Credit crunch: don’t knock the public sector

Brace yourself for some necessary staring into the entrails of economic forecasting for “these islands,” the smaller island in particular.
“Shoot the doves” is the FT’s message to those who hanker after a relatively quick return to faster growth; inflation is the deadly enemy, with the latest reports forecasting the UK teetering on the brink of recession and prospects for next year “dimming.” Households are £700 a year worse off, with rising food and fuel bills, according to the latest reports.
The Economist’s country briefing for this month adds its authority to a stark appraisal of prospects for the Republic, where recession is already happening.Economist quotes:

“In the decade up to 2006 residential property prices in Ireland rose more rapidly than in any other developed economy. Strong demand partly explains this: incomes, employment and population all grew robustly. The increase in the supply of new housing was just as phenomenal—the number of annual housing completions in 2006 was almost five times that of the early 1990s, which compares with static output in the euro area and in the UK. However, when supply and demand fundamentals are considered in tandem, the enormous increase in prices was unjustified.

Consequently, the country’s property market is now going sharply into reverse. Prices have been falling for 18 months and excess supply makes further declines all but inevitable. In the event of an even sharper correction than is currently predicted, the main lenders would probably suffer badly. Although Ireland’s banks have been highly profitable over a long period and are thus well capitalised, they are hugely exposed to the domestic property market. The international credit crisis, should it continue, could cause serious financing problems for the banks, adding to concerns about their balance sheets”.

And Northern Ireland? Different emphases, different reports. A fairly chipper view from the Executive, concentrating on the state of the job market and direct investment news, reflecting – I fear rather misleadingly – its narrow “Enterprise” functions and lack of responsibility for the wider economy.
A cheer-leader’s nose is put on the story from Belfast Telegraph. PWC in the Irish Times is a good deal more sober, forecasting growth of 1.25% compared to the official 1.8%. Both are less than half last year’s growth, PWC adds:

“The outlook for household spending growth in Northern Ireland is looking more subdued now than at any time since the early 1990s.”
The latest gloomy economic predictions for Northern Ireland come as one of the UK’s biggest mortgage lenders, the Halifax, revealed that house prices are now falling at their fastest rate in nearly 20 years”.

The mantra for the medium term and long term is I’m sure correct: that NI needs to switch from overdependence on the public sector to high value-added private sector investment and growth. But in the meantime, even with budget cuts, don’t knock the public sector for keeping NI on course.