Chris Johns: Hangover from crisis makes us incapable of optimism

We move effortlessly from one financial crisis to another: Greece to China. The transition is smooth, but it is clear we can only handle one crisis at a time. Or, at least, our attention can only be held by one financial problem, not two. China, after all, has been slowing for some time, has had an "unsustainable" debt mountain for years and, in the eyes of the more gloomy forecasts, it's only a matter of time before it becomes a problem for all of us.

Meanwhile, back in the real world, the news is, dare we say it, surprisingly good. From Greece, through parts of Europe and all the way to the US, there have been stronger than expected financial and economic data points over the past few days. Most of which haven't received the attention they deserved, with our gaze still firmly fixed on flaky equity markets.

Good news for the euro area economy is so unusual that it merits a special welcome. Given its rarity, it always needs to be treated with caution and we have to acknowledge that “good” is a relative term. Nevertheless, some rather old-fashioned commentators are getting excited by what is happening to European money supply growth: it is looking robust. The hope is that this is an early warning of accelerating economic activity.

Steady growth

More mundane economic surveys of the European manufacturing and service sectors suggest steady, if unspectacular, growth over the summer. Crucially, that growth rate has, if anything, shown signs of acceleration. Even

France

has witnessed some growth in its service sector – early days, nothing to write home about, but worth noting.

The UK and US economies, of critical importance to Ireland, continue to power ahead – particularly so in the case of the US which has roared back from its weak start to the year. Critics of the UK government were quick to point out that GDP per head is only now back to 2008 levels (GDP itself is a lot higher). This carping is misplaced: it might have taken seven years, but if UK incomes are now back to where they were at the end of one of the most "unsustainable" booms in history, things can't be all that bad.

The US economy could now be growing faster than its trend rate. This is important when we think about the likely direction of interest rates. Inflation might be low but rapid economic growth should, eventually, lead to wage growth. This debate, of course, is swept aside when Chinese financial concerns prompt a sell-off in the US equity market. Indeed, the Fed is most unlikely to raise rates in the middle of a bout of financial mayhem. But if concerns about potential equity wobbles are a reason not to raise rates, they will never be raised.

Everyone, policymakers included, would be well advised to ignore day-to-day movements in stock prices. Indeed, there is probably little information in year-to-year equity market gyrations, let alone shorter-term changes.

Barometer

It’s almost as if Ireland has been a leading indicator of this better overseas news. And right on cue, our own labour market data surprised everyone with a much stronger rise in the number of people in work during the second quarter of the year. We are also seeing some decent wage gains which is good news for future consumption growth. Because of all the well-known problems associated with GDP measurement, the labour market is probably the best single barometer of the health of the Irish economy.

It is utterly unfashionable to be optimistic. There are plenty of good reasons for caution. Leading economists warn almost daily about the likelihood of “secular stagnation”. But it could also be the case that we suffer from an understandable psychological hangover from the financial crisis. It was so bad, its effects still painfully fresh for so many people, it is hard to imagine, perhaps, a return of robust growth. I won’t use the word boom. But remember that hardly anyone forecast the post-2008 bust. And even the pessimists didn’t see how bad it would get. Today, nobody at all is forecasting a boom on any foreseeable horizon. I am tempted to say that you saw it here first.