AT A time of such economic gloom and uncertainty it passes for good news that the State’s finances are broadly meeting targets set more than six months ago. Yesterday’s exchequer statement by the Department of Finance shows that in the first half of 2011 tax revenues were up on the same period last year.
Unsurprisingly, though, this was because of tax hikes implemented in the budget rather than any buoyancy in the economy. On the expenditure side, efforts to rein in overall spending are – by and large – being met. But the austerity needed to achieve even this partial stabilisation has weighed on the economy. The recession that officially began in early 2008 grinds on.
At the heart of the economy’s woes is property. Yesterday, two separate surveys of residential property prices showed further large falls in prices in the second quarter of this year. There is no sign that the bottom has been reached. Without a solid floor under property prices it is difficult to see a strong and sustainable recovery taking hold. Among the many consequences of the continued fall in property prices is the impact on the decimated banking system. Most of the domestic banks’ assets are in the form of mortgages. The further property prices fall, the more troubled mortgages there are. This further weakens banks’ balance sheets. If these trends continue even the worst-case scenarios set out in the March 31st bank stress tests could be surpassed.
As has been the case throughout this most protracted and brutal of recessions, the Irish export engine has continued to rev. It has been the only part of the economy providing forward thrust. The first quarter of the year even saw exports of goods and services reach a new all-time record. But this booster may be petering out. Last week a closely watched and usually reliable survey of manufacturing activity, which is overwhelmingly focused on foreign markets, found that in June industry contracted for the first time in 15 months.
This is hardly surprising. Europe and the US appear to be going through soft patches in their respective recoveries. Weaker demand in big export markets means Irish industry produces less. In the second half of 2011 prospects for those economies – and hence for Irish exports – are subject to big risks. In the US, where public debt and annual deficits are higher than in the euro zone, the political class is becoming more partisan. With just one month before the US enters technical default, brinkmanship continues on how America should begin to put its public finances on a sustainable footing.
Euro zone leaders engage in brinkmanship too. Greece will not default this month, but the latest sticking plaster, applied over the weekend by finance ministers, will succeed only in staunching that country’s bleeding for a while. The euro zone’s sovereign debt crisis could reignite at any time. Spain and Italy are close to being sucked in. If they are, Europe’s leaders will face choices of real historical significance. In the absence of the appropriate collective political effort, the second half of 2011 may turn out to be even more unsettling than the first half.