Thursday 29 September 2016

Dumb luck played a large part in our recovery - but all is not yet rosy

Published 26/12/2015 | 02:30

Christmas shoppers on a busy Grafton Street as business returns to near peak levels. Picture:Arthur Carron
Christmas shoppers on a busy Grafton Street as business returns to near peak levels. Picture:Arthur Carron

You would want to be some kind of sadist to try and put the dampeners on what, for many, will be the first financially decent Christmas they have had in years. Scarred by austerity, fear and pessimism, lots of us tucked into our Christmas dinner full of optimism and hope for 2016. We are beginning to believe that the crash is finally behind us.

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The economy is growing at 7pc per year. Unemployment is falling. Confidence is up and people are spending more money. It would have been hard to imagine just four years ago that so much could have changed for the better in such a short space of time.

It would have been more difficult to imagine that the ESRI would caution the government about needing to put the brakes on to avoid overheating, as they did yesterday.

And there is no doubt that much of the economic turnaround of the last few years is real. Real jobs are being created. In the first nine months of this year we had 1.2 million more foreign visitors to Ireland than in the same period just two years earlier.

The economy will generate around €200bn in economic activity this year, which is right back to where it was at the peak.

But it would be wrong to assume that everything is rosy in the Emerald garden. Many things are better than they were, but not necessarily secure. The economic turnaround has been partially due to some very tough and sensible government decisions combined with some extraordinary blind luck.

Tough political decisions are only as good as the people who are prepared to live with them. So, if Michael Noonan and his predecessor deserve credit for tough action, the real credit goes to ordinary people who were prepared to shoulder job losses, pay cuts, poorer public services and higher taxes without sabotaging the whole lot with mass industrial action.

Now that the situation has improved expectations for tax cuts, more spending and higher wages are growing.

The latest ESRI figures suggested that austerity budget cuts had slashed household disposable income by an average of between 7.5pc and 10pc. It is human nature for people to want that money back. Noonan's October budget will restore the situation by an average of 0.7pc.

The recovery has not been felt equally by people. Those who lost their jobs in the crash have seen their incomes fall by a lot more than 10pc. Many of them are still not back working.

There are over 100,000 more people working than four years ago, but employment numbers are still around 110,000 below the boom-time peak.

So if the economy is generating the same value of economic activity as it did in 2007 but with 110,000 fewer people at work, somebody is making a lot of money. That is where blind luck has come in. Historically low interest rates around the world, combined with trillions in quantitative easing from Washington, London and, more recently, Frankfurt, have boosted stock markets and kept the flow of international money going.

It has also reduced the value of the euro against sterling and the US dollar. As an exporting country, a cheap euro - combined with low interest rates - has given our recovery an added turbo boost.

Throw into the mix the collapse in the price of oil last year and Ireland has benefitted enormously from three favourable external factors that are completely outside our control.

Last week the US increased interest rates for the first time in nearly a decade. It was a modest increase and the head of the US Federal Reserve, Janet Yellen, eased market concerns by signalling that future rises would be gradual.

Meanwhile, in the eurozone, Mario Draghi has committed to extending the quantitative easing programme which should keep euro values lower for longer and continue to provide a tailwind for Irish exporters. These could be positive for us, but only as long as we use them wisely. There are real potential icebergs out there, too. Emerging economies are massively in debt and a rising dollar could hurt them very badly. Between 2004 and 2014, corporations in emerging economies increased their debts from $4,000bn to $18,000bn. Much of it is borrowed in US dollars. As the American currency rises in value, the indebtedness of these economies will rise in real terms. That could slow down global economic growth.

Heavily indebted American corporations have enjoyed access to cheap credit through the artificially supported bond markets - and that could unravel with wider consequences.

The Chinese government has been trying to engineer a soft landing for its economy, which is slowing down, but with no guarantees of success.

A possible British exit from the EU is another unknown that could go against us.

These are all potential banana skins, rather than definite threats. But they are all totally outside the control of ministers in this or the next Irish government.

Irish businesses, the exchequer and Irish households have a window of a few years of favourable conditions to get themselves in order.

For someone on the dole, it might mean a chance to get a job. For a small business, it might mean tidying up their legacy debts.

For the government it might mean putting money aside and not overheating things with a slew of unrealistic promises.

These positive tailwinds won't always be blowing in the same direction and the opportunity should be maximised by everyone to make progress without fuelling the next bust.

Irish household debt has fallen by €40bn in the last five years as families repaid more in debt than they took out in new borrowing.

What we owe has gone from €200bn to €160bn. It is still a massive figure and is three times more than it was in 2004. The economy needs people to spend money they can afford to spend and it needs businesses to have the confidence to borrow money they can afford to pay back. What it doesn't need is hubris.

Advertisements from AIB offering loans of up to €30,000 ahead of next summer's Euro 2016 soccer championships in France send out all the wrong messages.

Radio advertisements saying 'we're off to Rome for the weekend' are all well and good as long as you are not going to stick the bill for it on a credit card.

We have a great chance in this window to address legacy issues and put the economic mistakes of the past behind us.

Unfortunately, it is hard to find hard evidence that, as a nation, we have really moved on from the boom/bust approach to sound financial management.

Irish Independent

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