Here Comes the Growth, say economists

At a recent Dáil committee meeting, Donal O'Donovan of the Irish Fiscal Advisory Council said the end of recessions such as the one Ireland has been going through often comes as a surprise, and that the upturn is often sharper than had been expected.

There are reasons to believe the kind of upturn O’Donovan was talking about, is now upon us.

Irish economists have been adopting a new tone of optimism over recent weeks, because of a figure released by the Central Statistics Office in late November: 3.2 per cent. That was the year-on-year increase in employment to the end of the third quarter of 2013, revealed the CSO's Quarterly National Household Survey.

The survey’s figures are considered highly reliable and 3.2 per cent was not only a healthy number of new jobs – 58,000 – it was evidence of a growing rate of job creation within the economy.

The year-on-year rise at the end of the third quarter compared with an increase of 1.8 per cent for the previous quarter, 1.1 per cent for the first quarter of 2013, and 0.1 per cent for the last quarter of 2012. A comparable rate of increase in employment was last seen at the end of 2007, said Brian Ring of the CSO.

Economists believe the employment figure is a very accurate indicator as to what is going on in the economy. Estimates for Irish economic growth are a source for endless debate as the affairs of just a few multinationals with operations here can significantly affect the gross domestic product figure. Because the value of the exports of a number of Irish chemical and pharmaceutical operations have been hugely affected by their products coming off patent, the GDP figures for 2013 are now widely viewed as having helped to conceal a turning in Ireland’s affairs that began earlier this year.

Positivity among employers
One of the earliest groups to profess optimism about the economy was the employers' lobby, Ibec, which noticed near the outset of this year a more positive attitude towards hiring among its members. But others were cautious, in large part because of the disappointing economic growth figures of recent years.

At the December 6th committee meeting attended by O’Donovan and his fellow members of the fiscal advisory council, it was obvious they were tempted to point to the jobs figure as a portent that good times were coming, but were nervous about doing so.

Ibec had no such hesitation when it issued its Q4 quarterly outlook this Monday, opting for the title: Here Comes the Growth. The cover summation read as follows: "The jobs recovery in the Irish economy this year has been spectacular. It is the clearest evidence yet that we are heading into a virtuous growth cycle. Strong GDP growth of close to 3 per cent will return in 2014 but the recovery is already clearly under way."

That prediction for GDP growth next year was ahead of the Government projection of 2 per cent. Ibec’s prediction for this year was 0.7 per cent but it said that, when you looked at gross national product, which strips out the effect of multinationals, growth this year would be 1.5 per cent.

On Wednesday, the Economic and Social Research Institute, in its Quarterly Economic Commentary, declared "the Irish economy has turned the corner". The CSO figures on employment had caused it to revise upwards its figure for economic growth, and downwards its unemployment projections.

Domestic demand
"Domestic demand in 2013 is estimated to have grown by 0.9 per cent, the first increase in this aggregate since the crisis began. It is a portent of a stronger recovery in 2014 and 2015," it said. GDP would grow by 2.7 per cent next year, from 0.3 per cent this year. GNP this year could be 2 per cent (as against the Ibec's 1.5 per cent).

Yesterday, the CSO released its quarterly national accounts for the third quarter of 2013, a set of figures economists treat warily because of their potential for later revision, but which nevertheless are examined with interest.

GDP was up 1.5 per cent on the previous quarter, and GNP 1.6 per cent. Those growth figures put Ireland well ahead of the other economies listed in a media presentation by the CSO. Latvia came next, followed by Britain, Estonia, Denmark and then Germany.

Seen as a bar chart, Ireland is Liberty Hall and the EU is Government Buildings.

“These are very optimistic numbers,” Prof John FitzGerald of the ESRI said after the CSO presentation. “We were too pessimistic yesterday.”

If the CSO figures turn out to be accurate, GNP growth this year will be closer to 3 per cent than the 2 per cent prediction the ESRI made on Wednesday, he said. “The patent cliff is really mucking up the GDP figure.”

A number of trends are now moving in the right direction and contributing to a feeling that a virtuous cycle is in play. Manufacturing export figures and productivity in that sector, which is predominantly domestic and labour-intensive, are strongly positive.

The UK is revising its economic predictions upwards, which is important for SMEs and indigenous exporting companies, which tend to be more UK-focused, and are hugely important to employment figures.

For Fergal O’Brien, chief economist with Ibec, the rise in the numbers in employment is key to the increased optimism.

“We all thought we would have a period of jobless growth, before employment picked up. But, instead, jobs have come on so strongly in the last two quarters. What gives me the most confidence is that the majority of the jobs are full-time. Up to now, it was pockets of part-time work, which indicated a lack of confidence.”

Still, FitzGerald cautions that people already in employment will not feel much by way of benefits next year, as public sector wages face further pressure, taxes creep up and prices too. The real bonus is for people who will find work.

The difference between the recession in the 1980s, which ended with an extended period of jobless growth, and this one, is the greater standard of education and skills among those seeking work, he said.

The biggest threats to our recovery are Europe and question marks over the banking systems’ ability to provide credit to renewed demand. In regard to Europe, revised estimates for German economic growth out this week for 2014 and 2015 are “really upbeat”, he noted, which is good news for Ireland.