This week has been an extraordinary one for financial markets. On Friday, five straight days of losses were reversed in equity markets. The world is slowing down. The Chinese growth model, for so long the envy of the West, is stalling. The American recovery is spluttering and the crisis in Europe rumbles on.
What is happening is not that different from what happened in Ireland. A huge investment boom is coming to an end. But China has the resources to plough into the domestic economy, so let’s wait to see what happens there.
One of the dilemmas for China is that when you have an investment-led, rather than consumption-led boom, you tend to be left with overcapacity – an Asian version of a giant ghost estate. Cutting interest rates in such an environment, if it doesn’t boost consumption and goes into yet more investment, makes the problem worse.
Over in the US, something stranger is happening. The consumer, the great hope of America, has disappeared. Consumer spending is not responding to the many interest rate cuts the Federal Reserve has offered in the past few years. The problem now is that real interest rates are negative, so cuts in nominal interest rates are not going to help much.
In Europe, the ‘did they, didn’t they’ game goes on. The debate about what the Germans actually agreed to at the summit two weeks ago continues. Some high-placed people in Germany are saying that Chancellor Angela Merkel didn’t agree to backstop peripheral banking debts or if she did, she agreed to an accounting trick – taking debts off sovereign balance sheets but still making the sovereigns liable – rather than a eurozone debt mutualisation deal.
This will come out in the wash over the coming months, and we hope with a positive result for Ireland.
However, looking at home, the evidence from the economy is depressing. The latest GNP figures released this week show continual contraction. This is not a huge surprise, but to see the figures so starkly reinforces the question of where our growth will come from.
This growth question is made yet more urgent as unemployment is still rising and the latest Irish League of Credit Unions survey showed that 70 per cent of people said their disposable income had dropped since this time last year.
Over 1.8 million people had less than €100 left at the end of the month after paying all their bills. And nearly a quarter of credit card owners rely on another credit card to pay their bills at the end of the month.
When we add these figures and survey data to what we know about mortgage arrears, we can see that significant mortgage default crisis is almost upon us.
The big issue for Ireland is if we want to avoid a mortgage crisis, we have to find a growth engine and we have to do it quickly. In the boom, it was construction, but now that is gone, where will the growth come from?
The growth question isn’t just about economics; it is about the future of our society too. For example, since 2006, the number of Irish residents born outside the country has grown by over a quarter to a figure of 750,000. Without economic growth and its promise of opportunity for most people, how can we keep the lid on potential race problems and the type of ethnicity problems which have blighted richer European countries?
When we examine, again against the background of zero growth, some of the trends in our economy over the years, we should sit up and question where are we going.
Take the Social Protection budget. It was €8 billion in 2001 but it was €21 billion by 2011. This is a 162 per cent rise.
In 2001, the Exchequer net pay and pensions bill (excluding local authorities) was €10.2 billion; it was €16.2 billion in 2006; €18.7 billion in 2008 and about €17.5 billion in 2011 – an increase of 72 per cent since 2001.
All this would be grand if the economy was expanding at these types of rates. But that is not the case. For example, the value of GNP shown by the figures released during this week was €127 billion in 2011. Compare this with €130 billion in 2004. GNP – the real measure of Irish income – has hardly budged in the past seven years, but spending is way up as we can see from public sector pay and pensions and the overall social protection bill.
In total, comparing where we are now to 2004 and now, public spending in 2011 was 37 per cent above the 2004 level, according to the Department of Finance.
And while there is a great fuss made over the export sector, according to the very comprehensive economic website finfacts.ie, jobs in the international tradeable sectors are at 1999 levels. So we are getting lots of productivity in the exporting sector but few jobs, which means that the figures look good but the impact on local Irish wealth and income is not that significant.
Don’t get me wrong: we should welcome any increase in exports, but in reality the impact on the ability of the state to support its commitments is not as significant as it looks.
Let’s examine agriculture for a moment, the sector which has become suddenly sexy again. Teagasc says public subsidies comprised 72 per cent of family farm income on all farms in 2011, a reduction from 97 per cent in 2010.
Farm income rose 32 per cent and farmers are reducing their debts rapidly. Debt levels in the farm sector totalled just over €1.8 billion in 2011- a 20 per cent decrease on the 2010 figure showing a substantial repayment of debt.
However, it seems that increases in food prices rather than output explains why there hasn’t been a big increase in jobs in agriculture despite increasing farmers’ incomes.
Agriculture, looking at the subsidy figure, is still largely a ward of the state in some shape or form.
Take all this together, the huge public salaries, the social protection bill, the absence of jobs in exporting and the subsidised state of agriculture and it’s hard to avoid the conclusion that Ireland is a rich country getting poor quickly.
In 2007, I suggested on a TV programme that Ireland could become like Uruguay – a formerly rich country that became poor. The notion was dismissed as ridiculous by many people. Unless we figure out a new growth model, maybe we should have a second look at Latin American economic history.
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Worm Hole Projection
Super Sucktion Dryson Power Cash Evaporation
Massive Wave of Plantation of Ireland 2012 style
Thanks for that David – for a moment there I was almost distracted from the reality of how bad things are – once again a fine litany of the depressed state of affairs with NO positive suggestions except the usual royal “we” which is of little help. As I said in a previous comment – you really do not help ( I won’t say us ) me by telling me that which is now old news. Surely with the wisdom you have ( prophecy of 2007) you can do better than say I told you so. I really wish “those… Read more »
Out on the front lines things are getting worse. There are plenty of jobs, but a reluctance to pay for your efforts. Everyone is guarding their cash, can we really believe anything the muinteoirs are telling us? Last week we came back from a short break to find the gas off. Funny I thought, then realised I didn’t pay the bill AND had ignored all of those pesky “pay or else” letters. Bord Gais claim we owe them €650. No I said, we owe you €250 and an unsecured interest free loan they are calling a deposit of €400. I… Read more »
I have to say I was taking aback this week by the figures that revealed that Google is now our largest ‘exporter’. Leaving aside for a moment the issue of Silicon Valley companies using Ireland as a tax break, what the bigger picture demonstrates is that the country is now extremely dependent on this kind of inward investment. It has in fact become the main feature of our growth policy – to attract this type of foreign direct investment. The current administration has zero interest in developing an indigenous industrial and manufacturing sector. They trumpet the low corporation tax rate… Read more »
David, you’re depressing me, again. We met in Waterstones’ in Nov/Dec 2009 and we said then that it was only going to get worse. What I am wondering today is; is there any strategy we can employ to lift us out of this mire that doesn’t require the cooperation of Gov? The present crew have by now demonstrated that they are as inept in dealing with this as the previous crew were. So, we are wasting time in expecting any useful help from that source but unless we fix this from the bottom up, you are right that we will… Read more »
Time has come for a radical change in philosophy. The closest thing I have seen to try and quell uprising is the men-in-a-shed initiative or else get everyone smoking to ease the long term pension timebomb. We need less government and less state apparatus, but we need more community support. It seems the very engines for community – credit unions – are about to get their wings clipped by this insolvency act. What a sickener…the thing needed to try and get people out of a debt hole kills the very debt issuer we need and rewards the banksters. Right now,… Read more »
In his books ,the late Ray Crotty wrote about the economic history correlation between Ireland and South America. Nobody listened . As usual, he was spot on.
Have we reached the end of growth as we know it?
Annual GDP growth is the goal of every country in the world.. is it not obvious that this is a delusion? Not physically, mathematically or biologically possible to have infinite growth on a finite planet. How can there be enough iron in the ground, fish in the sea and fresh water to continually expand economies in this “growth at all costs” model? Are we hitting the physical limits to this model?
Something has to give. Maybe better to focus on needs rather than wants and community rather than corporations.
It’s a pity that the word anarchy has come to mean disorder and lawlessness. Anarchy means the exact opposite, it means freedom and society following natural law, personal and corporate responsibility. We are in a time of change worldwide. We are seeing that endless consumption of rubbish is not leading to happiness and cannot even support an economic model. For myself, I just need freedom. We have the capacity for great productivity in food, fishing, building, travel etc. We could re-balance the economy towards free time and not higher pay. I’d like to work 2 or 3 days a week… Read more »
We have to get ready for a pace and a scale of change that is nothing like what we’ve been planning for. People in the financial markets are talking openly about how they think growth is going to stagnate in the developed world for the foreseeable and indefinite future. The more we’re prepared, the more we know what we need to do and the more we understand what was coming and don’t freak out, which is really important. Do things with an understanding that things are going to change rapidly when they do change, and therefore let’s get away from… Read more »
Thank you David. Informative and concise as always. Nobody should criticise a man who keeps us well informed. Today’s news is not the same as yesterdays. Similar maybe, but not the same! It is that kind of attitude that allowed our country fall into a state of delusion at the time when this situation COULD have been avoided or lessened, when objections to the pay rises and bonuses of the public sector COULD have been made! (along with other preventative measures) it’s too late now. But to the man who is sick of listening to the same old drole
…that is Gerry and authur. You didn’t listen yesterday! (2007) so please don’t let your erratic dispositions interfere with you seeing a way to help today.
Fergal misses my point! I have listened and agreed with David for some years now. My point is this; while being aware of the current state of play and recognising that the current crew will not be able (or willing) to take the steps David has outlined, we should be looking for a way to fix this from the bottom up. There will be no revolution in Ireland, it is not in our nature. Whatever chance we have of digging our way out of this mess will only come from using our natural resources (by that I mean resources that… Read more »
1. Politicians need to have a wage capped at the average industrial wage. Somewhere circa 30-35k I think it is. This would help attract the right kind of candidates
2. Cabinet ministers should have a requirement of relevant 3rd level education. Ie. they should be qualified to do the job
Can we get this list to continue? Anybody think of any more?
Couldn’t agree more with what you had to say, Adam!! This country has completely ‘gone to the dogs’ altogether!! As I mentioned in a previous post the sooner people realise that if they keep on voting for the same old people at election time then you’re just going to get the same results!! What’s sadly lacking in all forms in this country of ours is common sense!! I say just vote for independant candidates at election time and let the political parties go hang!! You never know we just end up with a completely different type of politics altogether if… Read more »
Iron Horse Express Cargo Robbery
I think that currently the rumour that there is not enough cash to pay the redundancy lump sums in Ironoid Eireann seems to spell out exactly what is ahead of us …and very soon.
Looks like the German Constitutional Court at Karlsruhe has got months to take time for a decision. This means it must take into account the LIBOR and ricocheting scandals now daily hitting the news, which proves the level of criminality an immune unelected ESM gang would be. Deutsche Bank got itself Crown Witness immunity for cooperation. LIBOR runs right through the system, it could be called the system. The looting level was immense in multi-trillions, Barclays bailout amounted to $860 billion while this was going on – Geithner will testify on this. Whether or not “no one listens” as posted… Read more »
To put LIBOR in perspective, $360 trillion PER DAY was subject to interest-rate manipulation over at least since 2005, but likely since 2000 after Glass-Steagall was replaced with Gramm-Leach-Bliley. All kinds of instruments were tied to this, such as Credit Default Swaps, which will now reach the light of day. It is going to make very interesting reading!
But on a brighter note, I seen the sun for all of 3 minutes today, the growth is slow and withering in the economy, the crops are suffering with growth issues too, crop yields are dropping stock market yields may rise as a result at least in the potato market due to a rise in prices, it seems there is a glimmering of hope for some, but for the majority of us pheasants, we may have less food on our tables. The good news is with all this doom and gloom, weather wise at least, skin cancer rates may fall… Read more »
Take all this together, the huge public salaries, well said and as we are all aware there is more going out then is comming in. It’s called greed of the gravey train,what I can’t get my head around is majority are sitting back and allowing this to continue. Remember all the lies told before the election has anything changed,yes things have got worse. This thing about all the people who are the new poor and at the end of each month have very little left,well is that living no ,what happens when the heating backs in ,the fridge packs in… Read more »
Very timely article. The media has been awash with “it’s time to look at the positives” guff from Fg since they came into power. It is all smoke and mirrors…. From a recent Namawinelake post – “Many of us are still scratching our heads at the Irish Times claiming “the domestic economy grew for the first time in two years in the first three months of 2012” — perhaps that was Mary Minahan’s contribution to the article, rather than the Irish Times’ own economics editor Dan O’Brien! Economist and UCD professor and Forbes contributor, Karl Whelan felt it was Orwellian… Read more »
David how did the hols go and tge family dog,my sons wife is from Africa and can’t understand how the Irish treat there dogs like there human.
Anyone listening to Vincent Browne last night. Interesting stuff on post war GDP ratios – it was around 250% for UK etc. Italy was 70% inflation in the 50s and interestingly, the Marshall plan (in an effort to keep the Iron Curtain at bay) wiped out Germany’s debt down to 20% of GDP – a great stimulus.
Seems to suggest that when there is a will there definately a way and history needs to repeat itself.
We will grow as soon as the Irish economy becomes wage-competitive versus the EU like it was in the ’90’s. To achieve this Ireland needs to slash it’s civil service wage bill by at least 35%. Same deal on social welfare and pensions. We should benchmark Northern Ireland. I know the familiar refrain, we are an expensive country, etc., The reason we are more expensive than N.I. is that our salaries and wages are much higher. The other reform needed to get us back competitive again is a secular overall in the legal and medical professions enfusing competition into these… Read more »
Nothing will contract your GNP quicker than the absence of discretionary spending, especially when your economy has passed its industrial phase and has become 75%+ dependent service economy.
Given that the bulk of the remainder of the economy, the 25% is being led by transfer pricing multi-nationals etc etc. then it does not take any great genius to figure out that we are on the same trajectory as the pelican who flew in ever decreasing circles until it flew up its own ass.
In 2009 our business dropped like a stone (down 60%). Over the last 12 months – no of inquiries up 50%. Sales back to 2008 levels. Many of our customers have crawled out from under their bunkers asking for prices.
While I totally appreciate DMW excellent analysis – sooner or later all recessions come to an end.
Many folk thought the bubble would never end – same for this recession.
Are we being too pessimistic?
I suppose there is some logic in some of the above cut everything to zero and the only way is up let’s pay ourselves less than everyone else on the planet. We could have those who are on the dole due to circumstance and those who worked all their lives to put the likes Leo Varadkar through trinity, the man has not worked a day in his life and is still living off the state, a true sponger, the neck of his ilk. Sure why not shoot the pensioner and those on the dole to save a few euro bullets… Read more »
James Turk interview on King World News blog
Points out how there is a silent bank run on European Banks that is back stopped by sovereign bonds that are downgraded to two points above junk status in the case of Italy. Even so the ECB accepts these bonds at face value.
There is a constant devaluation of the fiat currency and so the protection is to own hard assets. Land, houses, gold and silver. do not save money in the banking system!!!
Read more here…
http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2012/7/16_Turk_-_Summer_Doldrums_Over%2C_Gold_%26_Silver_To_Explode.html
Negative interest rates eh? Rewind and play it again Sam and bang the lambeg while you are at it. Let it strike fear into fenain hearts till we think about it and come out battling them from ower street. Never trust a guy with orange hair. If it it looks like a duck and talks like a duck …. christ is it that time of the year again? Bugger me it the 18th before I even knew it. I missed the fair fortnight trip to Blackpool. Only a few weeks till the glorious twelfth mind you. The Grouse is a… Read more »
The world is stuttering to a halt because the financial system is based on crime. Western politicians are behaving like dogs of war as they have done for centuries and they are the real problem now. Tinpot insiders dictating to the massive ingorance of sleeping giants (us) and cosy limp wristed teachers come politicians who have never done an honest days work in their lives. I depise politicians more than phoney academics, economists and sensationalist authors on the make The source of most of the trouble trammels three major western capitals and no one wants war but the warmongers, like… Read more »
[…] here to see the original: David McWilliams » Searching for real growth ← Steve Rhode: The Seven Emotional Stages of […]
Here is some straight shooting from Egon Von Greyerz. He tells it exactly like it is and has done for over ten years. Enjoy
http://goldswitzerland.com/why-gold-will-erupt/
I’d like to highlight the limitations of growth. Bear in mind that money comes from bank loans and that ever euro has a slightly higher debt. The production of, or indeed the sale of, an asset doesn’t affect the nation’s money supply. If I produce something, no money is created. If I sell something, no money is created. And hence it’s growth in the money supply that’s the real important thing. This tends to come hand in hand with a growth in GDP which is perhaps why most economists see a growth in GDP as so important. We can only… Read more »
We need to understand that “real” growth – societal growth at the level of culture and civil achievement is for the most part driven by ethical values.
All we are witnessing is dearth of ethics. The banks etc are utterly beside the point.
Fukoshima triggered the most abrupt U turn in EU history, Merkel did not even consult France, directly affected. Then Austrian press reported the Euroshma warning there. Now this :
Former German industrialist leader Hans-Olaf Henkel writes today in the Financial Times that opportunist Merkel could make on the Euro the same abrupt shift she made on nuclear energy.
An abrupt return to nuclear power as Japan has done, is also essential. Merkel is earning the name of Zik-zak Kanzlerin indeed.
No real physical economic growth is possible without high intensity energy sources such as fission and especially fusion. All talk og “growth” is a swindle if windy green low-density power is promoted, and is is no coincidence those very same LIBOR – connected criminals will promote green. None of them will give credit for reactors.
So let’s talk growth – population density, energy intensity, and real greening of deserts by moving rivers and runoff. In other words growth lies outside a Tiger’s ken. But being human one can see that, right?
Terminal 1
http://www.independent.ie/business/world/nouriel-roubini-sticks-to-2013-perfect-storm-prediction-for-world-economies-3172892.html
{ Take all this together, the huge public salaries, the social protection bill, the absence of jobs in exporting and the subsidised state of agriculture and it’s hard to avoid the conclusion that Ireland is a rich country getting poor quickly. In 2007, I suggested on a TV programme that Ireland could become like Uruguay — a formerly rich country that became poor. The notion was dismissed as ridiculous by many people. Unless we figure out a new growth model, maybe we should have a second look at Latin American economic history. } I found this hard to swallow a… Read more »