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Is there hard evidence that we are heading for a recession?

Confidence indicators are weak but real economic activity is holding up for now

The economy came through Covid-19 but is now being rocked by the fall-out from the war in Ukraine. But is there actual evidence of a slowdown so far? And how do we judge the outlook for the rest of this year and 2023? There has rarely been such uncertainty about the outlook. Economic sentiment is certainly on the slide, but so far real economic indicators – unemployment, tax returns and so on, remain solid. That said, the latest retail sales figures for June show some weakness. Here is what we know so far.

1. The forward-looking indicators: There is no doubt that economic confidence has been hit hard by the fallout from the war, the sharp rise in inflation and the resulting cost-of-living crisis. People are experiencing the first general fall in living standards since after the 2008 financial crash – back then it was largely because the level of cash incomes were falling, but now incomes are rising, but prices are rising much more quickly.

This shows up in the key confidence indicators for the Irish economy, which look at how people feel and what they expect to happen next. These are constructed from surveys which measure confidence among consumers and business. They are index figures that don’t “mean” anything in themselves but over time give a useful indication of sentiment.

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The KBC Bank Ireland consumer sentiment survey has shown a steady fall in recent months – bar a surprise uptick in June – and is now at its lowest level for 21 months. Consumer sentiment last fell when Covid-19 hit but then bounced back – but it is now firmly on the slide with consumers particularly worried about their own personal financial circumstances. Economist Austin Hughes, in a commentary on the figures, said that there was now a risk of the confidence reading, which was 53.7 in July, returning to levels last seen during the financial crisis – between 40 and 50.


With prices rising well ahead of incomes and the recent increase in interest rates already flagged in July, Hughes said that the fall in sentiment come as no surprise. The vast majority of consumers feel that they are now, or will soon, face severe pressure on their finances, suggesting a lot of households are now feeling the pinch. Interestingly, the survey found that while consumers were pulling back on spending plans, the drop here was smaller than might have been expected. Hughes said that consumers may be engaging in spending at summer sales and also pushing ahead with holiday plans. But clearly the risk of a slowdown in consumer spending heading into the autumn and winter is real. For now, Hughes said, the data seems to point to the likelihood of a clear slowdown rather than a complete stop in spending.

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Business confidence indicators have also been sliding. The Bank Of Ireland Economic Pulse Survey, which combines consumer and business sentiment, was 70.2 in July and the business element shows weakness across all the main sectors. Loretta O’Sullivan, Bank of Ireland group chief economist, said retailers were concerned about consumer spending, with firms in industry and services also worried about slowing world economic growth.

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Looking at sectoral trends, the BNP Paribas Real Estate Ireland Construction PMI - which looks at orders coming through for projects- noted a fall in total construction activity for the first time since early 2021 during Covid restrictions. PMI indices indicate contraction when they fall below 50 - and the construction index fell from 51.5 in May to 46.4 in June. Increasing costs and subdued demand were seen as key factors, particularly for industrial and office projects. John McCartney, head of research at the company, said June was a watershed month with the first absolute pull-back in activity since Covid restrictions lifted. However, in terms of housing supply he is still optimistic of a significant increase on 2021 levels.

AIB produces a monthly purchasing managers index for manufacturing and also one for services. The June manufacturing index showed the first fall in new orders in 16 months and was a marked turnaround from the second quarter. Oliver Mangan, AIB chief economist, said there are clear signs of the impact of the slowdown in global manufacturing on Ireland. The index, at 53.1 in June from 59.1 in April, is still just in expansion territory, but a steep fall in new orders, including for exports, is worrying. The PMI for the services sector, meanwhile, fell to 55.6 in June from 60.2 in May. New business is still growing, though the rate of growth has slowed sharply.

2. The indicators of current activity: The negative picture from the forward-looking indicators contrasts with continued strength in the real economic data, Of course the latter are backward- looking, reflecting what happened in the first half of the year, rather than what happens next. But they still show a remarkable bounce-back from Covid-19.

Job creation remains strong and unemployment has continued to fall to 4.7 per cent, though there are reports of slower recruitment on some sectors. Tech, where there are international pressures on some big Irish employers, is one to watch here.

Tax returns for the first half of the year show strength not only in corporation tax but also across the board in income tax and VAT - showing a decent first half for the domestic economy.

The IDA reported a record first half of the year in terms of jobs and new projects, with inward investment exceeding the previous pre-Covid-19 levels. More than 150 projects were signed in the first half of the year, promising to create 18,000 new jobs. Labour shortages continue in many sectors, meanwhile, with upward pressure on wages. Ireland’s export growth continued in the six-month period, with total exports up by a third in the first five months of the year due to a storming performance from the pharma sector in particular.

However there are some straws in the wind. Retail sales figures out on Thursday showed a 1.3 per cent monthly fall and are down 6.6 per cent in the year to June. While last year’s figures were boosted by the bounceback after the Covid shutdown - and sales remain above pre-Covid levels - there are clear signs here that the cost-of-living crisis is starting to affect spending.

3. The bottom line: The question is whether the forward-looking confidence indicators will be reflected in real economic data in the months ahead. The answer is yes although how significant the slowdown will be, and whether it might turn into a recession, remain uncertain. Further rises in gas prices because of the war in Ukraine remain the main risk - and could cause consumer spending to fall, rather than just slow or stall. As consumer spending is a big part of the economy, trends here are crucial and also feed through quickly to employment and taxes. As we have seen, despite strong exports in the first half of the year, there are also fears of an international slowdown affecting exports, which - if it happened - would weaken the support this sector has offered in recent years, including through Covid.

IBEC’s latest survey says that the economy is at a turning point, but is more likely to head for a slowdown in the growth rate, rather than a recession, when the level of activity falls. IBEC’s chief economist Gerard Brady also says feedback from its members indicate a weakening, too, in investment growth, the third key leg of the economic picture alongside consumer spending and exports.

The economy showed strong resilience through Covid-19. But the hits it is now taking means a significant slowdown in growth is now underway and will become evident in the real data soon enough. Whether it will turn into recession remains an open question, but if the energy crisis intensifies this is certainly possible.

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