A long depression with no end in sight
The world economy has been pushed into a very deep recession, with the contraction in economic activity the most severe seen in decades. The global banking system has also been fundamentally altered and many of the international banking names that I grew up with in my professional career are no longer around. Those that remain are still trying to work through the carnage created by the excesses unleashed by some financial geniuses who should never again be left loose on the global financial system or any system for that matter.
After two very difficult and turbulent years, some positive economic signs are at last starting to emerge. It is quite clear from the majority of recent economic releases that the global economic momentum has stopped falling, and is now stabilising. The hope is that there will be a gradual lift off over the next 18 months or so. I stress the word gradual, because it is difficult to envisage a robust and sudden recovery, given the destruction of personal wealth that has occurred in the US in particular, and the ongoing difficulties with credit availability around the global banking system.
Despite historically low interest rates, significant fiscal stimulus packages around the world, with the obvious exception of Ireland, and ongoing efforts to re-capitalise banks around the world, it would be surprising if the global economy could just shrug off the damage inflicted over the past couple of years and resume business as usual.
Here in Ireland, the implosion of the sub-prime crisis and the subsequent global economic difficulties seriously exacerbated the pre-sub-prime crisis housing market correction that had commenced early in 2007. Any possibility of a desirable soft landing for the Irish housing market, which I incorrectly believed possible early in 2007, was blown right out of the water by the global crisis.
As well as the destruction of housing wealth, the performance of Irish pension funds has been pathetic.
An economic recession is defined as two successive quarters of negative economic growth, and an economic depression is a decline of more than 10% in economic activity from peak to trough. Ireland passed through the recession phase in the middle of 2008 and is now in depression territory.
Unfortunately, it is very uncertain as to how much further activity could contract.
The fact that taxes are being increased amid such a deep economic downturn is particularly worrying. But the only way to prevent it is if the main elements of the McCarthy report are implemented. Spending should be increased and taxes cut in a downturn, but due to past failures by Government, that is not possible.
The failure by Government was the inability or unwillingness to control public spending at the height of the boom. They also allowed the tax base narrow too much by taking thousands of workers out of the tax net and becoming heavily dependent on the tax revenues that were flowing off the property sector.
Ireland is now paying for the economic and financial mistakes of the past decade and this aspect of Bertie Ahern’s legacy should not be forgotten. I wrote a few years back that a monkey could have managed the Irish economy during the boom period, and unfortunately it appears as if that may have been the case.
Hopefully, lessons have been learned and that history will not be allowed repeat itself. Meanwhile, we will just have to grin and bear it, and take the pain.
