Ireland and “the largest financial shock since the Great Depression”

While the UK wrestles with the problem of a plummeting sterling the Irish Republic faces an equally difficult challenge in the form of a soaring euro.

The International Monetary Fund says the Irish economy will grow by less than 2% this year, the slowest pace in almost 20 years and down from 5.3% in 2007. House prices have fallen 8.8 percent in the last 12 months, and the jobless rate rose to an eight-year high of 5.2 percent in February.
Tax revenues are down 600 million euros in the first quarter and unemployment is expected to hit between 5.5% and 6% this year as the construction industry continues to shed jobs due to the contraction in homebuilding.

Davy Stockbrokers estimate that housing starts fell a whopping 70% year-on-year in March — the biggest annual decline on record. Davy’s Rossa White told the Irish Examiner:

We estimate total housing starts (including one-off housing) were running at an annualised rate of 24,500, seasonally adjusted, in March. That compares with 27,000 in February, 32,000 in January and 40,000 in December.

House prices are 15% off their 2006 peak levels and housing completions are expected to drop to between 40,000 and 50,000 compared to 78,000 in 2007. Each fall of 10,000 completions cuts 1% off Ireland’s GDP.

The slowing economy means that the incoming Finance Minister will have his/her work cut out trying to meet budgetary targets.

Current Finance Minister and Taoiseach in waiting Brian Cowen says the slowing economy is a “response primarily to the global liquidity crisis” which will see the Irish economy go from a budget surplus in 2007 to a budget deficit of somewhere in the region of 5 billion in 2008.

As an export nation, Ireland’s economic performance is also adversely affected by the strong euro and weak sterling as 70pc of small companies export to the UK market. It is estimated that approximately 60,000 jobs in small companies are dependent on UK trade links.

The Small Firms Association (SFA) is already calling it a “crisis” situation while John Whelan, chief executive of the Irish Exporters Association (IEA) pointed out that it wasn’t just the slide of sterling that was causing the problems:

The deepening credit crises in the US is putting over €15bn of our exports at risk. At today’s euro exchange rate to the dollar, exporters have had to deal with an 8pc fall in the value of their exports since the start of January 2008.

The reality is that exporters large and small can handle a short- term swing in currency — however, we have had a two-year continuous slide in the dollar, with a 20pc fall in the period since January 07 alone.

There is a real concern amongst the large number of small exporters, whose main source of income is the UK market, as sterling is now falling in tandem with the dollar, both being locked together in the spiralling credit fallout. The UK accounts for 18pc of total Irish exports, and last year this totalled to €16.4bn. A continued fall in the value of sterling against the euro would have a severe impact on the indigenous exporters in Ireland, who are under cost pressures from continued high inflation, and record fuel price levels. These smaller exports do not have the resources to handle a continued overvalued euro and are much more likely to have to exit the export markets than the larger multinational corporations.

The UK accounts for 42pc of Irish food and drink exports and CSO trade data for December shows a 10pc drop in food exports to the UK compared with the same month last year.

The strong euro has also been blamed for decisions such as Motorola Inc. shutting its plant in Cork with a loss of 330 jobs and U.S. biotech giant Amgen putting on hold plans for a $1 billion plant.

The last time Ireland found itself in this kind of situation in 1993 when the huge devaluation of sterling by Britain led to a loss of competitiveness, it simply devalued the punt. This option isn’t available this time around now that Ireland is in the eurozone so it remains to be seen just how adverse an effect the continued weakness of sterling and the US dollar will have on the economy.

  • sammaguire

    The rush to comment says it all really. Hype.
    We’re in for a few lean years but the low National Debt will ensure we’ll get through it better than most.

  • Crataegus

    Weak Sterling could be good for the Northern economy as goods and services become cheaper here. Chweap holidays in the North and shopping trips to Newry and Derry.

  • Lafcadio

    i was at a young irish professionals event last year, where a panel discussed the irish economy. it was hosted by morgan stanley and one of the participants was an irish VP there on a fixed income desk (i can’t remember exactly what he did), and in wrapping up the pannelists were asked were they bullish or bearish about ireland – his reply was that he was bearish in the short-term, but bullish in the long term (due to the economy’s excessive dependance on housing, and the clear house-price bubble, and a certain complacency that had developed over the good years).

    i remember at the time being in agreement with him, and it looks like he was bang on the money.

  • Bob Wilson

    Crat – I avoid shops like the plague but this is already apparent – not just at IKEA and the Outlet thingy in Banbridge but Sainsburys and B&Q;at Sprucefield.More and more folk from the South making their money stretch further.
    Likewise in Asda in Strabane – downside is that shops within 10 miles of the border on the Southern side are screwed.
    Crazy really northerners driving down to buy petrol and southerners driving up to buy everything else!

  • DK

    Bob – I remember when it was the other way round – for Petrol anyway. Now all those abandoned petrol stations are converted to spars and off-licences. I think about 20% of the cars in ikea had southern regs last time I was there (a couple of weeks ago).

    This is one example of where the border is handy – the two economies give us, the punters, a bit more choice. I quite like it for that.

    In the longer term, it looks like maybe a bit of a rollercoaster for the South, while the North will remain bufferred from major swings by the rest of the UK economy.

  • Chris

    The US economy has been on the skids for the last two years – I think now must be the perfect time to organise a US investment conference.

    And with Westminster still refusing to allow constituent countries of the UK to set their own corporation tax levels, what are we offering exactly? That we’re “not quite as expensive as the south”?

  • slug

    Crat

    Indeed and its much more than shopping.

    I just have to look at a 5 mile radius from where I type in Ballymena. What are the major employers?

    O’Kane – agri foods will be able to sell to ROI more competitively.
    Dale Farm – ditto.
    Michelin – major exporter of tyres for lorries; more competitive
    Gallaher – exporter of tobacco products
    Wright – exporter of buses
    Farmers generally – milk prices are higher because of the tragable nature of cheese across Europe; etc.

    etc.

    Problem of course is there is a world demand slump but all these exporting businesses are helped by the more competitive exchange rate. Yes there are problems of higher import prices but I think overall its good for these private sector businesses.

  • BfB

    Contrary to what the US naysayers write in the lib media, things are going well down here in southern Florida…..hope things work out for you socialists
    on the island….;-)

  • Steve

    bfb

    thats different than my friend tells me, she cant sell her house but she cant quite afford to keep it.

    Besides that I was on a car trip through the midwest this winter and it looks pretty bleak there. Everything is old and past its sell by date and no one is upgrading because no one has any money. at best your economy has stalled and it appears to be losing a war of attrition

  • elvis parker

    Chris “And with Westminster still refusing to allow constituent countries of the UK to set their own corporation tax levels”

    Westminster might look more kindly on this idea if we were offering to pay for it rather than expecting London and the SE to pay

    Which hospitals, schools and leisure centres shall we shut?

  • Crataegus

    Slug

    Take your point re industry.We import a fair bit from the south, bricks, building materials generally, food etc. etc. I expect to see a sharp decline and more trade heading the other way.

    Problem facing the South are;

    1 rising inflation if it keeps rising they are in real trouble.

    2 the housing bubble is severe, property in much of Britain looks cheap compared to much of Ireland. Drops in house prices reduces tax take. In the North we also have high house prices but though I expect a fall I still maintain that there is a severe housing shortage here across many sectors, in many areas.

    3 Sectors like the tourist industry must be feeling pain. Why would anyone holiday in Ireland when even Switzerland is cheaper.

    That said I think Government borrowing is a bigger problem in the UK than it is in Ireland.

    It is a real shame that we in NI cannot effectively take control of our own financial policy and introduce measures that exploit the increasing costs in the rest of Ireland and the EU generally.

    However I am not so sure that we have enough able people up at the Assembly. Performance so far on many issues, dismal. Most of them belong in a different era. If you listen to the nonsense and consensual vocabulary used a lot of it reminds me of the Woman’s Coalition on a bad night. I don’t think many of them have any real idea why they are there in any practical sense. We need effective Ministers running less, but rational departments, who can get the economy of this place and local Services running efficiently. With a strong local economy we would be in a lot stronger position within the UK or within a future United Ireland. Mutual self interest.

  • runciter

    though I expect a fall I still maintain that there is a severe housing shortage here across many sectors, in many areas.

    If there is a shortage, then why are houses remaining unsold, and why are prices falling?

  • Crataegus

    Runciter

    Units of accommodation are not selling because

    1 Harder to get a mortgage.
    2 Many are delaying as they believe that prices will drop. We have a Mexican stand off as those selling are reluctant to drop. (New houses have dropped)
    3 They are units that are of the wrong type, like low grade flats. (Really needs to be some minimum spacial standards set for these some of those approved are dreadful).
    4 People are worried about their jobs.
    5 The dwellings are not where people want to live. (Like Tigers Bay or Rathenraw)
    6 Changes in Building Regulations and VAT now make the purchase of older property that needs substantial renovation an utter non starter from a financial point of view.
    7 There are not enough houses suitable for 1st time buyers, and they are over priced. (Due largely to the inflated price of land due to lack of building land)

    There are serious waiting lists for social housing and acute shortages in some areas. Many people just cannot afford to buy and much of the rented stock is very low quality.

    If you drive round any reasonable residential area you will find houses for sale but there are not many sitting empty.

    We have a serious housing problem ask Housing Associations or people in charities who run emergency hostels. Why else do you think house prices are so high here?

  • Gone_Fishing

    http://news.bbc.co.uk/1/hi/northern_ireland/7340682.stm

    Maybe we can fish our troubles away and drowning worms is the way forward. Though it didn’t keep The Deputy out of trouble, it has played its role in ending The Troubles. Now hhow can we introduce a sectarian element to killing worms and fish?

    Good top see an end of this Celtic Tiger business. Put Paddy back behind the mixer.

  • Good top see an end of this Celtic Tiger business. Put Paddy back behind the mixer.
    Posted by Gone_Fishing on Apr 11, 2008 @ 11:24 AM

    Would that be the six county loyal to the english queen type of “Paddy”, that the Brits call you all up in the wee six?

    Go away and drown the the next time you’re out fishing.

  • Worth a trip:

    “Charlemagne”, the regular comment column on Europe, in today’s issue of the Economist should be essential reading on this topic. Typical points (all cut-and-pastes):

    * the outlook for the euro area seems to be deteriorating a lot faster than the optimists had expected.
    * inflation has picked up to 3.5%—the highest in the euro’s nine-year existence. Troubles in the region’s two biggest export markets—recession in America and slowdown in Britain—are starting to bite.
    * A weaker dollar is driving an American export boom; a stronger euro is likely to have the opposite effect in Europe. Mr Almunia [“the engaging European economics commissioner”] says the euro is “overvalued” and adds that, although the impact has been moderate so far, “we are at the limits, if not beyond them.” It is a delusion to suppose that euro-area exports can continue to barrel on regardless of their cost.
    * Europe may have avoided the American subprime mess, but in several countries house prices have been even bubblier than in America. They are already falling in Spain and Ireland, and, beyond the euro zone, are starting to do so in Britain. A property bust may not produce an American-style mortgage meltdown, but it will surely topple economies heavily dependent on construction (which accounts for 15% or more of Spanish and Irish GDP, for example).

    Conclusion:

    the euro is about to show the world that it is not yet an optimal currency area—and the demonstration may not be a pretty one.

    To which must be added yesterday’s Irish Times front page news about unemployment: now 200,000, up 12,000 last month. Not forgetting today’s front page side-bar item about Unions getting restless about 5% inflation.

    Yes: Euro-area inflation at 3.5%, but in the RoI at 5%.

    Welcome to the dog-house, Mr Cowan: it’ll be you they blame.

  • Dr Pavlov

    Methinks not Malcolm. Politicians are insulated against criticism. Remember when Squire Hockey told Eir’e people that they were living beyond their means. The same will happen again. A paradise of butter vouchers.
    Plenty of money has been made, society has been reengineered with Sino fascists being a part of society, the old will have to trade down to get into the PDs’ old folks’ home. The circus goes on. We still have Biffo, Joe Duffy and Pat Kenny. We are happy.

  • They are units that are of the wrong type, like low grade flats.

    Spot on, Crat.

  • BfB

    Steve

    Your friend is responsible for overextension of financial obligations. Financial irresponsibilities, and their resulting dilemmas, are translated into ‘someone else’s fault’/RECESSION!!!! by the ‘blame it on someone else’ media. Those of us who keep within our means are fine, than you. And, we are legion. Haven’t been asked to beg for a bailout by the media…mmmm
    must be because I’m a white man.

  • Brian Boru

    I think this issue is somewhat hyped. Yes it’s bad but we’re in far better shape than France or Germany. Most analysts expect a slowdown not a recession, unlike the US. You also need to remember that the US recessions is caused by the sub-prime crash, where 25% of the mortgage market is sub-prime, compared to perhaps 5% in the Republic. The Irish slowdown is because of a property crash, that was long foretold by some economists who were dismissed as prophets of doom, as we were so used 10 yrs of 5-11% economic growth and previous predictions of doom which never transpired. I see this as an opportunity for a long-delayed focus on reweighting our economy away from overdependence on the construction sector.

    On the strong Euro, I think with some of the project’s critics, the Euro is ‘damned if it those and if it doesn’t. When the Euro was weak, British and other Eurosceptics argued this showed the project was a failure and their countries shouldn’t join. Yet now when has nearly doubled in value suddenly that counts against it too. You cannot have it both ways. Those who claim to be critics of the Euro for economic grounds but who come to the conclusions I have mentioned should just come out and admit the real reason they oppose the Euro is constitutional and based on principle – which of course is a perfectly valid argument.

    Personally I see the Strong Euro as beneficial to keeping inflation lower than it otherwise would be, especially with oil being priced in Dollars. It makes imports less expensive. And the best thing is that regardless of how strong it becomes, we don’t have to worry about another 1992 style currency crisis with the currencies of the current Euro member states fluctuating in a way that destroys export-based jobs, because those currencies no longer exist and there is only one currency for the 15 member states.

    Personally, I blame the govt for the slowdown. It refused to implement some of the recommendations of the Bacon Report that it commissioned abour 6 yrs ago when the property-bubble was already well underway. They diluted the recommendations for developers to be forced to set aside 20% of property for affordable housing, under pressure from FF’s construction-buddies. They moved far too late on Stamp-Duty, in part because of an arrogant wish not to be told what to do by a small uppity Coalition partner.

  • Brian Boru @ 07:24 PM:

    You are entitled to maintain all of those positions.

    As for:
    When the Euro was weak, British and other Eurosceptics argued this showed the project was a failure and their countries shouldn’t join.
    That is far too much of a generalisation. Ignore the UKIP types and their Tory fellow-travellers. The essential arguments against sterling entry were and are:

    1. That the economic cycles in Britain and in Europe do not harmonise. That meant sterling @64p/€ was at too high a level (which penalises British entry) or @80+p/€ too low (which makes British exports to the rest of the euro-area cheap, and so is unacceptable to the other euro-nations).

    2. That abandoning control of interest rates to the ECB (i.e. to the philosophy of the Bundesbank) removed from national control a major instrument for dealing with inflation. The main measures left to national governments are taxation and public expenditure: both of which impact directly on employment.

    As the Economist article I quoted at excessive length suggests, Ireland is in a difficult position. Inflation across the eurozone is a couple of percentage points above the UK level, which the Bank of England is mandated to keep at around 2/2.5%. In Ireland it is a full 3% above the UK level. Ultimately that costs Irish jobs.

    It is also true that, while the ECB sets a bank rate at 4%, and Irish inflation is at present levels, in Ireland there effectively has been “free” loans (if they were available, as they were until the last few months). That has been the basis of the property boom. It is not sustainable.

  • Crataegus

    The Euro is far too high and will do damage right across Europe. British (and other) industry has suddenly become about 20% more competitive.

    Inflation is rising as is unemployment. Coupled with an inflated currency and you have a very bad combination.

    The depth of the recession will very much depend on how long it takes to restore confidence in the Banking sector. Once that is established we may see some realistic currency realignments.

  • Greenflag

    malcolm redfellow,

    ‘ That the economic cycles in Britain and in Europe do not harmonise.

    Do not ‘harmonise’ ? Why not . Could this be because the UK is outside the Euro zone .

    Crataegus,

    ‘The Euro is far too high and will do damage right across Europe.’

    Devaluing a currency in the hope of gaining a ‘competitive ‘ advantage is always a short term gain at the expense of longer term economic stability . We saw this in the UK series of devaluations against the German Mark in the 1960’s and 1970’s and later . Despite all the hype about the benefits that devaluation would bring to British Enginneering and car exports by the mid 1990’s Germany had succeeded in not just maintaining it’s lead but in extending it over the UK in the number of medium to large sized engineering companies in their economy . Devaluation is not the answer to the dollar’s nor to sterling’s problems.

    Brian Boru,

    ‘Personally I see the Strong Euro as beneficial to keeping inflation lower than it otherwise would be, especially with oil being priced in Dollars. It makes imports less expensive.’

    True it also helps to keep NI cars rolling south to buy petrol and reduces the price of travel for those driving north to buy cheaper goods . Benefits all round I’d say for those living close to the border.

  • Greenflag @ 12:50 PM:

    The economic cycles of the UK and the Eurozone Do not ‘harmonise’? Why not? Could this be because the UK is outside the Eurozone?

    That’s a “chicken-and-egg” question, as you well know.

    So, start with the facts:

    UK export partners for 2006 were US 13.9%, Germany 10.9%, France 10.4%, Ireland 7.1%, Netherlands 6.3%, Belgium 5.2%, Spain 4.5%.

    UK import partners for 2006 were Germany 12.8%, US 8.9%, France 6.9%, Netherlands 6.6%, China 5.3%, Norway 4.9%, Belgium 4.5%.

    Clearly, the UK differs from the €-area by having a significantly-different pattern of trade and overseas investment.

    To put that another way, trade between the UK and the EU-15 is less than half of the UK current account, and less than 20% of UK GDP. If anything, with the rise of the Asian economies, even these percentages should progressively fall.

    Note how this is reflected in the way sterling tracks between the Euro and the Dollar.

    There are arguments for and against the UK joining the Eurozone. So far nobody in the UK Treasury or the Bank of England has seen the full logic of participation. Nor will they as long as 36%+ of US investment in Europe goes to the UK. And that’s by no means a euro-sceptic point-of-view.

  • George

    Malcolm,
    you are citing different inflation measures in your argument.

    Eurozone is 3.5% and using the same HICP measure, Ireland is 3.7% not 5%.

  • runciter

    1 Harder to get a mortgage.

    If there was a housing shortage, prices rise and banks would be happy to lend. They won’t lend because there is an oversupply, meaning that prices will fall and they will not be able to recover their investment.

    2 Many are delaying as they believe that prices will drop. We have a Mexican stand off as those selling are reluctant to drop. (New houses have dropped)

    Again, falling prices (the real cause of this stalling behaviour) are due to oversupply.

    3 They are units that are of the wrong type, like low grade flats. (Really needs to be some minimum spacial standards set for these some of those approved are dreadful).

    This does not explain why house prices are falling.

    4 People are worried about their jobs.

    Job security fears lead to falling demand. Falling demand leads to oversupply in the short term.

    5 The dwellings are not where people want to live. (Like Tigers Bay or Rathenraw)

    Presumably the price of property in these areas is rising then?

    6 Changes in Building Regulations and VAT now make the purchase of older property that needs substantial renovation an utter non starter from a financial point of view.

    So why are the prices of newer properties also falling?

    7 There are not enough houses suitable for 1st time buyers, and they are over priced. (Due largely to the inflated price of land due to lack of building land)

    There are plenty of unsold houses suitable for 1st time buyers. They are over-priced now due to the speculator bubble, but that will change as prices continue to (rapidly) fall.

    The inflated price of land was not due to a ‘lack of building land’ as you claim (since the amount of available building land in urban areas did not suddenly drop off) but rather to a sudden surge in demand driven by the investor bubble.

    There are serious waiting lists for social housing and acute shortages in some areas. Many people just cannot afford to buy and much of the rented stock is very low quality.

    A shortage of affordable housing is not the same thing as a shortage of housing. There are plenty of unsold houses around – it’s just that they are still over-priced. Since the market is currently undergoing a rapid correction (prices dropping), it would be foolish to artificially increase supply at this point.

    If you drive round any reasonable residential area you will find houses for sale but there are not many sitting empty.

    There are plenty of houses sitting empty. Look at recent housing developments.

    We have a serious housing problem ask Housing Associations or people in charities who run emergency hostels. Why else do you think house prices are so high here?

    We have a housing problem because of a lack of affordable housing. This is not the same as a housing shortage. Prices are high because we are just coming out of a bubble. They are falling fast because the bubble has burst and speculator-driven demand has dried up.

  • George @ 03:39 PM:

    citing different inflation measures in my argument?

    Perhaps, but I plead no-contest. I was taking The Economist and The Irish Times on trust. They get paid for this stuff.

  • Anent the previous post:

    It seems I am not alone in my reading of the figures. A year ago, http://www.irishconsumer.ie made the same point:

    Ireland’s inflation rate of 5.1% is already double the average of other industrialised countries.

    Inflation data for March, produced by the Organisation for Economic Co-operation and Development (OECD), shows inflation in the 30-member group averaged 2.4% over the month.

    Ireland’s inflation rate was the fourth highest in the entire OECD region of 30 member countries, after Turkey, Greece and Iceland.

    For the record, “HICPs” are the measure of “Harmonised Indices of Consumer Prices” required by Article 121 of the Treaty of Amsterdam. A comparison of the two measures (Consumer Price Index and HICP) can be seen at http://www.finfacts.ie/irishfinancenews/article_1012897.shtml

    The last update was published on 13 March, 2008, under the header:

    Annual Irish Inflation increases to 4.8% in February; Consumer Prices increased 1.2% in month; Food prices up 8.5% – the highest since 1984.

    The defence rests its case, M’Lud.