Saturday 24 February 2018

It's too soon to ring out the bells and mark end of lost decade for Ireland

Impressive work has been done in rebuilding the economy, but challenges remain
Impressive work has been done in rebuilding the economy, but challenges remain
Brendan Keenan

Brendan Keenan

MAYBE they should have rung the church bells. Just about now, the economy will regain the peaks reached in 2007. But then again, maybe they shouldn't.

The apparently cheery news was contained in the recent quarterly analysis from Goodbody. Using their preferred measure, the output of goods and services was the same as just before the mighty bubble of the early 2000s burst.

That preferred measure business is the first of many complications in any attempt to assess the economy's recovery that chief economist Dermot O'Leary highlights. He is clear that the "lost decade" is over but the devilish details show why ringing bells might be a mistake.

Even so, what a bouncy little economy it is. Ten years is a long enough time in a career, or a lifetime, but pretty short when it comes to economic cycles. Just about as short as it could be, economic history suggests. After a crash like that, 20 years to recover would not be that unusual.

It is still not over for some. Ireland's estimated growth this year will put it back at the eurozone average of the past 10 years but Italy and Spain are still below that figure while Greece continues to languish.

As to the "preferred measure," Goodbody calls it adjusted "core domestic demand" (CDD*). The Central Statistics Office also has a CDD*, as well as its new national income measure, GNI*. We have moved from being a leprechaun economy to an asterisk economy.

This is no laughing matter. The operations of foreign companies (and in the case of Ryanair aircraft, domestic) have made it near impossible to know what the Irish economy is worth or how it is doing.

These new figures are a help but official policy, including the Budget, will continue to be based on GDP numbers which no one believes. The latest estimate is €288bn, which surpassed the 2007 figure of €190bn some years ago. But using core demand, the economy has only now returned to its previous peak of €160bn.

The huge distortions that multinational activities and bizarre international accounting standards have produced are seen in the figure that GDP was 20pc higher than CDD in 2007 but is now 80pc bigger.

In a new Central Bank analysis, we see that the same distortions explain why Ireland seems to be 16pc in deficit with the rest of the world but actually has a small surplus. We really cannot go on like this, although it is difficult to know how or when it will stop.

The expected deficit this year will be officially recorded as 0.6pc of GDP. Last year seems to have been a bumper one for growth, but the deficit is barely changed. That is down to policy, not statistics but the funny numbers mean the reality is closer to a deficit of one per cent of national income.

All of which helps explain why the election campaign based on recovery fell so flat. An even bigger reason is in the figures which show current government spending increased by €5bn since the crash and income taxes by €7bn.

So much for spending cuts taking two-thirds of the correction. It must be presumed that, without the painful and unpopular "cuts" that did take place, spending might have grown by €15bn. At €1.5bn a year, that is not at all implausible, but it shows the difficulty of maintaining a cautious budgetary policy when our troubles are supposed to be over.

The economy looks like growing by 9pc over this year and next and, all being well, by more than 3pc in 2019. All may not be well, of course. It is impossible to know what a hard Brexit would do to that figure, and into the 2020s.

As talk of the next election grows, more promises whose costs will fall in future years are in the air. We know that a lot of debt must be replaced early in the next decade. This is not something one would want to do against a background of domestic and international turbulence.

There are reliable figures which do deserve celebration. The most cheering is also perhaps the most important - employment and unemployment. The growth in full-time jobs is not just the best since 2007; it is the best since 1999. The only employment figure which is falling is that for part-time jobs.

This is making a big difference to the national statistics. Wages are up by 10pc over the decade but that reflects the growing number of earners. Individual disposable income has grown by a less exciting 3pc.

One thing which would not have been expected after such a bust is that the population would grow by an eighth. That is good to see but it does mean that spending per person is still 11pc lower than in 2007.

It will certainly require a change in mindset to start to deal with the consequences of full employment as the jobless rate drops below 5pc. Already, more people are coming into the country than are leaving. They will be needed, to avoid inflationary wage pressures, but Brexit may turn Ireland into a more popular destination for EU migrants than is needed or wanted.

A sour joke during the bubble was that foreign workers were building houses for foreign migrants to live in. The danger now is that they will be building offices and shops while they and many of the locals have nowhere to live.

The failure of the housing market - which is the only way to describe it - may well be an even bigger threat to medium-term growth than Brexit itself; although one may reinforce the other.

The frightening statistic is that the economy needs another 35,000 housing units each year - the accumulated shortfall will reach 100,000 units in just a few years.

Understandably perhaps, comment concentrates on homelessness, which is the extreme end of this crisis. But most of the 100,000 will not be homeless; just unable to live where they want to and make the contribution the economy needs from them.

Many will have no choice but to emigrate. Like others, Mr O'Leary sees no solution in the piecemeal response so far. "An all-encompassing approach that includes increased density, penalties for land-hoarding, further release of state lands, speedier planning decisions and the embracing of large-scale institutional participation in the market is required," he writes.

The lack of action may be seen as the feebleness of government which seems to be a feature, not just of Ireland, but Europe in general but a look at Mr O'Leary's list shows the difficulty of breaking the policy chains created by years of rules and laws introduced with the best of intentions but no recognition of the inevitable unintended consequences.

Nothing stays the same and governments need freedom to respond to whatever they face, even though there is a price to be paid in the risk of foolish responses.

One of the most depressing stories of the year was the requirement to remove Vat from tolls on Dublin's downriver bridge, not because of some benign policy decision but - can you believe it? - as the result of a ruling from the European Court of Justice.

Those bells may have to be muffled for another while yet.

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