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Most forecasts for the world economy are familiarly upbeat
Each of the past few years has started with an array of hopeful predictions for the global economy that gave way to repeated downward revisions as the year progressed. Most forecasts for the world economy at the beginning of 2014 are again familiarly upbeat. Importantly, they also appear far more consistent with the emerging picture coming from most economic data of late.
My sense is that the global economy and the Irish economy, in particular, are now moving in a clearly positive direction. However, the legacy of the crisis of the past few years means that neither businesses, consumers or policymakers are in a mood that might allow ‘animal spirits’ take hold in a manner that would drive a sharp and straight line recovery in Ireland or most other western economies. That said, 2014 could be a very good year once we are not unrealistic in our expectations.
While the global economy is beginning to move in the right direction, a still fragile world faces significant and varied risks. For the coming year these include a testing rebalancing of the US Federal Reserve’s monetary policy, looming decisions of the German constitutional court as to what the European Central Bank may or may not do and the potential fall-out from the upcoming examination of Europe’s banks. Further afield but also of considerable importance, persistent worries about China’s ability to avoid a ‘hard landing’ and broader concerns about emerging markets will also command attention.
Although there is plenty to keep pessimists braced for further misery, there is also now a greater confidence that conditions in western economies have started to improve. Critically, there is also a belief that international policymakers are both able and willing to act to counter any threats that emerge.
With a range of complex and often interconnected factors pushing and pulling at what is a still tentative global upturn, we can’t set out precisely what path the Irish economy is likely to take. That said, it may still be possible to sketch out the broad contours of the year ahead. That outline is reasonably encouraging and points to a progressive improvement in activity and employment in Ireland in the coming year.
From the perspective of the Irish economy, recent signs that both the US and UK economies are set on healthier trajectories are particularly encouraging. The US is experiencing repeated mini-cycles of relative strength and weakness that make it difficult to assess its true health. However, an improvement in job prospects, a softer trend in energy bills and gains in house prices and stock market values have combined to support consumer spending. A pick-up in capital spending and less restraint from fiscal policy should also encourage solid US growth in the coming year.
Probably the most encouraging external development of late is evidence of a notably stronger UK economy. A year ago, the consensus view was that the UK economy would grow by 1.0% in 2013. It’s now estimated at 1.9%. Over the same period, the outlook for this year has been upgraded from to 1.6% to 2.7%. The scale of these revisions implies the British economy is altogether healthier than previously thought. With the Bank of England committing to alter its very low interest rates carefully and very gradually, the likelihood is that demand in Ireland’s closest export market will remain strong through the next year or two.
Demand in the Euro area seems a good deal weaker than in the US and UK but at least it no longer looks to be falling and a tentative upturn appears to be underway. Importantly, the European Central Bank continues to focus emphasise its concern in regard to downside risks to activity and inflation. As a result, it has repeatedly signalled its intention to keep its official interest rates ‘at present or lower levels for an extended period of time’.
For an Irish economy still in the very early stages of recovery, the combination of healthier growth in the UK and US, a slowly improving Euro area and interest rates remaining low probably represents as supportive a combination of external circumstances as can reasonably be expected. However, it should be emphasised that international markets remain far from the buoyant demand conditions that might be expected in a more ‘normal’ recovery.
One important consequence of the current economic climate is that inflation worldwide is a good deal lower than many had expected. Politically, there is a considerable focus on the associated weakness in incomes. These circumstances have many implications for the economic outlook. One helpful effect is that upward pressure on interest rates is restrained. However, it also means Irish companies have little scope to increase prices if market share is not to be lost.
A somewhat stronger global economy, allied to improvements in Irelands cost structure, should translate into reasonable growth in Irish exports in the year ahead. Importantly, solid UK demand should provide a platform for many smaller companies to share in this growth.
The small size of the Irish economy means that the capacity to sell goods and services in external markets will be pivotal to the success or otherwise of this economy.
However, the reality is that trends in domestic activity exert the dominant influence on key outcomes such as employment and tax revenues. More generally, many businesses and most households tend to use domestic spending as their principal metric as to how well or otherwise the Irish economy is doing. It is worth examining the drivers of the domestic economy in a little more detail to assess how the Irish economy may ‘feel’ in 2014.
For the past few years, Irish economic activity has been hit by unfavourable conditions abroad but the damage done by domestic employment and income losses has been notably more severe. This is reflected in a peak to trough drop in domestic spending of 23% -twice the fall recorded in Irish GDP. For this reason, the tentative improvement in domestic spending seen since the middle of last year is particularly important as it points to a possible turning point in Ireland’s economic fortunes. The fact that similarly encouraging news is emerging from jobs data as well as a range of surveys and other indicators hints that a turn is underway.
Far and away, the most positive development supporting expectations of an improving economic climate in 2014 is a broad array of evidence suggesting numbers at work in the Irish economy will increase in the coming year. Encouragingly, new hiring seems to be occurring across a broad range of companies in the private sector as the turn in the jobs market has come about in spite of a drop in public sector jobs. Improved competitiveness and a strong pipeline of investment into Ireland are supporting an expansion in the multinational sector. It also appears that some businesses that cut payrolls in the downturn are hiring again in response to even a modest turn in economic conditions. Significantly, in this context, signs of a turn in the property market have prompted a marginal rise in employment in construction after the collapse in employment in this sector in recent year.
With numbers at work increasing, and the drag from the fiscal adjustment somewhat smaller than in previous years, household spending power looks set to rise modestly through 2014. In addition, an easing in fears that the Irish economy is set for some apocalyptic ending together with renewed if still uneven signs of life in the housing market are boosting consumer sentiment. A sense that the focus of domestic economic policy is starting to shift from austerity to growth could also push in the same direction. In these circumstances, some of the spending postponed in recent years may start to re-emerge.
The likelihood is that any build-up in spending will be gradual. In an Irish economy that grows by just over 2 per cent in 2014, consumer spending is likely to rise by just over 1 per cent. Many households remain under significant pressure and most others will be slow to abandon caution in a still uncertain world. However, even crawling forward will be palpably different from falling backwards for businesses focussed on the Irish consumer and the construction sector. While, we remain some distance from the sort of conditions in which a clear ‘feel good’ factor might become established, 2014 could be the year in which ‘feel bad’ disappears.