Depending who you talk to of course, the fundamentals might be just rosy as hell. I tend to believe that the Irish economy has been a very sick puppy for a good many years now. It really only dawned on me last night what sytilised fact illustrates this so well.
Consider that the normal process by which an economy enters recession is via high real interest rates. Very often it is a sequence of excess demand leading to inflation leading to tighter monetary policy leading to high real interest rates leading to a drop in investment and recession.
Consider that it really only took zero real interest rates (really they were still negative) to push Ireland over the top. Granted there was the affect of credit rationing due to the credit crunch, but that really only gilded the lilly.
Compare the US, which most people think is in recession (despite positive weak GDP growth still). It succumbed to unusually low real interest rates in thes cycle, but they were still positive.
Basically Ireland fell over from the impact of a piece of goose down. The problem from here is considering what would normally happen next. Real interest rates would be pushed dwon, possibly negative. The exchange rate would fall. Neither of which are possible for Ireland. Even if Ireland left the Eurozone now, monetary policy is starting from a position of zero/negative real interest rates. That wouldn’t leave massive amounts of firepower available.
That is why I feel this is going to be a long drawn out period of below trend growth for Ireland (1-2% average) over the next 3-4 years maybe, unless there is some significant offsetting factor.
And unfortunately they’re not at all rosy when you look into it.
All the ‘nice looking’ fundamentals are only ‘nice looking’ due to the unsustainable cash flowing into the country from borrowing - government surplus, unemployment etc, are all bought and paid for by 60bn a year in borrowings.
Yep - and that shows how bad things are. We slow borrowing a bit (net borrowing of 54bn yoy to april, rather than over 60bn), and we’re reaching for the panic buttons.
I’d speculate that the only way to keep the party going would have been to hit >70bn by now - and that’s some economy - who can only grow (or even sustain itself) by borrowing ever larger amounts.
Yep - thanks to the government letting inflation run loose (and it did have tools to control it), it was actually worsening the already low cost of borrowing. As you say, we used up much of the firepower keeping the bubble going, and now there’s nothing left.
I’d say you’re being way way too optimistic there - as the second (and third, fourth etc) rounds of squeeze happen from the borrowing slowdown, i really can’t see there being any sustained economic growth (even 1% real yoy) in ireland for the next 5 years minimum. We’ve only seen the first wave (hitting construction) and some of the second (hitting the motor industry and restaurants) yet.
And if others in the EU clamp down on ye olde transfer pricing, you might not see GDP above 2007 levels for decades.
Unfortunately I think the things that are rosy at the moment (strong export growth, er, is that it?) are not sustainable if our export markets go into recession.
What I think we have seen so far is a consumer led recession, in part brought on by the collapse of the credit bubble and housing bubble (although these two may be the same thing). I think a real recession will cause far more pain - a decline in company earnings leading to a decline in wages coupled with cutbacks at the biggest employer in the state, the government. When this starts to hit, things could get very dicey indeed.
I am intrigued by the faith that the average punter seems to put in the export sector because no one seemed to care about it when we were blinded by a foolish construction boom. Our major trading partners are all in varying degrees of economic slowdowns, and our currency is going the wrong way for a country that is relying on exports to magically fill the gap left by a sharp fall in domestic demand.
I hope for yoganmahew’s outcome but fear that ragingbear’s bleak assessment of our prospects is the more likely outcome. Economies can stagnate for years - decades even. I remember having my eyes opened to the extent of the economic mismanagement that plagued this country in the 70s and 80s when I studied the subject. I have yet to be convinced that we are not about to repeat this is in some way.
For the moment I am so glad that I do not live in Ireland.
We are in for a (to use a well worn quote) “Winter of discontent” as regards the unions and the government negotiating pay settlements, I think it could get messy as the unions are making noises that they wont stray from what they want the government cant give it because they squandered it and IBEC are calling for restraint all around its never gonna happen.