Mind the gap, as they say at the railway station. The uncertainties facing consumers and businesses in Ireland have been added to by the political vacuum.
Recent economic data has also been a bit mixed, probably also reflecting fears over Brexit, the impact of a weaker sterling and some of the legacies of the bust which are still holding the economy back.
The question now is whether an ongoing failure to form a government might contribute to a “growth gap”, as spending decisions are put on hold by an uncertain public and by companies.
Perhaps on its own the political delay would have a limited enough impact, assuming it didn’t go on forever. But there are problems which need to be tackled if growth is to continue – the housing crisis, the chronic lack of underinvestment in recent years and rising public pay demands come to mind. And then there is the threat of Brexit and the need to have a government in place, particularly – of course – if there is a vote to exit.
It would be dangerous to read too much into some recent, more mixed, economic indicators. Irish growth was remarkable last year.
Everyone agrees that the 7.8 per cent headline GDP growth rate overstates things, but an analysis by Goodbody stockbrokers last week said the rise of domestic demand ran at about 4.5 per cent, and could be seen as a better measure. All forecasters expect growth to continue at a strong pace this year. It may not be a bad time at all to come into government.
However, all we can ever do is assess the evidence as it comes along, and recent figures have been more mixed. Consumer confidence is still positive, but the latest KBC-ESRI index showed a sharp fall in March. Tax returns remain ahead of last year, but income tax and VAT were weaker than expected last month.
Even industrial production had a bad month in February, though there are often sharp swings caused by multinational activity.
We may, in a few months, look back on all these as a "blip". You could construct a benign scenario for our economy. Let's assume US growth continues, Europe keeps chugging along and the UK votes to stay in the EU. But Irish growth is now crucially reliant on consumers continuing to spend and businesses continuing to invest and both of these rely on one key factor, which cannot be captured by even the most sophisticated economic model – confidence.
Economic confidence
The extent to which the comings and goings in Leinster House are affecting economic confidence is debatable. But common sense would suggest that the longer it goes on, the greater the dangers.
Working on the business desk of The Irish Times, there is certainly a sense of paralysis about the official government system. The normal deluge of press releases and spin about what the Government is up to is entirely absent, save for Richard Bruton, Minister for Jobs, driving around to a few jobs announcements. Businesses are wondering what will happen, and, post-election, many are now fixated on Brexit.
Civil servants can keep the show on the road, but they cannot make big policy decisions, nor can they go out front and communicate an Irish view of what is actually going on, and what it means for us. If Brexit fears grow in the run-up to the referendum, we need a taoiseach and senior ministers to clearly articulate what Ireland’s position will be if this happens, what our plans are to protect trade and (presumably) our determination to remain in the EU and the euro ourselves.
These are vital signals to investors and consumers, but coming from an “acting” government they simply won’t wash. And, as Merrion Stockbrokers said in a comment on Friday, were no government to be in place in the event of a negative vote on June 23rd, the risks would multiply.
Without a government in place, investors both outside the country and at home may just start to hold off on decisions. They may decide to wait a few months and see how the government situation works out, and whether Brexit happens.
Sensing this, and looking at the chaos in Leinster House, consumers – many still nervous after the crash and some still with heavy debts – could also hold off spending plans. It may not happen, but why take the risk to allow the political spring pantomime to continue?
Negative equity
We sometimes forget that, despite the encouraging economic growth or the last year or two, we are still missing a couple of our economic engines. Many households remain in negative equity – meaning many can’t move home – and thousands are still in mortgage arrears.
The banks are still not operating normally and the increasing flow of credit which normally accompanies a reviving economy is absent. And problems ares such as housing and rents, apart from the obvious social costs, also have an economic price.
There is “stuff” a new government needs to get on and do to underpin the favourable forecasts for the next few years. And while government borrowing rates remain very favourable, we must remember that this is with massive support from the ECB for euro zone bond markets, and in an environment where investors still believe Brexit will not happen.
It has taken long enough to start to restore consumer confidence in Ireland after the crash.
Business sentiment is notoriously fickle and also needs to be underpinned. Brexit may have to be dealt with.
The longer the political vacuum goes on, the more the risk of a “growth gap” emerging as business, investors and consumers sit on their hands and wait to see what happens.