Wednesday 12 December 2018

Has the Celtic Phoenix already passed its peak?

Martin Shanahan (left) and Taoiseach Leo Varadkar at Google – but Ireland relies too much on multinationals
Martin Shanahan (left) and Taoiseach Leo Varadkar at Google – but Ireland relies too much on multinationals

The Irish economy has had a phenomenal run. After being near the abyss in 2011 and 2012, almost every economic indicator from jobs and investment to the public finances have shown sustained, and in some cases rapid, recovery.

We're almost back at full employment, the banks are back in profit (but still weak), exports are continuing to increase, and a flood of largely US money has found its way into everything from hotels to technology, commercial property and house building.

Having gone down in flames and bounced back, Ireland's recovery has been dubbed the Celtic Phoenix, only half in jest.

The data remains strong, but cracks are starting to show. There are good reasons to believe that this could be as good as it gets, for quite a while.

Some of that is external. Our economy is hugely reliant on foreign direct investment, and with a trade war looming that money is set to become scarcer. A warning from IDA boss Martin Shanahan that the market is getting tougher should not go unheeded. Not only are rival countries making a more vigorous push for business, but also our own competitiveness is falling behind in areas like housing, infrastructure and personal taxation.

Ireland's fall of six places to 12th in a recent international competitiveness ranking went largely unmarked. In the era of Enda Kenny's Action Plan for Jobs it would have set off alarm bells.

Rightly, because Ireland is becoming less attractive to foreign investors at a time when that investment may be about to become scarce. Budget watchdog the Irish Fiscal Advisory Council (IFAC) said recently that the departure of just one large multinational could leave the State nursing a €276m hole in the public finances.

There is lots more to worry about. Brexit negotiations are a shambles and the chances of a favourable outcome for Ireland look very remote indeed. The fact that that's largely the fault of the UK government won't make it any less painful.

US President Donald Trump has brought the US to the brink of a trade war with China, announcing plans yesterday for tariffs on $50bn of Chinese goods. He's already launched a tit-for-tat trade scrap with Europe that will only have losers.

German's Bertelsmann Stiftung think tank ranked Ireland as the most globalised out of 42 countries studied - a great position when global trade is flowing, but a threat to our economy if the environment deteriorates.

In addition, the end of the ECB's massive quantitative easing stimulus programme brings an interest rate hike closer. The era of loose money is ending. Late next year or in 2020 that will hit people's mortgages. It will gradually but surely get more expensive for the State, the banks and industry to borrow. That comes as the Central Bank warns that debt levels - both for households and for the Government -need to be reduced further.

IFAC chairman Seamus Coffey appeared before an Oireachtas committee this week and said most indicators are that the Irish economy is close to reaching its full potential.

If the economy outstrips its potential we'll overheat, but a slowdown down seems just as big a risk. The question is merely what the trigger will be. And with the world in the shape it is, there are plenty of potential triggers.

When the downturn comes, it will likely hit us hard. Ireland's economic history has been one of boom and bust.

"The Irish economy doesn't do moderation," Mr Coffey said, adding that over a 60-year period the economy was growing in the 2pc-5pc range less than a third of the time.

Ashoka Mody, the man who used to head the IMF's operation here, believes the Apple tax ruling and increasing scrutiny on multinational tax avoidance will require Ireland to create a new growth model - one that doesn't rely so much on low taxes and multinationals. That's hard to do fast.

Martin Shanahan says Ireland's industrial development strategy was based on three pillars that should each be as important as the others: foreign direct investment, growing indigenous companies and developing R&D and innovation.

Two of those pillars have underperformed and the third is threatened by the rapidly changing global situation.

If we're going to get away from the boom and bust cycle we need to figure out a more stable way of managing the economy. Meanwhile, things may be about to get bumpy.

Irish Independent

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