Challenges ahead for economy despite positive signs
In the first nine months of the year, gross domestic product expanded by 4.9% and gross national product expanded by 4.7%.
An analysis of the components of growth shows business investment expanded by 10.6%; exports of goods and services expanded 12%; and construction sector output expanded by 8.8%.
However, consumer spending expanded by just 0.6%, suggesting that the personal sector remains the most fragile part of the economic recovery story.
There are no surprises there as the burden of the savage fiscal adjustment that has occurred since 2008 has fallen primarily on the shoulders of the personal sector, particularly those who pay tax.
The year-end exchequer returns which were released earlier this week highlight this fact. The exchequer borrowed €8.2bn in 2014, down from €11.5bn the previous year. Overall tax revenues came in at €41.3bn, €3.5bn ahead of 2013, equivalent to a growth rate of 9.2%. This was €1.2bn ahead of what the Department of Finance budgeted for in Budget 2014.
Income tax of €17.2bn was €1.4bn up on 2013, a growth rate of 8.9%. Last year, income tax accounted for 41.6% of the total tax take, compared to 27.2% in 2006.
Is it any wonder personal taxpayers have become so disillusioned and angry and the consumer expenditure component of the economic recovery story is fragile? Addressing this quickly will be a key element of whether the Government can get re-elected or not in 2016.
Apart from the public finances moving in a better direction, although we are still borrowing way too much to run the country, the IDA presented another strong set of results this week.
Companies it supports created an extra 15,012 jobs last year; 7,881 jobs were lost, giving a net increase of 7,131 jobs by companies that the state agency supports. In total, IDA supported companies now employ 174,488 people directly in the Irish economy, with another 122,000 jobs indirectly supported.
Notwithstanding the much more competitive global environment for FDI and the very challenging global economic environment, this is undoubtedly a good news story.
All in all, the economy is entering 2015 with quite a bit of momentum, but external developments should remind us there are still many serious threats lurking in the undergrowth.
The Greek election on January 25 and the possibility the hard-left party Syriza could assume power could pose massive potential difficulties for the continued Greek membership of EMU and consequently for the stability of the whole project.
The UK general election in May is also potentially very problematical in the context of a possible referendum in 2017 on the UK’s continued membership of the EU.
The fact that three members of the BRIC block of countries — Brazil, Russia, and China — are experiencing considerable economic difficulties is not something that should fill us with glee either.
However, the ongoing travails of the eurozone is the greatest source of concern.
Data on manufacturing and service sector activity in the region were very weak this week, but we also discovered that inflation fell into negative territory to the tune of 0.2% in December. This is technically deflation and proves conclusively that the ECB has failed in its inflation mandate, which targets a rate of 2% or slightly lower.
Quantitative easing is now a must, but will have a very limited impact. European governments need to recognise the reality that continued fiscal austerity is akin to a criminal act. If governments do not change course, the future of the euro is still in the balance.
From an Irish perspective, the ongoing sharp decline in the value of the euro, which looks to have much further to run, and the ongoing decline in oil prices, represent good news. However, we also have to hope that the sense of crisis evident in the eurozone this week will prompt a much more aggressive and co-ordinated attempt to stimulate economic recovery.
CONNECT WITH US TODAY
Be the first to know the latest news and updates
