Economic recovery on track but still vulnerable according to Friends First

By Business & Finance
27 May 2014

Ireland’s economic recovery has, so far, been felt primarily in the greater Dublin area, while many other parts of the country continue to struggle. If this recovery is to spread from the Greater Dublin Area to the rest of the country – there needs to be a policy shift at a national level to support this process and to bring jobs to the regions, according to Jim Power, chief economist, Friends First, speaking at the launch of the Friend First economic outlook, today.

While many of the economic fundamentals are pointing in the right direction with:

  • Retail sales up 5.6%
  • Employment numbers moving in the right direction – with an increase of 60,900 jobs in 2013
  • Export figures remain very volatile, with the patent issue having a very significant impact again in March but food and live animal exports are up more than 10%
  • Housing demand expanding, leading to higher prices
  • Taxation 5.6% ahead of last year and the deficit is steadily coming down

According to Power, the roots of a real recovery are evident and provided the external environment maintains a modest recovery trajectory, the Irish economy should continue to move in the right direction in a gradual fashion. Risks however continue to exist and vulnerabilities such as sovereign, personal and SME debt could very quickly derail a domestic recovery.

“The Government’s recently announced Construction 2020 plan, which includes proposals for new State support in the form of mortgage insurance for young couples, while positive, must be accompanied by a significant supply side response. Simply increasing demand without matching with supply would be reminiscent of the bad old days.” Power questioned if Government should get involved in mortgage insurance guarantees – in other jurisdiction the private sector fulfils this role more than adequately.

While the domestic signs of recovery are reasonably compelling, the key risk to the Irish economic recovery is posed by external factors, according to Power. “While the US and the UK economy are holding their own, the Euro Zone economy remains in a very difficult place and is characterized by low growth, high unemployment, high levels of sovereign debt and deflationary threats. The ECB will have to keep interest rates at the current low levels and possibly ease further, and may have to resort to quantitative easing of money supply, to prevent the Euro Zone from becoming stuck in a deflationary spiral.”

The overall credit situation in the Irish economy is still challenging and does pose a risk to the recovery.  In the year to March, credit outstanding to business declined by 6.1%, credit outstanding for mortgage purposes declined by 3.1% and credit outstanding for consumer loans fell by 7.9%.

“The overall economy is still not getting sufficient credit to fuel a meaningful and sustainable economic recovery. This continues to be a major challenge and one that need to be tightly managed. Businesses, particularly those in the SME sector need access to fresh credit to help them work through the difficult times and to benefit from the upturn. We need strong SME’s to keep any recovery on track.”

In conclusion, Power stated that the economic recovery story is real, but still has a long way to go and still faces considerable challenges.