Consumer spending the one worry in an economy that’s almost too good to be true
LAST week’s raft of data on the economy was almost flawlessly good. The three most important sets of quarterly data — on jobs, GDP and the balance of international payments — were published on Wednesday and Thursday.
The employment data gives the best reflection on the state of the economy, so let’s start with those figures.
In the final quarter of last year, almost 30,000 net jobs were added to the national payroll compared to the previous quarter. That was the biggest quarterly jobs increase since the recovery began, either in terms of absolute numbers or the rate of increase. It brings employment to just 12,000 shy of the all-time peak reached exactly a decade earlier.
The very strong performance of the labour market in the final quarter is also reflected in comparative data. As it happens, EU-wide employment figures (measured, it should be said, in a different way from the CSO’s numbers on Wednesday) came out last week. Ireland’s quarter-on-quarter growth rate was twice the rate in the eurozone as a whole.
Given that every economic indicator from the first months of 2018, including the length of dole queues, points to further jobs growth, it is very likely that as of now more people are working in the Irish economy than at any time in history.
If that all sounds splendid, and it is, it should not be forgotten that the population last year was more than 400,000 higher than a decade earlier. That means that each person at work is supporting considerably more non-workers than a decade ago. There is still a way to go before we move into territory that might really be described as “full employment”.
Another point worth highlighting from the jobs numbers is that the number of women employed surpassed the one million threshold last year for the first time ever. In contrast to men, female employment levels are now back above pre-crisis levels. The feminisation of the workforce continues apace.
Last Thursday’s GDP numbers looked even better than the jobs figures. Ireland was the fastest-growing country in the EU in 2017, a point unhelpfully made by the State’s statisticians when presenting the figures before they went on to say that other figures give a better reflection of what is happening in the economy.
For the record, multinational-addled headline GDP grew at a tigerish 8pc last year, but that can safely be ignored. The CSO’s own “adjusted domestic demand” figure, which attempts to strip out distorting multinational effects, was less than half that. A 4pc rate of growth is very strong for a developed economy, so nobody need feel crestfallen about the less spectacular number.
The most important and meaningful component of the GDP numbers is consumer spending, not only because it is the largest component of the domestic economy, but because it is the one that best reflects how the average Joe is doing. It was, disappointingly, one of the few figures to reflect a less than boomy picture.
Consumer spending grew in 2017, but it was up only 1.9pc annually. That was the slowest rate of growth since 2013. This is a little puzzling. Two of the most important drivers of consumer spending are the numbers of people at work and pay growth.
While employment growth slowed a little in 2017 compared to 2016, earnings growth surged. Average weekly and average hourly earnings across the economy both grew three times faster in 2017 than they did in 2016.
Another eye-catching figure, if in a more positive sense, was the growth in construction investment in dwellings. In 2017 as a whole it grew by 33pc. That was faster than any year on record, and well above anything recorded during the 2003-07 building frenzy. It points to a construction sector that is getting back into the home-building business fast.
Last week’s GDP figures also showed that a threshold had been surpassed for construction investment in buildings other than homes. In the final quarter of last year it surpassed the record set in 2007.
These figures might trigger alarm bells in some people’s minds. But fret not.
The exceptionally strong growth in home building last year, up from 16pc and 17pc in the previous two years respectively, comes from a very low base.
As is well known, home-building collapsed during the crash and output remains far below the level needed to satisfy demand. Indeed, inflation-adjusted investment spending on dwellings last year was the same as it was in 1995. It was still two-thirds down on the (unsustainable) peak years of 2006-07, so there is plenty of room for further growth before anyone needs to worry.
That more is now being invested in the non-home-building side of the building industry than in 2007 does raise some concerns. But there are no real indicators of a bubble yet. More importantly, the banks are much less involved in funding builders today than a decade ago, so if something does go wrong the collateral damage is likely to be more contained.
Last Thursday’s GDP numbers were accompanied by the (separate) balance of international payments statistics.
They indicate the degree to which Ireland Inc is paying its way in the world. Alas, these figures are also messed up by multinational activity, so, again, they also need to be treated with some caution.
Overall, they show that Ireland is earning much more from the rest of the world than it is paying out. Even if this figure is inflated, and the true international payments surplus is just half what was reported, it still leaves Ireland Inc in good position to pay down its too-high foreign debts.
These figures also include the only detailed data on the ever more important internationally-traded services sector. Last year, services exports grew in value by 14pc, reaching a staggering €161bn.
As has been the case in recent years, much of the growth in services export receipts came from the IT sector, with foreign earnings from computer services growing by another €10bn to reach more than €71bn.
Nearly every other category of services exports recorded growth last year, with financials services doing particularly well – earnings were up by more than 20pc on 2016 to come close to €15bn. All told, the economy is humming. It would take a lot to stop it in its tracks in 2018, but stranger things have happened.