In this weeks blog, Tom McDonnell looks at economic performance and the rocky road ahead.
Recent labour market data has been broadly positive. Employment was up 79,900 (+3.5%) in the fourth quarter compared to the previous year while the number of people in the labour force increased by 61,600. Unemployment was down 18,300 annually. More concerning is that a disproportionate number of the new jobs were part-time. Part-time employment increased 6.6% while full-time employment was up 2.7%. Even so, the rate of jobs growth remains impressive.
Monthly data provides a more mixed picture. The seasonally adjusted unemployment rate (4.8%) was down in February compared to last year (5%) although the total number of unemployed persons (120,100) was actually up marginally reflecting an increase in the size of the labour force. Youth unemployment was 11.4% in February.
Comparisons with other advanced economies are less flattering and this is pertinent to the discussion about the labour market overheating and the possibility that the economy has reached the limit of its productive capacity. Eurostat data shows that eleven European Union countries have lower unemployment rates than Ireland while the US, the UK, Iceland and Norway also have lower unemployment rates. Ireland’s employment rate of 75.1% of 20 to 64 year olds in the third quarter of 2019 trailed twenty other European countries. Ireland’s employment rate for females was 13.2 percentage points behind the leading country while the male employment rate was 6.5 percentage points behind the leader. While there is clearly scope for continued employment growth in Ireland it is also evident that there are labour market barriers for women with the cost of childcare being the most obvious. While there is remaining scope for employment growth there is evidence of labour supply constraints in certain sectors such as in construction and in ICT.
The ongoing strengthening of the labour market and the developing supply constraints are contributing to real wage growth. Average weekly and hourly earnings increased 3.5% and 3.6% respectively year-on-year in the fourth quarter of 2019. Average hourly earnings increased by 3.4% in 2019 while the Consumer Price Index by an average of 0.9% meaning real average hourly earnings increased by close to 2.5% in 2019. Hourly wage growth has been fastest in the high pay ICT sector and in the low pay arts and entertainment sector.
We’ll have quarter four data for economic output on Friday and the expectation is that real GDP will have grown strongly on an annualised basis. Real GDP grew by an average of 5.9% annually in the first nine months of 2019 while modified final domestic demand grew by 2.5% over the same time period. Personal consumption grew by an average of 3.4%.
Retail sales data has remained strong with an annual increase in the volume of sales of 6.1% in December and 3.7% in January. Sentiment indicators suggest strong output growth in services (59.9), and modest growth in manufacturing (51.2 in February) and construction (50.9 in January). Consumer confidence remains below its 2015 to mid-2019 levels but has rebounded from its Brexit related decline in mid-to-late 2019.
The sentiment data does not yet capture the impact on confidence of the spreading coronavirus outbreak. It is inevitable that there will be some impact on demand. Sectors like air travel and tourism may be particularly affected. Perhaps more significantly, a coronavirus recession would not be like the vanilla demand-side recessions that constitute a feature of the business cycle. The supply-side could be affected as workers stay home and borders close while disruptions to value chains could negatively affect production in hard to predict ways. Supply-side recessions are much more difficult for policymakers to counter as the traditional levers of monetary policy and fiscal policy are relatively ineffective when it comes to disruptions to production.
Finally, a breakdown in post-Brexit trade negotiations and end-2020 deterioration in trade conditions remains a realistic prospect. Were such a breakdown to occur it would do significant damage to the economy.
The economy may be facing into a rocky road over the next 12 months.