Wednesday, August 27, 2014

Stringing Up the Recovery

Like a lot of people I'm scratching my head at the conflicting statistics about Ireland's economic performance. On the one hand, the latest QNHS from the CSO tells us that the numbers in jobs were 1.7% higher in Q2 2014 than a year ago. On the other, the CSO also reports that average weekly wages were down 1.1% in Q2 2014 from last year. It's a wage-less recovery apparently.

There may be several explanations for what we are seeing - or there may be none. Such low percentage figures, based on survey data, are in turn vulnerable to margins of error that could leave one or both in reality close to zero. I used to think we witnessing a 'macro-recovery, micro-recession' - i.e.: improving headline numbers like GDP and exports, but weaker indicators at the level of firms and households. Now it seems the other way round, with the macro numbers remaining flat and the micro numbers (job creation/confidence) showing improvement.

I think these anomalies are further signs of our continuing balance sheet recession. In other words, despite a degree of pump priming by the authorities, and even some old fashioned boosterism by the media (and who can blame them), we're still coming to grips with what happens when you try to push on the monetary string. The number one financial priority for the majority of Irish adults is to reduce their exposure to debt. It's less of a priority for the very young and the very old, but then they tend to have both low debts and low incomes. Those with higher incomes - the 35-55 age cohort - are also more indebted, so any extra spending power/disposable income they get will only go one way.

But to add to the head scratching, the latest money supply statistics are enough to make your nearest and dearest wonder if you've picked up something contagious. The chart shows what is happening to the M1 and M2 measures of money supply in Ireland (data here). They tend to move together, but since the start of the year, M1 (currency in circulation and overnight deposits) has moved away significantly from M2 (M1 plus longer term deposits):

The source of the jump is the amount of currency in circulation (not overnight deposits, which are flat). In June 2014 there was €14.5bn in 'cash' circulating in the Irish economy, up 10% from a year ago to  reach the highest level on record. Sure looks like a lot of pump priming to me. The only question is: whose pump(s)?

It certainly isn't showing up in residential bank deposits, nor in wage packets for that matter. It may simply be more proof of the degree to which our financial system remains fractured and broken after the collapse six years ago. Or it may indicate that the wider economy is still very vulnerable and that recovery is still some way off for most of those seeking jobs, or waiting for pay rises for that matter. Despite an awful lot of pushing on string.

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