dozen freehold pubs in central Dublin at a knock-down price.
His five Irish bars continue to perform well but rising property prices and planning permission delays means the company’s expansion plans are effectively on hold at present.
He was talking after the group announced a 5.5 per cent rise in total sales for the 50 weeks to July 10th, with like-for-like sales increasing by 3.4 per cent.
Virgin Media said the agreement with ITV, which bought the two UTV channels last autumn, will also see it take over a 10-year supply deal for ITV-produced programmes including soap operas Coronation Street and Emmerdale.
In the newspaper sector, Paul Cooke resigned as managing director of the Sunday Business Post and sold his shareholding in the newspaper to its other shareholders, Key Capital.
The newspaper also announced that the company is to merge with the Cork-based printer Webprint, which Key Capital took control of last October. The investment house, led by Conor Killeen, said there was a “compelling” business case for combining both companies.