Economy is not as bad as some would fear

Economics: According to a recent Irish Times editorial, "most economic indicators are pointing to a slowdown", which appears to be a broadly held view, judging by the tone of commentary across the Irish media.

Yet it is by no means clear that this is the case, either domestically or globally, and the recent surge in international equity markets is testimony to the belief that the global economy is regaining momentum.

The dollar has also benefited from the perception that economic activity is picking up and longer-term interest rates have also risen sharply on the view that we may be at or near the bottom of the interest rate cycle.

What is clear is that economic activity in the euro area remains weak and so the US will lead any cyclical upturn.

We now know that the US experienced a mild and short-lived recession in 2001 and that the economy bottomed out in the third quarter of that year, oddly enough around the time of the "9-11" terrorist attacks.

The US economy then rebounded relatively strongly, growing at a 3 per cent-plus pace for the first nine months of 2002, before losing momentum.

Growth slowed to a 1.5 per cent pace in the latter months of 2002 and has remained at that level during the first half of 2003.

Consumer and business sentiment has picked up since May, however, no doubt boosted by lower oil prices, rising stock markets, historically low mortgage rates and another round of tax cuts, which will boost incomes from this month onwards.

Consequently, the consensus forecast envisages US growth accelerating to a 3-4 per cent range in the second half of 2003.

The Irish economy would be expected to benefit from any acceleration in global growth and there are a number of indicators implying that the economy actually bottomed some time ago, contrary to perceptions.

Take GDP, for example, which shows growth bottoming out in the fourth quarter of 2001, interestingly around the same time as the US, and then recovering in the first nine months of last year, before losing momentum in the final quarter.

Employment gives a slightly different picture, although again showing a cyclical bottom, this time in the third quarter of 2002, when annual employment growth slowed to only 8,000, before accelerating to 27,000 in the first quarter of 2003.

This is consistent with the Live Register, which has shown the unemployment rate steady at 4.6 per cent for some time.

Redundancies, too, are not as high as last year, running some 10 per cent down in the first five months of 2003.

This is not to suggest that unemployment has peaked but to point out that the deterioration in the Irish labour market has been very modest and not consistent with some of the weaker growth forecasts published of late.

The monetary indicators are also painting a positive picture, and, after all, are meant to be leading indicators.

Mortgage lending has received the publicity but non-mortgage lending has accelerated in recent months, with cash and currency in circulation also showing strong growth.

We also know that underlying retail spending (excluding cars) bottomed in the spring of 2002 and in April was up an annual 5.4 per cent in volume terms.

However, it has to be said that consumer confidence remains weak, judging by survey evidence.

There are other negatives of course and, on the face of it, external trade is particularly weak; exports in the first quarter of 2003 were some 22 per cent down on the previous year, with imports recording a 23 per cent fall.

Yet there are a number of issues surrounding this data, with implications for GDP growth.

In the first place, the Central Statistics Office (CSO) has taken the unusual step of drawing attention to a very significant fall in distributive-type trade in electoral machinery with Britain, which has distorted both exports and imports this year.

In addition, the CSO has yet to issue any price indices for trade, so it is not possible to discern how much of the export fall is in volume terms, which is crucial for measuring real GDP growth.

The prices of manufactured goods for export sale are falling, but the scale of these declines sits uneasily with the total fall in export values and the trend in industrial production.

The latter shows a 7 per cent rise in manufacturing output in the first quarter of 2003, including a 2.8 per cent gain in the indigenous sector, which implies positive growth in the volume of exports.

The CSO will eventually resolve the issue, statistically at any rate, when it publishes the relevant price indices for exports but, until then, one should treat any forecasts of external trade with more caution than usual.

Perhaps the best indicator, which also happens to be the most timely, is tax revenue and this shows revenue growing at over 9 per cent and, as such, an acceleration from the 5 per cent out-turn in 2002 - not bad for an economy that some would have us believe is on its last legs.

Dr Dan McLaughlin is chief economist at Bank of Ireland