It’s too early for talk of recovery but signs are good

A raft of economic data published over the past few days paints a fascinating but occasionally contradictory picture of the Irish economy. Has the recovery started?

The mortgage arrears data released yesterday hints that at least one part of the problem may not be getting any worse: the absolute number of arrears fell, slightly, for the first time. While one number does not make a trend, it is encouraging that at least something is moving in the right direction. However, it is far too early to begin to think that the problem is anywhere close to resolution. The data also contained confirmation of what we have known for a while, namely that we have not dealt with mortgage arrears in any meaningful way.

While the number of new arrears is down, mortgages that have been festering for some time are just sitting there. There was a big jump in the number of problem loans 720 days or more in arrears; the good news – the fall in arrears – came at the front end, loans that are 90 days or less in distress. Restructuring (of sorts) is happening, has picked up a bit but is still painfully slow.

New legislation has now been followed this week by the first personal insolvency case involving mortgage debt appearing before the courts. Again, a move in the right direction but slow – puzzlingly so. One of the great mysteries is why the Central Bank appears to have been less than robust in getting the banks, in particular, to move at a faster speed. Given the pace at which all of the vested interests seem happy to move, the best that we can hope for is that we soon begin talking about the “rump” of arrears, rather than its growth. In that way the problem becomes chronic rather than terminal.

On the good news side was the employment data. This took just about everybody by surprise – with, perhaps, the possible exception of the ESRI who have been an outlier in terms of their upbeat assessment of where the economy is and where it is heading. A big fall in the unemployment rate to 12.6 per cent confirmed the labour market is starting to heal.

Better employment news has been around for a little while now and might be thought inconsistent with trends in income tax data: if the numbers in work are up by so much, why are taxes not also showing more buoyancy? There are a number of possible explanations; one very tentative suspect is that a lot of the jobs might be lower paid. The truth is we don’t know: more data is required before we can reach any firm conclusions.

Retail sales were a little disappointing, particularly when set against the rise in the number of people at work. Again, people taking low paid jobs may be part of the story, but there are many other equally plausible explanations. If the rise in employment continues, there must be better news for retailers ahead.

House prices, in Dublin at least, are on the up. Most people would consider this good news, although there has been some fanciful talk of a new bubble forming. The level of transactions is still way too low to draw any definitive conclusions. At least the precipitate declines have stopped.

It is way too early to conclude that we have begun a sustainable recovery, although the numbers are encouraging. As always, we should look overseas for guidance about what happens next. There, the picture remains a familiar one: the UK is doing extremely well, the US is growing modestly, while in Europe, Germany is fine – but the rest of the euro area remains, at best, stuck in low or no growth. Markets got excited yesterday about stronger inflation from Germany – what we would expect and what is needed from a rebalancing perspective (Ireland's inflation is virtually nil).

Market expectations of further ECB monetary easing changed in the wake of the German inflation data. This sums up Europe’s problem: the ECB has to set policy for the euro area, not just one country. The Fed does not set policy just for New York. Hopes for European growth rest on more rational policy making.

We are catching something of a tailwind from the UK and US, but we need European growth to boost our recovery hopes.