Ahead of the Fiscal Compact referendum on Thursday this week, there is an argument thatIrelandis on the road back from the abyss and that a “no” vote might stamp out the fragile green shoots of recovery. This blogpost examines the latest economic statistics and concludes that we are not yet in recovery mode.
We’re in recession. The top-level measure of a country’s economic performance is its Gross Domestic Product (GDP) which tries to measure the total value of goods and services produced by a country and Gross National Produce (GNP) which measures what we produce but excludes profits made by foreign companies – those are simplifications. Economists define a “recession” as GDP declines in two successive quarters. Unfortunately there is no widely accepted definition of a “depression” though some have suggested you’re in a depression when you have a GDP decline of over 10%. So what do the latest numbers which relate to 2011 tell us? We’re back in recession with GDP contracting in the last two quarters of 2011 and with GDP down 9.5% from €178bn in 2007,Ireland might be said to be in a depression. The results for the first quarter of 2012 will be available at the end of June 2012.
Bond yields are rising: our notional borrowing costs are stable to rising at present. We say “notional” becauseIreland is not actively issuing debt at present, we get all our funding from the Troika bailout, but we can see the interest rates that apply on the secondary markets where holders of our bonds sell to one another. In November 2010 when we sought our first bailout, our notional cost of borrowing was 7% and it increased to 10% in March 2011 when the bank stress tests gave some confidence and there was a temporary decline to 9% but when Portugal sought its bailout in April 2011 and Greece started lurching from crisis to crisis our yields rose to a high of 14% in July 2011 when the EU decided to cut our interest rate along with Greece’s and Portugal and it reached a low of 7.5% a the start of October 2011 before increasing again to 10% as concerns grew for Italy in particular and then at the end of November 2011, the ECB announced it was practically printing money by offering 3-year loans to banks at 1% which banks could use to buy bonds, and that lead to a gradual reduction in our yield to 6.7% thought it steadied at 6.9% before the latest bout of jitters about Greece and Spain and this morning it stands at 7.5% again. Sustainable long term borrowing is perceived to be about 5-6% or lower. 7.5% is seen as unsustainable and indeed so also was 6.7% our low in the past six months.
Retail sales are falling: A good indicator of the domestic economy is the value of retail sales, what we are spending in the shops, and the latest monthly figures were published by the CSO this morning which show the value of retail sales was down 1.1% on a monthly basis in the month of April 2012 and down 1.8% on an annual basis and is down 26% from the peak in 2007.
Construction activity is falling: the latest index from Ulster Bank published at the start of May 2012 stated “activity in the Irish construction sector decreased markedly in April as fragile client confidence led to a drop in new business.”
Residential and commercial property prices are falling: the latest monthly indices from the CSO show that nationally property prices continue to decline, by over 16% in the past year and 1.1% in the month of April 2012. There have been two consecutive months of increases in Dublin, the first time that has happened since the peak in 2007 though we did have Dublin apartment prices increasing in two months last year before seeing substantial decreases this year. The latest commercial price indices from Jones Lang LaSalle and the SCSI/IPD both show commercial property continues to decline despite Budget 2013 being one of the most pro-property budgets for more than a decade.
Mortgage lending is falling: We saw with the latest quarterly lending figures from the Irish Banking Federation a fortnight ago that mortgage lending is practically flat-lining and for Q1, 2012 a total of €450m in new lending was approved, down 95%-plus from the peak, down from the previous quarter and down from the previous year’s Q1, 2011. The only bright spark is the annual pace of decline has eased but given the VERY low base of current lending that is hardly cause for optimism.
Business lending is falling by about 2% annually: anecdotally small and medium sized businesses complain about lack of access to credit. Referrals to the Credit Review Office confirm there are problems but suggest they’re not as bad as companies claim – companies counterclaim that to keep relationships with local banks, they won’t complain. The official figures however confirm that lending is declining.
Mortgage arrears are rising: We saw with the latest mortgage arrears figures that another 6,000 mortgage accounts went into arrears in Q1, 2012 though the pace of increase slowed slightly. One in 13 mortgages is more than six months in arrears, a time period after which there is generally considered to be little chance of the account becoming performing again. 15% of mortgage accounts are in arrears or have been restructured.
Our deficit: I think it is fair to say that our deficit is under control in the sense that monthly results are now in line with, or better than, projections, and that is no mean feat, even if many of the measures introduced have been mandated by the bailout programme with the IMF/EU. However, our deficit is second highest in Europe after the UK’s and although it is hoped it will be less than 8.6% in 2012 and less than 7.5% in 2013, this will rely on projections of economic growth as well as another €3.5bn of cuts and new taxes to be announced in six months time in Budget 2013. And we will need adjust our budget by €3.1bn in 2014 (on top of previous years’ adjustments) and €2.5bn in 2015 (on top of previous years’ adjustments) – in other words in 2015 we will have an adjustment of €8.6bn compared with 2012, that’s €5,000 per household in new taxes and cuts.
Our debt: our national debt is rising and next year is expected to peak at 120.3% as long as we meet deficit targets and have some economic growth. Arguably it is this debt which is unnerving bond markets and preventing our bond yields coming back below 5% where we could sustainably borrow. This is our gross government debt but it excludes any loss on NAMA and we know that NAMA paid €5bn more for its loans than they were worth in November 2009.
But is it all negative? Absolutely not, even in the figures above, there are rays of hope, there is some evidence of a slowing in the declines in residential property prices in Dublin, the number of mortgage accounts 90-180 days in arrears grew by just 300 in Q1,2012 the lowest increase on record. And in general, the forecasts this year are for modest growth.
Unemployment is stable and has been for a year and half now. It is still 14.3% which is very high compared with the UK’s 8.5% but nowhere as bad as Spain at 24% or Greece at 22%. We are creating jobs but the problem is we are still shedding jobs – we hear about large scale job announcements like Paypal’s 1,000 new jobs in Dundalk but in reality, many job announcements lead to recruitment which is spaced over a period of years and meantime there is a drip-drip of layoffs, many of which don’t make the national headlines. Our unemployment rate has stayed largely the same for 18 months fluctuating between 14.1% and 14.6%. We don’t know what effect emigration is having on the unemployment figures. It is almost criminal in Ireland, a country scourged by emigration that there is no comprehensive measurement of emigration and we must rely on estimates which tend to be out of date and wrong. The latest estimate for the year ended April 2011 was that 76,400 emigrated whilst 42,300 immigrated. Forecasts for 2012 tend to project unemployment staying at current levels.
Deposits are stable: monthly reports from the Central Bank ofIreland show that since the middle of 2011, deposits have stopped flowing out of Irish bank accounts. But since then there has been a stabilisation rather than growth. There has been growth of deposits at Irish banks outside of Ireland, eg with the Bank of Ireland/Post Office joint venture in the UK, but it is difficult to see what benefit this confers on the Irish economy.
Residential and commercial rents are showing signs of stabilisation: Residential rents have in fact been stable for well over a year and indeed until last month were beginning to increase by 2-4% annually. Last month’s 0.9% month-to-month decline might have been a blip but it might also herald reductions envisaged when social welfare rates were reduced in January 2012. Commercial rents rose by 0.7% during Q1, 2012 according to JLL, the first increase since 2008.
Inflation is low: we don’t have deflation in Ireland which is a mixed blessing. On one hand it would help sustain standards of living but on the other would lead to lower wages and might ignite a cycle which economists refer to as stagflation. The latest inflation figures show annual CPI inflation running at 1.9% with energy prices being a significant contributor.
Consumer confidence is up: the KBC bank/ESRI publish a monthly consumer confidence index and it has been showing signs of improvement in the last two months having risen from 54.3 to 60.1. Mind you, this index appears to be volatile and if you examine previous figures, you will see 20% declines in two months. At 60.1 it is at its highest level since September 2010, but then again it was at 59.0 in November 2011 only to decline to 54.3 in February 2012.
So do we have the fragile green shoots of recovery? Based on current statistics, no we don’t. The main economic indicator, GDP, shows we are in a double-dip recession – that’s black and white. Lending to our economy is in decline, and in some sectors is moribund. Our notional borrowing costs are unsustainable and are levels above those that applied on the eve of our first bailout and are currently trending upwards. Our deficit is a horror story though we are meeting our monthly projections. Our debt is also a horror story and is growing. Asset prices represented by property are declining. Our unemployment rate is stable but it seems that new jobs generated are being offset by job losses. Our inflation is low but above zero which is a positive and some surveys indicate a growth in consumer confidence from a low base.
Overall, based on the most recent statistics, you would have to say that we are not yet recovering.