The latest trends indicate that while economic activity continues to contract, it is doing so at a slower pace than before, writes JIM O'LEARY
THIS WEEK was a more than usually interesting one as far as Irish economic data is concerned. Most, though not all, of the fresh data published lends support to the view, now widespread among commentators that, while activity continues to contract, it is doing so at a slower pace than before.
Probably the most hopeful of the indicators released was the NCB Manufacturing Purchasing Managers’ Index (PMI) for June. This is a broadly-based index designed to summarise the health of the manufacturing industry.
A reading of less than 50 indicates shrinkage, and the June reading of 42.5 points to a pronounced decline, but it is well above the previous month’s value of 39.4 and even more decisively above the trough reached at the start of the year.
Better still, the forward looking elements of the index, relating to new orders, new export orders in particular, are edging close to the kind of scores that would signify the resumption of modest growth.
Another set of data that strongly suggests that things are deteriorating at a much more modest rate than earlier in the year was the latest Live Register figures. The increase was 11,400 in seasonally adjusted terms in June, the fifth successive month of clear deceleration. The June increase was little more than one-third of the increase that took place in January. Still, a monthly rise of over 11,000 is hardly good news in itself and, if sustained, would take the numbers on the dole beyond the half a million mark by early 2010.
Partly because of rising unemployment, consumer confidence has taken a fearful battering over the past year or so and its restoration will make an important contribution to economic recovery.
The most recent information here is the KBC/ESRI consumer sentiment index for June, also published this week.
The bad news is that consumer sentiment is still deep in negative territory. The good news is that it has become somewhat less negative in recent months with the June reading marking a continuation of that slow, unsteady trend, with a score of 53.4, up from 45.5 the previous month.
The more detailed results indicate that consumers are much more downbeat in their assessment of their future situation than of the present, and even though the June index suggests some improvement in expectations, consumers are still a very long way from being optimistic.
While they’re in this sort of mood, sales of big-ticket discretionary items will remain very weak. This week’s credit data from the Central Bank reflect this with the pace of decline in new credit card spending, for example, accelerating to 21 per cent year-on-year in May. Other evidence pointing to unrelenting weakness in consumer spending is provided by the data on VAT receipts.
Here, in contrast to some other tax categories, the pace of decline has been accelerating: in the April-June quarter, VAT receipts were down 27 per cent on the same period of a year earlier; in the January-March quarter, the equivalent rate of decline was 18 per cent, while in the final quarter of last year, it was 11 per cent.
On the face of it, yesterday’s exchequer returns suggest that the rate of fall-off in overall tax receipts has moderated considerably. Again looking at quarterly numbers, in order to smooth out the monthly variations, total tax revenue in the second quarter was just 9 per cent below its level of the equivalent period of last year. This compares with the 23 per cent year-on-year fall in the first quarter.
However, the second-quarter numbers have been very considerably boosted by the bringing forward of corporation tax receipts from November to June on foot of changes to payment arrangements introduced in last October’s budget. Across the other tax categories, the picture is mixed. As noted already, the deteriorating trend in respect of VAT seems to be picking up steam. The same is true of income tax, despite the increases heralded by the April budget. On the other hand, the rate of decline appears to be easing in respect of capital taxes and Customs duties.
Adjusted to allow for the timing of corporation tax receipts, the underlying rate of decline in overall tax receipts is broadly unchanged. That being the case, I think the balance of risk remains tilted towards an undershoot of the official target for the year, which is €34.4 billion. All other things equal, a shortfall of €2 billion would convert into a budget deficit €2 billion higher than that pencilled into the Government’s arithmetic.
With organisations like the International Monetary Fund and the Organisation for Economic Co-operation and Development forecasting a budget deficit in the range 11.5-12 per cent of GDP for this year (compared with the official 10.75 per cent target), that would hardly be a major surprise.
Back to the economy and the question of where it is in the current cycle. Probably the best way to answer this question is to start by considering what will be the locomotive that will pull the economy out of the slump it is in. The answer seems incontrovertible: it will be exports. The other carriages will follow with lags of different lengths (here it’s probably best to think of them being coupled together, not with rigid links, but with flexible links of different elasticity). Consumer spending may be among the early carriages; housebuilding will probably be amongst the last.
What will it take to get the locomotive going? Well, an obvious precondition is the recovery of demand in our main trading partners. The latest international economic indicators would suggest that that point is some distance away yet, even if there are hopeful signs, and the most recent Irish PMI data, discussed above, would tend to confirm that.
In summary, it is still too early for sightings of green shoots but not too early to speak of the soil being prepared and the seeds sown.
jim.oleary@nuim.ie
