IRISH MORTGAGE HOLDERS TO ENDURE MORE PAIN

Article in Irish Examiner March 6th 2023

Persistent inflation and rising interest rates have dominated global economic and financial discourse over the past year. Unfortunately, this trend has continued into 2023.

Over the past week we got further evidence of just how stubborn inflation is proving and that central bankers are determined to keep pushing interest rates higher. Inflation in France jumped to 7.2 per cent in February, which is the highest rate in that country since the euro was introduced in 1999. Spanish inflation jumped to 6.1 per cent up from 5.9 per cent the previous month. In both cases inflation was higher than expected. For the Euro Zone as whole the headline inflation rate declined from 8.6 per cent to 8.5 per cent due to energy costs, but the core rate of inflation, which excludes volatile food and energy prices, increased from 5.3 per cent to 5.6 per cent.

These inflation developments are proving very worrying for the European Central Bank (ECB). Headline inflation had been decelerating in recent months on the back of falling wholesale energy prices after a mild winter and lower fuel consumption. The problem is that inflationary pressures are strong in areas such as food and services, and it is the services piece that will strengthen the resolve of the ECB and other central banks to keep tightening policy.

The ECB’s Chief Economist, Philip Lane said during the week that there is still a strong case for the ECB to deliver an increase of 0.5 per cent in rates on March 16^th, as was promised at the February meeting. This is a nailed-on certainty at this juncture and it is certainly conceivable at this juncture that another 0.5 per cent could be delivered at the May meeting, although the ECB will have a lot of data to digest between now and then. The problem for the ECB is that apart from stubborn inflation, economic activity in the Euro Area is proving modestly strong. For example, labour markets remain very tight and the composite PMI (Purchasing Managers Index) of both service and manufacturing activity jumped to 52 in February, with a reading above 50 signifying that more companies are expanding than contracting.  

After the ECB delivers the 0.5 per cent increase in March, that will bring the cumulative tightening to 3.5 per cent since late July last year, and it does seem clear that there is further to come.

Meanwhile in Ireland, the harmonised index of consumer prices (HICP), which is the standardised Euro Zone measure and is a little different from the Consumer Price Index (CPI), increased to 8 per cent in February, up from 7.5 per cent in January. There was an increase of 1.4 per cent in the month, with food prices up by 1.2 per cent, and energy prices down by 0.2 per cent. Excluding energy, the inflation rate is still running at a high 5.8 per cent.

On Friday, the CSO published the national accounts data for the final quarter of last year, and we now have preliminary data for the full year. Gross Domestic Product (GDP) expanded by 12 per cent in real terms in 2022 and modified domestic demand – which is basically a broad measure of underlying domestic activity that covers personal, government and business investment spending, and as such is a better gauge of what is really happening on the ground in the economy, expanded by a very healthy 8.2 per cent. Personal spending on goods and services expanded by 6.6 per cent last year, which is a strong outturn.

The headline grabber from the CSO release was the fact that modified domestic demand contracted by 1.3 per cent in the final quarter, following a contraction of 1.1 per cent the previous quarter, meaning that the domestic side of the economy went into technical recession in Q4. This contraction was largely due to weaker business investment spending, but consumer spending expanded by 1.1 per cent in the final three months of the year.

As is the case every quarter, Irish growth data are notoriously difficult to interpret. However, it seems that while overall activity levels were strong in 2022, growth did slow later in the year. Looking ahead to the coming months it seems likely that some components of consumer spending will be adversely affected by the ongoing cost-of-living squeeze and the interest rate increases already delivered, and those yet to come. It is probable that the domestic component of the economy will be fairly flat in the first quarter, but the overall picture is still a positive one for the Irish economy but the risks are becoming clearer.