Bill Jamieson: Why Germany and Ireland are two lights in the gloom

AMID the economic gloom that has descended in recent weeks, it is hard to discern any grounds for optimism. From the United States to Italy, the UK to China, a fog of bleak apprehension has settled in. Almost everywhere growth seems to be slowing and hopes of accelerating recovery are on the ebb.

But there are two areas running counter to the gloom and showing improvement. Both have encouraging implications for us. Figures out last week showed that Ireland, experiencing one of the most severe austerity regimes in the eurozone, has moved decisively out of recession. And in Germany, industrial output has rebounded strongly, with orders for export-driven main sectors such as machinery, cars and chemicals pouring in.

Ireland's hammering austerity budgets brought pay cuts for the civil service — and government ministers — public sector manpower reductions, curtailments of spending programmes and reductions in welfare services. Despite all of this, Ireland's economy grew by 2.7 per cent in the first quarter compared with the immediate preceding three months. This was well above analysts' forecasts and marked the first positive change in gross domestic product (GDP) since the final three months of 2007.

This by no means signals the end of Ireland's time of trial. Claims for unemployment benefit rose a further 5,800 in June to 444,900. The fall in mortgage stock continues to accelerate and credit card ownership is falling.

Realistically, sustained growth is unlikely to take hold until well into next year. Nevertheless, for an economy that was staring at a black hole budget deficit in 2009 of 14.3 per cent of GDP — the highest in the European Union — the return to growth is a hugely encouraging sign that the medicine is working. But it will be a puzzling development for those Keynesian commentators who warned that austerity budgets risked recession relapse. Really? Contrary to those warnings at the time, the economy looks to have bottomed and started to recover.

Purchasing Managers' Indices (PMI) surveys of business activity suggest that Ireland's renewed growth continued into the second quarter. The Purchasing Managers Index (PMI) composite service index moved back up above the magic 50 mark — which indicates growth — to 51.7 in June against 49.9 in May. New export business was particularly strong at 58.6, up from 55.8 previously.

Why should this matter for the UK? It is too early yet to draw any firm conclusions from the Irish experience: one quarter of growth does not a recovery make. But the Irish experience calls into question the Keynesian critique that harsh budget measures would prove self-defeating, catapulting the economy deeper into recession. The signs are more encouraging than we had dared hope a year ago. Little wonder that the UK's coalition government appears to be going at the austerity programme hammer and tongs in the hope that if it can get as much of the bad news over in the first year, foreign investors and domestic businesses can have greater confidence.

The second upbeat development in a period chronically short of them is Germany where the manufacturing sector is being lifted by a strong rise in export orders. German engineering — the country's industrial heart employing 915,000 — last week revealed a 61 per cent increase in orders year-on-year in May. Manfred Wittenstein, president of the German engineering association, said it had raised its production forecast for 2010 from zero to 3 per cent. Peter Schwarnzenbauer, head of sales at Audi, said the premium car maker was on track to reach its 2008 record of one million new cars sold.

"With this order inflow," he declared, "we will soon face the problems of a skills shortage". German unemployment fell to 7.5 per cent in June, the lowest since December 2008, and Commerzbank expects the German GDP to rise 2.5 per cent this year, up from 1.8 per cent. German "headline" services PMI has also been revised up 0.2 (to 54.8) versus the "flash" June estimate, Talk of a double-dip recession has all but vanished.

Germany has of course been benefiting from a cheaper euro. But UK manufacturing, too, should also from a lower pound and a pick-up in demand from Asia-Pacific. Corporation tax cuts should also boost business investment. Amid all the uncertainty and turmoil, these are two encouraging pinpoints of hope to lighten the gloom.