Employment in Ireland regains momentum in second half of 2014

On the basis of Ireland’s quarterly GDP data the economy hit bottom as far back as the final few months of 2009, although no one felt that the following few years could be described as a recovery. This was partly due to the limp and volatile quarterly pattern of the GDP data and, perhaps more importantly, the continued fall in the numbers at work. Employment didn’t hit bottom until the third quarter of 2012, but the past two years has seen a clear and marked improvement in the labour market, which is probably  a better barometer of the health of the economy than the headline GDP data .

Indeed, as an earlier Blog pointed out , the relationship between job growth and GDP of late has been odd. Employment ( when adjusted for seasonal affects) rose by some 58k through 2013, although GDP was broadly unchanged (growth is currently put at 0.2%).  Yet we know that GDP grew strongly in 2014 ( the final figure, due in March, may show growth in excess of 5%) but employment growth was actually weaker, with a total rise of 27k over the four quarters.

That weakness was most pronounced in the first half of the year, with employment rising by over 6k, but the pace quickened in the second half of 2014 as confirmed by the q4 Quarterly National Household Survey; employment rose by around 20k in the final two quarters , bringing the total number of jobs created in the year to 27k and the overall figure during the recovery to 95k.

The sectoral pattern of job gains as revealed in the CSO data is unusual, however.The rise in employment was initially driven by  agriculture  ( accounting for over 40% of the rise in 2013!) and the hotel sector, but in 2014  employment fell  sharply in agriculture  and although virtually all other sectors saw some job gains (there were marginal falls in Public Administration and Health) some 45% of the rise in employment was again attributed to just one sector, this time Construction. Perhaps the original rise in agriculture reflected rural construction workers  returning to farming and this has now partly reversed, given the upturn in house building and other construction.

The labour force also declined sharply during the recession ( a peak to through fall of 128K) before recovering by some 20k  in 2013 ( a better chance of  employment can encourage people back into the work force). The labour force started falling again in the first two quarters of 2014, however, and although the second half saw a modest rise it was not sufficient to prevent a 10k fall in 2014 overall. That leaves the total off the lows but it is far from clear how the labour force performs from here- will the recent fall in net emigration continue and hence  help to boost the numbers seeking work in Ireland or will the fall in the participation rate continue, so keeping downward pressure on the labour force?

That uncertainty about the supply of labour will affect the unemployment total and the unemployment rate but for the moment at least the scale of employment growth is driving a sharp fall in the latter, which declined to 10.4% in the final quarter of 2014, the lowest since early 2009 and a long way below the peak of 15.1% recorded three years ago. Indeed, the q4 figure was also below the initial 10.7% ( based on monthly estimates). That means that the January estimate has been revised to 10.3%, implying that on the basis of the current trend the unemployment rate will fall below 10%  in May or June.

What if the electorate is reckless?

It is now received wisdom that the Irish authorities pursued bad or at least inappropriate economic policy in the years before the 2008  crash .Fiscal policy is usually seen as one culprit, with Budgets perceived as fuelling the boom rather than dampening down economic activity. Fiscal policy should have been counter-cyclical, it is argued, with the government of the day seen as culpable in not’ doing the right thing’. If we ignore the hindsight bias present in such analysis it also begs a simpler question- what if the electorate does not reward prudent policies and prefers what by normal economic criteria would be considered reckless ones?

In Ireland’s case the counter-cyclical argument is that the government should raise taxes and/or cut discretionary spending when the economy is growing too fast ( leaving aside the problem of establishing what is sustainable growth at the time). Yet commentary on the Budget and the monthly Exchequer returns is predicated on exactly the opposite- strong growth in tax receipts is seen as opening the door for higher public spending and ‘ a giveaway’ when next the Finance Minister delivers his Budget address to the nation.

A glance at the 2007 general election manifestos, for example, shows that all the main political parties envisaged tax cuts and further strong growth in exchequer spending . Were the politicians being irresponsible or simply rational, based on the belief that electorates want higher spending and lower taxes and will not reward a government which indeed adopts a counter cyclical policy, even if the need for that was  perceived clearly at the time ?

There are additional constraints other than the electorate, although perhaps not well understood by voters. One is the fiscal rules imposed by membership of the euro, and these have tightened considerably since 2010, including the stipulation that Ireland will need to limit current government spending in the medium term and to run a persistent Budget surplus when adjusted for the economic cycle. It remains to be seen what role these constraints will play in shaping the next general election.

The new fiscal pact also resulted in the setting up of the Irish Fiscal Advisory Council, which is there to assess the budgetary stance and monitor compliance with the fiscal rules. Yet it does not appear to resonate with the public and the government has ignored its recent advice, to no great media  clamor or cost in terms of public opinion.

The markets, too, play a role, and can punish profligate governments. Yet bond yields across the euro zone are generally at record lows, despite the fact that debt burdens are still rising, so QE has apparently trumped that potential constraint, at least for a while.

The issue of the electorate’s role in shaping policies is currently on show  in Greece, where the new Government is seen to have a mandate to end austerity, kick out the troika  and yet secure additional funding from Greece’s creditors. It is unclear how they can pull this off but the electorate has spoken. Yet the same electorate has tolerated the fact that no Greek government has run a Budget surplus in 34 years ( and no doubt longer but that is the limit of the IMF data base) with the average deficit amounting to 7.7% of GDP over that period. Clearly the Greek electorate are willing for future generations to pick up the tab. Some might say this is irresponsible while others seek to blame the creditors for funding what must qualify as reckless behaviour.

 

Irish Household deleveraging enters 7th year

The Irish Central bank has just published an update on the Financial Accounts of the Irish economy, incorporating figures to the third quarter of 2014. The data provides some positive news on Irish household wealth and the sustainability of household debt while confirming that deleveraging remains the order of the day.

The amount of outstanding loans to Irish households peaked at just over €200bn in the third quarter of  2008 and has been falling since, declining to €160.6bn , bringing the debt figure back to levels last seen in mid-2006. The scale of the deleveraging (over €43bn) is remarkable, as is the duration; net mortgage debt  continued to fall in the final quarter of last year according to the monthly data, implying that the household debt figure , when updated, will have declined for over six years.

Debt relative to household income is a standard measure of debt sustainability and on that metric the situation continues to improve. That was not the case at the onset of the deleveraging as household income was also falling. Consequently the household debt ratio did not peak until late 2009, at 218%, and was still above 200% three years later. Disposable income has  finally started to pick up so the debt ratio is now falling at a more rapid clip, declining to 177% on the latest figure, the lowest in nine years.

On the other side of the balance sheet Household assets have been rising in value. Financial assets have been boosted by the bull market in equities ( captured in insurance company reserves)  and  housing wealth by the upturn in residential  prices and completions. Consequently the net worth of Irish households ( i.e. housing and financial wealth minus liabilities) now stands at €574bn. This is well short of the figure at the peak of the boom (over €700bn) but is €84bn above the figure a year earlier and is further confirmation that household wealth is recovering.

What are the implications of these trends?. Rising wealth is generally  supportive of consumer spending, and a paper from the ESRI  by McCarthy and McQuinn  found that in Ireland a 10% rise in housing wealth would boost consumer spending by 1.1%. On that basis we can say that the 14% rise in housing wealth seen over the year to the third quarter could have boosted spending by 1.5%, or by €1.2bn. Of course other factors have been at work and consumer spending has emerged well below most forecasts, which brings in the second implication- deleveraging has undoubtedly had a strong negative influence on household consumption, with the gross savings ratio averaging over 14% in the first three quarters of 2014, double the figure  in 2007.It is impossible to know how long household deleveraging will continue and as such it represents a risk to any forecast of future household spending.

One final implication. Irish banks have seen an improvement in net interest margins but their assets are still falling, with deleveraging a significant factor. They are making new loans, of course, but that is being offset by debt repayment, both by households and firms, and again the recent monthly figures from the Central bank showed that the trend decline in bank assets was still evident in December.

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