Economics Recent data on the export front are dismal but low interest rates here are encouraging people to spend and improving housing affordability
Recently published data paint a mixed picture of Irish economic activity. Granted, there is no doubt that the days of tigerish growth in output and employment have come to an end, but whether the economy is in recession or just experiencing a much more moderate pace of expansion than we had become accustomed to is an open question.
On the face of it, the most dismal picture relates to external trade. The latest figures indicate that merchandise exports fell by 9 per cent in the first quarter of 2003 from the last quarter of 2002 and were 21 per cent below their level of a year earlier. For one of the most open economies in the world, this reads like a sure-fire sign of recession.
However, the data just cited are in nominal terms and are hugely affected by exchange rate changes. This is because a high proportion of exports from the Republic are invoiced in dollars and the dollar fell by almost 20 per cent in value against the euro between the first quarter of 2002 and the same period in 2003.
Corrected for this, the decline in exports over the period is probably just a small fraction of the 21 per cent suggested by the raw data. However, there has almost certainly been some decline.
Not all the other output-related data corroborate the story of a contracting exporting sector. The latest industrial production figures suggest that output rose by 8 per cent in the first quarter of this year from the last quarter of 2002 after two successive quarters of contraction. This series is an unusually volatile one and the message it transmits cannot always be taken at face value.
Moreover, recorded increases in industrial production are often more than fully accounted for by huge gains in one or two (typically high-tech) sectors. This was not the case in the first quarter: the "modern" part of industry recorded an output increase of 8.5 per cent and the rest of industry, where the bulk of employment is located, chalked up a very respectable 2.5 per cent increase.
Other available information tilts the balance of evidence towards the contraction story, however. The May reading of NCB's Purchasing Managers' Index for manufacturing was 47.5, decisively into contraction territory and close to the lows reached in the immediate aftermath of September 11th. The IBEC/ESRI Survey for May yields similar results.
The picture of the household sector that emerges is somewhat brighter. Retail sales are growing, albeit at a gentler pace than in the Tiger era. Excluding garages and filling stations, volumes increased at an annualised rate of almost 4 per cent in the first quarter. New car registrations in the January-April period were an estimated 2 per cent ahead of the same period last year.
The most cheerful statistics of all are those relating to credit growth: in April, overall domestic credit was rising at 16 per cent year-on-year while mortgage lending was rising at almost 24 per cent year-on-year. The house-building industry still appears to be operating at a brisk tempo.
For the time being, it looks as though the consumer, especially in his or her guise as a housebuyer, is keeping the economy above the waterline. For this, we can thank two factors in particular.
The first is interest rates. Low and falling interest rates are discouraging savings, encouraging spending and improving housing affordability. How this influence might evolve in the period ahead is not quite so straightforward.
It is overwhelmingly likely that nominal interest rates will be further reduced, especially if the euro continues to appreciate. However, I think real interest rates here (that is interest rates adjusted for inflation) are much more likely to increase as the Irish inflation rate seems set to fall much further than nominal interest rates. Economists regard the real interest rate as the decisive one.
So, the prospect for Ireland over the coming year or so is a tightening of monetary conditions, even as the European Central Bank attempts to engineer a looser monetary policy for the euro zone as a whole. This will be all the more so if the euro continues to strengthen because, in these circumstances, Irish inflation will fall all the more steeply and real interest rates in Ireland will rise all the more sharply (for a given nominal interest rate trajectory).
The second factor responsible for keeping the consumer/housebuyer buoyed up is the resilience of employment. In the first quarter of this year, economy-wide employment increased by 0.7 per cent, thanks in large measure to the continuation of vigorous recruitment by the public sector. But private sector employment also retained a firm tone, with private non-farm jobs up by 0.4 per cent in the quarter. This is mirrored in a decline in redundancies in recent months and has resulted in the unemployment rate flattening out at a low and non-threatening 4.6 per cent.
As a result of these labour market trends, household disposable incomes have stood up better to the slowdown in output than might have been expected. Moreover, consumers have not become dogged by anxiety about losing their jobs.
If employment remains resilient, then well and good. However, there are some reasons for concern on this score. One is the incapacity of the public sector to continue expanding its payrolls at post-benchmarking pay rates. In fact, this year's Budget contains a commitment to reduce numbers by 5,000 by 2005.
A second reason for concern is the suspicion that private sector employers, mindful of the recruitment difficulties they experienced in the late 1990s, have been hoarding labour in the expectation of an early upturn in output. If this is so, and that expectation is not realised, workers will be let go.
A third reason for concern relates to consequences for competitiveness of the recent appreciation of the euro. We have yet to witness these consequences but we can be sure they won't be benign.
Jim O'Leary currently lectures in economics at NUI-Maynooth. He can be contacted at jim.oleary@may.ie
