ANALYSIS:Signs from Ireland's main markets indicate exports should continue to perform strongly, writes DAN O'BRIEN
THE HUM of industry has never been louder. Figures released yesterday show that manufacturers in July churned out more product than ever before in a single month. One could quibble about the real significance to the wider economy, but it is unequivocally good news. Such news was needed after yet another week dominated by the millstone bank, the utterance of whose name alone is enough to make one wince.
But for all the sound and fury this week, we know little more about the underlying state of the economy and its future prospects today than when eyes opened on Monday morning. Industry numbers aside, there was precious little other hard economic information released over the course of the week, in Ireland or internationally, and whatever happens to the unmentionable bank in the future, it will have only a marginal effect on the overall cost of the irreversible mayhem it has already caused.
What really changed this week was sentiment, both here and abroad. At home there was a heightened sense of nervousness about. Internationally, the bond market provided a much more measurable gauge of sentiment. The effective interest rate on the most closely watched class of government IOUs rose to new highs. Although the yield on government benchmark bonds fell back on mid-week peaks by Friday, the upward trend appears inexorable. This means that those who lend to governments sought a higher premium to hold Irish government debt because they judge that the risk of not being repaid has risen. The banking and fiscal crises together are creating nervousness about whether the State will go bust.
This is not mere market skittishness. Ireland will run a massive budget deficit this year. Most of the costs of preventing the rotten bank collapsing will also be booked in fiscal 2010. Put the two together and a public finances imbalance of gargantuan proportions emerges.
As minds are easily boggled by billions here and billions there, historical comparison best illustrates the sheer scale of the deficit. As there is no peacetime instance of any country anywhere in the developed world running an imbalance of this size, one has to go back to the second World War to find such a gap between what states spend and what they take in in taxes.
The US has readily available numbers. At the height of that war, when its economy was effectively commandeered by the government, the federal budget deficit reached a peak of 28 per cent of gross domestic product. Ireland’s deficit will be there or thereabouts by year’s end.
Is this, to use officialdom’s mot du jour, “manageable”? The answer is yes, probably.
Ireland was fortunate to begin the recession with a low public debt. This is about the only thing that is growing rapidly in the economy right now, but even on the most pessimistic projections, it will top out at levels that other countries have lived with before, however painfully.
The stabilisation of tax revenues is essential if the costs of the fiasco are to remain manageable. Although recent developments are hardly reason to cheer, revenue returns are close to target and certainly not setting any warning lights flashing.
The domestic economy appears to have hit bottom. Signs earlier in the year that it was beginning to climb out of its deep hole have largely evaporated. Bumping along the bottom is not a good way to go, but it is better than sliding downwards.
Better news comes from the export side of the economy. As yesterday’s industrial production numbers and earlier international trade data suggest, it is doing well. The signs from our main markets – Britain, the US and the euro zone – give reason to believe that this should remain the case.
In Britain, where households are as up to their eyes in debt as they are in Ireland, the economy grew at its fastest rate in a decade in the most recent quarter. No one expects this blistering pace of expansion to last, but the economy has been remarkably resilient all things considered. Demand for Irish goods and services should continue to grow. And both will be more competitive as sterling has been considerably and consistently above its lows of last year.
In July and August, most economic indicators from the US were negative, giving cause to fear the country was slipping back into recession. But September’s news has been less negative, and the announcement this week by Barack Obama of something akin to a mini stimulus – though largely pre-election window dressing – could spur the economy on.
In the euro zone the picture is mixed, but mostly positive. It can only give reassurance that the German core of the bloc is so solid. If Germans open their wallets more – and there are some tentative signs that they are doing so – then a positive dynamic will take hold across the Continent, so large and important is that economy to everyone else.
But the situation remains fragile and there is plenty of reason for disappointment, both in relation to the absence of any real sign of recovery in the domestic economy and with regards the euro-zone debt crisis.
There has been a massive rescue package in place since early May, designed to provide bailouts – similar to that provided to Greece – to Ireland, Portugal and Spain should that become necessary. The very existence of this package should have calmed matters. Unfortunately, it has not had the desired effect, in part because the armoury made available in May to fight the crisis has not been used to the fullest extent.
The European Central Bank is the institution that is the cause of the reticence. The powers it was given in May are not uncontroversial. They fall just short of unrestrained money printing. In Germany, exercising such powers is seen as a step down the road to monetary perdition. That is certainly the case in normal times. But in these abnormal times, when the stakes are so high – for Ireland and the entire euro zone – concerns about runaway inflation are misplaced. The break up of the euro is a much more serious risk. If the Frankfurt bank were bolder, that risk would be reduced. We could all breathe more easily.
Dan O’Brien is Economics Editor