The Central bank released its quarterly report last week with its revised forecasts for 2011 and 2012.  The outlook they predict is GDP growth of 0.6% in 2011 and 2.1% in 2012.  This essentially translates into the first annual increase in economic output since 2007.  Growth is good for the economy.  It suggests more money will be available and that the government will have a higher tax take.  However, when we take a closer look at the figures it can be noted that the sole factor driving economic growth in the forecasts is exports and to a lesser extent investment. 

Domestic consumption is forecast to contract further in 2011 and 2012.  This essentially means that the central bank expects consumers to spend even less in 2012 than they are doing now.  While export lead growth is important for a small open economy such as Ireland, a recovery in domestic consumption is to be hoped for.  More domestic consumption further increases economic growth and can also generate employment. 

However, the Central Bank forecasts that employment will only increase by 0.2% in 2012.  This is much less than would be hoped for and will result in an unemployment rate of 13.9%, which is still incredibly high compared to a few years ago.

The government’s strategy is to get more people back to work, and while the export sector will generate some employment, the sectors engaged in exporting are not necessarily labour intensive.  Domestic consumption is required to generate local jobs around the country.  This is the reason we are being encouraged by the government to spend more as oppose to saving.  However, with increasing taxes and more uncertainty in the economy, it is unlikely that consumers will increase their spending.

Figures released by the Irish Central Statistics Office show that the value of retail sales has increased by 0.4% in the year to June.  This essentially says that people are spending more money on retail shopping and can be taken as a positive sign for the domestic economy.  If retail sales are increasing it suggests that more people are starting to spend, which could help boost the economic recovery.  The more we are spending the more jobs are created and the more money that is in circulation in the economy.  The figures should also be a good sign for Minister Noonan, who has in recent weeks been telling the Irish people to go out and spend.  Suggesting that it is our patriotic duty to try to boost our economy by consuming as oppose to saving.  

However, are we celebrating these figures too soon?  Up until last month retail sales were in decline, with fewer and fewer people spending.  So why the reversal in fortune?  Why are we suddenly spending more?  Well, while retail sales have increased so far this year these figures include motor sales.  And as we are aware, June was the last month of the car scrappage scheme introduced by the government.  After the 30th of June no government scrappage is allocated for new cars, meaning that if you were going to buy a new car June was the time to do it.  So as would be expected there was a rush of people buying cars in June.  This rush to buy cars has resulted in an unusual high value for car sales for this time of year, pushing up the total amount of retail sales.

So if we ignore the, what is likely to be a once off, increase in car sales what do thing look like?  Unfortunately, things don’t look so good.  When we don’t count motor sales we can actually see that retail sales have fallen by 3.2%.  This is a substantial drop and includes businesses such as department stores, supermarkets and book shops.  This fall is worrying as it suggests that the domestic economy is not actually seeing a revival. 

As motor vehicles were the main driver of the recovery in retail sales in June we can ask ourselves will this continue?  Can we count on the sale of motor vehicles to drive retail growth?  The answer is that it is unlikely that the demand experience by car dealers in June will last.  This higher demand was probably driven by people trying to purchase new cars before the scrappage scheme expired.  With the scrappage scheme now gone, and with anyone who was going to buy a car probably after doing so to avail of the scrappage scheme, we can expect demand for cars to fall. 

So if the one sector which was driving the domestic retail increase starts to contract, the overall outlook for retail trade is bleak.  With the announcement of a €100 housing charge and a hard budget in December it is likely that individuals will continue to save any spare income that they have.  This is bad news for retail outlets.  It is also bad news for jobs.  If people aren’t buying then there will inevitably be more shops cutting back on opening hours and staff. But this situation is likely to continue until economic conditions improve, and people are not fearing ever increasing tax hikes.  Minister Noonan may have to wait until he sees a return to the types of retail spending experienced during the Celtic Tiger which he so desires.  

The latest figures from the CSO show that property prices are continuing to fall in the Irish economy.  Figure 1 shows how they have declined from their peak value in 2007 to their current low in June 2011.  The continual fall in house prices will continue to have negative implications for mortgage holders, who will see the value of their property continue to fall while they go further into negative equity.

While the price of housing is continuing to fall there has been a slight slow down in the rate of this fall as displayed in Figure 2.  We can see that recently the rate of decline has been in the region of -1 to -2 percent.  This might have given some hope that the worst of the decrease was over, however, in June the decline broke past the 2% mark to reach a value of -2.1%.  Overall the decline from June 2010 to June 2011 in house prices has been -12.9%.

In quarter 1 of 2011 Ireland’s construction output continued to fall.  Figure 1 shows Ireland’s construction output against the EU27, our closest neighbour the UK and Germany.  It is clear to see that Ireland’s construction output has been hit much harder than the EU average and our neighbour the UK.  Ireland’s output is only 23% of what it was in 2005 (which was not even the peak of the construction bubble).  While the UK suffered a decline in construction over recent months it has increased to 2005 levels and more or less maintained these levels, with a slight fall in Q1 2011.  The EU average in also holding steady at about 90% of the output of 2005.  Slight seasonal fluctuations can be observed in the trend but that path is remaining fairly stable.  Germany is beating the downward and constant trend, with increases in construction output.  It is now producing at about 20% above 2005 levels.

These figures highlight the continuing dismal state of the Irish construction industry.  And worryingly, as quarter on quarter declines are still being observed, we appear to not have bottomed out yet.

Seasonally adjusted exports have remained static while imports have decreased by 24% (or €1,200m) between April and May 2011.  This has resulted in a widening of the trade balance €3,783 million (as can be observed in Figure 1).  

Relative to April 2010, we can see Ireland’s export growth and stabilisation over the past year has been cantered predominately in one area.  The Chemical and Related Products sector accounted for 61% of exports in April 2010 and this has increased to 64% of exports in April 2011.  These figures show the dependence of Irish exports on one broad sector, indicating a lack of diversity in our export portfolio.

If we look in greater detail at the Chemical and Related Products sector it is clear that even within this category it is a relatively small number of sectors which is driving exports.  Figure 3 displays the contribution of the various sub-components of the Chemical and Related Products sector to exports.  It is clear to see that Organic Chemicals and Medical and Pharmaceutical Products make up for the majority of Ireland’s exports in the Chemical and Related Products sector.  In total these two sub-components account for 82% of Ireland’s exports in Chemical and Related Products and 52% of our total exports.  This shows the dependence of Ireland’s exports on two specific sectors which are mainly comprised of multinational enterprises.  A shock to either of these two sectors could have serious implications for Ireland’s “export lead recovery”.

The latest data from the CSO indicates that in the year to June prices have increased by 2.7%.  Consumer Prices in June, as measured by the CPI, decreased by 0.1%.  However, Prices on average, as measured by the CPI, were 2.7% higher in June 2011 compared with June 2010.  This can be observed in Figure 1, where we can see prices slowly climbing again after they bottomed out at the start of 2010.

Table 1 Shows the underlying changes which have caused the 2.7% increase in the year to June.  It can be observed that increases in the price of Housing, Water, Electricity, Gas and Other Fuels has been the largest contributor to the 2.7% increases, contributing accounting for over half of the total increase in the 12 month CPI (from June 2010 to June 2011).  Following this Miscellaneous Goods and Services has also increased, contributing close to 30% of the increase in the 12 month period.  Other increases in Health and Communications have been relatively small.  Any of the categories which have fallen in price have seen a relatively small decreases.  Clothing and Footwear saw the biggest decrease (which was only -0.17%) followed by a slight decrease in Recreation and Culture.  Overall, the trend appears to be rising prices in most sectors, with only a small few sectors still seeing price decreases.

Ratings agency Moody's has downgraded Irish debt to "junk" status.  What does this mean?  Effectively it means that the rating agency believes that Ireland will default on its debt.  Basically, not paying back money to individuals who had taken out government bonds.  As is predictable with a down grade the yields on Irish government bonds rose dramatically, reflecting this increase in the perceived risk of Irish bonds.  Below is a graph taken from Bloomberg which shows the yield on Irish 10 year government bonds.

We can see the yield approaching 14% in recent days, with a large spike on the day of the announcement by Moody's.  This announcement has been widely condemned by the EU, but from an Irish perspective it may place more pressure on the EU to provide additional funding and attention to Ireland over the coming weeks and months.  It makes it practically impossible for Ireland to return to the bond market due to the very high yield that would be required to entice investors to hold Irish bonds.

The latest figures from EuroStat indicate that the volume of retail trade has fallen in the Eurozone by 1.1% in May 2011.  This is despite showing signs of recovery in April.  This can be observed in Figure 1.  The EU27 also suffered a drop of 1.1% in May.

When we compare Ireland’s performance with that of the Europe in Figure 2 we can see that Ireland’s fluctuations are far more severe than our European counterparts.  While Ireland saw a drop of over 2.5% in retail sales in Dec 2010, Europe saw a fall of only about 0.2%.  When Ireland rebounded strongly in Jan 2011 with 2.1% growth, Europe only experienced 0.2% growth.  

These extreme fluctuations, coupled with an unpredictable positive/negative trend make it hard to judge whether Ireland’s retail sales have bottomed out.  April and May of 2011 both show drops in retail sales.  Overall, this is not a positive sign for retailers, who have continued to see declining sales.

June has seen a slight increase in the number of people on the live register.  The total increase was 2,900 people, which is approximately an increase of 0.7%.  This is highlighted in Figure 1, with both the number of women and men signing onto the live register increasing.

The latest figures from the CSO suggest that Irish GDP increased in the first quarter of 2011 by 1.3%.  However, GNP has fallen by 4.3%.  In comparison with the corresponding quarter of 2010, GDP was up by 0.1% while GNP was 0.9% lower.  The big difference between the increase in GDP and decrease in GNP is attributable to an increase in Net Factor Income.  GDP captures all economic activity within a country, including foreign multinational companies operating within Ireland.  GNP on the other had excludes foreign multinationals operating in Ireland which repatriate their income to their home country.  Therefore, GNP can be viewed as a more accurate measure of the health of a domestic economy.  Figure 1 displays the quarterly trend in GDP and GNP since 2006.

There has been a substantial gap between GDP and GNP since the Celtic Tiger period of Irish economic growth.  Q4 of 201 saw a narrowing of the gap between the two, however, it has now widened again considerably.  Figure 2 displays the ratio of GNP to GDP.

It can be observed that this ratio has been decreasing throughout the economic downturn, with some recovery in the final quarters of 2010.  However, Q1 of 2011 has reversed this recovery and suggests that the Irish domestic economy is underperforming.  It would appear to be multinational companies, as oppose to indigenous companies, which are driving the growth in Irish GDP.