Monday 20 November 2017

Only thing we can be certain of is we haven't seen anything yet

Purchasing power has been forecast to increase by 9pc this year and next. Stock image
Purchasing power has been forecast to increase by 9pc this year and next. Stock image
Brendan Keenan

Brendan Keenan

A theme in many of the myriad books written about the Great Recession and the political upheavals which have followed, is that there was some kind of fundamental break in the global economy in the 1970s.

Who are you telling? One of the breaks was that financial journalism went mainstream; from specialist backwater to the front page and the top of the bulletin. Just the thing for a young(ish) hopeful reporter, I thought. And I was right.

On the other hand, I never entirely understood why this change occurred. Presumably, after more than two decades of solid growth, low unemployment and negligible inflation, people got very interested when things went badly wrong. We may be seeing something similar in the increased sales of mainstream media since Mr Trump's election.

The books wrestle mainly with the puzzle as to why the stability of the 1950s and 1960s (Ireland was a sorry exception in the first half) never returned. From my career point of view, puzzles have been the best bit.

Financial journalism may have a higher standing than 40 years ago, but is still regarded as a bit of a bore in many quarters. If it is boring to read or watch, that is our fault, but it is certainly not boring to do. Unlike supposedly more glamorous areas of the profession, such as sport or politics, nothing ever repeats itself.

Just look at what is happening now. Those who predicted the crash would be the first to agree that nothing like it had been seen for 80 years, which made their prediction all the more impressive.

I have the impression that even fewer thought we would be talking about the dangers of over-heating, and the risks of another bubble, just 10 years after the avalanche began to descend. Yet that is where we find ourselves.

In his latest update Conall Mac Coille, chief economist at Davy Research, increased his forecast for growth in the economy this year to 5pc, up from an earlier 3.7pc calculation. Growth estimates for last year were also upped, to 5.2pc.

These are figures well above the economy's assumed rate of sustainable growth. Mr Mac Coille garnered some headlines when he said unemployment, "would drop like a stone". Hardly surprising, with growth like that, but it is difficult not to be surprised at the idea of the jobless rate being close to 5pc by the end of next year.

This is a story we did not expect to be writing - at least not yet. The puzzle is why. It seems obvious enough to start talking about bubbles and heatwaves, but examine the puzzle and it becomes less obvious that such talk is correct.

For a start, there is no credit bubble. Quite the reverse. The latest figures show household debt as a proportion of disposable income also falling like a stone. Rising purchasing power - forecast to increase by 9pc over this year and next - has much to do with it but the actual amount of debt is down €50bn on its peak.

With house prices rising 10pc a year and mortgage lending reaching €75bn, property prices may still cause trouble, but to buyers rather than to banks or the economy in general. The review of the Help to Buy scheme needs to present the politicians with evidence that what people want may not be what they need. We will see if they can rise to the occasion.

The lack of new borrowing makes the growth figures all the more puzzling. With lending to companies and households stagnant or falling, there should not be enough credit to support a sustained recovery. But it depends on what you mean by "sustained".

Much of the puzzle has to do with the nature of recoveries. Ours has been an object of wonder - but so was our crash, even if it inspired wonder of a different kind. Look back to where the economy has come from and things do not look quite so remarkable.

Employment growth provoked the greatest wonder but the number of people in jobs is still 5pc less than in 2008. The much derided eurozone has seen employment increase by more than 4pc, although that disguises very different patterns in the individual member states.

Britain has seen a 7pc increase in employment and not much of a fall after the crash. The connections between that performance, its freewheeling labour market, and high levels of immigration, would make a book in themselves.

In Ireland, things are complicated by the enormous bubble and burst in construction. If that is excluded, the rest of the economy has restored the lost employment, although not yet increased it.

We would not particularly want that number of building jobs again but the industry should be able to add two or three percentage points more to total employment. But with non-building jobs already 5pc up on 2005 (a better comparison point than 2008), the recovery phase may be over.

The next challenge is to do something about the large numbers of Irish people who do not work at all. Not the unemployed, but those of working age who, for whatever reason are not seeking a job.

At 40pc of the total, they are more numerous than in most eurozone states. Even during the boom, the figure did not fall below 36pc. If more of them could acquire better qualifications, or enticed into the labour force with a different work/welfare regime, the potential for non-inflationary employment growth would increase.

Achieving that would mean changes to the education and social welfare systems which everyone knows are needed but which no one particularly intends to implement. That leaves it to migration to feed future demand for jobs; which is another great bugbear for Irish statisticians.

The recent analysis of Census 2016 found that there were 90,000 more people in the country than had been thought. Nobody quite knows who they are, their nationalities or how many of them are working or seeking work.

Depending on the answers, the real unemployment rate could still be 7-8pc. The Central Statistics Office carries out a large, expensive household survey every quarter, but the flows of people in and out of the country in the last 10 years were so large that the survey results proved misleading.

Then there is the leprechaun problem with Irish GDP. The latest, notes Davy, is the importation of €20bn of intellectual property by - well, we don't know by whom but there is a small list of possible suspects.

Given the kind of return on such property, it could add 2pc to GDP this year. Hence the 5pc figure, but little of that increase will show up in the Irish economy.

The Irish economy is so small, so open, and so trampled by corporate behemoths, that it does not follow the textbooks; not even the ones on small open economies. We are gradually finding out where we came from in the last 10 years, but there is considerable uncertainty about where we are now and, as for the future, who can say?

One can say with more than usual certainty that the next few years will be unlike any seen in the past. Despite the apparent successes since 2012, caution is the watchword. Irish politicians have rightly been criticised for short-termism but this is one time when any longer-term commitments must come with foolproof get-out clauses. Just in case we are caught by surprise again.

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