Behind the extraordinary volatility on the stock markets over the past week lies one big fear. It is that the western economies can no longer deliver economic growth and higher living standards as they did in the past. The economic crisis is over, after all, but “normal transmission” has not been resumed – we do not see the familiar pattern of rising prices and rising wages typical of an economic recovery.
This has huge political as well as economic ramifications, as governments – including our own – try to reassure people that things are getting better, yet the evidence is slow to show up in many pockets. And so better US growth figures spurred a rally for a time during the week, but in the current mood anything negative will lead to an equally dramatic drop.
The Government has better evidence than most of an improving economy, with 5 per cent plus growth and 1,000 extra jobs being created a week over the past year. Parts of the economy are flying, yet – as today’s water charge marches will no doubt show – there is also lingering anger.
Perhaps the international forecast will remain fine for Ireland. After all, the latest US figures show its economy growing at more than 3.5 per cent annually. But doubts remain. Just like electorates, investors are used to the cycle of rising growth bringing rising profits, and are not quite sure what is going on.
Pay packets
This growth dilemma is best illustrated by one fact – most people are not taking home any more in their pay packets than they were before the crisis. In the UK, an Institute of Fiscal Studies report showed that family earnings in 2014 were just a couple of hundred pounds a year higher now than before the crisis. It showed that younger families remained, in general, worse off. In the US, the picture is similar, with average earnings only this year overtaking 2008 levels. In
Germany
real earnings, adjusted for inflation, have only recently overtaken pre-crisis levels, though they are now being boosted by wage settlements and low inflation.
In turn this fuels the big political debate – what is the point of growth if it does not improve people's standards of living? Are we just watching an inevitably slow revival from a deep crisis, or is something more fundamental going on in the way western economies work? And so we see the search for new political ideas from sources as diverse as Donald Trump and Jeremy Corbyn.
Ireland has suffered from the same income stagnation, though there are finally signs of some growth in take-home pay. The latest earnings figures, published on Thursday, showed that if you look purely at average earnings per hour, the figure has not risen since GDP started to recover in 2011 and remains around €22. However earnings have started to rise in the private sector, up over 2.5 per cent in the second quarter of this year on average compared with the same time last year, a trend confirmed by Ibec surveys.
Some sectors, such as IT and technology, are now showing significant earnings growth while others, such as health and social work and the arts and entertainment sectors, remain in decline. Public sector earnings have been pretty much flat. The earnings momentum does appear to be generally turning upwards, but slowly, and remember actual spending power remains affected by higher taxes and charges introduced during the crisis. However, people are finally spending a bit more. Retail sales in July, excluding car sales, were 6.6 per cent higher in volume than in the same month last year, even if the value of goods bought was only 3.3 per cent up – in other words consumers are being attracted by lower prices.
There is another plus for Ireland. Rising employment is a big boost to overall living standards. This week’s figures show an encouraging increase in net job creation – gains minus losses – after a bit of a slowdown in the second half of last year. With 1,000 jobs being created a week and areas outside Dublin now leading the gains table, this is perhaps the strongest signal of a deepening and spreading recovery. If it continues, you would expect earnings to start to rise more consistently, too.
Favourable circumstances
Part of the reason Ireland is growing so fast is that we face a uniquely favourable set of circumstances – a lower euro, low oil prices, low interest rates and some recovery in big export markets like the UK and US. We need to pay attention to this week’s upheaval because if, over the next four or five years, some kind of normal growth cycle does not resume internationally, it is bound to have implications here. And of course a major market collapse might bring more immediate threats.
The market turmoil has highlighted the risks. The latest Irish data has showed that, for the moment, we have a window of opportunity to “future proof” our position as far as we can. Who knows if the bears or the bulls of the market are correct? But if growth in the developed world is lacklustre, or if we face a new downturn, then there are risks for our forecasts too.
The combination of a strong economy at home with nervousness internationally provides as good an argument as you could have for a minimalist budget. There is a strong case for banking the gains, cutting the deficit and debt and focusing what budget action there is on selected spending and investment in key areas of economic advantage or social need. Hard to see either the Government or the Opposition arguing that case though with an election on the horizon.