Talk of recovery may be premature
Announcements of job creation seem to finally be outstripping job losses; the Government has talked, even if only fleetingly, about cutting the punitive taxes which placed a stranglehold on our spending power for much of the last five years — the sting in the tail is a suggestion that the tax reduction be in exchange for some form of private-sector pay freeze; houses have begun to sell, car sales are finally on the increase again and retailers — in parts of the country, at least — are beginning to see their tills ticking over.
Last Friday, the Economic and Social Research Institute used its latest quarterly economic commentary to reveal that, “after a long period of attrition, we are approaching the end of the very painful period of fiscal adjustment”. It said the unemployment rate should be down to an average of 10% of the labour force in 2015 — at the height of the recession it was hovering close to 15%. It predicted Government borrowing will come in slightly below target in 2014, at 4.5% of gross domestic product (GDP), with a further decline to 2.8% of GDP in 2015.
“This would be comfortably within the Government’s target, in spite of the fact that the ex-ante cuts we have assumed in the budget for 2015 are significantly less than the Government had previously planned [€2bn],” it said. “This reflects the forecast improved performance of the economy in 2014 and 2015.”
Taoiseach Enda Kenny has been congratulated on the international stage for the way we swallowed the bitter medicine prescribed by the Troika and has managed to get a handle on our shocking levels of debt.
However, the reality is that we are still hanging over a very high precipice and, if predicted recovery targets are not reached, we face being crippled by our debt.
The ESRI did issue a note of caution in last week’s commentary.
“If Europe does not return to growth over the rest of the decade, or if policy mistakes made in Ireland delay a recovery, the conclusion on fiscal policy will be less benign,” it said.
A few days at the start of March showed that we cannot rest on our laurels yet. The CSO’s publication of the national accounts for 2013 showed GDP contracted by 0.3% last year, following growth of just 0.2% in 2012, though gross national product (GNP) expanded by 3.4% last year, after growth of 1.8% in 2012.
Economist Jim Power explained: “GDP is the total value of goods and services produced in the economy in a given time period. GNP is basically that part of GDP that ends up in the pockets of Irish residents. The difference between the two is called ‘net factor income from the rest of the world’.
“This primarily consists of the difference between the profits that foreign-owned companies operating here send back to their home country and what Irish companies operating overseas send back to Ireland; and interest on the foreign component of our national debt. The data for 2013 shows that GDP totalled €164bn and GNP totalled almost €138bn.”
Mr Power was not phased by the poor GDP performance, even though the Government had been forecasting it would grow by 0.2%.
He said the disparity between GDP and GNP could primarily be explained by a reduction in pharmaceutical exports, which meant fewer royalties had to be paid to the home country and lower profits were earned, meaning that the net factor outflows were more than €5bn lower than 2012.
“Sifting through the whole mess, we get a picture of an economy that is still bumping along the bottom, but which is starting to gradually lift,” he wrote in a column in this newspaper. “The economy is a lot like the curate’s egg, but things are getting slowly better. This trend looks set to continue.”
However, contemplating the same figures, fellow economic expert Stephen Kinsella was much less buoyant.
The University of Limerick economics lecturer said: “At the moment, the most important figure is [consumer] spending in the economy, and what the latest figures show is not good. Given that there were 60,000 jobs created last year, you would have expected spending over Christmas to have increased. Instead, domestic demand was down by 0.6%. This, combined with the latest fiscal data, show that, overall, things are not great.”
The economic performance prompted him to say the Government was wrong to promise tax cuts in next October’s budget.
“There should be no tax cuts for middle-income earners, because it potentially exposes the economy to another shock,” he warned.
Just a few days prior to the release of the national accounts, Morgan Kelly, the first economist to predict the scale of the Irish financial crash, warned that moves by the European Central Bank to “clean up” around €32bn in bad debts owed by small and medium-sized firms (SMEs) could plunge the country back into disaster.
“We could be facing something really, really terrible, quite soon,” Prof Kelly warned. “The Irish economy is equivalent to the SMEs. You’re going to have a lot of your SMEs wiped out in any clean-up of the banking system. That means you are going to have a big chunk of the Irish economy wiped out in one go. So, this is a potentially enormous problem.”
Meanwhile, while we may have been patted on the head by the Troika on its way out the door at the end of last year, Europe is still keeping a watchful eye in case we rediscover our Celtic Tiger penchant for profligacy. After all, it is hard to ignore the fact that the national debt as of the end of February 2014 was, according to the Central Bank, €175.67bn of which almost €69bn was EU/IMF Programme Funding.
Our debt-to-GDP ratio now stands at 120%. As Fianna Fáil finance spokesman Michael McGrath points out, that remains very high.
“A lot of economists would regard 120% as the threshold beyond which you are getting into serious difficulties with debt sustainability,” said Mr McGrath.
Nonetheless, in its commentary last week, the ESRI did say that the ratio would fall to 116% in 2015, if its predictions bear fruit.
It would appear Europe still remains concerned. Last month, the European Commission warned that taxpayers are facing at least another four years of austerity, including a bigger-than-forecast €2.5bn cut in Government spending in 2015.
The commission’s report on the Irish economy warned that government spending needed to be further cut to move from borrowing 4.8% of GDP to fund the State this year, to having a surplus of 4.9% in 2018 to achieve a structural budget balance. It believes that plan is “quite ambitious”, as very few countries have achieved such a high structural budget in the past.
The Commission has also warned that poverty rates are likely to rise again and income inequality will become more pronounced.
However, closer to home, the predictions are much less pessimistic. Last week, Ibec’s quarterly economic outlook upped its 2014 GDP growth projection to 2.9%, as well as predicting investment in the economy will increase by 21.5%. It also predicted 50,000 jobs will be created this year and that consumer spending will rise 1.9%.
“I think the issue ultimately comes down to economic growth,” said Mr McGrath. “If the economy grows by even 2%-3% per year, the debt becomes much more sustainable. The key measure is debt-to-GDP. If GDP is growing, your debt as a proportion of the size of the economy is going to reduce. Governments don’t pay off debts, they just keep rolling them over, as bonds fall due. They borrow again to repay one bond so the debt level won’t come down. The trick is for the debt as a proportion of the size of the economy to reduce.”
However, he added that if the economy were to stagnate — as it has done over the last few years, we could be in trouble very rapidly.
“I think the key risks are external demand for our goods and services, because our recovery will be export-led,” he said. “If there is no demand there, if the international economy deteriorates, then we will be in difficulty. A key risk is the level of indebtedness that individuals and businesses, particularly SMEs have. If that is not dealt with by way of proper sustainable solutions being put in place, that debt-overhang would certainly stifle economic recovery.
“Our competitiveness is also a concern — there have been calls for considerable pay increases, cost of energy is continuing to climb. The risk is that it makes us less competitive as an economy. The banking system generally is a risk. I think our banking system still is not functioning as a normal system should and the extent to which they have saved up for the losses they are carrying is something I would worry about. That would crystallise when the stress tests are carried out.”
One of the biggest fears in the banking sphere is around Permanent TSB. The 99.2% State-owned bank is still waiting for approval from the European Commission for the restructuring plan submitted last summer which would split it into three parts, a good bank, an asset management unit to wind down the bad assets and a separate UK division.
A chunk of its tracker mortgage book and non-performing loans are earmarked for the asset management unit, but that is contingent on securing funding for the assets. Europe wants the Government to provide the funding, which would be a significant cost to the Exchequer.
Mr McGrath asked PTSB chief executive Jeremy Masding about the stress test as recently as last week.
“He believes they will come through it, but nobody quite knows,” said Mr McGrath. “The stress tests will be rigorous and it is possible that additional money might be required for PTSB, perhaps less likely for AIB. If Bank of Ireland needed more money it would, in all likelihood, come from the market and private investors.
One element which will obviously aid our return to economic stability is the sale of Government bonds. So far, that has been a successful process. In March, the State raised €1bn in a 10-year bond in its first scheduled auction in four years. What’s more, it was achieved at a record low interest rate of 2.967%.
National Treasury Management Agency chief executive John Corrigan pointed out at the time: “The €1bn funding raised, together with the €3.75bn raised in the syndicated issue on January 7, amounts to almost 60% of our funding target of €8bn for the full year.”
In fact, March’s issue was almost three times oversubscribed, reflecting the robust level of investor demand for Irish debt.
“The NTMA has raised a lot of money,” Mr McGrath said. “We are funded well into 2015. If the NTMA did not borrow an additional euro for the next 12 or even 18 months, we would get by. But that is not the plan. They want to have a regular presence in the markets.”
That success has been mirrored by interest in Nama bonds. Its chairman Frank Daly has said the agency hopes to be in a position to close 50% of its senior debt of €30.2bn by year-end.
However, the successful sale of the country’s debt makes it less and less likely that, in the event of another economic collapse, Europe will be willing to step in with another rescue package.
Economic recovery is most often measured by the number of people in employment — after all, workers pay the vast bulk of the taxes which bolster the nation’s coffers, as well as pumping their earnings into the domestic economy
Furthermore, the higher the numbers of unemployed, the greater the percentage of the State’s finances which must be handed out in social welfare payments.
It stands to reason then, that our fledgling recovery has been accompanied by a steady drop in the number of dole claimants. Sceptics would point out that the fall in the live register is due in no small measure to the numbers of people forced to emigrate in search of employment.
Nonetheless, the decline has been significant. There were 470,284 people on the live register in July 2011. Fast-forward to February 2014 and the total was down to just over 398,000, the first time it had dipped under 400,000 since 2009. That’s a decline of more than 70,000 claimants.
When one looks purely at the “unemployed” — the live register includes people working and signing on part time — the latest quarterly figures show that 253,000 people, or 12.1% of those who were eligible to work here, were unemployed in the fourth quarter of 2013, a fall of over 41,000 in a year.
Overall, 61,000 jobs were created in the 12 months to December 2013, bringing the number of people at work above 1.9m, the highest since 2009.
Oliver Mangan, chief economist with AIB, said: “Unemployment is falling rapidly. Given the trends, the rate could move below the 10% level during 2015, which would be some turnaround, given that only two years ago it stood at over 15%.”
Yet, contained within the live register and the unemployment figures are significant signs that problems still remain, apart from the obvious symptom that more than one in 10 of the country’s eligible workers cannot find a job. Of the 398,000 people receiving benefits as of February, 180,000 — or almost half — had been on the live register for more than a year. Admittedly, that figure has come down from a high of almost 200,000 in 2011, and the percentage of long-term unemployed has fallen from 8.2% to 7.2% in the space of a year.
However, an OECD report at the end of last year warned that: “There is a high risk that these people [the long-term unemployed] will be simply left behind as permanent casualties of the recession as new and better-qualified job seekers, including immigrants, take advantage of the recovery.”
The other point which must be made is that there are currently 85,000 people on “labour activation measures” who are not included in the live register figures as of the end of January. That’s 15,000 more than when the current administration came to power three years ago. The 2014 total includes some 22,500 on community employment schemes, 25,000 on “back to education and vocational training” schemes and 6,400 on JobBridge.
There has been repeated criticism that these courses are being used to keep live register figures down. Sinn Féin’s Mary Lou McDonald recently pointed out that the “half-baked, Mickey Mouse schemes the Government comes up with to massage the live register figures will not cut it. People want real jobs and decent work.”
Nevertheless, there are State-sponsored schemes which do result in real jobs. Almost 1,600 long-term unemployed have been taken off the live register in the last eight months by employers signing up to the JobsPlus employment scheme. JobsPlus encourages businesses to focus on those out of work for long periods. Companies receive regular cash payments to offset wage costs and, the longer the person has been on the live register, the more the new employer will receive.
Vacant high street shops pay testimony to the ravaging effects of the recession on the retail industry and even today as the public begins to spend again, many stores are still not out of the woods.
“Sales are down by 25% and 40,000 jobs have been lost [since the recession began],” said Stephen Lynam, director of Retail Ireland. “This has had a huge impact on the industry, obviously. It has also had a huge impact on towns and cities — vacant retail units are a blight and a visible sign of the great recession.”
Central Statistics Office figures showed that January had the largest annualised volume increase in retail sales in almost a decade and, in February, the increase on 12 months earlier was 5%.
However, in revealing the upsurge in spending, the CSO clarified that when car sales were excluded, there was only an increase of 2.3% in the annual volume figure. That was because car sales increased 14.9% year-on-year. The increase in furniture and lighting sales (13.6%) also dragged up the average volume sales.
That meant there was only small single-digit rises, if any, in many of the other sectors. In others, such as food/beverages/tobacco (-5.5%), there was a significant decrease in annualised volume sales.
Switching from the volume of sales to the value in February, the CSO found an annual increase of 2.9% when compared with February 2013.
However again, if the motor trades was excluded the increase plummets, this time to 0.4%.
“Despite the losses, the sector is resilient,” said Mr Lynam. “We still have a competitive and vibrant retail industry and we are still the biggest private-sector employer in the country. Some companies have gone, and that is a shame, but those that remain are determined to survive and thrive. If retail sales can start to grow by 3%-4% per annum from 2016, the sector can create 40,000 new jobs.”
While the latest KBC Ireland/ESRI consumer sentiment index did find consumers are at their most confident in seven years when it comes to making large household purchases, KBC economist Austin Hughes said consumers would still need more evidence that a recovery was underway before they really begin to spend freely.
There is something of a “who will blink first” scenario in domestic spending. Trade unions point out that the State’s coffers benefit from an increase in wages, as it gives people more money to pump back into the economy through local spending.
However, as evidenced elsewhere in this feature, the Government appears more determined to gain revenue through the tax net.
While other elements of the retail sector are still in difficulty, there is no doubt that the motor industry is experiencing a revival, albeit from a low base. The number of new private cars licensed for the first time increased by 23.1% to 11,906 in February 2014 compared to February 2013. To put that in context, though, the total for new private cars in February 2007 was 26,495; In fact even in February 2011 it was 13,470.
Nonetheless, SIMI director general Alan Nolan is upbeat.
“The motor industry is often the first to be affected when there’s a downturn and one of the first to come back when the economy improves,” he said. “Dealers are undoubtedly seeing a lot more confidence among consumers, many of whom have been putting off making large purchases over the last few years. Feedback from dealers confirms that footfall and sales enquiries are holding up well and there is no doubt that it’s the return of consumers to the market, as opposed to business purchasers, that is fuelling the increased business. Better availability of finance for credit-worthy consumers, combined with improved consumer confidence, have helped make this a very good start to 2014 for the industry.”
This is evidenced in the stabilisation of employment in the sector, while February saw the formation of 37 new companies in the industry.
* New car sales up 21% on February 2013.
* 12,753 cars were sold, versus 10,579 in February 2013.
* The top three selling car brands were Volkswagen, Toyota and Ford.
* The top three selling models were the VW Golf, Ford Focus and Nissan Qashqai.
* The top-selling van was the Ford Transit.
* Buyers are concerned with fuel efficiency, with 93% of sales of the top-five selling cars in the lowest CO2 categories (Band A).
With the economy seemingly in recovery, workers who have seen their pay rate either stagnate or fall in recent years will now seek to — as the country’s largest union, Siptu, puts it — “recover the ground they lost” during the recession.
Even employers’ body Ibec has conceded that, as the economy enters recovery mode, “we will start to see that frustration of expectations that has been building up”.
A recent Behaviour & Attitudes survey found almost 60% of people aged between 25 and 49 years had either lost their jobs, had their hours cut, or had a cut in salary during the recession.
Of the 25 to 34-year-olds it questioned, 60% said either they or their spouse had suffered a loss of income — 38% through loss of job, 43% through wage reduction and 36% through a cut in hours.
It was similar in the 35-49 age bracket, in which 57% reported a loss of income in the household — 26% said a job had been lost, 47% said pay had been cut and 31% said fewer hours were on offer.
Ibec chief executive Danny McCoy said, in his latest end of year review, that half of members surveyed were prepared to pay increases to their staff over the next two years, a rise on the 39% prepared to consider increases a year ago.
However, how the rising “frustration” is addressed and alleviated on an economy-wide basis, threatens to raise yet another major impasse between unions and employers. Both the Government and employers repeatedly said in the first few weeks of the year that a new national wage agreement was not a viable proposition in the short-to-medium term, and that “enterprise level” bargaining, ie by individual workplace, was the best option for now.
However, newspaper reports of comments from Mr McCoy and then remarks attributed to the taoiseach seemed to signal a shift in that thinking. In February, The Sunday Business Post featured an interview with the Ibec chief executive in which he talked of the sense in having an “incomes policy” as part of a national agreement and that “anchoring wage expectations is important”.
Then in March, the Sunday Times said Taoiseach Enda Kenny “sees merit in easing the demand for pay increases in exchange for concessions on tax”. The report also said senior ministers feared the impact increases would have on competitiveness.
Siptu leader Jack O’Connor (pictured above) insisted his union was “pressing ahead with our strategy to win pay increases in profitable employments across the economy in order to begin the work of recovering ground lost over the crisis years”.
He said negotiations on such agreements are “conducted at a level that is so remote from workers and because when you arrive at some kind of one-size- fits-all, inevitably people who can do better are restricted by it”. In the Sunday Business Post article, Mr McCoy said talks on an agreement would give an opportunity to say “guys, here is what’s happening out there, the norm is 2%, it’s not 7%”.
In a number of sectors, pay rises have been in train since the start of 2013, with about 2% common. For example €15m worth of wage rises were secured by retail worker members of Mandate trade union in the 18 months to last December. In recent weeks, 14,000 members of the union in Tesco began balloting for a 2% pay rise.
In March, a joint Industrial Relations News-Chartered Institute of Personnel and Development pay survey of more than 600 large, medium, and small firms provided what the surveyors described as a “picture of cautious optimism”, with findings that only 33% of firms intend raising basic pay in 2014. The results showed that larger firms were, in general, more likely to pay a wage rise this year, but average wage rises for those would be more modest than wage rises in smaller and medium-sized firms.
Whether fairly or not, the collapse of the construction industry was not greeted with too many tears from numerous sections of society that saw rogue developers as synonymous with the profligacy which got us into trouble in the first place.
However, at the heart of that sector were tens of thousands of individuals and families who, almost overnight and through no fault of their own, found themselves with no way of making a living. Projects simply stopped, sites closed down and builders, plasterers and plumbers with no other skills were left with the stark choice of the dole queue or the departure gate. With house-building almost at a standstill, the few State projects still affordable were suddenly over-subscribed many times over, with applications from workers looking for a role.
As a result, from a high of 270,000 at the height of the boom in 2007, those employed in construction dropped to below 100,000 by the end of 2012.
However the first quarter of 2013 saw the first, albeit marginal, step towards a recovery. At that point, the Central Statistics Office recorded a 4.4% annual increase in building and construction output. That was followed by a 11.2% increase in the second quarter of last year.
That led Construction Industry Federation director general Tom Parlon to tell the federation’s annual conference in September:
“Confidence has been seeping back into the sector in recent months as we have started to see a few indications of more construction activity... If the right steps are taken, we will see the construction sector move to sustainable, measured growth. No-one wants to see the economy being dependent on the construction sector again. However a healthy, active construction industry is a vital part of any functioning economy.”
Certainly, numerous reports in the last few weeks have made it clear that there is plenty of activity required in the home-building sector. In recent days, the Housing Agency said almost 80,000 homes, half of them in Dublin, will have to be built over the next five years for the rising population. This year alone, it said 9,500 new properties would need to be built around the country.
Mr Parlon questioned the agency’s estimate that 5,663 new units will be required in the Dublin region in 2014, saying it “simply won’t happen”.
“House builders want to build, but unfortunately the current market conditions are stopping that from happening,” he said. “The cost of house building is still at too high a level. That is because the various taxes and levies have barely been altered since the downturn and do not reflect the current market reality.”
The lack of sufficient housing generally is having an impact on the prices being demanded of prospective buyers, predominantly in Dublin.
Earlier this month Ronan Lyons, economist with Daft.ie, found that prices rose nationally by 3.7% in the first quarter of 2014, the largest quarterly rise since mid-2006. When the percentage increase was broken down by region, it showed that the rise in Dublin was 5.7% — the largest since 2006 — compared to just 2.3% across the rest of the country.
Mr Lyons did, though, point out the quarterly rise outside the capital was the first since mid-2007.
The annual rise in Dublin list prices was 15%. That compared to a fall of 3.3% in the rest of the country.
One must remember, however, the thousands of households for whom the cost of buying another property is meaningless. They are in a home for which they can no longer make repayments and their predominant worry is whether it will be repossessed. At the end of last year, 79,782 mortgages were more than 90 days in arrears to the value of €107.4bn.
Of those, only 13,985, or 18%, had been permanently restructured. Of the rest, 6,571, or 8%, had been temporarily restructured, and 59,226, or 74%, had not been restructured.
At the same point, there were 33,589 mortgage accounts with arrears of greater than 720 days — almost two years — which the Central Bank said corresponded to outstanding balances of €6.9bn.
Ominously, at the end of last week, Permanent TSB became the first of the four main banks to target borrowers who are less than 90 days behind in monthly payments, as well as those with long-term arrears. It said it expected the number of repossessions this year to be “in the hundreds”.
At the end of last year, there appeared to be a light at the end of the tunnel, with the emergence of debt solutions under the auspices of the Insolvency Service of Ireland.
However, it secured just four mortgage write-downs for hopelessly overburdened debtors in its first seven months in operation.
Nonetheless, it still expects to have thousands of people on its books by this time next year.
For the duration of the Celtic Tiger, much of Ireland’s burgeoning economy was based around the construction industry, but there was no doubt that hotels cashed in over the period.
However, when the recession decimated the construction sector — which was responsible for so many of the hotels which sprung up during the boom — tourism also felt the full effects of the crash.
Irish Hotels Federation chief executive Tim Fenn said: “Irish tourism experienced a major shock during the second half of 2008 on foot of the global economic crisis, marking the beginning of a dramatic decline for the hotels sector. Over the next four years, depressed Irish consumer demand and falling overseas visitor numbers from our key markets — Great Britain, continental Europe, and North America — took a very heavy toll on tourism businesses throughout the country.”
By 2009, national occupancy levels for hotels and guesthouses reached a low of 55%, a level not experienced since the 1980s.
By 2010, total revenues generated by Irish tourism dropped to €4.6bn, down 30% since their peak in 2007, when they stood at €6.5bn.
Total annual overseas visitor numbers had dropped to 6.04m by 2010, down 2m on 2007 (when they had reached a high of just over 8m).
By 2010, the number of visitors from the UK had fallen 32% on 2007 while visitors from continental Europe were down 20% and North America down 13%.
At the height of the economic crisis in early 2010, sentiment in the hotels sector was extremely pessimistic, with 88% of hoteliers concerned about the viability of their business, an IHF survey showed.
“At the time, over 90% of respondents said they had reduced staffing levels during the previous 18 months,” said Mr Fenn. “Only 10% of hoteliers had a positive outlook for future trading conditions, while 93% said they had either put investment plans for their business on hold or had scaled investment back.”
However, by the end of 2011, the industry began to see tentative signs of stabilisation, not least due to targeted pro-tourism initiatives from the Government that year, including the reduced 9% Vat rate.
“Since then, our sector has made inroads into the enormous ground lost during the downturn, creating over 23,000 new jobs in the process,” said Mr Fenn. “The tourism industry now supports almost 200,000 jobs, equivalent to 11% of total employment in the country, some 54,000 of which are in the hotels sector.”
While current tourism revenues and visitor numbers remain significantly down on 2007, tourism is on a firmer footing, with overseas visitors up some 7.2% in 2013, following the success of The Gathering.
Annual overseas visitors now stand at 6.99m, compared to 6.04m in 2010, and national occupancy rates for the hotels sector are at 61%, compared to 55% in 2009. Overall confidence levels are up significantly, with 83% of hoteliers now indicating a positive outlook for trading conditions for their business in 2014, and 68% planning to take on additional staff. Nationally, 75% are seeing an increase in business levels over last year
“Early indications are that city destinations such as Dublin and Cork are benefiting in 2014 from event and business-related tourism, while traditional tourism hotspots, such as Killarney, Kilkenny, Galway and Westport, are also doing well,” said Mr Fenn.
“However, many rural hotels continue to face the twin pressures of weak domestic demand and difficulties encouraging overseas visitors to venture outside traditional tourism locations. The decision by the Government to retain the 9% Vat rate continues to help our industry when marketing Ireland as a tourism destination.”
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