This morning has opened with some good news for the Irish economy and it is fair to say that she has been in a relatively good run in economic life. In geographical terms Ireland is one of the farthest flung of the Euro area economies and perhaps that symbolically has helped a little. I doubt that her near neighbour the UK has helped much as it has struggled overall in 2012 but perhaps her many links with the United States have. When I have reviewed the state of the Irish economy before I have concluded that whilst she has strengths such that she has been the best performer of the peripheral Euro area countries she also has weaknesses. Let us examine the evidence for where she stands right now.
Her Service Sector
If we look at the latest Purchasing Manager Index we get the theme for it from this.
Strongest rise in activity since October 2007 as new business increases sharply
Irish readers can permit themselves a smile at this point as this is the best Euro area headline I can recall in 2012. If we look deeper into the detail we see that the index rose to 56.1 in October from 53.9 in September on a scale where numbers above 50 demonstrate expansion. We see also this.
A sharp rise in new export orders was also recorded, extending the current period of expansion to 15 months. Moreover, the latest increase was the fastest since June 2010.
And in addition Irish eyes may be particularly smiling at the section below.
Employment increased for the second month running, and at a solid pace.
In a country where the unemployment rate is 14.8% then any increase in employment which may help with this is welcome. The latest Live Register numbers had already shown a fall in unemployment of 10,260 over the past year,although this was accompanied by an increase in the unemployment rate of 0.3% to 14.8%. It made me wonder if net migration was a factor here and as it was -34,400 in the year to April 2012 it may well be but we can only suspect its full influence as the figures are some months behind. What we do know is that the labour force in Ireland has shrunk.
What About Manufacturing?
Last week we received the latest data in terms of the Purchasing Manger’s Index for Irish manufacturing and it too showed growth as her reading expanded from 51.8 in September to 52.1 in October. If we look at little deeper we see that the background is again optimistic.
A solid expansion of manufacturing output was recorded in October. Production rose for the sixth successive month, and the latest increase was the fastest since June. Respondents mainly linked higher output to rising new orders.
Also we see optimistic news on employment
An eighth successive rise in employment was recorded as firms responded to increased workloads and expectations of further growth of new orders in coming months.
So we can conclude that the most timely data that we receive shows the Irish economy to be in good shape. Indeed particularly good shape if we consider the position elsewhere in Europe.
Let Us Examine The Official Data
We need to go back in time for these but the numbers at the end of the second quarter told us this.
Preliminary estimates for the second quarter of 2012 show no change in volume in GDP (Gross Domestic Product) compared with the first quarter of the year while GNP (Gross National Product) registered a 4.3 per cent increase. Compared with the same quarter one year ago GDP decreased by 1.1 per cent while GNP increased by 2.9 per cent.
So if we look at her overall economy we see that it shrank on a year ago but it comes with the counterpoint that the part she can tax most easily which is GNP rose by 4.3% on the previous quarter and 2.9% on the year before. This matters particularly for Ireland because her low Corporation Tax rate and enthusiasm for companies like Google to open offices there means she has a low of what are in effect “non-domiciled” companies and corporations there. This is what the difference between GDP (39.7 billion Euros) and GNP (33 billion Euros) mostly measures and as you can see the gap is large. If we look back it was a feature of the so-called Celtic Tiger economy in the boom years as foreign companies flocked to Ireland. But the catch is simple, if a company comes to you because you have low tax rates and you raise the tax rates what do you expect it to do? Tucked in there is a problem for Ireland as she struggles with her fiscal deficit and national debt.
Government Bond Yields Have Fallen
The situation here has improved. Ireland’s stock exchange calculates an overall index for her government bond market and this has risen from 93.05 six months ago to 103.33 now. She does not actually have a ten-year bond but her longer-dated yields are of the order of 6.6 to 6.7%. So way too high still but considerably improved is the summary.
What About Her Banks?
There are ongoing problems in this area. There was an enormous bail-out of the Irish banking-sector and it took place on such a scale that the whole economy was in effect put in hock to finance it. However it would appear that they have ended up financing more than they bargained for. the 20.7 billion Euro bail-out of Allied-Irish Bank (AIB) was discovered to have this feature last week. From Nama Wine Lake.
The AIB pension fund was topped up with €1.1bn of funds that can be attributable to the taxpayer bailout.
It looks as though this may also be true at Bank of Ireland and Anglo-Irish Bank although these numbers have yet to be declared and quantified. UK readers will see echoes of the situation of ex-Royal Bank of Scotland head Fred Goodwin in the numbers below.
The man who bankrupted Allied Irish Bank, Eugene Sheehy gets an annual pension of €529,000.
Regular readers will be aware that I have written many times that bondholders in Irish banks should have been made to fulfil their obligations rather than being repaid, and let me be clear that this would have meant the bonds being declared worthless. Now it seems that the institutionalised corruption at the heart of Ireland has another costly feature for the Irish taxpayer to carry.
Is It the Debt Stupid?
Ireland was a country with a low-level of national debt pre credit crunch. You could have looked at the numbers and concluded that she was very fiscally conservative as her level of national debt dipped to one-quarter of her annual economic output. However this was to ignore the rising level of private debt particularly in her housing market and her political classes willingness to socialise losses in her banking sector.
According to Eurostat she now has a national debt of 179.7 billion Euros. It calculates this as being 111.5% of her GDP and that this ratio had risen by 3% in the second quarter of 2012 and by 10% compared with a year earlier. So relatively high and rising quickly. In 2011 she recorded a fiscal deficit of 13.4% of her GDP.
Now let us compare this another measure of her ability to pay which is her “taxable capacity” or GNP. If we use the latest ratios of GDP to GNP we now get her national debt being 134%. As you can see this is more of a problem. Whilst I am not saying that every non-domiciled company would leave immediately if she tried to raise tax rates it does represent quite a problem as some/many no doubt would.
We have seen today that there are grounds for optimism for the Irish economy in her latest data. In the prevailing economic climate she is putting in a good performance. However for her to reach escape velocity and exit the aid programmes she needs to find a way of dealing with the following. Her fiscal deficit is high and she plans to reduce it via euro area austerity. As she expects unchanged revenues all of the strain is going to be on reduced central government expenditure. The plan is for this to fall from 48.8 billion Euros in 2011, to 44.1billion in 2012, to 43.5 billion in 2013 then really be squeezed again to 40.8 billion in 2014 and 38.8 billion in 2015. We know the economic distress caused by that sort of action elsewhere. Also the squeeze is even harsher than it looks on the surface because expected debt interest is rising.
So we see that whilst she is doing well the gravity of austerity may yet make Ireland and her economy crash-land.