Will the global downturn put our tiger to sleep?

Plunging stocks, panicked banks and the US in crisis have helped replace the imagery of Celtic Tigers with the Four Horsemen of the Apocalypse. But is the hype been driven by merchants of misery or genuine economic trends? Conor Ryan investigates.

A looming US slowdown?

IN the strictest terms a recession happens when there is negative growth for six months running.

The definition is disputed in some quarters but as America is learning, when it comes to economists arguing technicalities it is akin to fretting about the phrasing of an epitaph.

The latest prediction for Ireland is for the economy to expand by 2.3% in 2008, a far cry from the lofty 11% figures at the height of the boom, but while it is still on the positive side of zero the dreaded “R” word is not an issue.

The next question is if an American recession is necessarily contagious?

European expansion and the increasing consumption levels in China and India had some people believing America could stumble without dragging the rest of the world with it.

Last Monday made them think again. Around the world investors woke up in nervous form and by the end of the day about 7% was wiped off the value of world stock markets.

This came only months after the exposure of American banks to subprime borrowers — who cannot repay loans — took an international dimension.

This happened because the value of loans were sold to international banks and despite months of difficulties nobody is willing to admit the true extent of the problem.

More worrying is the wilting consumer confidence in America with people squirrelling away money rather than splashing it out.

As the world’s biggest economy, with annual consumption standing at a staggering $9.3 trillion, it carries a lot of purchasing power, far outstripping anything offered in the emerging markets.

Even if consumers carry on spending this side of the Atlantic, exporters will suffer badly and jobs will hang in the balance.

A looming US slowdown?

IN the strictest terms a recession happens when there is negative growth for six months running.

The definition is disputed in some quarters but as America is learning, when it comes to economists arguing technicalities it is akin to fretting about the phrasing of an epitaph.

The latest prediction for Ireland is for the economy to expand by 2.3% in 2008, a far cry from the lofty 11% figures at the height of the boom, but while it is still on the positive side of zero the dreaded “R” word is not an issue.

The next question is if an American recession is necessarily contagious?

European expansion and the increasing consumption levels in China and India had some people believing America could stumble without dragging the rest of the world with it.

Last Monday made them think again. Around the world investors woke up in nervous form and by the end of the day about 7% was wiped off the value of world stock markets.

This came only months after the exposure of American banks to subprime borrowers — who cannot repay loans — took an international dimension.

This happened because the value of loans were sold to international banks and despite months of difficulties nobody is willing to admit the true extent of the problem.

More worrying is the wilting consumer confidence in America with people squirrelling away money rather than splashing it out.

As the world’s biggest economy, with annual consumption standing at a staggering $9.3 trillion, it carries a lot of purchasing power, far outstripping anything offered in the emerging markets.

Even if consumers carry on spending this side of the Atlantic, exporters will suffer badly and jobs will hang in the balance.

Exports showed strength in 2007

With a population of 4.2 million, Ireland could not sustain its economy alone, especially with the expansion experienced in the latter half of the 20th century.

Our profitability is heavily reliant on exports and the strength of the euro does little help our cause.

Between January and October last year we exported €13 billion worth of goods and services to the United States.

The higher the euro rises against the dollar the more expensive Irish products become making them less attractive to a market which has recently been forced into a more money conscious approach.

However, despite currency concerns 2007 was not as bad as it could have been. This was aided by a shift underway in the nature of our exports business with two emerging trends pulling the overall figure in different directions.

On one side our export of services is gaining momentum, jumping by 18% last year to €64.8bn.

Service exports now account for 42% of all products leaving our shores.

John Whelan, chief executive of the Irish Exporters Association, said the growth in service exports was “tremendous” but looking at a global picture the economy needs to pull up its socks.

Jobs ‘at mercy of others’

HAVING created a situation where we have the lowest unemployment rate in Europe it is harrowing to think our jobs market is at the mercy of others.

The social think tank, the Economic and Social Research Institute, expects the number of people unemployed next year will rise to 130,000 — the highest since 1992.

During the same time it estimates population growth of 62,000 so there will be 8,000 more people working by the end of the year. Future prospects will depend on how much money people are willing to spend on the products Irish employers are bringing to the market. Consumers were reluctant to spend last year with footfall figures in shops increasing by just 0.2% in 2007, making a mockery of the predicted SSIA spending frenzy.

The tell-tale signs were more evident at Christmas when in the final week the number of shoppers on the streets fell by 4.4% compared with 2006.

It becomes a simple equation for employers — when they are faced with a fall off in demand they reduce their supply. In the worst case it threatens the jobs of the people producing the goods and delivering the services.

Our low corporate tax rates and large community of multi-nationals mean the bulk of the workforce is dependent on the consumer spirit of consumers abroad. On this score the decision makers at the highest level have mixed predictions with a 50:50 split about the prospects for the next 12 months.

A Price Waterhouse Cooper survey of 1,150 global chief executives was released at the World Economic Forum in Switzerland this week.

Half were very confident for their 2008 prospects but the other half saw the glass as getting distinctly empty. Unsurprisingly, the mood was worst among American chief executives but the survey said elsewhere business leaders were upbeat. “The possibility that the downturn could worsen into recession looms large for chief executives in established economies like the US and western Europe. In the newly emerged economies CEO confidence remains strong, perhaps because they have experienced nothing but rapid expansion for a decade or more.” None of Ireland’s chief executives were interviewed for the study.

Property prepares for tough times

Our obsession with property ownership ignited the economy in the ‘90s but the embers of the boom are burning our fingers today.

Last year, alone €11 billion was wiped off the value of the housing market and this was reflected in a larger than expected budget deficit from lower stamp duty returns.

Ireland is considered to be wading in murky waters but there is hope. Rental prices are still rising — last year they grew by 12% in some areas.

This suggests many first-time buyers are sitting waiting for a better deal at the end of the property slump.

The consensus among estate agents is while doom and gloom prevails, the smart buyer will keep his powder dry.

If property prices start rising again these buyers will be forced to re-enter the market, especially if interest rates come down and borrowing becomes attractive again.

Nationally house prices have suffered, but the sheer size of the Dublin market and the amount of development within commuting distance of the capital creates a natural bias.

There was a 10.6% drop in value of Dublin houses last year but nationally the average price rose marginally to €319,000.

The latest statistics revealed that Limerick experienced a significant rise in house prices and Cork to a lesser extent.

For the last few years economists have been praying for something to cool the market. However, the Exchequer’s dependence on stamp duty put us in an unduly vulnerable position.

Not only does a drop in prices put individuals in a position where their mortgages are larger than the value of their homes, it cuts off a revenue stream the Government could use to inject cash into the economy.

Housing output for the next two years is expected to come close to 65,000, down from a peak of 93,000 in 2006.

Stock turmoil leads to pensions worry

ANYBODY with money in stocks had a bad 2007 — and things got a lot worse on Monday.

The mood picked up later in the week when banks and financial stocks received unexpected backing after America’s emergency investment package and the 0.75% drop in the Federal Reserve’s interest rate.

It provided a stimulus which on Thursday saw Dublin’s ISEQ close up 5%, London’s FTSE finish 4.8% ahead, with Paris and Frankfurt gaining 6% in value.

The question is, has this only staved off an inevitable crash or will the markets ride the storm?

For most people without direct investments in stocks and shares the primary worry is what this turmoil will do to their pensions.

Many pension funds are tied to the international stocks and the advice being given to people on the verge of retirement is to hold off for the time being.

Irish pension funds lost 3.5% of their value last year and the first few weeks of January 2008 have brought more bad news.

This year alone as much as €10bn has been wiped off the value of Irish pensions during the worst of the stock market declines.

Fund managers worldwide are reassessing where is the wisest home for their money, but they run the risk of doing further damage to their stock portfolios if there is an exodus away from the financial markets.

Talking ourselves into a recession

TAOISEACH Bertie Ahern has already articulated the main problem with all this recession talk — it’s a self -fulfilling prophecy.

Last year he said talking doom and gloom undermines consumer confidence, affects till receipts and, in turn, causes a fall in production.

This is happening and as people ignore the positives the situation gets worse.

All indicators are that the Irish economy will still grow this year, house prices are not in free-fall and there will be more people employed in December than there are at present.

Europe could adjust interest rates to help its situation with the dollar but the last thing it wants is to create panic.

Across the water, there is the beginning of a united war on recession. On Thursday, the Republicans in the White House and Democrats on Capitol Hill agreed a panic package to release $150bn (€102bn) in tax rebates for workers. It will hand individual workers $600 (€408).

Stock markets recovered around the world but there was nobody suggesting this would stop the dam from bursting. With an election looming, everyone is waiting until November.

Until the race clears up after February’s Super Tuesday selection event and the rival candidates pin their colours to the mast, we wait uneasily.