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 â‚¬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 â‚¬8 billion in 2001 but it was â‚¬21 billion by 2011. This is a 162 per cent rise.
In 2001, the Exchequer net pay and pensions bill (excluding local authorities) was â‚¬10.2 billion; it was â‚¬16.2 billion in 2006; â‚¬18.7 billion in 2008 and about â‚¬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 â‚¬127 billion in 2011. Compare this with â‚¬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 â‚¬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.