Year synonymous with one word: Subprime
2007 was very interesting year in the world of politics, economics and finance and the year ahead looks set to be every bit as interesting.
From a political perspective, the General Election in May was the key domestic event.
In its aftermath, Fianna Fáil returned to power as the dominant party, but this time with the support of a drastically depleted PD party and, amazingly, with the Green Party.
The notion of the politically correct Greens going into power with the politically incorrect Fianna Fáil is still hard to come to terms with.
It just goes to prove that in politics one needs to be incredibly nimble to carry out the sort of U-turns we have witnessed over the past year.
The Greens did an amazing about turn by agreeing to go into government with the traditional enemy, while we have been treated to further U-turns by the Taoiseach in relation to stamp duty on residential property (twice) and the pay awards granted to senior politicians.
It just goes to prove that the ancient art of politics is all about the art of the possible.
It seems certain, that further nimble movements will be required over the next couple of years as the Government seeks to back away from many of its pre-election promises.
It does seem that the only time we should be surprised with politicians is when they actually do what they said they would. It is probably safer not to hold one’s breath in anticipation of such surprises.
On the economic front, the fortunes of the Irish housing market changed after a decade of sustained upward momentum. Some people blame a certain RTÉ programme early in the year for the change of market fortune.
However, the reality is that after a couple of years of insanity in the market, particularly in the early months of 2006, it was always ripe for a correction. ECB interest rate actions provided the catalyst for that correction.
This correction is not undesirable as it would not be healthy if house prices and housing supply had continued to grow at the pace of recent years, and if personal debt levels had continued to go to the stratosphere.
The issue as we move into 2008 is that the correction would not yet appear to have run its course so there will likely be further weakness, uncertainty and downward price pressures over the coming months.
Not surprisingly, the end of the building boom took considerable heat out of the Irish economy and its labour market, but Finance Minister Brian Cowen felt the most intense pain, as he prepared Budget 2008.
The Irish equity market also delivered the worst performance in the developed world. Looking ahead to 2008, it would appear that against a background of the lowest level of economic growth since 1993, tax revenues will come under further pressure, unemployment will rise further and international scepticism about the Irish financial sector could persist.
By far the most dramatic development in 2007 was the implosion of the US subprime market and the consequent spectre of Irish savers queuing outside a financial institution to withdraw their savings.
The crisis forced a number of previously hawkish central bankers to do a remarkable about turn on interest rate policy.
When the history of financial excesses and financial loss is being written, 2007 will feature very prominently in the story.
But the story is not yet complete and we can be fairly certain further turmoil will emanate from this particular source in early 2008.
Next year promises to be more uncertain than most.
Hang on tight.
Jim Power, chief economist, Friends First
