Our economy needs ‘SSIA in reverse’ scheme

THE Irish economy needs an SSIA scheme in reverse that rewards consumers who spend rather than save, according to Bloxham stockbrokers.

Bloxhams Irish Quarterly Economic Outlook for July 2011 forecasts that the Irish economy in GDP terms will grow by less than 1% despite the slowdown in the world economy.

Bloxham chief economist Alan McQuaid said the slowdown in the world economy couldn’t have come at a worse time for Ireland given the importance of the manufacturing/export sector to the country’s recovery prospects.

“Despite the somewhat sluggish start to this year, the ongoing strength of exports overall is likely to support manufacturing output in the coming months, with merchandise goods volumes expected to expand solidly, by 3% to 5% in both 2011 and 2012 as the global economic recovery regains momentum in the second half of the year,” he said.

“With domestic demand so weak it is vital that the manufacturing/export sector continues to expand, which we think it will. A strong manufacturing/export performance should in our view provide the platform for a sustainable Irish economic recovery over the next few years,” he added.

Mr McQuaid said the reality is that when imports are taken into account, net exports are only equivalent to between a fifth and a quarter of national output, with the consumer the biggest part of GDP at more than 50%.

“So therefore if the economy is to regain significant traction over the next few years, then weaning consumers off their savings and getting them back into the shops again and into spending mode is essential.

“At the end of the day, if consumers continue to remain cautious then the chances of generating enough overall economic growth to meet our budgetary targets will be seriously diminished. What in effect we need in our opinion is an SSIA scheme in reverse, rewarding consumers who spend rather than save,” he suggests.

Mr McQuaid said Bloxham believes state asset sales are a required component of national recovery but strongly advocate a Precision Targeting (PT) approach.

“By this we mean any state asset sale should be explicitly used in a project that stimulates employment and domestic economic activity. For example, a sale of Dublin Port (net assets of €238m) could finance eight new schools. A sequence of PT announcements would help boost national morale and create a tangible link between any asset disposals and economic stimulus projects,” he said.

Mr McQuaid said any pick-up in the labour market tends to lag recovery in output/GDP by six to nine months, and said it is likely to be the end of the year at the earliest before there is an underlying improvement in employment conditions.

“Indeed, more losses in the construction, financial services and retail sectors look inevitable over the next few months. However, people retiring, greater numbers staying on in education, and of course emigration will be the key short-term factors in preventing the jobless rate rising significantly further. An average unemployment rate of 14.3% is projected for 2011 as against 13.6% in 2010,” he estimates.

Mr McQuaid believes the CSO figures showing a sharp movements in the seasonally-adjusted jobless rate over the past two quarters give a very misleading view of the Irish labour market and economic activity in general.

The Bloxham economist also fears a rise in inflation. “The median projection in the latest Reuters monthly poll of Irish economists put consumer prices averaging 2.7% this year, more than twice the 1.3% prediction at the beginning of 2011. However, we wouldn’t be surprised if it was closer to 3.0%, adding yet more pressure on to hard-pressed consumers,” he said.

Mr McQuaid said the bottom line is that we are still a long way from where the country needs to be to get the economy moving again. “The reality is that until the banking sector crisis is fully resolved and things improve on the labour market front then the supply/demand for credit will remain subdued in our view, severely hampering the recovery prospects for the economy as a whole in the process,” he said.

On the house price front he sees little hope after property prices have fallen for 41 straight months and are now 41% below a 2007 peak.

“Given weak labour market conditions and the continuing lack of available bank credit it is hard to be optimistic on the prospects for the property market in the immediate future,” he said.