Get set for a new year chill, but don’t put on the hairshirt just yet
A severe slowdown in construction would hammer jobs and Government revenues and in itself could tip the economy into recession
is facing into its most difficult economic time for more than a decade and we are likely to hear quite a lot of bad news this year. No amount of wishful thinking can deny that, although some angry people with much to lose if they have over-extended themselves are blaming the media for talking us into a crisis. Media commentary may have some part to play in creating a climate of anxiety, but it is relatively small; the media should not ignore the evidence in front of it in the hope that by doing so things mysteriously will take a turn for the best. Here’s my take on some of the major economic issues facing us in 2008.
Many people hope the European Central Bank (ECB) will cut them. Unfortunately, the ECB is required by its mandate to concentrate on fighting inflation, which is rising, so it more likely to put up rates. The best we may hope for in the first six months is that the ECB will leave them alone so as not to increase the value of the euro against the dollar too much.
Many banks have incurred savage losses by investing unwisely in complicated loans to those who couldn’t repay them. The problem is exacerbated by a lack of knowledge as to who actually owns the worst loans. Banks are finding it harder to borrow money from each other and have to pay more for it. This means they will charge borrowers more or offer depositors less. Or they may cut back their lending to personal and business customers dramatically.
A range of factors, including higher mortgage rates, rising oil prices and more expensive food threaten to send inflation consistently to more than 5% here and elsewhere in Europe during 2008. This will increase the pressure on the ECB to lift interest rates. Workers may demand higher pay to compensate but find employers unwilling or unable to grant it.
Falling prices should be a good thing for those who were priced out of the market up to now. Unfortunately, many of those who may think prices now better reflect the value of houses may not be able to get the size of loans from banks they require.
New houses and apartments have been the (soft) backbone of the economy in recent years, accounting for about 14% of economic activity and 12% of employment. his year we may see the 2007 figure of 90,000 new units more than halved. The idea that there is a population-led demand for 60,000 new units a year is doubtful, especially if immigrants stop coming or start heading home. There are too many vacant houses as it is and builders may sit on them for years rather than sell cheaply. A severe slowdown in construction would hammer jobs and Government revenues and in itself could tip the economy into recession.
The Government had become used to making “profit” during the last decade, but disappointing tax revenues and a failure to curtail spending meant it had a €1.6 billion deficit last year. That wasn’t serious in itself — and some productive borrowing does not go amiss — but things could get much worse during 2008 if the Government fails to achieve its own target of increasing its spending by “only” 8.5%. Its tax revenues could come under huge pressure in a slowing economy, meaning next December’s budget could result in income tax increases and worse.
The Government’s annual pay bill could be increased again if the second benchmarking review for public sector workers — to “compensate” them for perceived disadvantages compared to private sector employees — is again like taking cash from an ATM. Logic would suggest that public sector employees — with their far greater job security and pension entitlements — would get little or nothing from this latest review. Logic has little role to play in benchmarking, though.
Irish companies are likely to find domestic and import markets tougher. Demand may be down and prices hard to maintain, let alone increase. A continued dollar fall will make things tougher for exporters to the US. Borrowed money may be more expensive and funding may not be available for some projects at all if the banks scare easily. Job expansion projects will be put on hold. Foreign companies operating here may look to move to cheaper locations.
The rout in the Irish market over the last 12 months — with shares falling by nearly one-third in value — means more to people than many may think because pension fund managers have invested too heavily in Irish stocks. Direct investors have lost large amounts, especially if they bought shares late on rather than early in the cycle. Stock market falls put pressure on companies to increase profits to reassure investors and the convenient route many managers take is to cut costs by axing jobs.
One of the extraordinary stories of the last decade has been the addition of hundreds of thousands of new jobs, providing massive amounts of extra money in the economy. But the tide has turned and some respected economists believe the amount of net new jobs created in 2008 will be minuscule. Our best hope may be that tens of thousands of immigrant workers who lose their jobs in the construction sector will move elsewhere instead of claiming social welfare benefits here. If they stay, the dole queues will return at great financial cost.
If the number at work fails to rise, or falls, consumer spending will fall. It may anyway, as people tighten their belts and pay down debts. The failure of an SSIA boom to materialise after money in those accounts became available to savers was a disappointment to retailers, but a sign that good sense started to take hold with many people early last year.
But it’s not all bad news. The interest rate rise may never happen and could be reversed quickly even if it does. The banking crisis may ease allowing a release of funds to borrowers. Inflation could be tamed by ECB actions. Property prices could fall to a level that provides reasonable value to everyone and not only unjust booty for builders and the Government.
A sustainable level of home construction could be achieved and the national development plan for infrastructure could take up much of the employment slack. The Government could become fiscally responsible. Benchmarking might recommend no pay increases.
Corporate profits may remain resilient. Shares on the stock market may have been sold at excessively low prices providing investors with a great opportunity to make big profits on a recovery. Job losses then would not become an issue. Consumers may be unable to break the spending habit.
What do you think?
The Last Word with Matt Cooper is broadcast on 100-102 Today FM, Monday to Friday, 4.30pm to 7pm.
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