So, what will 2014 bring on the economic front, for Ireland? Will we continue to turn corners without ending up back where we started, or will we slip back into the chilly embrace of the troika so recently departed?
1 The latter half of 2013 has seen the economy stabilise if not actually begin to show improvement. If we are to have any hope of regaining actual economic sovereignty then we need to see this continue and more especially deepen.
A real sustained economic recovery will only become evident when we see a stabilisation of domestic demand, and that demand being broad based. Right now there is stabilisation, but it is patchy and by no means broad based.
2 There has been a welcome uptick in jobs. Since the start of 2012 we have seen 74,000 new persons in employment. Digging into these, however, we see that over a third of that is made up of self-employed with no staff.
While entrepreneurial setups are great, these will not, in any feasible amount of time, result in significant economic growth. These TINAEs (There is no alternative to entrepreneurs) are micro-businesses and not huge job creators. Another 5,000 are assisting relatives — working on the farm or on the shop for low wages. We are an eyewatering 270,000 lower in terms of total workers now (1.899m Q3 2013) compared to the peak in Q3 2007.
3 We have already seen that we will have a lost decade in employment. We are now back, and this is with an upswing as noted, at mid-2004 levels of jobs. The composition of the workforce however has changed. Comparing Q1 2008 to Q1 2013 we have 60,000 more people in health and education, 90,000 fewer in construction, 35,000 more in residential and social care and what may surprise people, we have 20,000 more persons in financial services.
Manufacturing areas have taken falls of between 20% and 60%. A careful eye on the structure of employment to ensure we do not become unbalanced is essential.
4 The banks are a long, long, way from fixed. The halting nature of the repair job, with the banks unwilling to write down residual SME and mortgage debts, the Government unwilling to force this for fear of the blowback from repossessions and emergent capital holes, and the EU unwilling to countenance any form of retrospective funding, has left the economy like Mr Orange in the climactic scene of Reservoir Dogs — bleeding out on the floor while vested interests hold each other at gunpoint.
Of gross new lending to SMEs in the first three quarters of 2013 only approximately 10% went to manufacturing and 10% to services.
The largest single amount – 35% — went to agriculture. While a vital industry, this reflects the incapacity or unwillingness of Irish banks to lend absent ‘real’ security. Steps will have to be taken to ensure that credit flows to the areas that will create sustainable employment in the large numbers needed.
5 Within Europe the debate on the banks continues. The present state of play enshrines the bail-in principle, where Cypriot-style resolutions to failing banks may result in deposits being subject to writedowns before taxpayers are involved. The proposed rules are subject to political agreement of public funds being invested and there is every likelihood that when a large bank gets into trouble first there will be calls from the markets (blessed be their name) that bondholders cannot be burned for fear of Lehmans-style crisis, and there will be rigid teutonic unwillingness for community funds to be invested.
Thus failing banks will continue to infect the sovereign and the doom loop remains intact. With Greece at the helm of the EU council in 2014 it would be nice if Ireland could play a part in breaking this doom loop, but given that the principle of depositor bail-in was agreed under our presidency that is too much to hope for.
6 The increasingly less black swan of UK exit from the EU continues to lurch forward. Assuming, and it is still a big assumption even with an improving economy, that the Tories win the next election, they are committed to a referendum on EU membership.
It would be a calamity for them to vote to exit the EU — but it would be an even worse one for us. Europe is not in a particularly forgiving mode at this juncture and it is highly improbable that a soft exit would emerge. An isolated UK (perhaps reduced to England and Wales, with an increasingly unwanted Northern Ireland) would be poorer and thus less amenable to Irish exports. It would be more closed, resulting in it becoming a less effective safety valve for Irish migrants. Soft power should mean that the 400,000 Irish diaspora in the UK be reminded of how useful a UK in the EU is to them and to us.
7 The Irish economic model remains one that in essence entices foreign direct investment into the country on the basis of a combination of tax incentives. We are not a tax haven per se, but do form a crucial link in the worldwide tax arbitrage chain. This will have to change.
We will have to ensure that stateless companies do not operate from our jurisdiction, but more importantly we need to face up to the fact that a large part of our services exports are based on tax arbitrage sand. Pretending that this is not the case is folly. Much real work is done and exported but this tends not to be sexy techy household name stuff. We need to take heart from the success of Storyful, for example, and focus on growing more of these and less iFaceGoogles.
8 The key, to success in the modern world is a well educated society. Government needs to bang business heads together and suggest that they cannot blather and bleat about the lack of skills in the graduate workforce without taking a lead in the debate on solutions.
These will involve a refocusing away from level 7 and 8 Higher Education courses (great for massaging the aul dole queue numbers) and towards the reintroduction of proper business-education apprenticeship structures in all areas of the economy. It will also require the Government to accept that there are levels, specialisations and tiers in higher education.
9 There is throughout the Irish economy a focus on the glitz and glamour of exporting to Brazil, Russia, India, China and South Africa. Yet, areas such as Latin America and Africa, sub-Saharan Africa in particular, have shown remarkable resilience and growth in the last decade and forecasts are for this to continue. While small in aggregate terms there are deeper cultural links than to China. A wider more adventurous approach to our exports would pay dividends.
10 Finally, as we run towards the election season, there will be a massive temptation in government to find sweeties for all and sundry. Even with all the work done there is still a massive hole in the budget; we have a chronic lack of joined up thinking; insider elites scoff at the notion of change and wonder ‘what recession,’ and the Government shows worrying signs of reigniting a mini property bubble. A focus on reform and good governance would be nice to see.
© Irish Examiner Ltd. All rights reserved