ANALYSIS:Bond market vigilantes let us off easy yesterday – don't expect that to last as the prospect of recovery looks unlikely, writes DAN O'BRIEN, Economics Editor

LET’S START with the good news because, Lord knows, it’s needed. There is enough bad news about to cause even the sunniest soul to feel glum.

The main reason for cheer is that exports are booming. We learnt yesterday that companies operating out of this country sold €40 billion worth of goods and services to foreign markets in April, May and June combined. This is an all-time quarterly record. It is nice to hear of billions being earned rather than burned.

Yesterday’s series of economic indicators confirmed what was already known from earlier data releases: that sales to the rest of the world of tangible products were doing well up to mid-year.

More encouragingly, they showed for the first time that foreign sales of services exceeded their previous records.

A huge €18.3 billion flowed into the country in the April-June period in payment for services rendered internationally.

This is important because on the goods exports side, too much of the growth has been concentrated in just pharmaceuticals and chemicals.

While there is no downside to selling billions worth of pharma products to all and sundry, export success needs to be broad based if it is to be felt where it matters most – job creation.

A breakdown of the services exports numbers offers hope on this score. Companies in most services subsectors are winning new business abroad.

As Ireland is the second largest per capita exporter of services in the world, such strong, broad-based growth in an area where we have real and proven competitive advantage can only be very good for employment. It makes existing jobs more secure and raises the chances of fresh hiring so that strong new demand can be met.

Another reason for optimism is that the enormous contraction in investment spending – known as fixed-capital formation – may be at or near an end. In part this is because building activity, which came to dominate investment spending during the frenzy, is at a near standstill and thus cannot shrink much further.

Another factor may have been that companies are buying the capital goods they need to keep the enterprises doing whatever it is that they do – from desks and computers to trucks and plant.

That’s the good news. Here’s the bad. Exports were not enough to prevent the economy contracting again in the second quarter (see charts 1 and 2).

In the first quarter, it grew by less than was previously thought, as statisticians revised their numbers.

These two facts mean that to reach the Government’s GDP target for 2010, the economy will have to grow by 3 per cent in the second half of the year on the first half. That looks like a very tall order at this juncture.

One reason for this is that consumers continue to pull in their horns. In the three months to June, they cut their collective spend compared to the first quarter, burying any hope that a consumer recovery was under way.

A more up-to-date indicator – retails sales for July – suggest that the consumer spending crunch continued into the second half of the year. And let’s be clear – there won’t be any real recovery until people start going back to shops, restaurants and such places in numbers.

One reason for depressed consumer sales is that aggregate incomes are almost certainly falling as fewer people earn salaries and wages.

The numbers at work fell again in the second quarter, we learnt on Tuesday. Figures on the length of dole queues in July and August suggest that the numbers in gainful employment continued to fall into the third quarter.

Those dole queue numbers also show that it is white-collar workers who have been losing their jobs in recent months. As they earn the most, the loss of their jobs has a proportionately bigger impact on aggregate incomes.

This, in turn, means even less consumer spending.

From Tuesday’s comprehensive jobs survey, it is hard to see where employment is going to come from in the quarters ahead.

It is easy to see more jobs being shed. The survey shows that sectors dominated by the Government have seen employment rise during the recession.

Although the Department of Finance insists that the numbers employed in the public sector are down, it would appear as if public sector managers are getting around the department’s hiring freeze by employing people in ways that keep them off the books (never underestimate the bureaucrat’s ability to find ways round diktats from the top).

But as the austerity steamroller gathers steam, such ruses will be squeezed. The result, inevitably, is that numbers at work in the health, welfare and education sectors will do nothing but fall, further sapping consumer spending.

How did yesterday’s news of a contracting economy go down with the masters of the universe who trade government bonds?

The answer: they were predictably unpredictable. The latest bout of perverse behaviour in the bond market involved traders arriving at work yesterday with the wind up over Portugal, our fellow euro-zone fiscal basket case.

Traders dumped Portuguese government debt from the opening bell. The usual contagion took hold. By 9.30am they started selling off Irish Government bonds. So far, so normal.

Given the early morning sell-off, one could have braced for a rout when the bad Irish GDP numbers were unleashed on windy traders (the markets had not been expecting a negative figure).

What happened? Precisely nothing. Yields barely budged over the course of the rest of the day.

If the bond market vigilantes let us off easy yesterday, don’t expect it to last. Yesterday’s developments can only make keeping the budget rebalancing on track more difficult.

Then they will be back to deliver a beating.