| | | | | | | | | | | | | | | Economic Growth Momentum
2009 will go down in history as the sharpest ever annual contraction in Irish economic activity – GDP declined by 7.6 per cent and the more meaningful measure of economic activity, GNP declined by 10.7 per cent. Consumer spending declined by 7 per cent, investment declined by 31 per cent, exports of goods & services declined by 4.1 per cent and imports of goods & services declined by 9.7 per cent. Not surprisingly against this economic background, unemployment increased very sharply, the public finances plunged into deep deficit and business and consumer confidence weakened significantly.
The Irish economy technically emerged from recession in the first quarter of 2010. On a seasonally adjusted basis, GDP in the first quarter was 2.7 per cent higher than the previous quarter. This was the first quarter-on-quarter increase in activity as measured by GDP since the final quarter of 2007. This does confirm that the recession technically ended in the first quarter. However, when account is taken of the seasonally adjusted net factor outflows of €7.9 billion during the first quarter, the more realistic measure of domestic economic activity, GNP, contracted by 0.5 per cent. This metric has contracted in every quarter since the first quarter of 2008 and in fact has fallen by a dramatic 16.5 over that period. However, the decline of 0.5 per cent in the first quarter is the lowest rate of contraction over the period. During the first quarter, consumer spending fell by o.2 per cent, investment fell by 13.8 per cent, imports increased by 2 per cent and exports increased by 6.9 per dent.
| | | Labour Market
This collapse in economic activity resulted in a sharp deterioration in the labour market situation. While the live register is not meant to measure unemployment as it includes those who work up to three days per week and seasonal and casual workers, it is still a reasonably good indicator of labour market conditions in the economy. At the end of July 2010 there were 466,824 people on the live register, which represents an increase of 228,600 over the previous two years. The unemployment rate has jumped to 13.7 per cent of the labour force, up from just 4.4 per cent at the beginning of 2007. But for the fact that Ireland is now experiencing significant outward migration, the unemployment rate would be higher. In the first seven months of 2010, 43,200 people were added to the live register.
On the employment side of the equation, the latest Quarterly National Household Survey shows that there were 1,857,600 persons in employment in the first quarter of 2010. This represented a decline of 30,100 on the previous quarter, and a decline of 108,000 over the past year. There was an annual decline of 80,400 in male employment, with almost 63 per cent of this due to the construction sector. |
|
| | | | SECTOR
| CHANGE 12 MONTHS | CHANGE 24 MONTHS
| AGRICULTURE, F&F
| -20,900 | -35,200
| Industry
| -20,300
| -39,900
| | Construction | -50,800 | -123,000 | | Wholesale & Retail Trade | -17,100
| -47,400
| Transportation & Storage
| -500
| -1,200
| Accommodation & Food Services
| +5,500
| -7,000
| Information & Communications
| +1,400
| +2,400
| Financial, Insurance & Real Estate
| -
| +200
| Professional, Scientific & Technical
| -1,900
| -9,000
| Administrative & Support Services
| -7,400
| -23,100
| Public Admin. & Defence
| +300
| +3,300
| Education
| -3,000
| +8,400
| Human Health & Social Work
| +9,600
| +11,700
| Other
| -2,900
| -6,700
| Total
| -108,000
| -266,500
|
|
|
| | Source: CSO
The construction sector accounted for 47 per cent of total job losses over the past year, and 46 per cent over the past two years. On a 12 month and a 24 month view, the public sector was a net creator of jobs. The employment rate among persons aged between 15 and 64 years fell to 60.2 per cent in the first quarter of 2010, which is the lowest level since the second quarter of 1998. The labour market situation is still very difficult and has not yet bottomed out.
Consumer Spending
Consumer behavior and consumer confidence are gradually recovering, but spending levels are still weak and the environment for retailers remains very challenging. The volume of retail sales in the first six months of the year was 2.3 per cent higher than the same period of 2009, but in value terms there was a decline of 1.8 per cent. Retailers are still cutting prices to shift stock.
Manufacturing Output
Manufacturing output in the first six months of the year was 6.7 per cent higher than the same period in 2009. The modern multi-national sector expanded by 9.5 per cent, but the traditional sector declined by 0.1 per cent. The mainly foreign-owned modern sector which is dominated by ICT, and Chemical & Pharmaceuticals is doing very well. Indigenous sector is still finding the environment challenging, but it appears to be stabilizing.
External Trade
The value of merchandise exports fell by 3.3 per cent, while imports declined by 6.7 per cent in the first four months of the year.
The Public Finances
The weakness in the public finances continued in the first seven months of 2010, although there are some signs of stabilization starting to emerge. A deficit of €8.96 billion was recorded in the first seven months of the year, compared to €8.36 billion in the same period in 2009. In the January to July 2010 period tax revenues were running 8.2 per cent behind last year. All of the key tax headings such as VAT, Income Tax, Stamps, Excise Duty and Corporation Tax are all running behind the same period last year. However, revenues are just €247 million lower than projected, with Income tax behind by €290 million. This reflects a worse than expected employment performance and downward pressure on wages.
On the spending side, total net voted spending was 7 per cent below the same period in 2009. Net voted current spending was 2.9 per cent lower and net voted capital spending was down by 35.5 per cent. The government’s capital expenditure programme continues to be cut back.
Credit Conditions
Credit conditions were very weak in 2009 due to a combination of weak demand and constraints on supply as a result of the banking crisis. In the year to December 2009, total private sector credit outstanding declined by 7.6 per cent and mortgage credit outstanding declined by 0.3 per cent. The weakness in credit conditions has carried over into 2010. In the year to May total private sector credit outstanding fell by 10.4 per cent and mortgage credit outstanding declined by 1.8 per cent. Credit conditions look set to remain weak over the remainder of 2010. Demand for credit will remain weak. On the credit supply side, the NAMA process is now underway and in recognition of reality, the initial loans are being transferred at discounts in excess of 50 per cent. It is clear that bank balance sheets will remain poor despite NAMA and it will take some time for more normal credit flow to resume in the economy. This is not going to happen in 2010 and indeed credit conditions will remain tight in 2011. | | |
|
| | THE ECONOMIC OUTLOOK
Despite the fact that the economy technically emerged from recession in the first quarter of 2010, the economic environment remains very challenging. It is likely that having fallen off a cliff over a three-year period, the Irish economy has now hit the bottom and the question is how quickly it can pick itself up and start to recover in a meaningful way. During the first quarter domestic demand remained weak, which is not surprising given the difficult economic and financial backdrop for consumers and business. Consumer spending and business investment are still very weak, while the construction sector is still in steady decline. Exports on the other hand are doing reasonably well, but it is a selective performance, dominated by the mainly foreign-owned Chemical & Pharmaceutical, and IT companies. In a nutshell, the picture that is emerging is of an economy that is being pulled out of recession by the foreign-owned multinational sector, while domestic demand still remains weak, but there is increasing evidence that it is starting to level out.
The labour market remains very weak, but there is generally a time lag of up to a year between the bottoming out of the economy and an upturn in the labour market. So while the labour market is likely to deteriorate somewhat further over the coming months, there is hope that it will have bottomed out by the end of 2010. However, strong growth in employment thereafter is not guaranteed. If one examines the Irish labour market on a sector by sector basis it is very hard to identify too many sectors that might be net job creators over the next two or three years, and in fact it is not difficult to identify those sectors that could well shed further jobs. Job shedding is not yet likely to have ended in manufacturing, construction, the retail sector and financial services and it is inconceivable that the public sector can be a net job creator over the coming years given the requirement to correct the public finances.
Despite Ireland’s technical emergence from recession, the outlook over the next couple of years remains very challenging, not least because the external economic outlook remains very fragile. The nature of the recovery that Ireland is now experiencing is unlikely to have a positive impact on tax revenues and employment – a recovery in domestic demand is required. This is likely to be slow to materialise, but it is essential that policy makers remain focused on three key priorities - getting credit flowing in the economy, improving competitiveness, and addressing the structural imbalances in the public finances.
IRISH ECONOMIC FORECAST | | | Average
| 2008 | 2009
| 2010f | 2011f | GDP
| -3.5%
| -7.6%
| 0.0%
| 3.0%
| GNP
| -3.5%
| -10.7%
| -0.5%
| 2.5%
| Consumption
| -1.5%
| -7.0% | -1.5%
| 2.5%
| Investment
| -16.8%
| -37.1%
| -10.0%
| 3.0%
| Government
| 2.2%
| -4.4%
| -2.0%
| -2.0%
| Exports
| -0.8%
| -4.1%
| 2.5%
| 5.0%
| Imports
| -2.9%
| -9.7%
| -2.0%
| 2.0%
| Consumer Price Inflation
| 4.5%
| -4.5%
| 0.5%
| 2.0%
| Unemployment (average)
| 6.3%
| 11.8%
| 13.5%
| 13.0%
|
|
|
| | | | IRISH BORROWING COSTS
The sovereign debt crisis in Europe is imposing significant funding costs on errant governments around the EU, including Ireland. It is imperative for Ireland that the fiscal consolidation continues in order to control funding costs, which are already significantly higher than they should be. If Ireland were to show any signs of swaying from the path of fiscal austerity, the cost of funding would soar to Greek-style levels and that would be disastrous for a country that is currently borrowing close to €400 million per week. Apart from the short-term requirement of getting the public finances back under control, there is also a requirement to fundamentally re-structure the public finances to achieve stability and sustainability in the longer-term.
Standard and Poor’s recently downgraded Ireland’s debt to AA-, which is the worst rating this country has received from that agency since 1995. This downgrade was accompanied by a ‘negative’ outlook. It is important to recognise that the ‘negative’ outlook attaches to the credit rating given to Irish debt, rather than to the economy itself. Notwithstanding this point, the latest downgrade to Irish debt is unambiguously bad news for Ireland. To borrow money for 10 years on international capital markets, Ireland now has to offer an interest rate that is 3.44 per cent above Germany. Such an interest rate differential makes no sense for a country that shares the same currency as Germany, but it reflects the awful state of Ireland’s public finances and the damage that has been done to Ireland’s reputation and credibility by the banking system.
Standard and Poor’s based the downgrade on its belief that the cumulative total cost to the Government of providing support to the banking sector will be €90 billion, rather than its previous estimate of €80 billion, and that the re-capitalisation of the banking system will cost between €45 and €50 billion, compared to a previous estimate of €30 to €35 billion. Only time will tell if these estimates are correct, but for the moment potential investors in Irish government debt will be guided by the analysis provided by bodies such as Standard and Poor’s, and borrowing costs will remain inordinately high for a country that is borrowing aggressively.
THE HOUSING MARKET
All available evidence continues to suggest that activity in the housing market remains very weak. |
|
| | | |  | New home completions totaled 26,420 in 2009, which represents a decline of 48.9 per cent on 2008 and compares to completions of 93,419 at the peak of the house building cycle in 2006; |
| | House completions in the first seven months of the year totaled 8,383, which is 49.6 per cent lower than completions in the first seven months of 2009; |
| | New home registrations in the first seven months of 2010 totaled 1,233, which is 47.4 per cent lower than the first seven months of 2009;
|
| | There were 2,357 new house commencement notices in the first four months of 2010, which is 27.6 per cent lower than the same period in 2009; |
| | The latest PermanentTsb/ESRI house price index shows that national average house prices fell by 6.4 per cent in the first half of 2010;
|
| | | The latest mortgage figures from the Irish Banking Federation show that the value of the mortgage market fell to €1.31 billion in the second quarter of 2010, which was 39.9 per cent lower than the second quarter of 2009. The number of mortgages granted declined by 38.3 per cent.
The demand and supply dynamics in the housing market remain very weak. On the demand side, the lack of adequate credit availability and low levels of buyer confidence due to a variety of factors are hampering demand. On the supply side, there is still serious excess supply all over the marketplace and this will be exacerbated by NAMA as it attempts to offload supply on to the market over the coming years. Against this background it appears likely that average prices could fall by around 12 per cent this year. Based on the forward looking activity and completions could be around 14,000 at most in 2010.
The fundamentals of the housing and mortgage market are still weak and are unlikely to get significantly better any time soon. The impact of NAMA on the market in terms of fire-sale prices, general sales activities and the completion of unfinished estates will have a fundamental bearing on the market into the medium-term. That impact is difficult to gauge until we get a clearer picture of how NAMA will operate.
JIM POWER
AUGUST 26th 2010
| | |
|
|
|
|
|
| | | | | | | |
|
|
