Saturday 23 June 2018

Ignore euphoria surrounding our economic miracle - housing crisis could still blow it

Despite widespread evidence of a remarkable recovery driven by FDI, low interest rates and oil prices, the housing crisis has the capacity to drag it down (stock picture)
Despite widespread evidence of a remarkable recovery driven by FDI, low interest rates and oil prices, the housing crisis has the capacity to drag it down (stock picture)
Richard Curran

Richard Curran

Lots of people had a pep in their step this Christmas. Overall spending was up but you could see it anecdotally. Some people were spending a little more on presents than previous years, or reintroducing others to the Christmas list, who had dropped off in more belt-tightening days of the recession.

This wasn't the madness of the Celtic Tiger days. There wasn't a sense it was Christmas splurges financed purely by credit cards or money people don't actually have. Yet, there was something about the end of 2017 and the beginning of 2018 that felt different - in a good way.

Gerard Brady of Ibec put it well this week when he said 2017 marked the end of the 'recovery' phase. After five years of boom, five years of bust, we have just come out of five years of recovering. And like the patient after an operation, we have been getting better, but now finally can say we are well again.

But just what sort of health are we in? Figures pulled together by Ibec for its Quarterly Economic Outlook should, at least on paper, leave us feeling euphoric. Here are some key stats.

The total amount of loans owed by Irish households has fallen by €60bn since the start of the crash. We now have €4bn more of savings than outstanding household loans. Irish households had €16.5bn more on deposit than 10 years ago. Last year there were 55,000 net new jobs created. Earnings rose an average of 2.2pc, four times faster than the EU average.

And the piece de resistance is the statement that post-tax income in working households is now estimated to be higher than it was a decade ago, and therefore higher than ever before.

Taking all of this at face value, the turnaround in our economic fortunes has been quite remarkable. Go back to 2011 and house prices were still falling at around 10pc per year. We had one of the highest debt-to-GDP ratios in the world. Taking our sovereign debt and our household debt together, Ireland was one of the most indebted countries in the OECD per capita.

As recently as 2014, the Exchequer was running a deficit of around €8bn. This year it is likely to be zero. Unemployment peaked at 15.2pc at the bottom of the crash. The turnaround has been remarkable, swift, unforeseen and very welcome. But is it real and sustainable and how come living in Ireland doesn't quite feel as wonderful as the positive statistics might portray? The turnaround has been largely driven by a combination of external economic forces outside our control and government decisions we were forced to make by the Troika as part of the bailout programme.

This is not to say Irish governments can take no credit for the recovery, but in truth it has been as much about luck as it has been about government policy. The Government has maintained fiscal discipline, up to a point.

It has handled Nama and the banks well, but not perfectly. IDA Ireland and Enterprise Ireland deserve enormous credit for the work they have done in recent years, while government policy to support sectors like the tourism industry, proved to be sensible and effective.

But this recovery was largely driven by Foreign Direct Investment flooding in and creating a lot of jobs. It came about on the back of the three tail winds of low interest rates, a cheap euro to help exports and cheap oil. Together these have been the main driving forces for change. And there are real questions about the impact they might have when they start to turn in the other direction.

Another vital factor in the turnaround has been the response of businesses themselves to the crash. Many managers had never even seen bad times but were plunged into deep crisis. They have survived, rebuilt or re-engineered their businesses very effectively in recent years.

They now have the confidence and resources to invest for the future. Irish businesses have invested around €14bn in machinery and equipment in the last 24 months if all airplane investment and IP is excluded. This is all good news but we also have to see it in context. Here are a few salient points about the numbers:

 

1) The housing crisis is far from sorted. Piecemeal rent controls introduced by the Government are not working. In fact, rents in Dublin continue to rise by 10pc a year.

The housing crisis is the Government's greatest failure. Figures suggesting working households are earning the same, if not more, after tax income as 10 years ago, are meaningless if they are paying much higher rents or mortgages.

Their buying power and quality of life is not the same. Rents and house prices are a real and connected problem but the lack of activity to quell exorbitant rents in particular will come back to haunt us.

 

2) With the economy firing on all of these cylinders the push towards full employment is almost complete. We will need more workers to come into the country to take up these new jobs.

The Ibec report points out that between 2005 and 2009 more than 200,000 people moved to Ireland from Central and Eastern Europe. During the crisis, net migration from Eastern Europe was negative, as workers returned home, but they are not coming back in significant numbers. Last year, net migration from Central and Eastern Europe was only 2,500, as the economies of those countries improves and prohibitive rent puts people off.

 

3) The economic recovery is happening around the country and not just in Dublin. You can see the pick-up in many but not all regions. Figures show that of the 55,000 new jobs created, around 80pc of those new income earners live outside capital. However, this figure does not take account of the concentration in just a handful of other cities, or the numbers having to commute from small towns to Dublin, Cork or Galway for work. They might live in small towns and villages, but the job isn't necessarily there.

 

4) Our Corporation Tax take has been phenomenal in recent years. Last year it most likely topped €8.2bn, a full 22pc higher than a decade ago. The sustainability of this remains questionable. Even if we accept it as a tremendous result, it should not be relied on to fund current spending, because it simply might not be there in the future.

 

5) Surely one of the purposes of economic prosperity is quality of life. We can rightly take it that landing a job, and earning a wage should lift a family's circumstances. But many more people are working in this economy now who would question whether the right decisions are being made to actually improve their quality of life - from health services, to tackling crime, from rent and mortgage costs, to planning for future population growth.

There is now doubt the economy enters 2018 in the strongest position for many years. The rising tide is lifting many if not all boats and you can feel that. But if outside forces brought much of this positive change, they can take it away. There are genuine reasons to be upbeat about our short-to-medium economic fortunes, but future governments will be tested on whether they have really learned the lessons of the past.

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