GOOD FIRST HALF, BREXIT LIKELY TO DOMINATE SECOND HALF
By Jim Power
As we move into the second half of the year, it is possible to look back on the first six months with a certain degree of positivity. On the whole, the Irish economy continued to make progress and thankfully the relatively negative prognostications for the global economy at the beginning of the year have not really materialized. The global economy has actually maintained a pretty stable state; albeit that state is somewhat softer than policy makers or indeed we here in the small open Irish economy would aspire to and hope for.
Based on the statistical evidence we have to date, the Irish economy is likely to be experiencing real annual growth, not the distorted version, of around 3.5 per cent at the moment. Within this there are some very positive trends, but equally we are starting to see some warning signs that should be taken quite seriously.
On the positive side, the export sector continues to be the stand out performer and issues such as Brexit are not having much of a visible impact, while the Exchequer finances are still showing quite a degree of economic buoyancy.
In the first four months of the year merchandise exports were 12.7 per cent ahead of the same period a year earlier. Exports to the EU, which accounted for 49 per cent of the total, expanded by 11.4 per cent. Within that, sales to the UK expanded by 9.3 per cent, but the UK in total accounted for just 10.8 per cent of our total export sales. I suspect this is the lowest market share in our history, but of course for the indigenous export sector the exposure to the UK is still dangerously high. Almost 36 per cent of exports of food and live animals were sold into Great Britain. This is the real area of concern in the context of Brexit.
Consumer spending on goods, as captured by the monthly retail sales series, increased by just 2.9 per cent in volume terms and by 2.1 per cent in value terms in the first five months of the year. Within this, new car registrations declined by 7.4 per cent in the first six months, with used imports increasing by another 2.4 per cent. Anecdotally and statistically, it is clear that for consumer facing businesses, it remains quite a challenging environment and margin pressures remain the order of the day.
On a somewhat cautionary note, and I stress the term somewhat cautionary, tourism is starting to show some strains and manufacturing activity is under some pressure.
While overall overseas visitors to the country increased by 3.7 per cent in the first five months of the year, there was a year-on-year decline of 0.4 per cent in May, with the UK market down by 4.4 per cent. This is not a situation of crisis by any stretch of the imagination, but it does highlight the cost competitiveness of the Irish tourism product and does in my view cast some doubt on the decision to increase the VAT rate in Budget 2019.
On the manufacturing side, the monthly index of manufacturing activity as measured by AIB Bank, fell marginally below 50 in June, which is an indicator of contraction. Not surprisingly, Brexit is the key factor here.
The unemployed total increased by 300 in June and the unemployment rate remained unchanged at 4.5 per cent. This is no cause for concern in an economy approaching full employment, but it does probably suggest some employer caution as the Brexit clouds continue to darken. Having said that, the labour market has come so far, so fast, the downward momentum was always likely to be arrested at some point.
On the Exchequer finance front, the returns for the first six months of the year show that although total tax revenues are running a modest €128 million behind target, they are still €1.7 billion ahead of last year. There is no greater indicator of what is happening in an economy than tax revenues; after all we tax everything that moves in this country.
So all in all, the report card for the first half of the year is a positive one, but the looming Brexit deadline of October 31st is hanging over Ireland like the Sword of Damocles. Interestingly, a UK group called the Alternative Arrangements Commission is about to publish a report called Alternative Arrangements for the Irish Border, which although very technical and complicated in nature, does suggest some interesting ways of getting the Irish government out of its backstop bind. Watch this space.