NAVIGATING THE IRISH ECONOMIC TEA LEAVES
Despite the continued strong momentum in the Irish economy, logic would suggest that we should be concerned by very worrying global developments.
This weekend the Sunday Independent led with a cover study based on an opinion poll suggesting that 70 per cent of respondents expect a deep recession within 12 months. Almost two-thirds of respondents expect their personal financial position to deteriorate. The escalating cost of living is cited as the key concern. Coming in a week when Eurostat estimated that the Harmonised Index of Consumer Prices (HICP) for Ireland would be at 8.2 per cent in May, the concerns expressed look well-grounded in fact. It is worth remember what Michael Bruno said many years ago during a period of stagflation – ‘the persistence of inflation tends to increase with the rate of inflation.’
No wonder people are concerned. Energy price inflation is continuing to escalate and with the latest EU energy sanctions on Russia, it is difficult to envisage the energy price crisis ending anytime soon. We are also facing into the likelihood that food price inflation is really going to become an issue over the coming months as the Ukraine tragedy continues to seriously disrupt fertilisers and food.
Globally, there is also much to be concerned about. Bond yields are rising; official interest rates are on the way up in most jurisdictions, with the ECB looking certain to increase interest rates by 25 basis points in July and September; equity markets are very volatile, very nervous and very vulnerable; global geo-politics stink; global energy prices are escalating; and a global food crisis is being spoken of with greater frequency. All in all, it is difficult to be terribly optimistic about the global situation at this juncture.
The Exchequer Finances
The Exchequer continues to collect significant amounts of tax. In the year to the end of May, the Exchequer ran a surplus of €1.4 billion, which compares to a deficit of €6 billion in the same period in 2021. The turnaround of €7.4 billion is due to ongoing strong growth in tax revenues and reduced current expenditure as the Covid-19 supports are being phased out.
The key trends on the tax revenue front in the January to May period include:
Overall tax revenues totalled €30 billion which is 26.9 per cent or €6.4 billion higher than the equivalent period in 2021. The early months of 2021 and 2020 were distorted by severe Covid restrictions, which exaggerates the annual growth rate in 2022. However, when compared to the first 5 months of 2019, tax revenues in 2022 were €8.4 billion or 38.5 per cent higher.
Corporation tax receipts in the first five months totalled €5.2 billion, which is €2.2 billion or 76.9 per cent higher than last year. While there are some timing issues here, it also reflects the strong profitability of many of the multi-nationals operating here.
Income tax came in at €11.9 billion, which is 17.1 per cent or €1.7 billion ahead of 2021. The strength of income tax receipts reflects the very progressive nature of the Irish income tax system, and the high quality of employment that is being increasingly created in the economy. It is indicative of a very buoyant labour market, where retention, recruitment and increased labour costs are now significant challenges for many employers.
The VAT take is up by 28.6 per cent or €2 billion. This reflects the ongoing improvement in consumer spending, although the year-on-year growth rate is exaggerated by the restrictions in place a year ago. However, when compared with the first 5 months of 2019, the VAT take is up by 22.8 per cent, or €1.7 billion.
External Trade
The external trade performance continues to be very strong, although the numbers are not very up to date. Merchandise exports showed annual growth of 25.9 per cent in the first three months of the year. Exports to Great Britain were up by 26.2 per cent; Northern Ireland up by 48.7 per cent; the EU up by 32.7 per cent; and the US up by 27.9 per cent.
The Labour Market
The labour market is still very strong. The economy is effectively approaching full employment and recruitment and retention are huge issues for business. In the first quarter, employment hit a record high of 2.505 million and the unemployment rate hit 4.7 per cent in May.
House Prices
House price inflation continues to power ahead as demand continues to exceed supply. In the year to March, national average house prices increased by 15.2 per cent; average prices in Dublin increased by 12.6 per cent; and average prices outside of Dublin increased by 17.3 per cent. Private rents increased by 9.3 per cent in the year to April. Little wonder that Sinn Féin continues to climb in the polls.
First Quarter Growth Data
As is always the case, the latest national accounts data relating to the first three months of the year give reasons for great cheer, some concerns and no little confusion.
In the year to the first quarter, Gross Domestic Product (GDP) expanded by 11 per cent; Gross National Product (GNP) expanded by 8.2 per cent; consumer spending increased by 13.6 per cent, with spending on services up by 18.8 per cent and spending on goods up by 6.7 per cent; exports of goods & services increased by 14.1 per cent; and modified domestic demand (MDD), which is a broad measure of underlying domestic demand that excludes IPP and aircraft related globalisation effects, increased by 11.1 per cent. However, it is worth remembering that the year-on-year growth rates are heavily exaggerated due to the fact that the economy was subjected to severe restrictions in the first quarter of 2021.
It is more instructive to consider the quarter-on-quarter changes, which are seasonally adjusted. In Q1 2022 compared to Q4 2021:
· GDP increased by 10.8 per cent.
· GNP contracted by 0.4 per cent.
· Personal spending on goods and services decreased by 0.7 per cent, with spending on services declining by 0.9 per cent and on goods down by 0.4 per cent.
· Exports of goods & services increased by 5.2 per cent.
· Modified Domestic Demand, decreased by 1 per cent.
· Multinational dominated sectors grew by 14.1 per cent in the quarter while sectors focused on the domestic market increased by 7.6 per cent.
· Construction contracted by 3.7 per cent in the quarter.
· Net factor income outflows of €34.7 billion – which includes multinational profits – were recorded in Q1 2022, the highest to date. This resulted in a contraction of 0.4 per cent in GNP the quarter.
In overall terms, the first quarter data highlight clearly the dual nature of the economy and the inordinate impact of the foreign-owned sectors of the economy.
Concluding Thoughts
Despite all of the global economic, financial and political uncertainties band the pessimism apparent in the Sunday Independent poll, the Irish economy is still showing decent momentum, but the dual nature of the economy is apparent. The big question of course is how long Ireland can remain immune from the increasingly difficult and uncertain global economic and financial backdrop. It certainly seems to me that most logic would suggest that the Irish economy and house prices (hopefully) will decelerate over the coming months. That is what logic would suggest, but of course logic does not always apply in Ireland, particularly given the influence of FDI in all economic and financial indicators. However, with prices escalating and wage pressures likely to go in the same direction, it seems appropriate to be quite cautious about Ireland’s economic prospects over the coming year.
On a brighter note, it is interesting and amusing in equal measure to see the great-Brexiteer Daniel Hannan suggesting that staying in the single market or large parts of it would have saved the UK lots of trouble. He suggests that ‘had we declared, immediately after the 2016 vote, that we intended to return to the European Free Trade Agreement (EFTA) – the body we founded in 1960 as an alternative to the EEC – we would not have been at risk of an EU trade embargo.’ Daniel Hannan is a writer, journalist and former politician, who has served as an adviser to the UK Board of Trade since 2020. You just could not make this stuff up.
ECB asleep at the wheel , the one job keep inflation at 2 % and it’s over 3 times that. Too much money printing and paying the price now.
I’m not sure what the headline re “70 percent expecting a recession in next 12 months” was supposed to do?
Should we
1. Start panicking? (A useful activity😂)?
2. Cancel any planned “big spend” ?
3. Change job to a “protected” industry?
4. Demand the government magically create available & affordable housing right now!
5. Demand an election so that SF get in ... they will solve everything.... right??😇
6. Ignore it - why talk ourselves into a recession?
7. Play the ostrich!!