Despite jobs growth, households still need help
This upgrade looks totally justified based on the domestic evidence we have and also based on the stronger-than-anticipated performance and outlook for the global economy, particularly the eurozone.
The unemployment rate is projected to average 6.4% this year and 5.8% in 2018. Both of those labour market forecasts look too conservative at this juncture and it is clear Ireland is rapidly moving towards full employment.
This will clearly pose its own set of challenges and problems. The one thing we cannot risk is an implosion on the wages front, particularly in the context of the threats and opportunities posed by Brexit, and the possibility that the US and the UK could take a very aggressive approach to corporation tax over the coming years.
Labour shortages in skilled areas of the economy is also something we need to be very wary of.
It will take strong political leadership to guide us through these challenges, but the total and utter debacle evidenced in the policy towards water charges would not give one cause for optimism, although the eventual outcome achieved by Fine Gael in the face of populist madness was a good result of sorts.
At the moment, our political system looks depressingly dysfunctional and it is far from clear that an early general election would change anything.
Notwithstanding these obvious political challenges, the economic backdrop looks promising, but a note of caution is advisable. Consumer confidence has levelled off in recent months and beneath the surface it is clear that the personal sector is still under considerable strain.
Consumer spending remains somewhat cautious, with the value of retail sales up by just 0.2% and volume of sales up by 2.3% in the first two months of the year. However, weak new car sales have distorted these figures.
When car sales are excluded, the value of retail sales was up by 3.4% and the volume of sales by 6.1%. The persistent gap between the value and volume metrics is indicative of a consumer sector that is still very resistant to higher prices and this creates its own challenges for all consumer-facing businesses.
This consumer caution is likely to be due to a combination of factors. The exchequer returns last week showed that income tax receipts are just €62m ahead of last year, representing an annual growth rate of just 1.4%.
More surprisingly, income tax receipts are running €180m behind what the Department of Finance had expected. This is surprising because all of the labour market indicators are pointing towards a very positive background. The quandary is how the strong labour market indicators tally with the relatively disappointing income tax returns.
The most obvious conclusion is that many of the jobs being created are relatively low paid and following changes to the universal social charge in the past couple of budgets, many new employees may not be in the USC net at all or are paying very little based on earnings.
This labour market background is generating a more sober consumer, but it is also the case that the financial burden on the personal sector is still intense. House prices are rising strongly, putting upward pressure on mortgage repayments.
The cost of living is rising strongly and is soaking up disposable incomes. In the year to the end of March, private rents increased by 8.6% (they have increased by 51.3% over the past six years); the cost of petrol increased by 14.2%; the price of diesel increased by 18.7%; the cost of home insurance increased by 8%; the cost of private health insurance increased by 8.3%; and the cost of motor insurance increased by 0.7%.
All of these increases in the price of what are necessities for many people are putting financial pressure on consumers. The personal sector, and particularly those who pay income tax, will need some relief in Budget 2018.
