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Dan White: Why the recession may be nearly over but we still feel poor

Employers' body IBEC has forecast the end of the recession. It is predicting that the Irish economy will shrink by only 0.7pc this year, less than half of its previous forecast of 1.6pc.

IBEC is even more optimistic about the prospects for 2011, pencilling in economic growth of 2.1pc as compared to its previous forecast of 1.7pc.

However, for anyone tempted to use the more optimistic IBEC forecasts as an excuse to drown the shamrock today, my advice is to not to get carried away.

Last week, the ESRI updated its forecasts for negative equity, where people owe their lender more than their home is now worth.


The picture painted by the ESRI is a grim one. It estimates that there were 116,000 homeowners stuck in negative equity by the end of last year and that this will rise to 196,000 by the end of this year.

In fact, as the ESRI itself readily concedes, these estimates for negative equity are almost certainly way too optimistic. The baseline ESRI estimates were calculated using the Permanent TSB house price index, which calculates that average house prices fell by 31pc from their February 2007 peak by the end of 2009.

The problem with the Permo house price numbers is that, with deals taking so long to close, the index is up to six months out of date.

So how much have house prices actually fallen by? With even the Construction Industry Federation now conceding that the fall is at least 50pc, it almost certainly makes more sense to base any estimates for negative equity on house prices having halved from their peak.

Apply the 50pc test and the ESRI puts the number of homeowners stuck in negative equity at 188,000 by the end of last year rising to a truly horrifying 350,000 by the end of 2010.

Amazingly, there are no up-to-date figures for the total number of residential mortgages outstanding. What we do know is that there were 645,000 homes with mortgages at the time of the April 2006 census and that 760,000 new mortgages were paid out over the nine years to the end of 2008.

With 111,000 new mortgages having been paid out in 2006 alone, it is likely that the total number of mortgages now outstanding is much closer to 760,000 than 645,000, say 750,000.

Even allowing for a much higher number of mortgages, the 350,000 home loans which the ESRI forecasts will be in negative equity by the end of 2010 represents almost 47pc, as near as makes no difference to one-in-two, of all mortgages.

Even where people can continue to afford to make their mortgage repayments, negative equity on this scale will act as a drag on the economy for years to come with hundreds of thousands of people stuck in "their" homes.

So how does this tally with the IBEC forecast? Do the two organisations inhabit parallel universes?

No. In fact the two apparently contradictory forecasts may be perfectly compatible.

Cast your mind back to the late 1980s and early 1990s. In those days, the multinational-dominated export segment of the economy was doing quite well while the indigenous economy lagged far behind. With Irish costs having been slashed, something similar is now beginning to happen again.


What this means is that, even if IBEC's forecasts prove to be correct it could be the middle of the decade before economic growth feeds through into lower unemployment and higher incomes. That's what happened in 1990s when it took the 1993 devaluation to kick-start the domestic economy.

Still, it might not be a good idea to turn up our noses at renewed economic growth, even if it is of the jobless variety. Even the longest march must first begin with a small step forward.