| | | | | | | | | | | | | | | GREEN SHOOTS OF RECOVERY?
Since the lows reached in the first half of March, global equity markets have rebounded very strongly. In the year to date the US S&P 500 has gained 4.6%, the German DAX is up 6.2%, the French CAC is up 3.8%, the FTSE 100 is flat and the ISEQ has gained 22.4%. Indeed since the lows reached in the first half of March the S&P 500 has rebounded by 39.6%, the DAX has rebounded by 39.4%, the CAC has rebounded by 32.7%, the FTSE 100 has rebounded by 25% and the ISEQ has gained an impressive 52.6%.
This improved equity market performance has given a much-needed boost to pension fund values and has generated a higher level of confidence than has been seen since late in 2007. Equity market performance is reflecting a belief that the global economic cycle is now starting to stabilise and that ‘green shoots’ of recovery are now starting to be seen.
Most available evidence is suggesting that the downward momentum in the global economy has been arrested and that stabilisation is now occurring.
In the US all housing indicators are looking stronger, consumer confidence has jumped from a record low reading of 25.3 in February to 54.9 in May and the purchasing mangers index for manufacturing activity has jumped to 42.8 in May from a low of 32.9 in December 2008. The index for service sector activity has jumped to 44 from a low of 37.4 last November. A reading below 50 signifies that activity is contracting, but the rate of contraction is clearly starting to decelerate. However, the stabilisation is happening at a very low level of activity, as reflected by a US unemployment rate of 8.9% and total employment in the economy has fallen by 5.7 million since the beginning of 2008. In the first quarter, USGDP contracted by a massive 5.7%.
In the Euro Zone the story is similar. The purchasing managers index for manufacturing jumped to 40.5 in May from 33.9 in March, and the service sector index jumped to 44.8 in May from a low of 39.2 in February. Like in the US, the stabilisation is happening at a very low level of activity. The Euro Zone unemployment rate jumped to 9.2% in April, which is the highest rate since September 2009. Unemployment in the zone increased by 396,000 in April and has increased by 3.2 million over the past year. GDP in the Euro Zone recorded a record decline of 2.5% during the first quarter, and was 4.8% lower than a year earlier.
In the UK, the story is also quite similar. The purchasing managers index of manufacturing activity jumped to 45.4 in May, up from a low of 34.5 in November 2008. The purchasing managers’ index of service sector activity jumped to 51.7 in May, signifying expansion in that sector. It reached a low of 40.1 in November 2008. The UK economy contracted by 4.1% in the first quarter of 2009.
Despite the justified improvement in optimism based on a stabilisation of economic activity almost every where across the global economy does represent good news, but it is important to bear in mind that this stabilisation is occurring at exceptionally low levels of activity. This stabilisation is due to the very strong official policy response to the exceptional difficulties that have befallen the global economy over the past 18 months. Interest rates have been slashed to historic lows, fiscal policy is being expanded where possible, and bank re-capitalisation efforts are continuing around the global financial system.
The recovery process is likely to build from here. However, given the nature of the shock to the global financial system and the damage that has been done to the global corporate sector, and the massive destruction of personal wealth that has occurred in economies such as the US, UK and Ireland, the recovery process is likely to be slow and gradual, rather than v-shaped.
For the Irish economy, it is not yet apparent that the downward momentum in economic activity has been arrested. In fact all anecdotal evidence is still suggesting that activity levels are still weakening. The key challenge now for Irish policy makers is to use the current recession to bring down the consumer and business cost base of the economy. However, the most crucial challenge is to ensure that the banking crisis is sorted out in order to restore credit flow in the economy. It is still too early to be terribly definitive about the prospects of NAMA working, given all of the details that are not yet available. It is essential that NAMA does work and that credit starts to flow again, because in the absence of this, recovery prospects will remain elusive. |
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| | | | IRISH PUBLIC FINANCES
The exchequer finances arguably represent the most accurate reflection of what is actually happening in the economy. During period of strong economic growth tax revenues tend to grow strongly and during periods of economic slow down, tax revenues tend to weaken accordingly. On the other side of the balance sheet spending tends to rise during periods of weak economic growth as unemployment rises and should slow down during periods of strong economic growth. The trend in tax revenues over the past couple of years has been very firmly in a downward direction, while pressure on spending has been intensifying.
The latest exchequer returns for the first five months of the year clearly indicate just how weak the Irish economy is at the moment. The deficit of €10.6 billion for the first five months of the year compares to a deficit of €3.6 billion for the same period last year. This almost three fold increase in the size of the deficit is indicative of an economy that has fallen off a cliff over the past year. No big surprises there!
The details on tax revenues in the latest exchequer returns do not make for pleasant reading, but do not come as a shock. Tax revenues are running 21% behind the first five months of last year. Stamp duties are running 63.5% behind last year, which in it self was well behind the previous year. This reflects the collapse in housing transactions. VAT receipts were down by 21.2%, reflecting weak consumer spending and the collapse in new house building. Income tax receipts are running 6.9% behind last year. This is despite the various levies that have been introduced in the two budgets since last October. With employment falling and wages being cut across the private sector, the weakness in income tax receipts is likely to weaken further over the coming months. Corporation tax is over 16% behind last year, which reflects the ongoing pressure on corporate profitability. The take from this heading is also likely to weaken further as the banks report losses. Finally capital gains tax receipts are running almost 69% behind last year, which is no surprise given that very few capital gains have been made over the past couple of years. This shows the folly of the increase in the capital gains tax rate in the budget.
On the spending side of the equation voted current spending is running 4.3% ahead of last year, while voted capital spending is running 6.3% behind.
While the government is expressing satisfaction that the public finances are now behaving as they had anticipated at the time of the April mini-budget, the reality is that the public finances are in a very poor state. It is difficult to believe that the downward momentum in tax revenues will be arrested any time soon or indeed that the upward pressure on social welfare spending will be arrested against a background of rising unemployment. Following the ill-advised increase in the personal tax burden in the April mini-budget, it would appear certain that the downward pressure on consumer spending will intensify over the coming months as the reality of wage cuts and the various levies start to take a real toll on disposable incomes.
So far government has failed to adequately address the spending side of the exchequer equation and until this happens it is hard to see any semblance of order being restored to the public finances. The notion that the Minister for Finance might turn around next December and again increase the tax burden on the personal sector is a frightening prospect.
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