| | | | | | | | | | | | | | | International Economy
At the beginning of 2009 the global economy was in a very difficult place with almost all indicators of international economic activity still moving in a downward direction. A year later, much has changed. The emerging economies such as China and India are showing strong growth momentum and all of the major economies in the developed world have official emerged from recession.
Recently it was officially confirmed that the UK economy emerged from recession in the final quarter of 2009, albeit growth only expanded by a miserly 0.1 per cent during the quarter. However, this improvement follows six successive quarters of contraction, which is the worst performance since the 1950s. Overall, the UK economy contracted by 4.8 per cent last year and from peak to trough the recession has been much worse than that experienced in the 1980s or the 1990s. It will take some time to get the UK economy back to the levels seen prior to the economic meltdown, but at least progress is being made.
In Germany, business confidence as measured by the very influential Ifo survey improved for the tenth consecutive month and is now at the highest level seen since July 2008. In the US, consumer confidence jumped quite strongly in January and is now at the highest level since the final quarter of 2008 and the labour market is showing signs of stabilizing after a couple of extremely difficult years that saw massive job losses in the economy.
While the economic news emanating from the developed world is reasonably good, the news out of the emerging economies is considerably better, with China now apparently on fire again. This is all good stuff and does suggest that the global economy has emerged from the deepest economic crisis since the 1930s. We can expect the emerging economies to continue to recover at a very brisk pace, but the chances are that the recovery in the developed world will be more modest and more staggered, but at least it is moving in the right direction.
Table 1 presents the latest global economic forecasts from the International Monetary Fund (IMF). The prognosis for 2010 is reasonably good, with a return to positive growth in all of the major economies. However, the forecasts are suggesting a gradual rather than sharp recovery. Given the imbalances in the global economy, particularly the US consumer, that economic prognosis appears just about right and realistic.
Table 1
Global GDP Forecast | | | | | 2008 | 2009
| 2010f | 2011f | World Growth
| 3.0%
| -0.8%
| 3.9%
| 4.3%
| United States
| 0.4%
| -2.5%
| 2.7%
| 2.4%
| Euro Area
| 0.6%
| -3.9%
| 1.0%
| 1.6%
| Germany
| 1.2%
| -4.8%
| 1.5%
| 1.9%
| France
| 0.3%
| -2.3%
| 1.4%
| 1.7%
| United Kingdom
| 0.5%
| -4.8%
| 1.3%
| 2.7%
| Japan
| -1.2%
| -5.3%
| 1.7%
| 2.2%
| China
| 9.6%
| 8.7%
| 10.0%
| 9.7%
| India
| 7.3%
| 5.6%
| 7.7%
| 7.8%
|
| | Source: IMF World Economic Outlook, Jan 26th 2010 |
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| | | | The biggest source of concern in the global economy at the moment concerns events in Greece and the potential fallout for some other Euro Zone economies whose public finance situation is not good. The most vulnerable ones include Spain, Portugal and Italy. Following the December 2009 budget, the international perception of Ireland has improved, but it will be essential to maintain the fiscal progress that has been made to date. Any reversal of Government policies in relation to spending cuts would propel Ireland back into the international firing line again. This must be avoided.
Serious questions are now being asked about the future sustainability of the Euro Area and the euro has weakened sharply against sterling and the dollar as a result.
Rumours of the death of the EMU project are greatly exaggerated and the system will survive the first big test it has faced since its inception in 1999. The political cement holding the project together is more than strong enough to prevent its economically flawed make up from leading to its collapse. Meanwhile the euro looks set to remain under pressure and the ECB will not be in any position to contemplate tightening interest rates while this uncertainty persists.
Irish Update
The renewed strength of sterling and the gradual uplift in the global economy is unambiguously good news for Ireland and will inevitably give some boost to the export performance.
Meanwhile the challenge for Ireland is to continue to push for improvements in competitiveness, restore stability to the sick banking system, and not allow the public sector unions push the fiscal correction plan off track.
There appears to have been a concerted and orchestrated attempt to talk up the Irish economy in recent weeks. Perhaps this is natural after such a desperate year for the Irish economy, but extreme caution is still required and will be for some time yet. The most positive thing that can be said about the Irish economy at the moment is that the external environment continues to get gradually better and that will of course eventually help us. However, talk it up as we may, the reality is that the domestic economy is still in a difficult place; a fact that was confirmed by a number of recent data releases.
The Exchequer returns for January showed that a deficit of €780 million was recorded in the first month of the year, which is more than €32 million above the dreadful outcome for January of last year. On the spending side, the day to day costs of running the country fell by 11.9 per cent, which is a positive development after years of reckless spending. Capital spending is running more than 21 per cent behind last year, which is less pleasing given the ongoing requirement for heavy capital spending to get our infrastructure, in areas like roads, water, schools and hospitals up to first world standards. On the taxation side, the picture is still pretty grim. Total tax revenues in January were 17.7 per cent below last January’s very weak outcome. All of the major tax headings in the first month of the year were well behind last year. This is indicative of weak consumer spending, the weak labour market, and a still very dead residential and commercial property market.
It is clear that the trends evident last year have carried over into this year and at this early stage it is possible to say with a reasonable degree of confidence that it promises to be another challenging year for Ireland’s public finances. The practical implication of this is that the framing of next December’s budget will be extremely difficult again. Having hit public sector workers with a pension levy and wage cuts over the past year, it is inconceivable that Government could go back for more. The spending focus in next December’s budget will have to be on efficiencies and hopefully he will start with a radical dismantling of the very expensive and grossly inefficient quango system. One can only hope that the Minister and his officials are currently studying carefully the McCarthy report of last year. It will have the form the centre point of Budget 2011.
On the labour market front, the news in January was also not very good. Another 13,341 workers were added to the live register, representing an increase of more than 110,000 over the past year. While the live register is not a measure of unemployment as it includes part-time workers who work up to three days per week, and seasonal and casual workers who are entitled to Jobseekers Benefit or Allowance, it still provides a decent picture of labour market conditions. The picture it paints is not a good one and unfortunately many businesses are still more interested in shedding than hiring workers at the moment.
The labour market is always a lagging indicator in the sense that it generally turns around by at least six months after the economy turns. However, the Purchasing Managers’ Index of service sector activity fell in January, as did the Index of manufacturing activity. These indices are forward looking indicators of manufacturing and service sector activity, and both are clearly suggesting that activity is still falling.
On top of this reality, ongoing developments in the banking sector are still giving serious cause for concern. The NAMA loan work is showing up some very dubious practices in the banking sector in relation to how loans were given and how the security for the loan was taken. This is extremely worrying as it suggests that the loans may be worth a lot less than what was originally envisaged.
For the year ahead exports represent the best source of hope, but consumer spending, construction activity and general business investment activities are likely to remain weak. It is still too early to call the all clear on the Irish economy and 2010 will be another challenging year. However, it is not likely to be as bad as 2009, given the more positive external influences.
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