Irish High Steet spending: some volume growth, boosted by falling prices

The volume of Irish retail sales excluding the motor trade peaked in December 2007 and fell by almost 15% over the following four years , recovering marginally in 2012 before making a double bottom early last year ( using  a 3-month average to reduce some of the volatility in the CSO data). Since then the volume of spending has picked up somewhat, rising by 5.2% from the low,  with the annual increase in August at 3.7% .Still a long way from the peak, therefore, but at least there is some signs that consumers have returned to the High Street.Total retail sales are up 6.8% in volume terms, thanks to strong car sales, and overall consumer spending has  also shown some growth, albeit at a slower pace (spending was up an annual 1.8% in the second quarter) implying that spending on services has yet to show the same forward momentum.

The upturn in  High Street sales is widespread, with most areas seeing some increase in volumes over the past year. The most pronounced is in Furniture and Lighting, up an annual 20.7% , no doubt reflecting the pick up in housing transactions and completions, followed by Electrical goods with an 11.6% gain. The volume of spending on Footwear and Clothing is also recording strong growth( 5.4%)  as is Motor Fuel (4.4%), which is not surprising given the surge in car sales this year (an increase of 24% according to the retail data). Spending on Food tends to be less volatile than most other areas and that too has seen growth, with the volume of sales up 3.2%, although spending on beverages and tobacco is down.

Spending in volume terms is  also falling in some other areas, including Pharmaceuticals and Cosmetics (-0.8%), Newspapers and Books (-1.6%) while in Bars the figure is -2.7%. It is not clear that the  latter has yet bottomed, with the volume of sales down over 37% from the peak , while the fall in the volume of Newspaper and Book sales is even starker, at over 47%, although there has been some modest growth in the past few months.

Some good news then for at least some areas of the High Street, although a closer look at the data reveals that the growth in actual spending is not as pronounced, with price falls still evident in most sectors. The price of Electrical goods is down by over 5%, for example, so reducing the increase in the value of spending to 5.8% despite a volume increase of 11.8%, with Furniture and Lighting also seeing a pronounced price fall, this time of 3.6%. A few sectors have attempted to raise prices, including Newspapers and Bars but the total  price deflator for retail sales ex autos fell by 1.7%, so reducing the rise in the value of sales to 2% despite a volume increase of 3.7%. The pace of price decline has eased a little over recent months, from -2% earlier in the year, but it is clear that although conditions for High Street businesses are indeed improving, the volume figures give a more upbeat trend than  experienced by many retailers.

 

Irish GDP surges, impressing the Government but not consumers

Ireland’s quarterly GDP figures are volatile and often surprise, with the latest no exception; the economy grew by a seasonally adjusted 1.5% in q2, following a 2.8% expansion in the first quarter, the latter revised up marginally from the initial release. That surge in Irish output left the annual growth in real GDP in q2 at an extraordinary 7.7% and means that in the absence of revisions the average growth rate for 2014 as a whole would average 5% even if GDP was to remain flat in the second half of the year. The consensus growth forecast has moved steadily higher as the year  has unfolded , from an initial 2% to around 3%, but this latest data will no doubt prompt a further substantial upgrade- the Finance Minister has already mentioned 4.5% and that requires a fall over the second half of the year. Some commentators prefer GNP as a better measure of economic activity in Ireland (it adjusts for net  external flows of profits, interest and dividends) but that tells a similar story-indeed, the annual GNP  growth rate in q2 was 9%, although base effects in the second half may mean that the annual  GNP growth rate in 2014 will also be around 5%.

The monthly external trade data had implied a strong  merchandise export performance in q2 (the Patent Cliff impact on chemicals appears to be over, at least for now) but the national accounts included  even stronger figures,  which alongside a better performance from service exports resulted in a 13% annual increase in export volume. Import growth was also very strong, at 11.8%, but such is the dominance of exports (now 117% of GDP)  that annual GDP growth would have been 4% even if the other components made no contribution.

In the event they all contributed. Investment rose by 18.5% on the year, adding 2.5 percentage points to GDP growth, following strong gains in construction output and spending on machinery and equipment. Government spending  also rose , and by a puzzling 7.9% in volume terms, which sits uneasily with the idea of spending cuts and fiscal austerity and may reflect problems with the price deflator. The third component of domestic  demand, personal consumption, also rose, but by a modest 1.8%, and even that was flattered by base effects from last year as the quarterly increase in q2  this year was just 0.3% following a meagre 0.2% rise in q1. It is clear from other data sources that Irish households are still  paying down debt at a steady clip and it is impossible to say when this deleveraging will end. Employment growth has also slowed sharply in 2014 and in the absence of a marked change in household  behaviour personal consumption growth in 2014 is likely to be nearer to 1% than the 2% many expected.

Such is the volatility  and unpredictability of exports and investment that real GDP  growth in 2014  could be over 6% or nearer 4%, but we currently expect  5%.Export prices are falling, as is the deflator of government spending, and for that reason the rise in nominal GDP this year may be less than that recorded for real GDP – we expect 4%.That would give a nominal GDP figure  in 2014 of €182bn but still substantially above the €171bn forecast in the 2014 Budget. Tax receipts are also  running well ahead of target and so we now expect the General Government deficit for the year to emerge at 3.4% of GDP compared with the 4.9% originally forecast by the Government. The implication is that a fiscal adjustment of the order of €2bn in 2015, as originally envisaged and still advocated by the Fiscal Advisory Council (although the Council’s latest paper did  not take account of the q2 GDP figures), would probably push the deficit well below 2% of GDP and therefore comfortably under  the 3% target set by the Excessive Deficit procedure. The  strength of tax receipts had moved the Government towards a much smaller adjustment in any case  but the latest GDP figures appear to have convinced them to abandon austerity and at worse go for a neutral budget, with tax cuts funded by higher taxes elsewhere, mainly the Water Charge.

Irish household wealth is rising but debt repayment ongoing

Mario Draghi may be doing his best to encourage European consumers to borrow and spend but the evidence in Ireland still points to ongoing deleveraging, despite rising household wealth. The debt burden is now falling steadily, however, in contrast to the situation over recent years, but is still extremely high by international standards and it is anyone’s guess when the deleveraging process will come to a close.

The Irish Central bank publishes financial accounts data which tracks each sector’s assets and liabilities and the figures for the first quarter have just been released. Loans to households fell by €1.9bn in q1, bringing the total decline since the peak in mid-2008 to over €39bn. That deleveraging has dwarfed any new lending, which explains why the outstanding amount of personal credit is still falling despite a pick up in new loans. The absolute debt figure is now back to the level last seen in mid-2006.

Of more significance is the debt burden, which is generally expressed relative to disposable income. On that metric the burden peaked at 218% in late 2009 but did not fall materially for some time after that despite deleveraging because household income, the denominator, was also falling, reflecting rising unemployment, falling wages and an increase in the tax burden. Income finally stabilized  in 2012, ( although it is still volatile even on the four quarter total used by the Central Bank ) and has started to inch higher, so the debt ratio has started to fall at a steady clip, declining to 182% in the first quarter of 2014 from 185% in the previous quarter and 198% a year earlier. The household debt burden is now also back at 2006 levels, although a long way above the 133% recorded a decade ago.

Households are reducing their liabilities but their financial assets are climbing, and indeed have been rising for the past five years, largely reflecting growth in the value of assets held in pension and insurance funds. Household’s financial assets amounted to €339bn in q1, leaving net financial worth of €165bn, a record, and some €100bn above that recorded at the nadir of the financial crash.

Most Irish household wealth is in the form of housing, however, and when that is added we arrive at a  total net worth figure of €509bn. The housing component actually fell in the quarter ( national house prices declined in q1) and wealth  is still some €200bn below the peak but it has recovered by €50bn over the past year.

House prices rose again in q2 so that alongside the pick up in house building ( up an annual 37% in h1) will have boosted wealth  in recent months. The data on bank lending implies that debt repayment has remained a feature as well so the net household wealth figure will probably record a further rise in q2. Rising wealth is generally seen as positive for consumer spending but we have never seen the pace of deleveraging evident in Ireland of late (households have been net lenders rather than borrowers for over five years now) and we do not know how long that will continue to dampen personal consumption.

Ireland now has jobless growth instead of growth-less jobs

The relationship between Ireland’s reported GDP and employment has been a puzzle of late. Output in the economy barely grew last year yet employment soared and this year has seen GDP growth pick up but employment effectively stagnate; growth-less jobs has given way to jobless growth. The unemployment rate is still falling, it has to be said, but the explanation for that is more to do with a decline in the labour force rather than any strength in labour demand. Average pay is also declining and so the picture painted by the recent labour market data is certainly at odds with the recovery narrative currently holding sway.

The main source of information on Irish employment is the Quarterly National Household Survey (QNHS), which means that sampling errors are always present. That aside, the data shows that employment bottomed in the third quarter of 2012, having fallen by a seasonally adjusted 327k (or 15%) and  then rose sharply in 2013, with the annual increase in the final quarter at 61k or over 3%. Not all industries participated and agriculture saw by far the biggest increase in employment, but on the face of it the pace of job creation was extraordinary, and one usually associated with a booming economy. Yet the recorded GDP data, which measures the output of the economy, initially showed a fall in 2013, and although subsequent revisions have been positive, the latest vintage still has real GDP growth last year of only 0.2%.Nonethelss the strength of job creation precipitated a substantial fall in the unemployment rate, to 12.2% at end 2013 from 14.2% a year earlier, despite a rise in the participation rate. The implied tightening of the labour market was not evident in terms of pay, however, as average weekly earnings fell by 0.7% last year.

The data revisions to the national accounts had left exports stronger than previously thought and a positive contribution from external trade was the main driver of the 2.7% rise in Irish GDP reported for the first quarter this year, offsetting another fall in domestic demand. The data left the annual growth rate in q1 at 4.1% and, as we expected, has prompted a substantial upward revision to the consensus growth projection for 2014 as a whole, with many private sector forecasts now  well over 3%. Many analysts are also anticipating a pick up in personal consumption, in part predicated on a strong employment figure, but the latest QNHS data, for q2, is very disappointing in terms of job creation; employment rose by 4.3k on a seasonally adjusted basis in the quarter bringing the increase in employment in the first half of the year to just 5.5k. Coverage of the figures tended to emphasise  the annual increase in employment of 37k but  the quarterly flow implies that  the annual rise will slow sharply by the end of the year .

The unemployment rate fell further in the quarter, to an average 11.5%, despite the weak employment figures, reflecting a fall in the labour force and a decline in the participation rate. The decline in the latter was particularly acute for those  over 16 and under 24, with more staying on at school or entering third-level. Emigration is a factor too, although the net figure fell  to 21k in  the year to April 2014, with an increased inflow of  61k partially offsetting a reduced outflow of 82k.

The surprisingly weak employment figures should also be set against the data on average earnings, showing an annual fall of 1.1% in the second quarter, which again would not indicate a tightening labour market overall, although some industries did see strong annual pay growth including construction (6%), the hospitality sector (5.3%) and manufacturing (4.2%). Some have pointed to the strength of income tax receipts as being inconsistent with the pay and jobs data, which is worth noting, although it should be remembered that the 2014 Budget did include measures to boost income tax by over €200mn as well as strong carryover effects from 2013.

As is often the case with Irish data we are left with a confusing picture- is the economy growing very strongly, as indicated by the GDP figures, or is it much weaker  as implied by the employment figures?. The latter does seem to suggest that domestic demand, and particularly the domestic service economy, where most jobs are located, remains in the doldrums. This does not preclude 3.5% GDP growth but it does mean that growth will again be driven by the multinantional export sector, which is not labour intensive.

 

Irish mortgage lending picking up but still far from healthy market

New  Irish mortgage lending for house purchase peaked in 2006 at some €28bn, with over 110k mortgages drawn down, and subsequently fell, collapsing completely from 2008 onwards before bottoming out in 2011 with a value figure of just €2.1bn and a volume total of 11k. The ending of mortgage tax relief in 2012 prompted borrowers to bring forward their draw down which helped to boost lending to €2.5bn  in that year but the corollary was a weaker figure in 2013, with the value of lending slipping to €2.4bn alongside a fall in volume from the 14k  seen the previous year. Lending has picked up substantially this year, however, and the annual total may well rise to around €3bn, with perhaps over 16k new mortgages for house purchase likely to be  drawn down.

The past year has certainly seen some positive changes in terms of both the supply of credit and the demand for mortgages. The number of active lenders fell away sharply in the downturn and is still low but credit standards are back to more normal levels , having tightened considerably at the onset of the recession ( credit standards always tend to be pro-cyclical). On the demand side affordability is back to the benign levels seen in the latter part of the  1990’s and employment is rising which has helped to support household incomes,  the main driver of mortgage demand. Price expectations ,too, play a part, and  few now doubt that the market has bottomed, at least in the main cities, particularly the capital.

The latest  new lending figures from the Irish Banking Federation (IBF) show that 4337 mortgages for house purchase were drawn down in the second quarter, an increase of 52% on the same period last year and compared with 3126 in the first quarter. Buy-to-let mortgages account for less than 5% of the total compared with a quarter at the peak of the boom, although the rental yield is now higher than the mortgage rate which was certainly not the case in 2006 and 2007. First -time buyers now dominate, accounting for  well over half the total (from a third at the peak) with the balance made up by those moving house, a segment that has taken a much more stable proportion of lending.

The average new mortgage for house purchase is also rising, as one might expect given the rise in house prices nationally, increasing by over 5% at an annual rate in the second quarter, to just over €178k. As a result the total value of mortgage lending for house purchase in q2 was €773m or 60% up on the previous year, following a figure of €539m in the first quarter.

These annual growth figures are clearly very impressive but when put in context the housing market is still far from what might be considered  liquid and healthy. Total transactions amounted to over 8700 in the second quarter, for example, according to the Property Price Register , so the mortgage data implies that less than half of transactions are being funded by bank credit, which remains unusually low. In addition, mortgage repayments are still outpacing new lending so net mortgage lending is still contracting; net lending fell by a total of €1.5bn in the first six months of 2014, which implies repayments of €2.8bn given that new lending (as per the IBF data) was €1.3bn.

What level of mortgage lending would take place in a healthy market?. One approach is to assume that a 3%-4%  annual turnover in housing transactions is normal, implying transactions of 60k-80k (there are approximately 2m houses in Ireland)  compared with around 30k last year, Again, perhaps 80%-85% might be normally funded via a mortgage so that gives a mortgage volume figure in the region of say 50k-60k per annum. The 2014 outturn may well be around 16k so we are still a long way away from an equilibrium, although lending is clearly now finally  moving in the right direction.

Trend in Irish household income rising but savings ratio also increasing

The initially reported contraction in Irish GDP last year has now been revised away which alongside strong growth in the first quarter of 2014 has prompted forecasters to revise up their projections for the full year, with exports and investment spending seen as the main drivers. Consumer spending continues to disappoint, however, having fallen in q1 and the final quarter of 2013, so again dashing hopes of a recovery in that key component of domestic demand. The consensus still expects some growth in consumption this year, nonetheless, but the scale of any forecast  rise is being trimmed back. Consumption largely depends on the trend in disposable income but  the proportion of any given  income spent and saved  can and does vary over time. On that basis the recent trend in disposable income is encouraging but  the  trend in the savings ratio has also started to rise again, reversing the  downward path evident since 2010, adding a further degree of uncertainty to the economic outlook.

Household spending is not uniform through the year and so the savings ratio also exhibits pronounced quarterly swings, falling sharply in the final quarter of the year, for example, and rising steeply in the first quarter. The CSO seasonally adjust for such moves and the adjusted figures for household disposable income and savings tend to be the focus of attention. Volatility is still high, however; disposable income fell by 4.8% in the first quarter of 2014, latest figures show,  after a 3.8% rise in the final three months of 2013, but the change in consumption was  much less pronounced (too modest quarterly declines) so the savings ratio fell sharply, from 15.4% to 11.7%.The implication is that households had to spend a higher proportion of their income in q1 to support spending in the face of a sharp fall in income.

The trend in these variables is more significant, however, and a 4-quarter total shows a different  picture. The latest CSO figures now show that the declining trend in household disposable income bottomed in the first quarter of 2013 and the past year has seen an upturn in income, no doubt supported by the recovery in employment which is offsetting stagnant wages; the 4-quarter income  figure in q1 was €90bn, the highest since late 2010 and compared with a cycle low of €87bn. A modest increase, leaving incomes well below the cycle peak of €102bn, but a welcome change in trend from the relentless falls seen since 2008.

The onset of the recession at that time and accompanying surge in employment prompted a substantial change in household behaviour. The trend in the savings ratio ( defined here as a 4-quarter moving average)  rose sharply, from under 7% in 2007 to over 16% by the end of 2009.Most forecasters  then expected the ratio to decline, particularly when the labour market stared to improve, and that duly unfolded, with a fall to around 10% by the end of 2012. That trend decline has come to a halt, however, with a pronounced upward drift of late, to 12.8% in q1 2014,, the highest since 2010.Households are still deleveraging, of course, and that is no doubt an influence, but household wealth is also rising again and the interest rate paid on savings products is unusually low, which might argue for a fall in the ratio.

I have noted elsewhere that the savings  and income data are subject to substantial revisions  , so the past year’s data may look different in time, but for the moment the trend in  disposable income is positive although it appears households remain cautious about spending, despite other data showing  that consumer confidence has recovered to pre-recession levels.

 

€10.7bn boost to Irish GDP improves Budget outlook

I recently questioned the timing of calls for a strict €2bn fiscal adjustment in the 2015 Budget (‘Irish Fiscal Adjustment-too soon to know‘, in part based on the simple observation that the first quarter GDP data had yet to be published, with the additional caveat that the CSO figures would incorporate substantial revisions to previous data, reflecting the adoption of a new international standard of accounts. The figures have duly emerged and were a major surprise, both in terms of past revisions and in relation to growth in the first quarter of the year.

The level of Irish GDP  has been revised back to 1995 and is now substantially higher than previously published; the 2013  figure was initially estimated at  €164.1bn but is now put at €174.8bn, in large part due to the inclusion of R&D spending as investment (some illegal activities are also now estimated). The revision might be seen as just a statistical quirk in the arcane world of national accounts but it has an important implication- Ireland’s debt and deficit ratios are now lower than previously thought. The debt ratio in 2013, for example, was over 123% but is now 116.1% thanks to the higher GDP denominator. The annual deficits are also affected but the impact is less dramatic ; the 2013 deficit falls to 6.7% from the initial 7.2%.

The revisions to GDP did not have a huge impact on real growth rates, although last year’s marginal contraction in the economy (0.3%) is now seen as a modest gain of 0.2%. Growth did pick up sharply in the first quarter of 2014, with real GDP expanding by 2.7%, thanks to a strong contribution from net exports and to a substantial rise in inventories. GDP had fallen sharply in the first quarter of 2013 so that also dropped out of the annual comparison, leaving real GDP 4.1% above the level a year earlier. Consequently, the consensus growth figure for 2014 as a whole ( currently around 2%) is likely to be revised up , probably to well over 3%.

In fact the data revisions also incorporated reclassifications to external trade, with the result that exports and imports are  also now higher than previously published. The broader picture of an export-led recovery has not changed as a result however, with domestic demand still contracting over six consecutive years from 2008 to 2013. Indeed, the positive news on first quarter growth must be balanced against another  decline in domestic spending with all three components recording falls. Consumer spending is up marginally on an annual basis, albeit by only 0.2%, and at this juncture the 1.8% rise forecast by the Department of Finance looks unachievable, with deleveraging proving a stubborn offset to the positive impact of employment growth on household incomes.

Export prices are falling, as is the deflator of government spending, so the annual rise in nominal GDP in q1 was not as strong as the volume increase. emerging at 2.8%. Nonetheless it seems reasonable to assume a 3% or so rise in nominal GDP for 2014 as a whole which would yield a figure around €180bn, or a full €12bn higher than recently assumed by the Department of Finance, and result in a deficit ratio of 4.4% instead of the 4.8% currently projected, assuming the actual deficit emerges on target.

For 2015, the Department forecast a 3.6% rise in nominal GDP , to over €174bn, but on the same growth rate the implied level of GDP is  now over €186bn, given the higher starting point..As things stand the 2015 deficit is projected at €5.1bn, predicated on a €2bn adjustment, but that would now deliver a deficit ratio of 2.7% of GDP and as such well inside the 3% limit imposed under the excessive deficit procedure.Of course the deficit may diverge from expectations over the second half of the year and GDP may disappoint (including revisions!) but at this point the news today from the CSO is clearly positive for the economy and the Budget outlook, with the implication that a €2bn adjustment may not be required if a 3% deficit remains the target.

Irish Household incomes and pay

The plunge in support for the sitting Government in the local and European elections has been attributed to a number of factors but a general theme is the view that Irish households are not seeing any improvement in their incomes, despite the much talked about economic recovery. Irish GDP has indeed picked up somewhat but the increase has been very modest, at just over 2% from the low in late 2009 , and extremely uneven, with any quarterly gains often followed by contractions, as per the most recent figures for the final quarter of 2013.The labour market has been an unambiguous positive, with surprisingly strong job creation through last year, but the available data from the CSO  shows that household incomes still fell in 2013, for the fifth year in succession, and that trend is clearly dominating  many people’s perception as to the general health of the economy.

Gross household disposable income in Ireland grew very rapidly in the first half of the noughties, sometimes at a double digit annual pace, and peaked in 2008 at just under €102bn. Wage income is the major driver of total household incomes (the product of average pay and the numbers in employment) and during the boom both components were rising at around 5% per annum, with other gains from rents, profits and rising transfers from the State.  The scale of the fall since then has been extraordinary;gross income is now back under €87bn, a level last seen in mid-2006, following a cumulative 15% fall over the past five years. The plunge in employment has been a key factor, but the other components also fell , offsetting higher transfers, and the tax burden has also risen, although it is worth noting that two thirds of the total €30bn fiscal adjustment occurred between 2009 and 2011.The hit to nominal incomes has been cushioned to some degree by low inflation (in fact negative at times) but the CPI is currently around the same level as in 2008 so that 15% decline translates into a similar fall in real incomes.

The pace of income decline is slowing however, with the initial data showing only a 0.5% fall in 2013, and the latest figures on pay point to some potential improvement. Weekly earnings did fall in the first quarter of 2014 but the  annual decline was a very modest 0.4% and included a 0.7% increase in private sector earnings. The quarterly data can be very volatile but the private sector did record marginal pay increases in both 2012 and 2013 , albeit with a very broad distribution, including strong gains in the  professional and scientific area and in information and communication, with more modest rises in retail alongside further falls in  other industries. The pay increases seen in the first quarter were broadly based,  nonetheless, with 7 of the 10 private sector industry groups recording wage gains, including a double digit annual increase in construction, over 4% in industry and over 5% in the hospitality sector. Pay in the public sector is still falling however and so a significant rise in overall earnings is unlikely this year, but the downward trend may at least be coming to an end.

Any rise in average pay will of course boost household incomes, as will a further increase in employment, although  job creation slowed to a halt in the first quarter and the rise in 2014 is now likely to be lower than most forecasts had envisaged.Rents, too, are rising again, offering further support to household incomes, but disposable incomes will be affected by a rise in tax receipts .Overall, then,the big falls in household incomes are hopefully  behind us but it is difficult to see a period of strong increases in incomes in the near term particularly if employment growth slows further.

Irish Consumer Confidence is a puzzle

Irish consumer confidence , as measured monthly by the ESRI/KBC index,  has risen sharply over the past year and is now back at levels last seen in early 2007,  i.e. before the financial crisis and subsequent plunge in Irish employment and economic activity. The economic situation in Ireland has  certainly improved of late but the scale of the change appears at odds with the buoyant confidence readings and is difficult to explain.

The index is compiled from a telephone survey of households and is based on a number of questions involving the respondents own economic situation and perceptions of the broader economic backdrop. The series is volatile and is best viewed as a three-month moving average and on that basis  over the past  decade  has ranged from over 100  (during 2004 and 2005) to around 40, the low recorded in mid- 2008. Confidence subsequently picked up to a high of 66 in mid-2010 before plunging back below 50 around the bail-out and  entry of the Troika later that year. A slow and uneven recovery ensued but the past twelve months has seen a marked acceleration, with the index currently standing at 85 from around 60 in the spring of last year.

As noted, this is now at levels last seen some seven years ago but the economic backdrop then was very different. The economy was at full employment, for example, with the unemployment rate at 4.5% against 11.7% now, although the latter has fallen from a peak of over 15%. Inflation was much higher back then, at around 5%, as against the current 0.3%, but the Misery index (the sum of the unemployment rate and the inflation rate) was still lower , at 9.6 versus 12 today. Wages were also growing strongly in 2007, by 5% per annum, in contrast to the falls recorded in recent years ,and of course disposable income has also been hit by tax increases since 2008.

The index is thought to have  a close relationship with retail sales and consumer spending but again the picture is very different in the two periods; real personal consumption was growing at an annual rate of some 7% in the first quarter of 2007 but the most recent figure, for the final quarter of 2013, showed a 1.1% fall in consumption. Spending probably turned positive again in the first quarter but most forecasters envisage a 2% rise in 2014 at best,  far from the pace recorded when confidence was  last at similar levels.

It may well be that the index is responding in an exaggerated manner to specific variables, such as the rise in house prices ( which is not positive for everyone), or simply reflecting relief that the economic situation is not as dire as was the case in 2008-2010, and that the economic outlook, although still cloudy, is at least somewhat clearer than  appeared at the worst of the crisis. It is also possible that the consensus is wrong and that spending will surprise to the upside so supporting the confidence index as a useful forward indicator of spending. Time will tell on that issue but it does seem clearer that another observed relationship involving the index has indeed broken down, at least for now- the correlation between consumer confidence and support for the government. In general, strong readings in confidence tended to go hand in hand with strong support for the sitting government, as captured by opinion polls, but that relationship appears to have well and truly splintered of late , as the confidence surge over the past year has not translated into a  boost for the  government in the polls.

Irish Austerity Budgets: why more may be needed

The 2014 Irish Budget was the eighth in succession since 2008 (there were two  in 2009) which cut government spending or raised taxes with the total fiscal adjustment amounting to €30bn, including around €11bn in tax measures. These austerity Budgets were undertaken in order to reduce Ireland’s fiscal deficit and  therefore  comply with strictures under the EU excessive deficit procedure , with the State required to reduce the deficit to under 3% of GDP by  the end of 2015( last year’ it was 7.2%). The Troika may have gone but that requirement remains and Ireland, like others in the same predicament, has to produce a Stability Programme Update (SPU) each April, which sets out medium term forecasts for the economy, the fiscal outlook and the debt situation.

The latest SPU, just published, revealed that the  Government expects this year’s cash deficit to emerge €0.9bn below that initially forecast but that the General Government deficit ( the preferred EU budget measure) will still be about €8bn or 4.8% of forecast GDP, as per the original projection. Real growth in the economy is expected to be marginally stronger than envisaged last October , at 2.1%, although the Department of Finance is now much more upbeat about domestic spending, including a 2% rise in personal consumption and a 15% surge in investment spending, and now expects the external sector to have a negative impact on GDP, with export growth of only 2% offset by over 3% growth in imports.

The main change to the outlook relates to inflation, however, with price pressures across the economy now projected to be much weaker following the trend in 2013. Consequently nominal GDP  is now forecast follow a lower trajectory  in the medium term than previously thought; the 2014 forecast is for GDP of €168.4bn instead of the original €170.6bn , with similar shortfalls over the following few years That  change affects the debt dynamics and although the burden is still expected to fall from last year’s 123.7% of GDP the decline is now slower; the 2014 debt ratio is now forecast at 121.4% instead of the original 120%.

The growth forecast also envisages the economy gathering momentum into 2015 and beyond (although previous projections were too optimistic in that regard) and further strong gains in employment, a combination that might imply less need for further austerity measures. The Minister for Finance has signaled otherwise and to understand  why that may be  the case it is  necessary to delve a little deeper into the SPU document. The Irish economy, according to the EU, is actually operating very close to capacity and to full employment, a view which would surprise many and one that has met with some opposition, most recently from the ESRI in its latest ‘Quarterly Economic Commentary’. That debate may seem arcane but, unfortunately, it has serious implications for Irish households because on the EU view the Irish deficit is virtually all structural and therefore will not disappear with stronger growth. The actual deficit will shrink but if one adjusts for the economic cycle the structural deficit would still remain, requiring policy measures to reduce government spending and/or increase tax revenue. Moreover, Ireland is charged with reducing the structural deficit to zero  by 2019 from last year’s 6.2% of GDP, which implies the post-2015 fiscal landscape will not be as sunlit as some expect. A given economy’s position in the economic cycle is not observable and estimates are just that,so convincing the EU that far more of the  Irish deficit is cyclical would have a big impact on the perceived scale of  the fiscal adjustment required.