Signs suggest recovery is gaining momentum

Recent data on the economy point to a recovery in activity that appears to be gaining momentum.

Figures released for the closing months of 2013 and opening month of this year have generally been quite strong.

Purchasing managers’ indices are timely monthly economic surveys published in many countries. They are viewed as good leading indicators of activity. An index reading above 50 usually signals economic expansion, while a sub-50 reading generally points to contraction.

The Irish services purchasing managers’ index has risen in recent months to its highest level in nearly seven years. The January index stood at 61.5, up from an average of 59.6 in the final quarter of last year. These figures point to strong growth in the largest sector of the economy.

Meanwhile, the manufacturing PMI has been hovering around the 53 level for the past six months, coming in at 52.8 in January. This is well into growth territory and well up on the levels evident in the early part of last year.

Another good measure of industrial activity, the OECD leading indicator index for Ireland, climbed to its highest level in over five years during the second half of 2013. The construction index was stuck at extremely low levels from 2007 to mid-2013. However, it rose strongly in the second half of last year, averaging 58.9 in quarter four, with another strong reading of 56.4 recorded for January. This suggests that activity is starting to rebound in the sector after a prolonged slump.

Real economic data support the positive trends in the index surveys. Retail sales, excluding the motor trade, increased by 1.1% in the final quarter of 2013 following a rise of 1% in quarter three. By December, sales volumes were 3% above year earlier levels. Car sales have had a very strong start to 2014, rising by 33% year-on-year in January.

This pick-up in spending by households is consistent with the marked rise in consumer confidence over the past year. By January 2014, consumer confidence had risen to its highest level in over six years. Meanwhile, output from indigenous firms in the manufacturing sector rose over the last three quarters of 2013. Construction has also picked up over the past year.

Notably, new housing registrations and commencements are beginning to pick up, albeit from very depressed levels. Dublin house prices were up by over 15% year-on-year in December, while outside of Dublin prices have stabilised and are beginning to edge up. There has also been a marked improvement in labour markets conditions. Employment in the third quarter of 2013 was 3.2% higher than a year earlier, with good gains in jobs across the private sector.

Meantime, the unemployment rate fell again in January, declining to 12.3%. It has now fallen in every month, bar one, since July 2012, and is well below its peak rate of over 15% reached two years ago.

The improving economic trends are helping to keep the budget deficit on a downward trajectory. The Department of Finance reports that, after allowing for timing distortions, tax receipts were up by 5% year-on-year in the first month of 2014.

There are some signs also that exports are picking up. We still await full data for the final quarter of last year, but the export sub-component of the services sector purchasing managers’indices has risen to very high levels. Strong economic growth is being forecast this year for key export markets like the US, UK and Germany. The ‘patent cliff’ effect, which has resulted in a sharp fall in pharmaceutical output and exports in the past two years, is expected to ease in 2014.

Exports are expected to recover this year, which would be yet more good news on the economy.


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