Recovery of sorts is still far from being safe as houses
An economy with merely the potential to grow is a sterile thing — consumers need a break
Published 29/06/2014 | 00:00
Remember the era of "jobless growth"? In the summer of 1994 - twenty years ago - as Albert Reynolds's government staggered from one crisis to another, although none of those crises had anything to do with the economy, the economy was an underlying source of discontent and instability. For seven years, Ireland's rates of economic growth outperformed those in Europe. And for seven years unemployment was stuck close to 20pc, while consumers were stretched.
A different mismatch is happening now. For the first time, house prices are registering double-digit growth. Nationally, average prices are up by over 10pc in the last 12 months. A boom, it is not. But as a recovery, which, of sorts, it is, it is a very odd one.
Yes, house prices are rising. But outside of the public sector and a few parts of the private sector, incomes aren't rising to match either the higher cost of house purchase or rising property taxes. Yes, interest rates remain historically low. But if you can't get a mortgage, that's not much use. Prices are undervalued, significantly so. The IMF recently put this undervaluation at 7pc but prices have further to rise. Lumping Irish house buyers in with countries where renting is the norm and population is stagnant as the IMF does, leads to it understating our equilibrium house-prices level. Even in Dublin, prices are barely half of peak levels and they need to reach around three-quarters of that before normality returns.
A normal economy is one where mortgage lending grows modestly and houses are bought by borrowers. Ireland's market is currently dominated by cash buyers who escaped the recession, or foreign buyers taking a punt on our property market. For the average Irish home buyer, the market is as unaccessible as ever.
So, while latest figures show the strong potential for recovery, until the domestic economy recovers, potential is all that it is.
Excluding the motor trade (which is undergoing see-saw movement) retail sales are flat since the end of last year and recent falls in consumer sentiment don't suggest a strong improvement soon. The recent election seems to have cast a pall of gloom over consumers. Unless the next budget creates a domestic recovery, it is hard to see one materialising.
Interestingly, the Italians are now pushing for a let-up in budgetary discipline. Ireland has some case for being given some slack, provided this is used for growth-promoting tax cuts. Last year's budget took this approach by giving tax relief to small businesses. If the recent Global Enterprise Monitor is anything to go by, it is working a treat. But corporate Ireland can only flourish if consumers do, and this time it is the turn of home owners and consumers to get some tax-cut slack. There is no comparison between the boom era - when such stimulus was destructive - to the present time, when it is badly needed. Besides, the tax burden is so high that tax cuts hardly amount to "stimulating" the economy.
Not that tax cuts alone can address the house-price condundrum, which has a second odd dimenstion to it: up 22pc in twelve months, house prices in the capital are rising much faster than elsewhere. Until recently, this was just compensating for deeper falls in Dublin during the crash. But as a spate of job announcements in Dublin underlines something else is now at work - the 'Leinsterisation' of recovery. Time and again this column called for our spatial strategy to be overhauled to create a system of regional capitals that could target new hubs for growth, job creation and foreign direct investment. So many people are now flocking to the capital that Ireland might tip over into the sea. The IDA has made valiant efforts at spreading jobs growth around the country. But to end unemployment, it's the indigenous domestic economy - outside Dublin as well as inside - that matters most.
Government faces a challenge on two fronts. First, resuscitating a domestic economy and, secondly, envisioning and implementing a radical spatial strategy to promote balanced regional recovery. The latter is a long-haul affair and results will take a decade to materialise. Resuscitating the domestic economy is the urgent priority: GDP fell at the end of last year and barely grew at all over 2012 and 2013. Despite trillions of loose credit pumped into the US economy it declined sharply in the last quarter and while Asia grows strongly we aren't yet exporting as much to Asia as we should be (Richard Bruton was in China and Korea last week addressing this). But the good news is that economy has the potential to recover domestically. House-price growth is a sign that domestic demand can bounce back, if given a break from an excessive state induced burden of debt and taxes. But as Albert Reynolds learned to his cost, a domestic economy with merely the potential to grow is a sterile thing. And people grow weary of being told a recovery is happening to the economy unless they can see it also happening to them.
Marc Coleman presents 'The Marc Coleman Show' each Sunday from 9pm on Newstalk 106-108fm