Q Has economic recovery begun?
This week we learned that the single most important indicator in the Irish economy has finally turned upwards.
The numbers at work in the economy not only stopped falling in the first half of last year, but actually started rising in the second half. Usually a period of zero growth is to be expected after a decline in employment because the labour market has slow-turning, tanker-like characteristics.
When this and all the many other economic indicators are considered, there is now enough hard evidence to say – for the first time in 4½ years – that things have been getting better rather than worse over a significant period.
But before anyone hangs out bunting, let’s introduce some words of caution. Economists are very bad at forecasting economic performance. Just because there has been a good half year in the economy does not mean it will necessarily continue.
Uncertainty is heightened by the kind of downturn entered into in 2007/08, known as a “balance sheet” recession. This is the worst kind of bust and leads to a deeper and longer slump than any other kind of recession.
Gradual process
The aggregate balance sheets of households, companies and banks, as well as that of the State, are still in very bad shape. Improving them will be a gradual process, involving paying off mountains of debt on the one hand and rebuilding savings – in the form of pensions, cash in the bank and other assets – on the other.
But here, again, there is a sign that things are turning. In the third quarter of last year, household balance sheets started to improve for the first time since the crash.
Household net wealth grew by €11 billion in three months, the first increase since 2008. That happened because people continued to pay down debt, rebuild their savings and, crucially, the value of their property assets stopped falling.
Given that residential property prices remained broadly stable in the final three months of the year, a second consecutive quarter of rising household net wealth is likely to have occurred in that period.
Along with the indicators that are turning for the first time since the recession began, other strengths have been maintained.
Remarkably good
Hardly a week passes without yet another foreign company announcing new hiring plans. The near miraculous decline in government bond market borrowing costs continues. The promissory note deal was remarkably good and, thanks to fellow bailed out euro zone member Portugal, there is a very good chance that the terms of about €50 billion in European bailout funds will get prom-note treatment this month.
All that said, there are still some indicators going in the wrong direction or suggesting a continuation of bump along the bottom pain. Salaries and wages are stagnant; the banks are still acting as a drag on recovery as lending continues to fall and the age of austerity is not going to end any time soon.
There has also been some unwelcome news. The export engine, which alone generated growth during the darkest moments of Ireland’s depression, is spluttering. Europe’s recession is taking its toll.
That recession is particularly acute in southern Europe. Along with political instability in Italy, all the ingredients exist for a renewed inflammation of the euro area debt crisis. However, if that can be avoided, there is now a real chance that the incipient recovery will be sustained.