ANALYSIS:CAUTION IS needed in interpreting monthly statistics. It is essential at a time of economic volatility. With those caveats in mind, retail sales figures for May and inflation numbers for June, both released yesterday, raise an element of concern about the momentum behind the recovery.
Of the two sets of data, the retail figures are most significant. Chart 1 shows trends in core sales over the past 30 months (this measure excludes vehicle sales, which are highly volatile). As illustrated, the precipitous slide in sales experienced by traders hit bottom at the turn of the year. Early 2010 brought freer spending. But the plateauing since March may suggest that the pace of recovery in the second quarter of the year will be slower than hoped. A drill-down into the numbers supports this conclusion as it shows that most subsectors of retail were affected.
The fall in prices registered in June is less significant than the April-May retail numbers, for two reasons. First, a decline in prices can be caused for a number of reasons and does not necessarily point to a weakening of demand. Second, and as is clear from Chart 2, the decline in the price level last month reversed a four-month trend. It could well have been a one-off, even if it was not accounted for by the sort of factors, such as volatile energy prices and interest rate hikes, that can sometimes distort.
A more positive aspect of the inflation numbers is the continued divergence between developments here and those in the wider euro zone (see Chart 2). This difference equates to a competitiveness gain for Ireland. Comparable figures are not yet available for June, but preliminary numbers suggest that the improvement continued.
Lower wage bills also boost competitiveness. But this does not appear to be happening according to the latest numbers, which were also released yesterday for the final quarter of 2009. Compared to previous three-month period, earning roses by 3 per cent.
The release of these indicators was preceded by the Department of Finance’s latest economic forecasts. The Government’s view on GDP growth has become much more positive, with a full 2.3 percentage improvement in the 2010 forecast since budget day. It now believes that the economy will expand by 1 per cent this year.
Most components of the new projections stack up in light of the latest GDP numbers. One does not. The Government believes spending on investment, mostly construction linked, reached a low point in the first three months of the year and will now expand. To expect a return to growth in anything related to the building sector seems premature at best.
