The Irish Economy

To take our minds off the heavier economic / financial topics for a while I thought I would share some thoughts provoked by the Annual Summary of Vital Statistics for 2010 published at the end of June. Taken in conjunction with the preliminary results of the 2011 Census, it reveals some surprisingly positive trends for a country in the throes of a very deep recession.

Our birth rate is holding up despite the surge in unemployment and the resumption of net emigration (even if at a more modest rate than previously feared).

Over 75,000 births were registered in 2008 – almost 60% more than in 1994 and the highest number recorded in modern times. However, this was probably the peak, as the annual total for 2010 was 2% lower than that for 2008, while the 2010Q4 figure was 4% lower than the corresponding figure for 2008.

The surge in births will have far-reaching implications for the economy’s medium-term prospects.  Most immediately it is placing pressure on the educational system, but over the longer run it could be argued that our relatively youthful population will bestow a competitve advantage relative to the rest of Europe, where the ageing of populations is becoming an acute problem.

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The preliminary results of last April’s Population Census are available here.

They show continued strong population growth, averaging 1.6% a year over the last five years.

The CSO is to be complimented on the timely production of this very informative release.

One of the point that has been made repeatedly about the Irish economy over the past year or so is that weak domestic demand is connected with a high savings rate. (Admittedly, the actual national income data on personal savings rates are only available with a long lag but the slow pace of consumption spending is consistent with this story). Many, including now Minister Noonan, put this increase in the savings rate down to discretionary precautionary savings and believe that once people relax about their future, domestic demand will take off again.

I’ve always been pretty skeptical of this argument. My take on spending patterns has been that the increase in the savings rate may be more connected to people who had previously been able to live beyond their means having to pay back debt because of the change in financial market conditions, while others who have always saved continue to do so.

The implications of this story for the future evolution of the savings rate are quite different. There is little reason to think those who have been saving all along (e.g. for retirement) will reduce their propensity to do so. Indeed, if they were reliant on their funds invested in Irish property or in Irish pension funds now subject to the new levy, then the opposite would be the case. And those who are apparently saving because they are re-paying debt are, in practice, feeling as if every euro they earn is earmarked for either debt repayment or managing to keep going. These people are also unlikely to suddenly start spending if the economy stabilises.

Anyway, I’ve meant to make that point on this blog loads of times but didn’t. Then Seamus Coffey wrote this excellent post and, in comment speak, I want to say “What he said.”

The quarterly national accounts for 2011:Q1 have been released. They show seasonally adjusted real GDP increasing 1.3% quarter over quarter and seasonally adjusted real GNP falling 4.3% over the same period.

Smoothing through the volatile quarterly series, looked at on a year-over-year basis, real GDP was up 0.1 percent and real GNP was down 0.9 percent.

Overall, the picture seems to be one of an economy in which output has stabilised. Given the substantial negative headwinds (fiscal contraction, falling credit, debt overhang and a frozen property market) this is a pretty good performance. Still, it seems too early to say that the economy is about to produce a period of job-producing growth.

The OECD has launched a new index with the aim of facilitating comparisons of the quality of life across countries. You can find the country summaries here.

Ireland does quite well in the rankings, although the usual caveat about using GDP in an Irish context applies.  Moreover, the data used are mostly from 2008 and we have undoubtedly slipped towards the relegation zone since then.

The new IMF Country Report is available here.    A transcript of yesterday’s conference call following the release of the report is also available (see here).   Dan O’Brien provides analysis here.  Update: Additional analyses from Colm McCarthy (see here) and Cliff Taylor (article; SBP editorial). 

It is encouraging that both the IMF and the European Commission are impressed with the government’s implementation of the programme.    The unavoidable fact remains, however, that bond markets are unconvinced on Ireland’s long-term creditworthiness.   Not too surprisingly, the IMF is more willing to be critical of Europe’s approach to resolving the crisis.   It is becoming increasingly evident that uncertainty about the evolving balance between bailouts and bail-ins is making investors shun Irish bonds.   The critical challenge is to convince investors to provide new funds to Ireland, which is now being hampered by fears of being caught up in any future bail-ins.   It is also interesting that the European Commission is more open than the IMF to a modest speeding up of the fiscal adjustment.   This could be viewed as a high-return investment in reinforcing the credibility of the government’s capacity to see through the necessary adjustments, which already differentiates Ireland from Greece and probably Portugal.     

For good or ill, the future financial prospects of the Irish sovereign depend in various ways on the future of the Irish property market, both via its purchases of NAMA property and its investment in banks with considerable mortgage books.

The Irish Bankers Federation report on the mortgage market (data here and press release here) paints a picture of a market that has almost completely collapsed. NAMAWineLake provides his customary high quality analysis here. I’d note that the series seem to have a seasonal pattern so comparisons of 2011:Q1 with peak may be a little misleading but even year-over-year comparisons paint a picture of a market in freefall. These figures also tie in pretty well with the figures from the new house price index from the CSO which showed a faster pace of price decline in the three months to March 2011 than had been seen since mid-2009.

The CSO have released a new house price index (press release here and data here). Analysis by Namawinelake here.

The rise in the unemployment rate reveals a grim picture of the impact of the recession. The overall unemployment rate has risen from 4.4% at the beginning of 2007 to 14.6% today. Male unemployment is now 17.3%, while unemployment among men aged 20-24 is 32.3%.

Concentrating on the situation of males in some key age groups, the first Chart shows the unemployment rates for those aged 20-24, 25-34, 35-44 and 45-54 (four-quarter moving average of the Quarterly National Household Survey rates). Unemployment rose dramatically in all fours age groups, but younger men were most severely affected.

During a deep recession unemployment rates do not tell the whole story because people tend to withdraw from the labour force, cease to search for work and are no longer classified as ‘unemployed’ according to the International Labour Office conventions.

The CSO publishes broader measures of unemployment as well as the main ILO rates. The broadest of these includes those marginally attached to the labour force and others not in education who want work and it now stands at 23%.

This broad unemployment rate is not available by age and sex. However, the ‘employment rate’ (the proportion of the population that is employed) is available by demographic group and it sheds light on labour market trends that supplement the information in the conventional unemployment rate.

The second Chart shows the employment rate in each of the four age groups. As we would expect from the unemployment figures, the fall in employment has been most dramatic among younger men. Since the end of 2009 fewer than 50% of males aged 20-24 have been classified as ‘employed’, compared with over 75% as recently as 2007.

It is instructive to look at the distribution of ‘non-employed’ men between ‘unemployed’ and ‘not in the labour force’. This is shown in the following four Charts. The proportion of the population ‘not in the labour force’ is lowest among men aged 35-44 and highest among those aged 20-24. But in all four groups there has been a significant rise in non-participation during the current recession. In fact the rise in ‘non-employment’ was split approximately 3:1 between increased unemployment and increased non-participation in all groups. While some of the rise in the numbers not in the labour force may be attributable to increased retention of younger males in the educational system, most of it is likely to reflect drop-out due to discouragement and the belief that no jobs are available.

Previous research has shown that those most likely not to be employed are single males with low educational attainment living in areas of high overall unemployment. It is likely that these factors continue to increase the risk of being without work.

The rise in unemployment and fall in employment leveled off during 2011 but as in recoveries from previous recessions further improvement is likely to be slow and the adverse effects of the contraction in the economy will be felt well into the future.

Let us hope that the ‘jobs initiative’ to be announced later today can make some impression on these figures and will include measures to ‘re-activate’ those who have dropped out of the labour force as well as those who are overtly unemployed.

Results from the Quarterly National Household Survey for 2010:Q4 are now available (press release here, full release here.)  The seasonally-adjusted unemployment rate for the quarter rose by one percentage point to 14.7%. This is a percentage point higher than the previously available proxy for the seasonally adjusted rate based on Live Register figures.

I’m not sure what the explanation is for such a large divergence between the QNHS and Live Register series for this quarter. One possible factor is that some people are now reaching the expiry of their benefit eligibility and thus falling off the Live Register while still being unemployed. The different behaviour for 2010:Q4 doesn’t seem to reflect a big drop in the labour force, due to emigration for example, because the decline in the labour force was of a similar magnitude to previous quarters.