December 2, 2013
When we get a rake of economic numbers, it gives us an opportunity to assess where the economy is in the cycle. This new information should also be fed into our own world-view and we should change our minds, borrowing the logic from the great Keynes who declared ”when the facts change, I change my opinion, what do you do sir?”
I think these numbers are strong enough for people to begin to see that the economy is emerging out of the darkness.
For the first time in years, the economic data published last week was almost unambiguously positive. When Europe is flirting with deflation, the expression, ”almost” unambiguous, is good enough. More than that, the data indicates that we may be witnessing a build up of ”pent-up” demand, which could be released into the economy next year.
By far the most encouraging figure was (and is always) increases in employment. A jobless recovery is no good to anyone, but the idea that the economy is creating employment opportunities is something we should truly rejoice over.
The figures showed that 58,000 more people have jobs this year than had jobs last year. That is 58,000 people who have a job this Christmas who didn’t have one last year. Consider the extra number of families that have someone working this Christmas? Of these new jobs, 53,000 are full-time.
One worry is the on-going generational divide. Young workers are not getting a fair chance and they are still – in the main – caught in a limbo-land of not having enough experience to get a job, but not having the job to get enough experience. This column has written before about this poison – one of the most significant challenges for, not just this society, but all Western societies.
The largest annual increases in employment were in the 35-44 age bracket with 21,000 new jobs, and the 45-54 age group with 18,400 extra jobs. Younger workers continue to struggle, with more than 9,000 jobs lost in the 25-34 age group over the period. The long-term impact of kicking around looking for work and facing daily rejection in one’s twenties is unambiguous. US data indicates that people who experience long periods of unemployment in their twenties never recover in terms of wages or income and always lag behind those who have jobs in this early part of their working life.
However, I will come back to this in other columns, for now let us focus on the positive.
One other encouraging development is that the labour force continues to grow. The number of employees in Q3 2013 was 1,573,600, up 27,300 over the year, and the number of self-employed people was also up 30,100 to 309,900.
In general, therefore, income is up in Ireland.
If we take a back of the envelope calculation and take the data published on Tuesday on average weekly wages and then multiply this by the number of new jobs, we get an idea of the sort of increases in incomes we are seeing in the country.
Taking the full-time jobs figure of 53,000 workers and using the newest average weekly wage of Euro 675.53, we get an increase in income before taxes of just under Euro 36 million per week in the country.
Now here is the strange thing.
If income in Ireland is up, how come retail sales have fallen in the most recent month?
You would expect that if people’s income rises, we go out and spend it. But this isn’t – or at least hasn’t – happened.
In fact, there was no change in the value of retail sales in October when compared with September, and there was an annual decrease of 2.1 per cent when compared with October 2012, and a drop of 0.9 per cent in volume terms, after adjusting for inflation.
So out on the main street the increased incomes aren’t being spent.
Where it is the money going?
Luckily, we have new figures from the central bank, which may give us a clue. Deposits from the Irish resident private sector increased at an annual rate of 7.6 per cent in October 2013, following a rise of 8.5 per cent in September.
So that’s it then, the money is being saved. That makes sense doesn’t it? People are saving their new wages. This would make sense because if you have been out of a job for a long time and you get a new one, you are likely to have been traumatised by the experience of not having cash, so you are likely to hoard your new income.
But unfortunately, it isn’t that simple or straightforward because, household deposits, which account for 51 per cent of private sector deposits, actually declined by 0.5 per cent over the year to October 2013. But deposits from private companies rose by 4.9 per cent.
How do we explain this conundrum?
Let’s dig a bit and think about where else the new income could be going.
Let’s look at most recent credit card statistics. We see that the outstanding amount on plastic is falling (and has been for some time). This indicates that people with credit card debt are paying this off and therefore, not spending and not saving really either (see panel). Therefore, the deleveraging cycle goes on and the average person is trying to clear their decks of debts before they start again.
But at some stage this will stop and people will start to spend a little bit and then a little bit more. This is part of the ”pent-up” demand, referred to in the opening paragraphs. As the cycle continues, more and more income will be spent. This might come as a surprise to retailers when it happens, simply because they have been battered in recent years and don’t expect fortunes to turn.
Equally, the fact that Irish companies are saving significant amounts also implies that we are likely to see a substantial increase in investment and hiring in the years ahead. After all, when interest rates are 1 per cent, what’s the point in saving capital that can be put productively to use?
Increased spending from ordinary Irish companies is the other reason, that we should be more confident about the outlook for the economy.
Ultimately, people who have secured new jobs, or those who have simply held onto their positions, will become more confident and begin to spend some of the cash they are now saving. In addition, they will stop paying down credit cards and become more comfortable with their debt position.
This economic tipping point could come as early as 2014, simply because the gains in employment are significant and, with our largest trading partner, Britain, motoring along, external demand for the stuff that real Irish companies produce is buoyant.
Equally, as the Eurozone flirts with deflation, interest rates will stay low so the housing market’s recovery should remain on track, for a while.
It would be a shame to end such an upbeat article with a warning, but unfortunately there is one and this is the likelihood of another bank recapitalisation next year as our big banks fail the ECB’s stress tests.
In my view, only a miracle can prevent this.
However, there is a solution to this. By digging in our heels and insisting with all our power that the Eurozone pick up the new tab based on financial solidarity, the government could actually quarantine the still toxic banks and allow the long awaited recovery to take hold.
David McWilliams hosts the Winter Tales’ book festival at Dalkey on December 7. Tickets www.dalkeybookfestival.org