The Tiger Tones Down

Ireland Calling with John Spain

The Tiger Tones Down

March 19, 2008

By John Spain

IT’S not quite time to call it a day yet. But the party's definitely over. Last week the most respected official research organization in Ireland, the Economic and Social Research Institute (ESRI), published a new report on the Irish economy that sent shivers down the spine of everyone here.

The ESRI forecast said that growth in Ireland this year will be the lowest for 20 years, and that the number of people out of work will be the highest for 10 years. They are pretty scary numbers, no matter what way you look at them, although that did not stop the eternal optimist, Taoiseach (Prime Minister) Bertie Ahern and his ministers trying to put a brave face on them.

And what's more scary is that the Irish economy could get even worse than that if the international financial situation continues to deteriorate. The ESRI is predicting that Ireland's GNP will grow at just 1.6% in real terms this year, down from 2.3% in its December forecast and down from an actual growth level of over 4% not much more than a year back.

Because of the decline in growth, the ESRI says unemployment here will rise from around 5% to 6% this year, and will peak at 6.2% next year. Much of this is due to the slump in construction.

Developers are slashing prices on the backlog of unsold new homes and apartments from last year to try to shift them. The downturn has also affected period homes, even in the best red-brick areas, and the same tactic is being used with houses advertised for two or three million last year now on the market for half a million less.

Sales have picked up a little as a result. But the market is flat, prices continue to fall and the building boom is well and truly over. The end of the construction boom is the main reason the ESRI has produced such a gloomy forecast for the year ahead.

There are other factors, like the steady stream of manufacturing jobs that are being lost to low cost countries. But it is the current slump in the global economy that is making our difficult situation here even worse.

The international credit crisis that started with the sub-prime mess in the U.S. will cause severe problems for a small open economy like Ireland, and there's not much we can do about it. We are so used to hearing that we have been the fastest growing economy in Europe and one of the fastest in the world, and that our living standards are way up there, that we tend to forget the reality.

All the Celtic Tiger statistics were true. But the reality is that we are just a cork floating on the ocean of the world economy. When the tide goes out, so do we.

With the U.S. heading for recession, if it's not already there, oil at $110 a barrel, and the dollar-euro exchange rate collapsing ($1.59 to *1 on St Patrick's Day!), the economic outlook is not good from our point of view.

We are open to the world economy, we are closely linked to the U.S. economy, and we are one of the most heavily oil and gas import dependent countries in Europe.

And most worrying, we have become far too dependent on construction as the biggest driver of the Irish economy. With that fading fast, we suddenly look vulnerable. Although we don't have a sub-prime problem here, the Irish banks have been very dependent on developers for their profits. Now they are worried not only about their profits but about all those hundreds of millions that were loaned out for construction projects.

A lot of anxious meetings are being held. That anxiety has added to the general slowdown in construction, and as the economy here has slowed with it, the tax revenue stream to the government has been hit.

Unemployment has already hit 5.2%, and tax revenues are *500 million down on what they should have been for the first eight weeks of this year. If that trend continues to worsen, the government will have to go back to heavy borrowing if cutbacks in services are to be avoided (the deficit this year will be at least *5 billion.)

All of which sounds pretty bad. But without wanting to minimize the problems we face, we do need to keep it all in perspective.

Even if we have to go back to borrowing we will be doing so from a strong position, having had budget surpluses in 10 of the last 11 years. As a result we now have one of the lowest levels of national debt in Europe.

So yes, we can borrow. But it should be for investment, not current spending.

That is the real challenge we now face, controlling state spending (it went up last year by a whopping 13%) to reflect the new reality. State spending on services like health and education has soared in the last 10 years, three times what it used to be.

Although the population has gone up over that time, most of that money has gone on pay, without much improvement in efficiency and productivity to show for it. That has to change, and there will have to be a much tougher line taken by the state in the next year or two, or for however long this downturn lasts.

But it's not all doom and gloom. The ESRI says growth in the Irish economy will improve next year to 3.5%, although inflation is also on the way up which will make holding down the state pay bill even harder.

Even if we do have 6% unemployment by the end of the year, it's not as bad as it sounds. That would still be well below the average unemployment level in other European countries, and it's not that far above the 4% or 4.5% you expect in a normal economy with a normal growth level of 2% or 3%.

Our problem is that the Celtic Tiger has got us used to growth rates that are three times that level, and state spending that throws piles of money at everything (like the Port Tunnel which cost about three times what it should have and construction workers on *1,000 a week).

Interestingly, the ESRI is predicting that immigration will continue here this year (even though there will be no growth in jobs), although it expects the number of immigrants to halve to around 60,000 this year and emigrants, including foreigners, to increase from around 30,000 to 50,000.

And the ESRI is saying that it expects global conditions to improve next year, allowing average growth in the Irish economy of 3% over the three years up to the end of 2009, a sort of soft landing for the Celtic Tiger. But that forecast relies on continued strong exports from services like banking and computing to deliver growth here, which in the current climate is uncertain, to say the least.

Even so, it could be worse here. The Irish economy is twice as big as it was a couple of decades back.

In spite of the sub-prime chaos, Bear Stearns, Northern Rock, plummeting stock markets and soaring oil prices, we still have growth in the Irish economy. I seem to remember that my old economics teacher used to define a recession as a period in which at least three consecutive quarterly figures showed nil or negative growth and we haven't reached that yet.

So it could all be all right in the end. Now, where did I put that good luck shamrock?

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