ECONOMICS:Consumers, it seems, are far from persuaded that the recession is about to bottom out
THE GOVERNMENT, it seems, has been taking some comfort from the most recent set of figures on the state of the public finances.
Responding to the end-May exchequer statement, published this week, Minister for Finance Brian Lenihan welcomed the slowdown in the rate of decline in tax revenues that it revealed. He declared the numbers in line with official projections.
Moreover, Taoiseach Brian Cowen found the latest increment of budgetary information encouraging, and went on to offer the broader observation that there were now hopeful signs of the recession bottoming out.
How much of this relatively cheerful talk can we put down to electioneering, and how much can we take as an informed and objective comment on the economic reality?
First, the exchequer returns. Yes, it is true that the pace of decline in overall tax revenue has abated somewhat: for the first four months of the year total receipts were down 24 per cent on the same period of 2008 – for the first five months, the fall was 21 per cent. Receipts in May were just 11 per cent below May of the previous year, the smallest drop since last September.
However, the devil is in the detail. Tax revenue can be very volatile from one month to the next, particularly at the level of individual tax heads. Thus, May benefited from a surge in corporation tax, completely against the run of play. This is much more likely to reflect one-off factors than to mark a change in trend. Significantly, excluding corporation tax receipts, the rate of decline in tax revenue at end-May remained stuck in the 21-23 per cent range that has characterised the last four months.
What this suggests is that the underlying pace of deterioration has steadied. While this is unquestionably better, it does not signal a point of inflection, much less a turning point.
In particular, it is still far too early to be confident that this year’s fiscal targets will be met. Indeed, if the current pace of contraction in non-corporation tax receipts persists, non-corporation tax revenue of about €28 billion can be expected for the full year.
Even if corporation tax receipts come in on target (€3.75 billion), the total tax take in these circumstances would not exceed €32 billion, €2 billion less than the Department of Finance projection. Of course, it cannot be ruled out that the official target will be exceeded, but the balance of risks is still slanted in the other direction.
What of economic conditions more generally? Are there hopeful signs that things are bottoming out, or are there just hopeful statements? A snag in trying to answer this question is the short supply of timely and meaningful indicator data.
The latest available “hard” number on economic activity (like industrial production, retail sales) typically lag several months behind, while the more timely data tend to be of the “softer” and arguably less reliable variety (such as measures of sentiment). A consequence of all this is that one’s assessment of the state of play must contain a large element of the qualitative and tentative about it.
That said, as things stand, there is little to indicate that the end of the recession is at hand. The great bulk of indicators continue to point to declines in activity, even if they also suggest that the pace of decline has moderated.
Among the data that fall firmly into this category are the Purchasing Managers’ Indices (PMIs) for the manufacturing and services sectors of the economy by NCB, the most recent of which relate to May and were published in the past week. In each case, the overall index signalled a continuing steep decline in activity, and sharp deterioration in operating conditions in May. There is some silver lining present in that the rate of deterioration has moderated over the last couple of months, but such lining is thin, because in each case the latest index reading (39.5 for services, 39.4 for manufacturing) is a long way from the mark that signals a revival (a value of 50 or more).
The good news from purchasing managers across the board is that they are seeing sharp reductions in input costs (though not enough to prevent profits from continuing to fall), and are now tending towards optimism about the future, but only just. Asked whether they expected business activity levels at their company to be higher in 12 months than they are now, 32 per cent said yes versus 31 per cent who said no.
Turning to the consumer, the latest available hard data relate to March and, in common with most statistical releases, have something to offer the deep pessimists (core retail sales volumes were down 2.2 per cent in the month, the second largest monthly fall since the slump began) and the silver lining chasers. Core sales volumes in the first quarter were down just 1.2 per cent, the slowest rate of decline since the first quarter of 2008. Some indication as to what might have happened since is provided by this week’s KBC Bank/ESRI Consumer Sentiment Index (CSI) which suggested that overall consumer confidence in May was not much improved from its very low level of March.
Significantly, the detail of the CSI numbers indicates that consumers are much more downbeat in their assessment of their future than of their current situation. In contrast to purchasing managers, they fear that things are going to get much worse before they get any better.
Consumers, it seems, are far from persuaded that the recession is just about to bottom out.
