China crisis will rip up our green shoots

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IT has been a week of good news and bad news. No, I am not talking about the prospects for the various presidential election candidates. While it was a week of some interesting poll results, I intend to wait another week or so before talking in depth about the race for the Park.

The good and bad news I am referring to today concerns the prospects for our economy. Last Tuesday, the Department of Finance published the Exchequer returns up to the end of September. These show the State’s balance sheet for both spending and taxes collected.

The figures do give us some cause for optimism, especially when taken alongside the compliments from the recent IMF report on Ireland.

There are, however, some hazard signs on the horizon. What is worse, the potentially most dangerous of these is totally outside our control or influence.

First, the good news. The figures published last Tuesday show that the actions taken at the last Budget by the late Brian Lenihan are working. The targets he set for the economy for 2011 are being met.

On the taxation side of the balance sheet, the amount of taxes coming in, particularly income tax, looks like it is starting to grow again.

If this is still the case at the end of the year, then it suggests signs of some growth in economic activity.

On the spending side, the news is maybe even a little bit better. Public spending is being tightly managed, with most, though not all, government departments and agencies showing that they can live within the budgets set for them by the last Government.

Indeed, the figures published on Tuesday contained such modestly good news that the Government’s two Finance Ministers — Howlin and Noonan — were moved to take all the credit for the progress made and completely forgot how implacably opposed they were to last year’s Budget.

Not the first time it has happened and I predict not the last either.

The other pieces of good news last week were the fact that foreign deposits are starting to make their way back into Irish banks and the announcement by Google that it is investing €75m in a new data centre in Ireland. This is a sign that major companies have confidence in the path Ireland has taken.

But there was bad news too. Some items of that bad news appeared in the same figures mentioned above. While the overall figures look good at first glance, there are two areas where looks can be deceiving, both on the tax side.

The first is the effect of the Government’s pension levy on ordinary private pension schemes. Though the levy was introduced to fund the job initiatives announced last May, it is becoming increasing clear that around €200m or more of the €461m raised so far will be not be spent this year.

This makes the overall tax figures look better than they really are.

The other area for concern is the poor VAT returns. The amount collected in VAT is now €300m less than expected. Worse still, this is the fourth month in a row where they have fallen.

Falling VAT figures means falling sales and less activity in the domestic retail sector.

We need them to be increasing not falling at this stage.

Whether the coalition government has the capacity or the will to address these two individual problems will be seen in the coming months.

The one thing neither this Government nor any other government this side of the Atlantic would have the capacity to cope with would be a crash in the Chinese economy. The internet was alive over the past week with dark mutterings of the Chinese economy facing a hard landing. It has been slowing down in recent months, mainly due to the authorities there raising rates several times.

One more alarmist analysis prepared by the Bank of America/Merrill Lynch warns of a potentially massive hard landing for the Chinese property and banking sectors.

If the pessimists are right and there is a crash based on the worst-case model then it would herald even further disaster for small countries such as ours.

Let us hope the pessimists are wrong.

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