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Half-year report card fair but long road ahead

As we pass the mid-point of another year, it is worth taking stock and assessing where the Irish economy now finds itself.

While we don’t yet have complete data for the first half, it is possible to build up a picture of what is going on.

The patterns we saw emerge in 2011 are being sustained this year. In 2011, real GDP expanded by 0.7%. but when the impact of multinational profit repatriations is factored in, the more meaningful measure of economic activity on the ground, namely GNP, contracted by 2.5%.

This is indicative of a good export performance, and very weak domestic demand. The evidence so far in 2012 suggests that this trend is continuing, but merchandise exports are under pressure.

In the first five months of this year, the volume of retail sales was 1.5% lower than the same period in 2011, and the value of sales was down by 1%. Consumer spending power continues to be eroded by downward pressure on earnings, a very difficult labour market, personal wealth destruction, fiscal austerity, and uncertainty about the future of the eurozone.

In the first four months of 2012, the value of merchandise exports was actually 0.6% lower than the equivalent period in 2011. This reflects two main factors — external demand conditions are weakening, and a number of blockbuster drugs are now coming off patent.

In the first four months, the value of medical and pharmaceutical exports was €1.07bn lower than the same period last year. This is a source of concern.

Last year, service exports accounted for 44% of total exports, and this component still appears to be performing strongly.

In the first four months, manufacturing output was up 0.4% on the same period in 2011. ‘Modern’ sector output rose by 2.5% and output from the ‘traditional’ sector fell by 3.7%.

The labour market situation remains difficult. In the first quarter, employment stood at 1,786,100, which means that employment has fallen by 363,700 from the peak, and by 18,100 over the past year. The unemployment rate stood at 14.7% in the first quarter and rose to 14.9% in June. Meanwhile, the public finances are gradually improving but borrowing levels still remain too high.

House prices nationally declined by 15.3% in the year to the end of May 2012, but they showed the first monthly increase in five years. Overall prices are now 49.8% down on the peak, but apartment prices are down by 60.8%. The outlook for the market remains uncertain.

The labour market is very weak; disposable incomes are still under pressure due to the fiscal tightening and ongoing pressure on earnings; consumer confidence remains very fragile; and mortgage availability is still a major issue for prospective buyers.

There are, however, some indications of scarcity of suitable housing supply in some parts of Dublin and prices in those areas could increase over the coming year, but the national market in overall terms is likely to remain weak.

All in all, the economic situation remains difficult.

It will be challenging for Ireland to return to long- term funding in the bond market anytime soon, despite the successful sale of treasury bills yesterday, but provided last week’s change of heart by Merkel actually delivers an easing of the debt burden for Ireland, it could be possible.

It is clear that the debt burden and consequent fiscal adjustment are more than the economy can bear, but any easing would be very beneficial.

The mid-year report card reads along the lines of ‘some improvement in work rate and grades, but significant improvement is still required and external help will be necessary if the student is to improve grades and remain in the honours class’.

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