Systemic weakness in the Tiger?

Jason Walsh takes another look at the economic prospects for the Republic, and finds that it may not have the ‘broad shoulders’ and ‘sturdy legs’ some in Northern Ireland believe.

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  • Jack gallagher

    Mick
    Anxious to read this article I clicked on but receive a self congratulatory speech from CC Orde.Is there a problem with the link or is it my lack of computer skill?
    T.Ruth

  • Mick Fealty

    My fault. Trying to get out to the beach too quickly!!

  • Occasional Commentator

    Even without economic collapse, construction cannot continue to prop up the economy forever, at least not in the way that’s going on in Ireland right now.

    I’m no economic expert but it looks to me like it’s the other way around – the economy is propping up the construction industry. The rest of the economy is generating enough wealth to procure the materials and pay the wages in the industry. So the economy must be really strong if it can afford to employ 13% of its people in an industry which doesn’t directly create new wealth (even business buildings are only useful when businesses move in).

    The comparison with the public sector in NI is unfair. The public sector generates little or no wealth directly or indirectly, and obviously consumes wealth. And also it’s subsidized externally.

    A better example would be to discover an economy that sustained itself, had a high standard of living, but still managed employed 50% of its people digging holes and filling them in again. The collapse of the digging-and-filling-in industry would be great for that economy!

  • Brian Boru

    I agree we are far too dependent on construction, an industry that provides 9% of the govt’s revenues. Ths strategy seems to be bring in the immigrants to stimulate housing demand which in turn stimulates construction. I am not a fan of this idea because eventually house-prices may grow so large that Irish demand for housing collapses and tens of thousands of construction jobs are put at risk.

    I think the solution is to manage demand. In this regard the govt should stop handing out non-EU work-permits. We don’t need them anymoe with 70,000+ immigrants coming in per annum. Slower immigration would reduce the increase in housing demand so that the rate of price increase will slow. This would help save us from the high-speed train to a housing crash. However it might not be enough. The Bacon Reports some years ago failed to reduce house-prices.

  • call centre flunky

    Most of the stories on the Irish ‘economic miracle’ in the international press make much of the supposedly high-tech nature of the modern Irish economy, as if a few call centres and a Google branch office somehow made Ireland the equivalent of California’s Silicon Valley.

    Is that the height of his knowledge of the IT industry in this country? Very enlightening and very indepth. From this one sentence it is ambundantly clear that knowledge on the subjest is scarce.
    I work in the IT industry, therefore have a lot of friends in it. Not one of them is working in a call centre. Call centres pay too poorly. He is fairly dismisive of the fact that Ireland is the second highest exporter of software in the world. Not bad for a few call centres and a google desk!
    When a country can compete and win for investment with places like Sitzerland and Singapore, then something must be going right somewhere.

  • kensei

    As a recent IT graduate, I’d second that comment. There are about 10 times the IT jobs going South of the border than North. Practically all the big palyers are South – I can think of Microsoft, Google, Sun, Intel, Accenture right off the bat.

    Plus even half of the overseas companies were to leave tomorrow, they’ll leave behind a high skilled workforce that at least has a shot at creating their own software.

  • Crataegus

    Inevitably there will be a down turn in construction. It is a sector that tends to go in cycles, but that in itself will not destroy the economy.

    A bigger problem are the loans based on the equity of property. If interest rates do start to creep up people will start to default and repossessions will increase. Where it starts to get scary is when Banks end up with large amounts of property that is worth less than the loans secured against it. The Banks who financed the over extended borrowing, and in many ways caused the bubble, start to panicky and put the breaks on ALL liberal borrowing. So not only the new house buyers find it more difficult to raise a loan, but more importantly so also does business. Banks also increase their margins and call in unsecured loans and over drafts and as they do we rapidly edge towards recession. Ireland needs to take the heat out of the housing market and a static or slightly reducing value would be in everyone’s interest over the next 5 years.

  • Grimesy

    Excellent comments Crataegus.

    As I southerner living in Belfast, I’m amazed at people’s attitude to money everytime I’m down in Dublin – lifestyles all being funded by ‘never-never’ money. The respect that NI people have for money took some getting used to when I first moved.

    I’d a friend at the weekend tell me that he was borrowing €10,000 (“nothing nowadays” appartently) to go to Australia for a year – despite being mired in debt already…

    Another took out a 100% mortgage – representing 92% of the house’s purchase price – repayable over 40 years…

    There’s gonna be alot of people in awful trouble when the boom finally ends – many have forgotten/don’t appreciate the dark days of the mid/late eighties.

  • Irwin Armstrong

    Sadly the economy in the South has a significant number of highly mobile (e.g. software and assembly) companies taking advantage of low tax rates. As it seems likley a change in US tax legislation to negate this tax effect is in the offing, carnage could result in Ireland in those types of industries.

    More indigenous stable industry is required that will be less mobile.

  • Fraggle

    I’m puzzled by the maths in the article. The author states that, “The significance of non-Irish workers construction is massively overstated.”

    He goes on to quote some statistics saying that,”Employment in the construction sector in Ireland accounts for a total of 252,100 jobs- this from a total of 1,929,800 employed persons in Ireland.” This comes to 13%.

    He then states,”only 22,600 non-nationals are employed in construction. Conversely, 27,800 non-nationals are employed in manufacturing, 23,100 in the hospitality industry and 21,500 in financial and business services.” Now, unless there are thousands of non-nationals employed in some other sector of the economy which he does not mention, 22600 out of 95000 is 23.8%.

    He is quoting figures which contradict his argument.

  • BogExile

    Somebody challenging the received republican othodoxy that the south is a shining upland of capitalism while we languish in an economic bog??? Shurely shome mishtake.

    We need that strong economy bhoys!! Keep her lit! I’m sure a few million stolen fags or gallons of red diesel would keep the woolf from the door.

  • Henry94

    Fraggle

    The collapse of the Celtic Tiger is one of those subjects that get blogged no matter how poor the actual article is.

  • Gerry Lvs Castro

    I must say I’m fairly gobsmacked about the average house of a 3 bed house in Greater Dublin — £515k. How exactly does your average Joe afford over half a million quid? Does anyone know the stats on average Dublin wages and how they compare with say London?
    Anecdotaly (spelling?), my sister-in-law, who could give Imelda Marcos a run for her money in high-street fashion spending, recently spent a couple of days in the fair city and returned empty-handed. ‘Too bloody dear’ was the huffy verdict.

  • Henry94

    GLC

    Take this property for example

    http://tinyurl.com/hxw54

    Two people earning 30,000 a year each could afford it if they put one salary aside for the morgage and lived on the other.

    A Teacher mrried to a nurse for example could do it easily.

  • kensei

    “Somebody challenging the received republican othodoxy that the south is a shining upland of capitalism while we languish in an economic bog??? Shurely shome mishtake.

    We need that strong economy bhoys!! Keep her lit! I’m sure a few million stolen fags or gallons of red diesel would keep the woolf from the door. ”

    Anyone in the Republic want to swap our problems for yours? Anyone?

    Back in the cave, troll.

  • J. Walsh

    Fraggie,

    I’m not quoting contradictory figures. The workers that I listed were not the totality of all non-nationals working in Ireland, for those you can read the AIB report yourself. My point in quoting those figures was to show two industries with more non-national workers than construction and one supposedly more glamorous sector with almost as many.

    As for IT, I know there are more IT jobs in the south than the north but that doesn’t make the south a high tech economy in the way that, say, Finland is. An economic comparison with the north of Ireland is not relevant and would make most countries look well diversified.

    Henry, I didn’t predict the collapse of the ‘celtic tiger’, I predicted a downturn in construction brought about by higher living costs and increases in interest rates. I suspect there will be a relatively ‘soft landing’. However, even a soft landing will be bad news for those with 100% mortgages and the building industry.

    J…

  • Henry

    Two people earning 30,000 a year each could afford it if they put one salary aside for the morgage and lived on the other. A Teacher mrried to a nurse for example could do it easily.

    …if they had a huge chunk of equity to bring to the table in the first place. Or if they planned never to have kids, or go on a holiday ever again.

    A first-time buying couple on a combined income of about €60k would get a mortgage of about €300k, even if they were only looking for a 92% mortgage.

  • By the way, I am well aware of the Irish software industry and if you read between the lines (let’s face it, it not even that disguised) I am arguing for more diversification, including more IT, in the Irish economy.

    If half of the foreign owned companies pulled out they would indeed leave behind a highly-skilled workforce. An unemployed and highly-skilled workforce.

    As for BogExile’s comments: get a grip. At least the ROI has an economy, over-dependent on construction though it may be.

    Henry, that house is in Rialto, for god’s sake.

  • seabhac siulach

    “Somebody challenging the received republican othodoxy that the south is a shining upland of capitalism while we languish in an economic bog??? Shurely shome mishtake.

    We need that strong economy bhoys!! Keep her lit! I’m sure a few million stolen fags or gallons of red diesel would keep the woolf from the door. ”

    Not sure it is worth answering but…

    In the South it is Irishmen and women determining for better or worse the direction of the economy and using Irish money to do so, for the betterment of all the citizens…as for the North, it survives from crumbs that fall to it from the Master’s table in London, economically dependent on a Master that could not give a damn, without a say in any economic decision whatsoever, detrimental or beneficial…
    My money would be on the South each time
    …being economically independent brings a flexibility, e.g., being able to set a tax rate, negotiate with unions on benchmarking, etc., that is not and never will be there in the six counties under absentee-landlord-type rule from London.
    As for talk of the imminent collapse of the Celtic Tiger, where have I heard that one before. Wishful thinking perhaps?

  • Stephen Copeland

    Gerry Lvs Castro,

    … my sister-in-law, who could give Imelda Marcos a run for her money in high-street fashion spending, recently spent a couple of days in the fair city and returned empty-handed. ‘Too bloody dear’ was the huffy verdict.

    And Dublin’s verdict on her might be “too bloody poor”.

    Of course Dublin is expensive, but the average Dubliner is a lot richer than the average Belfaster. And all things considered, even the high prices, it seems that people generally prefer Dublin.

  • seabhac siulach

    “Of course Dublin is expensive, but the average Dubliner is a lot richer than the average Belfaster. And all things considered, even the high prices, it seems that people generally prefer Dublin.”

    And it is to get a metro, has the Luas, etc., etc. all paid for through Irish funds…the construction of the metro, the new motorways, and other continued essential infrastructural spending will help keep many people in construction-type jobs no matter how the rest of the economy goes (well, within reason…)

    I think when discussing the numbers employed in construction we need to filter out those working on government projects (infrastructure) and those working on house building. House building may be susceptible to fluctuation in the economy but essential infrastructural projects should not, being able to be funded through long-term loans if necessary and not out of annual budgets.
    In a booming economy govt. money being spent on vast infrastructural projects can help to distort the true health of the economy, priming it…and also helping to give a misleading picture of an economy propped up by construction on housing.

  • audley

    They do indeed, the south is a much better country and they dont have all those miserable, humorless prods about the place – depressing everyone all the time. If the south was full of auld prods, I’d probably f**king kill myself having to look at them. COuld you imagine a city in ireland with a million prods all in the one place?? Jesus Christ that would be terrible.

    So in summary, the difference between the north and south is not one of economics or religion its climate, a climate of prosperity in the south and the harsh winds of sectarianism from up in prodland. Good lord they cant even walk down a road without creating problems. What a bunch of miserable auld prods, no wonder they were kicked out of scotland. Would you want them about the place?? Next thing they will be posting in forus. God help us all

  • George

    Irwin,
    “Sadly the economy in the South has a significant number of highly mobile (e.g. software and assembly) companies taking advantage of low tax rates. As it seems likley a change in US tax legislation to negate this tax effect is in the offing, carnage could result in Ireland in those types of industries.”

    The only reason the American government won’t introduce such legislation is that it won’t stop the flight of capital but will most likely increase it and lead to a greater flight of jobs as they would have to also produce in low tax regions. That is why you won’t be seeing such legislation any time soon and if you do, there’s a strong argument to be made that it will lead to greater investment in Ireland.

    Also, a preliminary European Court decision last week means the British Revenue (and other EU states) can’t top up tax on British companies in the IFSC so if this is confirmed more of them will be setting up headquarters in Dublin to avail of the positive business conditions.

    It could all go wrong but it could equally keep motoring as it is. Who knows? But every year a giant step is made away from the misery of the 80s.

    As for the reliance on construction and house prices, time will tell. Three years ago the gurus in The Economist said house prices would drop by 20% in four years. They have risen by over 30% so we would need a collapse of gargantuan proportions to return to where we were 3 years ago.

    10 years ago the Daily Telegraph said the Celtic Tiger was on its last legs and had major structural deficiencies. The reality is that there is an awful lot of money out there, over a million people will be getting up to 17k each from the SSIA’s in the next 12 months for example.

    16 billion is about to flow into a small open economy. This is unheard of in economic history. It could do anything – good or bad.

    Add that the government is running at a surplus and if the bad times are on their way it won’t be for at least another 12-18 months.

    Sometimes I think that an awful lot of Irish people look on the current economic boom as one long party after one long bout of misery and poverty. They are going to party till the music dies and will worry about the hangover then.

  • kensei

    “If half of the foreign owned companies pulled out they would indeed leave behind a highly-skilled workforce. An unemployed and highly-skilled workforce.”

    Which is infinitely preferable to an unemployed and unskilled workforce. It gives the chance of producing an indigneous software industry. Obviously it would be preferable if that process started now (and certainly the government could help there), but the indication is we are heading into another IT shortage.

    The point is remove half of the South’s Software industry and they are STILL better off than us.

  • Shuggie McSporran

    One thing is obvious, nobody really knows what they are talking about when it comes to the economy.

    The differences people talk about between economic performance in Northern Ireland and the republic seem exagerated to me when I look at what is going on in front of my eyes – There has never been so much money in NI as there is now.

    I was walkin through Belfast at home-time the other day, past that big new development beside the law courts. Buses were coming to pick up the building workers – most of them were foreigners.

    According to a post by Mick Fealty a couple of weeks ago NI has has the lowest unemployment rate in the world.

    Ikea is opening a store in Dublin soon, it is also opening one in Belfast. The Dublin store will be 500 square feet bigger than the Belfast store. In the nature of the debate on slugger those extra 500 square feet will be cited as a measure of how the republics economy is steaming ahead compared to the north. Don’t believe the propaganda, it doesn’t equate to reality.

    One thing that the ROI and the UK do have in common is that the Health Service is shit in both jurisdictions and on average everybody owes 3 times more than they earn ( I can’t remeber exactly but it was a scary figure). Under what circumstances will the piper demand payment?

    The recent UK property boom has been less dramatic than the ROI. Is that because the last UK property boom ended in an almighty bust 16 years ago whereas ROI has never had that experience?

  • kensei

    “Don’t believe the propaganda, it doesn’t equate to reality.”

    Unfortunately the facts do. By any statistics you care to name, the Republic has a succesful and functioning economy in the way the North simply does not.

    There have been communist countries with less reliance on the public sector than us. A low employment rate isn’t that hard when 2/3rds of the jobs are supplied by the government.

  • Brian Boru

    “According to a post by Mick Fealty a couple of weeks ago NI has has the lowest unemployment rate in the world.”

    Because of the huge role of the public-sector. The British are getting exasperated at what they see as the North of Ireland leeching off them. Cuts are on the way I suspect and the true underlying fundamentals of the Northern economy will be exposed. I believe that a local administration could perhaps alleviate the situation somewhat. However, face facts while partition remains, the economy will fall further and further behind the Southern economy. The private-sector is more efficient than the public-sector international experience has shown that.

    The role of the public sector acts as a powerful disincentive for Northerners to set up a business and compete in the rich export markets of the US, EU etc. As a result far less money in coming into the Six Counties. In the Republic, 51% of our exports are by multinationals, and 95% of what we produce is exported. So there is huge untapped potential in the Northern economy, due largely to far higher corporation tax rates. Low corporate tax rates attract multinationals into the Republic and they in turn export to foreign markets, leading to exponential growth in the Southern economy.

    It is unfortunate that NI’s economy is destined – while partition continues – to be constrained by the English reluctance to allow other parts of the UK a chance to prosper in competition with them.

  • Crataegus

    Are we all so insecure that if someone comments that our economy is perhaps getting a bit flabby we instantly reply, YA BOO not as flabby as yours and by the way its not flab just look at the underlying six pack.

    Many years ago I found it difficult to borrow to invest in a business. However it was obvious that the bank would lend against equity thus by chance I ended up earning my living mainly in property.

    Now I’m not an expert, but a few observations.

    1 Just at the minute borrowing is as easy as it has ever been. Lots of money swilling around and in such an environment it looses its real value. We loose clarity as to how long it can take to earn the money and we assume our earning capacity will continue at current levels or higher.
    2 Property prices for investors are now supported less by the rental value and more by the anticipation of increased future value. Buy now at any cost for tomorrow it will be more expensive or buy to let for how could you loose? This is becoming a dangerous market for income should always show clear profit.
    3 Recessions when they hit come very quickly and the mood changes virtually overnight.
    4 Before previous recessions, or property bubbles, people seem incapable of shifting their vision from the potential profits in a rising market. Their greed locks them in. They loose their sense of judgement, it will never end! No one wants it to end and those who think it will are quietly getting their money out. Governments will say little for fear of spooking the market.
    5 When it happens recession hits the business community most severely because Banks move rapidly to reduce their exposure. This dramatically increases the downward trend. Remember the local bank that called in all business overdrafts in NI, it wasn’t that long ago that this happened.

    If the interest rates in the Euro Zone increase the potential for a downturn will increase, a 1%-1.5% increase would have a severe impact above that and pain. It all depends on speed of increase.

    I can clearly remember all the comments about the skilled work forces of the past that were made redundant. Good skills base and all that. Some will set up their own businesses, most won’t, and when they do it is often in businesses that have nothing to do with their original skill.

    North and South we need stronger indigenous economic bases and predicting future relative strengths is pointless, better to hope that both go from strength to strength and cooperate to try to achieve that, but watch for property bubbles. I wouldn’t rush in to buy houses in Dublin just now, I am not suggesting that the floor will fall out of the market but time to take stock.

  • Shuggie McSporran

    Kensei

    “By any statistics you care to name, the Republic has a successful and functioning economy in the way the North simply does not”.

    A good statistician will compare like with like or not bother. You may be right but I have yet to see good statistics that compare like with like between north and south, no such substantial statistics have ever been published anywhere that I am aware of. What I do now is that there has nver been more wealth and employment as there is now in the north.

    One interesting statistic that emerged today. Rent supplements for private sector rented property in the south have increased from 150 million euro in 2000 to 369 million euro 2005. That seems odd to the extent that increasing amounts of taxpayers money is going to landlords and mortgage companies to cover people who can’t afford the rent in such a dynamic and rich economy. Something wrong surely.

    Brian Boru

    “The British are getting exasperated at what they see as the North of Ireland leeching off them.”

    When you say British i think you actually mean English. According to a recent survey quite a lot of English people think “Ireland” is in the UK. Your average English person is probably as much exasperated with Northern Ireland as they are with Hull.

    What really exasperates them is the refusal of the Scottish to cheer on the England team.

    “However, face facts while partition remains, the economy will fall further and further behind the Southern economy”

    As I said before people in NI have never had it so good – that’s a fact you might want to face.

    “The private-sector is more efficient than the public-sector international experience has shown that.”

    Not in all circumstances, look at the disasterous and extortionate balls-ups that resulted from giving jobs to Fujitsu in the UK public sector over the past decade.

    Crataegus

    “one wants it to end and those who think it will are quietly getting their money out. Governments will say little for fear of spooking the market.”

    I take it you mean sell, sell, sell!

    If the bubble bursts in the southern property market by the end of this week I’ll point to your post as the moment confidence failed. God forbid, but posters from the south seem to have lost all perspective on their property and the economy.

  • Crataegus

    Shuggie

    I take it you mean sell, sell, sell!

    If it’s your own house you can’t do much about it, but if it’s an investment I would cash in and take the profit. Then move the investment to a place where there is greater opportunity for growth in the market.

    I may be wrong but why take the risk?

  • J McConnell

    The ROI property bubble has now gone way beyond any previous bubbles in the US or UK, even the Bay Area bubble seems sane when compared to the current situation in Dublin. Sometime in the last year the market in Dublin entered Tokyo in the 80’s style irrationality, and like Japan in the 80’s it will end in a monumental crash. Expect property prices to decline at least 30%, and up to 80% for commercial property. It took Japan more than a decade to recover from their bust and their economy is still in a not very healthy condition almost twenty years later.

    The real multiplier effect from the property crash will not be the decline in employment, you can add at least 5% to the unemployment rate, or the large negative equity of more than a third of mortgage holders, or the steep decline in consumer spending due to lack of confidence, but the fact that most of the increase in government spending in the last 5 years has been financed by heavily cyclic tax sources, stamp duty, VAT on property etc. So when the boom busts government receipts will decline at a far faster rate than the economy contracts. That will make deficit financing on the bond market very difficult, and very expensive.

    When the economic history of the Celtic Tiger boom and bust is written I think that 2002, the year Ireland joined the Euro, will go down with 1932 and 1977 as a year when a government made a spectacularly incompetent economic decision for purely short term political gain. Staying out of the Euro would have allowed some kind of soft landing, joining the Euro has created an economy awash in cheap money, and absolutely guaranteed a hard landing sooner or later. And the longer this situation continues the nastier the final crash.

  • kensei

    “A good statistician will compare like with like or not bother. You may be right but I have yet to see good statistics that compare like with like between north and south, no such substantial statistics have ever been published anywhere that I am aware of. What I do now is that there has nver been more wealth and employment as there is now in the north.”

    Go have look at the comparable GDP figures, average wage, percentage of the economy state ownwed between North and South and come back, a wee bit embarassed. The fact that we are marginally better off is irrelevant. We’re still miles behind not just the South, but most of Europe.

    And the reliance on the public sector is 100% unsustainable. That is the key point.

  • Crataegus

    J McConnell

    I for one agree with your analysis and the point you make about government revenue is a good one.

    With regards the entry into the Euro, it did increase the magnitude of the problem but the problem was compounded by the government not taking any other action that would have taken heat out of the property market or the economy generally. Put crudely tax in boom spend in recession.

    On the southern economy generally, and just as an observation, I used to enjoy quite a few breaks in the South, I haven’t been there for reasons of recreation for several years as I think its now better value to go to say Switzerland. This is totally unscientific and may not reflect the economy and competitiveness generally, but I think it highlights a potential problem, it would bother me.

    Politically FF have the devils own luck. It will be the next government that will have to face the problems. All the promises being made by various parties now may seem foolish in a year or two. If the alternative coalition do get elected they may have a very difficult time.

  • Brian Boru

    Even with the Tokyo scenario, unemployment in Japan remained very low, never rising above 5% so there is that at least.

  • Crataegus

    Why pay £500,000 for a house in Dublin when you can have this little munber on e-bay for £400,000

    Titan 1 ICBM Missile Base – Located in Washington State
    HUGE UNDERGROUND FACILITY – 57 acres m/l

    Just do a search for Titan missile base on ebay can’t be too many of them.

  • Crataegus

    Brian

    In all recessions most people are employed but it’s a bit rough if you are one of the unemployed. Also real incomes tend to fall and there is less spare money around. It just becomes much harder to do anything.

    One of the main problems is the reduction in tax take and the higher exposure of the public purse to benefit claims. So other services like education and health start to feel the pinch.