Two things can be true at the same time. An economy can grow strongly and also be badly managed. The key is what Keynes called “animal spirits” which can’t be suppressed indefinitely. In fact, history suggests that economies can grow despite bad management, which begs the question how much could be achieved if economies were managed properly?
I think the Irish economy might be about to hit a spurt of activity not seen for many years. This view is, in some quarters, about as popular as bringing an electric guitar to a 1960s folk festival, but let us keep an open mind and remember the thing about two things being true at the same time.
In fact, possibly the reason the growth may surprise on the upside could be precisely because there are government bottlenecks everywhere. Government asphyxiation makes the economy fight more to grab a breath. These airwaves need to be cleared – something that could be done quite easily.
However, for now just consider the possibility that the economy is fighting and showing imprudent signs of life.
Could this be a turn?
Well, the queues are back. Dublin airport is jammed. House prices are going up, as are rents. The price of hotel rooms – a very reliable leading indicator of the economy – has also turned upward sharply. On the roads, the traffic is back. The Newland’s Cross overpass couldn’t have come at a worse or better time – worse because the tailbacks in the morning are awful, better because the commuter traffic into the city is building. Tickets for gigs are selling much quicker than last year, restaurants are reporting much better trade and tourism had a better than expected summer.
Something is stirring in the Irish economy. The place looks set to take off. Don’t be surprised if the growth rate hits 4% at some stage in the years ahead. All economies recover at some stage, downturns don’t go on forever and the human spirit’s belief in the future is a redoubtable force. The role of economic policy is to make downturns as short as possible and growth periods as prolonged as prudent. Policy in Ireland has undoubtedly prolonged the slump. If you examine how quickly the UK, with its own exchange rate, or the US, with a massive fiscal expansion, came out of recession, there’s little argument on this point.
Admittedly, I have been in denial this year about what I was seeing around me but now the time has come to say with a certain degree of confidence that the economy is likely to rebound much stronger than most are expecting. Yesterday’s exchequer returns are part of this rapidly improving story. Income tax receipts were up strongly as were VAT receipts. These are crucial areas because unlike corporation tax, they are much more linked into the real economy.
Despite the increases in income tax, the major area that is lagging now is employment and wages, but all indicators point to these turning up too in time. The reason for this is that unemployment is what is called a lagging indicator in economics. It lags the cycle. People who employ others usually wait until the new orders are firm, some old debts are paid down and feel truly confident that there is demand out there.
Companies don’t create jobs. That is the great misunderstanding in the Irish political lexicon. I have never seen a company where the objective is to create jobs. Jobs are a cost to a company and that cost has got to be covered by revenue. What creates revenue? Demand creates revenue and solid revenue, over time, allows the employer to consider taking on more workers. So demand leads to revenue and revenue prompts both new hires and higher wages, in time.
Unemployment will fall and wages will rise if the indicators of the real economy keep going as they are and there is no reason to be pessimistic right now.
What is happening out there and why is it happening now?
The first thing to remember is that Ireland suffered a catastrophic “balance sheet” recession. This means that the balance sheet of the broad middle class in our country was destroyed by the property slump.
On one side of the balance sheet is the asset side, and it is the middle classes who have “assets” – houses, land, apartments. Asset values were eviscerated by the property collapse. In contrast, on the liability side of the balance sheet, these people had the debts they incurred to buy the assets. Not only did the debts not fall in tandem with the assets, the debts actually rose, because interest rates although very low were still positive.
When the balance sheet implodes like this, people panic. Those with a bit of money panic about the future and they save like hell. Those with too much debt try to pay back money as soon as possible.
What is the net effect of both of these moves? People stop spending and savings rise. Demand falls. The evaporation of demand causes revenue to dry up and people are let go because there is no money in the companies and no demand for the goods. In 2009, savings amounted to over 16% of disposable income (against a ratio of only 6% a few years earlier) but gradually, people and companies have stared to spend again. The ratio declined steadily from there and fell back into single figures last year at 9.4%. This decline in savings will continue and this means that when people are faced with the decision to spend or save, they will vouch to spend. Confidence is viral and when you become a bit more confident and spend a bit more too, so too do I.
In addition, since 2012, our major trading partners, the UK and US, have been doing well. America is now growing at 4% and the UK isn’t far behind.
As house prices have risen in Dublin, the balance sheet of people in the capital has started to improve. Rising house prices makes people who have houses “feel’ wealthier, they become less pessimistic and they spend a bit more.
We see that in retail sales buoyancy and also in big-ticket items like new car sales. In June, new car sales were up 24% on the same time last year. 64,031 cars were sold versus 51,556 for the first six months in 2013.
With interest rates to remain low and possibly go lower, consumer credit will become more available and “legacy” debts slightly more manageable. This will underpin local demand. Falling unemployment falls from here, and is likely to reinforce this relative optimism. Also the US and UK should keep motoring along for a few years yet.
Ironically, we need the Eurozone to stay on its knees, mired by deflation and the reverberations of Russia’s invasion of Ukraine because we are more positively affected by lower Euro interest rates than by negative trade demand on the continent.
The economy has turned materially. You mightn’t feel it yet, but I suspect, it has.
Subscribe.
That was a quick edit, David. Great times ahead.
It is very possible to be ill and feel well – it’s what drugs do so well. The economies you mention, US, UK, are on very strong drugs at the moment – the UK is on £100bn a year in extra government borrowing, and it has also used government spending to create another property bubble. This is certainly economist’s growth – and we may even see breakfast roll man back – but is it not actually making the patient worse? If you are seriously ill, doctors wouldn’t recommend a game of soccer followed by a weekend on the lash, subsequent… Read more »
This boom will get boomier until they manage to pump enough cash into the European majors that it will start to tick up inflation and interest. When that happens, the buy to let and tracker loan books here will snap. I am a buy to let landlord, had positive equity of about 400k in 2007, am now 600k underwater and am about to declare myself bankrupt in the UK. Up until May all my loans were “performing” on interest only. I hope the recovery sticks, but I fear we are in for another boom/ mega-bust cycle. I noticed that the… Read more »
I had the luxury to spend the summer months at home in Ireland. There was an upbeat feeling in Ireland while property prices went up and up. I guess the great summer weather in Ireland has brought all this. I also saw plenty of young people going for their Friday night’s piss up and of course with massive hangovers the next day and very often these hangovers lasted till Sunday afternoon. Come Sunday afternoon and recovering from Friday night, they often wake up in the afternoon just to find out the sun is still blasting and yes, it is time… Read more »
“or the US, with a massive fiscal expansion” Are you sure it wasn’t a monetary one? http://www.economicshelp.org/blog/1850/economics/difference-between-monetary-and-fiscal-policy/ 4% growth rate in the US? Really? Prices rise because of inflation in stock markets and commodities due to aggressive monetary policy and since GDP is measured using an increase in the market value or prices of goods and services this is portrayed as GROWTH? What a joke! When interest rates skyrocket what do you think will happen then? We need the euro zone to remain on its knees do we? What a really perverse and negative statement. Surely we need the euro… Read more »
Cabaret
A class in Dublin with over 30 pupils were asked a question this week : What is it that makes the World go round from the musical ‘Cabaret ‘ ?
Is it :
Bananas
Money
Elephants
Bob Geldof stood up and said: Bananas
DMcW stood up and said : Money
The rest of the class stood up and said : Elephants
The elephants still remain no matter how the music plays and big bank/ school loans remain outstanding and larger classes continue to grow.
Banana Education! Who is teaching your children?????? A relative of mine, an office worker with FAS for the majority of said career, was this week redeployed to a Dublin secondary school to teach French on the basis of holding a French degree from 30 years ago. My relative received the ‘redeployment’ letter last week and was understandably gobsmacked, having no teaching experience and not having spoken a word of French in 30 years, and so this week started this new career in the twilight of one’s working life. As a sensitive soul this is traumatic, but a thick neck colleague… Read more »
I find this confidence in the economy theory rather confusing every time you bring it up. I’m not spending money right now because I have practically no disposable income. It’s not that I’m not spending because everybody around me isn’t spending – I’m not a sheep that feels I must spend because everybody else is doing so. And my “balance sheet” didn’t change because of any property values. Am I just an outlier? I used to have more disposable income before the government decided it needed to tax me a whole lot more. And while I have asked for pay… Read more »
What I find slightly irritating about this is that arguing against it makes one sound like a grim, scrooge, for whom glasses aren’t so much half empty, as they are completely missing. There’re a number of things bearing in mind, before diving headlong into this thing: Firstly, it was just a couple of weeks ago the McWilliams was reminding us to watch out for the Vulture funds. Well, many of them have been in for a few years ad have made their huge profits curtesy of NAMA, and are now looking for buyers. If anyone fancies a really good deal,… Read more »
Of course everyone wants to see Ireland recover and maybe no is that time. However it is hard to be positive when this crisis was wasted. The insiders, the have’s still have most of everything. Ireland needs to change, it needs to be looking 50 years out and putting in place the foundations of future prosperity, one which does not rely on a property induced wealth effect, when you live in the lowest density country in the EU. The worry, is this is a false dawn, but on the upside if there is another major financial crisis, which many are… Read more »
Well, this shows what power sub-editors have. The additional introductory three paragraphs change the flavour from the Indo article, which could easily have been thrown in with the rest of the pom-pom ra-ra! cheerleader Boosterism in the Irish press lately. Unless you’ve read Mr McWilliams in detail, of course! It’s not rocket science. Since the Bubble deflated in 2007, there’s been an effort on a par with building Mayan pyramids to re-inflate it so the 1% can pass on their bad gambling debts to the 99%. As Eric Janzen nailed it when he welcomed his followers to “The Post-Market Economy… Read more »
I got in a wee tiff with some young lad on Tw on this stuff yesterday, asking “Where’s next iteration Strategic Plan for Ireland Inc? Tech/B2B innovation or temporary credit Tsunami to gift NAMA?” With Draghis latest interest rate cut today, I have the answer: #NoCurrencyNoCountry Ireland is going to get banjaxed again once the Bundesbank regain control of the ECB and put a stop to The Draghi Heresies. ” Or something like that. Others on this thread are asking the same questions about the next iteration of Ireland Inc & the wider Irish Civilisational Project. And even some eejit… Read more »
[…] […]
Ireland could & should have become the richest country on earth, not just in temporary income but long-term sustainable wealth given it’s extraordinary material land/sea resources, culture & history, including being founded on Danish cultural wealth/propserity memes as much as ‘Celtic’. Or Anglosphere. Ireland’s, like Britain & unique in that it’s borders look to neighbours both to America and to the UK and Europe. But that multi-cultural legacy of Anglo-Danish memetic Cultural Wealth Creation codes was all blown in a bonfire of vanities based on a toxic mix of envy, begrudgery, sleveen paddywhackery & cute hoorism from the very top… Read more »
Tak 4 da online hygge-craic!
Slut. [The End]
GP-AndrewGMooney
5th September 2014
[sent from The Bardo…
“in a coracle sailing from the Celtic to the Norse Sea” ]
The first bailout of the FIRE (Finance, Insurance, Real Estate) economy consisted of people’s taxes being used to bailout of large financial entities who caused the people to be loaded with debt. The second bailout of the FIRE economy, is a series of state policies designed increase debt again, and make the banks solvent, through manipulation of the housing market. The housing market in Dublin has been rigged since the mid 1990s. And it is still rigged. The housing supply has been controlled. Bringing on additional supply is extremely difficult. The housing demand has been increased, as an explicit aim… Read more »
The Truth,unveiled.Thanks Mike.
smokin’ shades btw
;)
Has David stopped caring about his justification for his economic beliefs? I’m beginning to wonder….
http://www.tubechop.com/watch/3549272
http://www.zerohedge.com/news/2014-09-07/europe-goes-all-will-sanction-rosneft-gazprom-neft-and-transneft
ji?ng s?
what’s ‘masterful’ anyway?
is this is masterful?
http://sfglobe.com/?id=670
And again, compliments of tarpleydotnet
say it ain’t so Joe??
it’s Joe,dontchaknow
http://www.voltairenet.org/article185085.html [The very astute and insightful Thierry Meyssan]
[a web of deceit!!]
While the Banks are given a free hand to do what they like on interest rates, Lower interest rates from the ECB will mean higher interest rates for all Variable Rate mortgage holders in Ireland, as the likes of AIB try to mitigate their exposure to the vast amount of Tracker Mortgages they hold, by increasing Variable Rates to maintain their balance sheet performance. And if you think for a minute that as a Variable Rate Mortgage holder you would be better off with higher ECB rates – think again, as the banks will raise Variable interest rates then too,… Read more »