Nothing has been quite as sudden, or as rapid, as the fall from grace of the Celtic Tiger. Economic forecasters have been falling over each other with ever more gloomy revisions of previous forecasts – often made only a few months ago. An Taoiseach (Irish Prime Minister) has complained that we are in danger of “talking ourselves into a recession”. One wit in the Irish Times retorted by suggesting that on this logic we can therefore talk ourselves out of a recession as well.
Of course forecasters have also been saying that they knew all along that our building boom was unsustainable, that house prices had to fall, and that a correction was inevitable. The problem is that they have been saying this for years and the economy just kept motoring on at rates in excess of 5% growth per annum. The fall from grace has been a bit like the cartoon character who races over a cliff and only starts to fall when he realises he has been threading on thin air for some time.
The problem was partly that there were a lot of vested interests tied into this growth in the building industry, in particular. Ireland was building up to 90,000 new houses a year (half the total for the whole of Britain – with a population only 7% that of Britain). The leading political party, Fianna Fail, has close ties to the Building industry and the Government became ever more dependent on huge windfall tax gains from Stamp Duty and VAT on houses. The Banks and Mortgage providers were also major beneficiaries and it was mostly their economists who had been talking up the economy.
The halving of housing output this year – to perhaps 45,000 will knock 4-5% off GDP alone. Had this occurred at a time of general wellbeing, it would have been a mere temporary blip on the radar – reducing growth for one year from perhaps 6% to 2% on a once off basis and affecting only those employed in the building and associated materials and finance industries.
But the timing couldn’t have been worse. The US sub-prime crisis, which has now become a full world-wide credit crunch has resulted in the Irish banks losing 75% of their value in the last year – despite still being very profitable and relatively cash rich enterprises. Interests rates are going up just as we need them to go down because Ireland doesn’t register on the European Central bank radar. Oil and commodity prices – the real causes of inflation – are hardly likely to be significantly effected by the rise in interest rates which will however help to choke off domestic economic activity.
Consumer confidence has fallen through the floor and Retail sales fell 4.8% in May – CSO – The Irish Times – Tue, Jul 15, 2008
The volume of retail sales declined by 4.8 per cent in the year to May, the fastest rate of decline in over 20 years figures released by the Central Statistics Office today showed.
A 13.9 per cent annual drop in electrical goods sales dragged down retail activity in May, contributing to a fourth consecutive month of decline, according to the CSO. Sale of furniture and lighting fell 11.1 per cent during the 12 months to May.
A recession is usually defined as two succeeding quarters of negative growth, but it looks, on these figures, that we are looking at a full scale depression. One firm of stockbrokers put it as follows:
Goodbody Stockbrokers – News and Comment – Monday’s Thoughts
The Irish economy is facing its first contraction in GDP since 1983. GDP is now expected to contract by 2.2% in 2008 (2.1% GNP). Sharply declining construction output, a weakening labour market and decreasing consumer spending have all contributed to this decline. Internationally, higher food and energy costs, appreciating currency and interest rate hikes are also adversely affecting the economy. With construction expected to contract further and continuing labour market weakness, recovery is not expected until 2010.
Property values have dropped by 25% and are expected to drop another 15% by 2010 – a drop of perhaps 45% drop from peak to trough. The stock market is down over 50% since the start of the year and is currently in free fall – dropping by as much as 5% on some days (including today).
May saw the largest rise in unemployment in many years and redundancies are now spreading beyond the building sector and Davy stockbrokers have just announced 75 job cuts because of a drop in private clients business.
The Government – initially distracted by the resignation of Bertie Ahern and the Lisbon Referendum has belated begun to respond – announcing €440M of public spending cuts this year and a plan to cut €1Billion next year. However beyond cutting overseas development aid by €45Million and belatedly seeking to put a cap on lawyers fees for the Tribunals (estimated to cost €1 Billion!!) there have been few specifics.
The National Social Partnership talks are currently in progress and there have been the usual calls for wage restraint and even one (from the Small Firms Association) for a cut in the minimum wage of €8.65 per hour. There seems to be a consensus that the National Capital Development Plan which is focused on infrastructural development should not be touched – although it is to be hoped that there will be a better focus on value for money and project management controls on overspends.
It is 20 years since Ireland faced a similar crisis and the National Partnership Process (and EU aid) were instrumental in overcoming the problems the last time around. However it should also be born in mind that Ireland is in an immeasurably stronger position this time around. GDP/GNP has more than trebled in that time, living standards have risen to close to the highest in the world and the debt/GNP ratio has fallen from c. 100% to 25%. Unemployment is forecast to rise to 6% which is still well below the EU average and there are also some positive signs on the horizon.
Firstly the Northern Irish Peace process continues to pay a peace dividend with Bombardier investing €624m in its Belfast manufacturing plant (for wings for a new generation of jet aircraft). Ireland tops the latest statistics for EU Industrial growth for May (+13% compared to an EU average of -2%). Ireland has an abundance of wind energy, some natural gas has been found off the west coast and the largest find of Gold in the UK and Ireland has just been announced in the small border village of Clontibret which doesn’t has much else going for it!
However there are also some major structural problems which need to be addressed. The Irish public health service still has unacceptable waiting lists and gaps in services despite a doubling of Government funding – much of which seems to have been squandered on a huge management bureaucracy and some of the highest salaries in Europe.
The lack of accountability and a culture of efficiency and value for money in the public sector needs to be addressed. Many recent house buyers are sitting on negative equity largely because of a building bubble which was promoted by the Government, building and financial services industries. Insurance costs make many marginal businesses unviable and there are many quasi monopolies in both the public and private sectors who can charge more or less what they like for indifferent services because of a lack of competition or choice in a small market.
Overall, I am confident that Ireland will come good again in the next few years, but that can be a long time if you are young, looking for a job, sitting on negative equity or having to pay still exorbitant rents. A lot of people have done very well over the past few years and a lot of waste has been allowed to prosper within the system. It’s going to be a lot tougher for the next few years but the level of societal cohesion still evident in Irish society combined with the national partnership process should see us through.
