Silver linings

While balanced economic recovery will inevitably take time, there are some positive signs for SMEs in 2013, Bank of Ireland Group Chief Economist Dr Dan McLaughlin tells Lorraine O’Hanlon

Dr Dan McLaughlin, Group Chief Economist of the Bank of Ireland, will be keynote speaker at the launch of the 2013 SCCUL Mentors Programme later this month.

Since its establishment in May 2012, over 160 SMEs have benefited from mentoring from leading local business figures as part of the initiative, which Dr McLaughlin feels is an invaluable resource at a difficult time for SMEs.

According to Dr McLaughlin, the main challenge for Irish SMEs stems, in large part, from the composition of spending in the economy as while the export sector has done “reasonably well” over the last three years, rising by seven or eight per cent since the peak of the boom, the domestic economy hasn’t yet recovered. 

“What people probably may not realise is that if you take Irish GDP it actually bottomed out at the end of 2009 and is actually three and half per cent higher than it was then but it doesn’t feel like a recovery and most people still talk about recession because, and this is the problem for the SMEs, most of them would be selling into the domestic economy and that hasn’t recovered, at least to date,” he says. 

Dr McLaughlin explains that there are three elements to domestic spending; Government spending, which has been falling steadily and is likely to continue to fall for a number of years, consumer spending, which has been “pretty weak”, remaining at about ten per cent below what it was at the peak in 2007, and business spending on items such as machinery, equipment and construction, which is still falling. 

“Although Ireland’s getting a lot of international plaudits for its performance over the last few years and technically the economy has recovered to some degree, it’s a very unbalanced recovery and it’s been the absence or weakness of domestic spending that I think has been the big problem,” he says.

Elements impacting on consumer spending include a significant rise in the income/savings ratio, with people now more careful with any discretionary income that they may have, the huge fall in employment, which is yet to bottom out according to Dr McLaughlin, and the fall in average household incomes.

However, consumer spending seems to have picked up a little in the second half of last year, and Dr McLaughlin suggests domestic demand may stop falling in 2013, as the drop in household income appears to have levelled out. 

“To some degree there are signs that we might be seeing, potentially, a little bit of a change this year,” he says, adding that business spending on machinery and equipment rose last year for first time in five years, the residential property market appears to have reached its lowest point, and that mortgage lending also appears to have picked up in 2012.

However, he suggests that Ireland’s export performance last year was “disappointing”, and explains that while food and drink or pharmaceutical products and medical devices may spring to mind when the word ‘export’ is mentioned, half of Ireland’s exports are now services such as insurance or business services, computer or Internet services.

In fact, manufactured exports fell in the second and third quarters of last year, affected in part by the so-called ‘patent cliff’, which sees a number of pharmaceutical products manufactured in Ireland coming off patent over the next few years. 

Dr McLaughlin adds that while areas like construction, retail, wholesale and to an extent manufacturing have all experienced “horrendous” job losses in recent years, high value added exports do not generate a huge amount of mass employment.

“Over the last few years, the economy has technically grown but the problem is it’s quite skewed…We are seeing some job creation in certain areas mainly to do with the export sector but that hasn’t been strong enough to offset job losses and I think the reality is to get a significant and sustained increase in employment, we need a recovery in domestic spending,” he stresses.

While forecasts suggest the economy will grow by 1.5 per cent in 2013, Dr McLaughlin stresses that the global outlook is “pretty cloudy” and that, as our recovery is still dependent on the exports sector, and the risks to the sector are clear.

He adds, however, that it is hoped employment will at least stabilise in 2013, with exports hopefully continuing to grow and some employment being generated in the sector. 

In terms of Government policy potentially encouraging consumer spending, he explains that when “you strip aside the rhetoric”, he is unsure what the Government can do to really stimulate it.

“Because if you are committed to reducing the budget deficit…essentially cutting government spending, and essentially raising tax revenue, that’s inevitably going to dampen activity so it’s hard to simultaneously come up with policies that are going to do the opposite, stimulate activity. What’s happening is just going to take time,” he says.

Dr McLaughlin will be keynote speaker at the launch of the 2013 Programme from SCCUL Mentors.ie on Wednesday 30 January at 8pm in the Clayton Hotel. The event will include case studies from businesses and mentors who have taken part in the structured mentoring programme. 

The event is free, however registration is required. To register, contact Liam Bluett on 091-386 004 or email ballybaneec@gmail.com. For further details check out www.scculmentors.ie.

Name: Dr Dan McLaughlin

Occupation: Chief Economist, Bank of Ireland Group

Location: Dublin

CV: Dr McLaughlin was appointed Bank of Ireland Chief Economist in 2001 and leads the bank’s Economic Research Unit in providing economic analysis on the main international economies of the UK, the US, the Euro area and aspects of Australasia. The ERU devotes particular attention to the Irish economy, covering property trends, the labour market and consumer outlook.