This article appeared in the Sunday Business Post August 3rd 2014
In recent days somebody whose views I deeply respect suggested to me that official data releases and general popular discourse are not fully capturing and reflecting the magnitude of the real upturn in the fortunes of the economy. This view resonates with my sense of what is going on around the country. Whatever about official economic data releases which I believe, have been very positive in recent months, many businesses I deal with and speak to have been suggesting to me in recent times that there is a very noticeable improvement in conditions. Granted, this view tends to be more prevalent in the greater Dublin area than elsewhere, and is very relative, given the low base from which many businesses are now operating. Be that as it may, there is an inevitability about recovery starting in the capital city and its environs, and it is very reassuring that the precipitous decline in economy activity from 2008 onwards has stabilised over the past couple of years and there is now a very real recovery starting to build. The perennial pessimists and sceptics, and those who advised us to follow the Argentinian route may find this difficult to stomach, but the recent evidence is pretty compelling.
Despite the collapse in our banking system and its’ still pretty dysfunctional characteristics, the results from our two biggest banks over the past week have been relatively positive.
In the first half of this year AIB returned to profit for the first time in six years. It delivered a pre-tax profit of €437 million, which was well ahead of any analyst forecasts that I am aware of. The bad debt provisioning has been reduced considerably; operating expenses continue to fall; and total income rose by 36 per cent. Furthermore, its Chief Executive David Duffy has reassured the taxpayers of Ireland that his bank will return all bailout funding of €20.8 billion received from the state since 2009. For a bank that is 99.8 per cent owned by the state, this is good news. Meanwhile over at Bank of Ireland, a first-half pre-tax profit of €399 million was announced.
This week’s news from the banks is unambiguously positive. Whatever we may think about banks and bankers, it is an irrefutable fact that for an economy to function properly, its banking system must be functioning properly. The role of a bank is primarily to act as a trustworthy intermediary to attract deposits and channel credit into the real economy. Since 2008, the Irish banks have not been meeting these criteria, but with a return to profitability, this looks set to change over the next couple of years. A functioning banking system will help accelerate the return to a properly functioning economy.
On the real economic data front, the news is also generally positive.
Earlier in July, national accounts data for the first quarter showed that GDP expanded by 2.7 per cent during the quarter, and was 4.1 per cent higher than the same quarter in 2013. Real GNP increased by 0.5 per cent during the quarter and was 3.1 per cent higher than the first quarter of 2013. This represented a very positive start to the year, and the good news is that the recovery has subsequently gathered pace.
Consumer confidence is at more than seven-year highs, but consumer spending is also gradually gaining traction. In the first six months of the year the value of retail sales was 4.4 per cent higher than the same period in 2013, and the volume of sales increased by 6.5 per cent. However, when the motor trade is excluded, the retail sales performance was less strong, although more vibrant than in previous months. Excluding cars the value of retail sales increased by 1.5 per cent and the volume of sales increased by 3.4 per cent. We know that the number of new cars registered was 23.4 per cent higher than the first half of 2013. Indeed after 9 days of July, car sales for the year to date surpassed total sales for 2013.
On the export front, the news is also positive. In the first 5 months the value of merchandise exports was 0.3 per cent higher than last year. Exports of Chemicals & Related Products declined by just 1 per cent (the patent issue), but exports of Food & Live Animals increased by 10.7 per cent. The volume of manufacturing output is 21.8 per cent higher than last year. Irish industry is clearly moving again.
The labour market also continues to improve. In July, the number of people signing on the live register was 37,461 lower than a year earlier and has fallen by 55,800 over the past two years. Most recruitment consultants will tell you that there is a marked pick-up in demand for labour. The IDA also continues to deliver. In the first six months of this year, over 100 investments were secured, which represents an increase of over 40 per cent on the first half of last year. Over 40 per cent of the investments secured are from companies investing here for the first time, with the remainder coming from existing companies. It is estimated that those investments will lead to more than 8,000 extra direct jobs in the economy.
The final piece of the jigsaw is in the housing market. According to the CSO, national average property prices have increased by 12.5 per cent in the year to June and are now 13.9 per cent off the low point seen in March 2013; Dublin prices have increased by 23.9 per cent over the past year and are now 30.2 per cent off the low point in August 2012; and Outside of Dublin, property prices have increased by 3.4 and are now 5.6 per cent off the low point in March 2013. While this strong pick up in house prices will not please all, it does help remove thousands from a negative equity situation and does indicate a greater level of confidence out there.
All in all, I find the evidence of economic recovery very compelling, and hopefully it should continue to build from here. This is not to suggest that it will be plain sailing. It most definitely will not. There are still many obstacles to overcome, including the continued pressure on discretionary incomes; public and private debt; credit availability; housing market issues; and the fragile nature of the banking system. However, economic growth will make all of these problems more manageable, and it is very clear that this is starting to happen. Hopefully, Michael Noonan will deliver a modest budget correction in October, and this should reinforce the more positive vibes in the economy and in business.