There is still debate as to what exactly economic recovery might entail

For some, the return of Garth Brooks will be proof enough. For others, the fact that three or possibly four nights in Croke Park could sell out so quickly may be a clear pointer. But for most of the rest of us, a debate about whether the Irish economy is recovering could continue for some time.

Like so many issues in economics, recovery means very different things to different people. Does it mean the losses of the past few years in terms of output, employment and incomes are reversed? Viewed from this perspective, recovery is still some considerable distance away. In the US, where conditions have been improving for some time, numbers at work remain below their pre-crisis peak. For Ireland, where both GDP and numbers at work fell so dramatically, making good such losses will be a lengthy process.

Even if we are realistic in our ambition and settle for clear signs that the economy is set on an improving path, there is still debate as to what exactly recovery might entail. The crisis has significantly inflated Ireland’s external debt and this implies that a sustainable upturn will have to be driven primarily by exports. Indeed, an extreme interpretation might suggest that a healthy Irish economic recovery would comprise strong growth in exports and prolonged weakness in domestic spending.

On this strict view, it could even be argued that an Irish economic recovery has been in train for the past three years. Over this time, economy-wide measures of output have increased, albeit modestly and somewhat erratically, the fiscal deficit has been reduced and the country has run growing external surpluses as domestic spending remained moribund. While these circumstances may have been very difficult to avoid, I think it’s quite a stretch to label them as a recovery or to suggest that the persistence of such conditions might represent a sustainable future for Ireland.

Recovery, like the proverbial bird, will not fly on one wing. For most businesses and consumers, the sense of a turnaround is much more likely to be associated with a clear improvement in domestic spending. It is also the case that an upturn will need to deliver significant improvements in numbers at work and in tax revenues, outcomes that will be closely related to the health of domestic spending. Finally, at a broader level, serious tensions have emerged in a range of countries of late about growing inequality in economic outcomes meaning that a narrow ‘technical’ recovery in Ireland could prove unsustainable in terms of its implications for the health of society.

Although there is little prospect that Ireland’s domestic economy will ‘take off’ in 2014, there are grounds to suggest that improving conditions will take hold. The past few months have seen a distinct Uneven Improvement In Irish Consumers’ Fortunes Now Underway6 February 2014 2 change for the better in the mood of Irish consumers that should be consistent with a stronger trend in spending. Fears in regard to the future are gradually easing. The scale and speed of the deterioration in Irish households’ finances has clearly been the key driver of the downturn in consumer spending but there has also been some pullback against the threat of an even more apocalyptic outcome than materialised. As these worries ease, some of this ‘precautionary’ restraint may begin to unwind.

In this context, it is notable that recent sentiment surveys report that just over half of Irish consumers think the Irish economy will improve in the next twelve months, the first time this has happened since the year 2000. As recently as the end of 2012, negative responses to this question outnumbered positive responses by a factor of three to one. Importantly, this change in thinking is not simply because consumers think it is now less likely that really bad things will happen. The key driver of the change in consumer sentiment of late is also the main influence on their economic well-being; a turn for the better in the jobs market in Ireland.

A healthier labour market boosts sentiment and spending in two ways. First of all, by suggesting a reduced risk of job loss, it makes consumers more confident about their income prospects and thereby supports spending. More importantly, those getting jobs have increased purchasing power. On current trends, there could be an extra forty thousand in employment in 2014 compared to 2013. So, the year ahead should see more people in work and, therefore, more people spending. However, for a sense that a broadly based recovery is taking hold, a key question is whether the far greater numbers already in work or set to remain jobless are likely to spend more.

There appears little prospect of dramatic growth in pay in the coming year. Official statistics trends indicate ongoing falls in average earnings in the autumn of 2013 and a recent survey by KBC and Chartered Accountants Ireland suggested that only one in five firms envisage pay increases of more than 2 per cent this year.

With Budget 2014 freezing most benefit rates and introducing a range of measures hitting household finances, spending power looks likely to be significantly constrained. Importantly, however, these pressures are not intensifying in the way they have in recent years. Indeed, with inflation low, many Irish households may see 2014 as something of a watershed in that unlike the past five years, their spending power may not weaken materially.

Alongside the prospect of a less worrisome trend in incomes, there are also tentative signs that the massive wealth destruction of the past few Uneven Improvement In Irish Consumers’ Fortunes Now Underway6 February 2014 3 years is at least beginning to be reversed. Recent estimates from the Central Bank suggest that the emerging turn in the housing market, gains in financial assets and some reduction in debt have combined to support Irish households’ net worth. Again, in itself, the emerging trend is only modestly positive but, more importantly, it is markedly different to that seen through the crisis. 

The emerging turnaround in the spending power of Irish consumers may be modest and uneven. In broad terms, an expected increase in consumer spending of around one and a half per cent this year can be attributed to higher employment. To the extent that it is driven initially by growth in numbers at work rather than improvements in pay and social welfare, it may not reach across all households. For many, pressures related to debt and joblessness will remain key influences on economic well-being.

That said, a sense the worst is over should percolate more broadly through the economy and support a clear pick-up in aggregate consumer spending as 2014 develops. Although we may not see a broadly based ‘feel good’ factor emerge, the prospect that the entrenched ‘feel bad’ of recent years might disappear would seem to mark 2014 as a year of recovery on any reasonable definition of that term.

Note: This article was originally published in the Irish Independent on 6 February 2014.