Tuesday 18 June 2019

Tricky times ahead but there's no call for panic - for the moment at least

Opinion - Our View

With the economy said to be overheating and trouble brewing in the Eurozone, it's a nervous time for Ireland but we shouldn't be panicking just yet.

As the seemingly endless political turmoil continues in Italy this week, the Paris based Organisation for Economic Cooperation and Development (OECD) has warned that's Ireland's economy is showing signs of overheating and Brexit remains the biggest risk.

While we should certainly take the OECD's warning - which is largely based on the state of the Irish property market - on board it is important that we, and the markets, don't overreact.

Given past experience and the disastrous collapse of the Irish economy 10 years ago it is no surprise that the OECD is keeping a keen eye on Ireland at the same time that Italy threatens the Euro.

However, the OECD's experts appear to have missed out on one very important fact about Ireland's spiralling house prices.

The OECD has raised the scary prospect of another property bubble developing in Ireland and has suggested that new credit controls be used to tamp down credit growth.

What is important to note is that this time around the growth in house prices has not been caused by speculators with access to practically unlimited credit.

On this occasion it is the law of supply and demand that is at the heart of the issue.

Put very simply, after Ireland's lost decade there just aren't enough houses to meet the demand.

Contrary to what the OECD suggests, freeing up more credit might actually help matters.

We certainly don't want to see a return to the financial madness of the boom era but if housing prices are to be steadied then we need more houses. Lots of them.

To do that developers - many of whom are solvent but still can't access enough credit - need cash to get the construction sector moving again.

Similarly, concerns about Italy's political deadlock and the risk it poses to the Eurozone would also appear to be a little over the top.

The crisis in Italy has seen the value of the Euro fall sharply as investors run for cover but in the long term - based on Italian public opinion - there appears to be little threat of the Eurozone's third largest economy leaving the single currency.

Such jitters in international markets are nothing new and some adjustments are inevitable when political crises unfold.

We should not overreact and lose focus on the major unfolding issues that are a threat to Ireland, namely US tariffs on steel and aluminium and the potential impacts of Brexit.

The looming trade war between Europe and the USA, along with Brexit, pose what the US would call a 'clear and present danger' to the Irish economy and it is one these that our attention should remain primarily focussed on.

The situation in Italy and the OECD's warnings about our housing market should be noted but they shouldn't be allowed distract attention from where the real risks lie.

Drogheda Independent