AS WE approach mid-year, hopes that 2011 would mark a turning point for the economy are fading. In the first three months of the year the economy showed no signs of growth. The most recent figures suggest that the second quarter will be little better than the first. Forward-looking indicators give scant reason to believe that anything much will change over the summer months.
In May, the months-old rebound in tax revenues faded. A like-with-like comparison between May this year and last, which strips out the big tax hikes introduced in December’s budget, shows that the underlying capacity of the economy to generate tax revenue actually declined. Two separate surveys of executives in manufacturing and services for May, both of which were published last week, point to a weakening in both sectors. The most recent figures for retail sales show that consumers in April spent less in the shops than in any other month so far this year. A survey of consumers in April showed that their confidence declined. If voters gained any satisfaction from ejecting the Fianna Fáil-Green party government from office, their choice of a new administration has not given them more confidence to spend.
None of this is surprising. Belief in recovery in the short term should be based more on hope than expectation. The headwinds buffeting the economy are many and strong. One is interest rates. They have risen and are going only one way in the medium term. Although the European Central Bank is not expected to raise rates when it meets on Thursday, a quarter-point hike is all but certain in July. With household debt levels in Ireland among the highest in the euro area and a very large proportion of that debt on variable rates, the Irish economy is unusually sensitive to rate changes. Given that it is now among the weakest of the 17 in the euro zone, the upward movement in interest rates will hinder any catch-up with the rest.
If there is precious little evidence of an upturn in the economy here, there are signs that the rebound internationally is faltering. Britain – still Ireland’s largest trading partner – has not grown in six months. A debate rages as to whether austerity is choking off Britain’s recovery. In the US – by a distance the biggest investor in Ireland – the economy has run into another soft patch. On Friday, unemployment in the US reversed its very gradual downward trend. A week ago, house prices reached a new recession-era low. They have been falling for five years and the decline is now greater than that recorded during the Great Depression. Of the big developed economies, only Germany is unambiguously strong and solid.
This summer marks the fourth anniversary of the beginning of the international financial crisis. It was, quite coincidentally, around that time when the Irish economy began to falter and hopes for a soft landing disappeared. A four-year period of slump is already unusually long. It will, alas, and at the very earliest, be well into a fifth year before that elusive corner is turned.