November 25, 2007

Back to basics for Ireland Inc

Posted in Celtic Tiger · 20 comments ·
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After the property gold rush, it’s now time for us to focus on small businesses in areas that make sense for the country’s economy.

The biggest lie doing the rounds here in the past few days – peddled by the same stockbrokers, estate agents, journalists and banks who told you that there would be a ‘‘soft landing’’ in the Irish property market – is that the collapse in Irish shares is merely a symptom of a greater global malaise. This is not true.

Ireland is suffering disproportionately because investors think we are in deep trouble as a result of a five-year borrowing binge, a hubristic attitude towards criticism and a willingness to believe our own propaganda.

In time, we will get over this and the economy will recover, but not before the pain we are seeing in the stock market seeps into the broader economy. With all the flannel being spun in reaction to the slump in the market, it seems we are still in the denial phase. Previously (SBP, August 19, 2007), this column has explained how reaction to a dramatic change in our economy can be viewed through the prism of the classic five stages of bereavement: denial, followed by anger, bargaining, depression and then acceptance.

In the denial phase, people put their heads in the sand and assume the problems will go away. Failing that, they create excuses in their heads as to why something is happening, absolving themselves of any culpability. This is what is happening at the moment. But it doesn’t wash.

Unfortunately, the Irish stock market is a good barometer of our economy, in the sense that it is dominated by purveyors of cheap credit and house-builders. Friday saw a ‘‘dead cat bounce’’ when Irish shares rose by 4.4 per cent as investors moved to safeguard their positions. However, the mood remains poor, and the negative implication of the sell-off of recent months is unambiguous.

Ironically, many of those nowselling bank shares are the very developers who borrowed from the banks in the first place, creating the bubble. If you are a developer sitting on an apartment scheme that you can’t sell, the only way to protect yourself from a faltering property market is to make money from selling the only liquid asset in Ireland at the moment – the quoted banks.

If you still believe the spin that what is happening in Ireland is happening everywhere, contrast the performance of the French and Irish markets. France, this week, is on strike. The trade unions caused chaos, reminding everyone, once again, who actually runs that country.

This should cause investors to flee in droves. For the supposed free capitalist financial markets, the sight of French workers on the streets should be enough. Yet the market actually rose during the week.

In free-wheeling Ireland, none of this is going on. US multinationals are still here enjoying tax breaks. The unions are emasculated by partnership and there are hundreds of thousands of immigrants keeping labour costs down. Yet the market is crashing.

The reason is simple – the housing recession is upon us, and it will get dramatically worse. The banks are the best leading indicator of this. Just as happened in the boom, where the banks led, the economy followed. Today in the slump, where the banks lead, the economy will also follow.

The era of easy money, accidental millionaires and cheap credit is over. The days when getting rich was as simple as buying property, waiting and selling on are also over.

Now we have to reinvent ourselves. We have to think of a new economic blueprint, one that is not based on buying and selling houses to each other with other people’s money. Ireland has got to get back to making stuff, generating value added and getting our hands dirty.

Believe it or not, this is actually good news. For the past few years, the property monster stymied real business. The best way to look at the malignant influence of property is to compare it to a gold rush. In the 1850s Californian gold rush, everyone wanted gold and nothing else. Even the schools in San Francisco closed down as teachers and pupils joined the prospectors in the hills. Everything else apart from gold speculating dried up. When the gold rush ended, there was nothing to fall back on.

We too became similarly obsessed, and good businesses with entrepreneurial ideas and real vision found themselves struggling for finance as the banks bailed into the fools’ gold of property.

But now it is time to focus on small businesses in areas that make sense for Ireland. One such obvious industry was on display in the Shelbourne Hotel last week. Good Food Ireland (www.goodfoodireland.ie) is a new movement which aims at fusing the best of Irish food with the best of Irish tourism to position Ireland as a food destination for tourists. On display on Monday was the very best that Ireland has to offer in two growing areas where we should be strong – food and tourism.

We are talking about small businesses, everyday entrepreneurs who are butchers, hoteliers, pub owners, restaurateurs, cheese makers, fishermen and bakers.

These are people who get up every day, make stuff, sell it for a profit and start again the next day. They employ thousands of us. They are the unsung heroes behind the glittering headlines of the economy. Most importantly, they are building markets and businesses. They are exporting and enhancing our brand all the time.

Think about it. After the bubble in construction, food and tourism are Ireland’s two biggest indigenous industries, with a combined turnover of close to €16 billion. They are labour-intensive industries and most importantly internationally, they are growing industries. People of all ages and classes eat and travel.

Look at the top rated TV programmes – many are about food and travel. Among the top-selling books every year are cookbooks and celebrity chef annuals.

Likewise, we are travelling more than ever. Airports have become part of people’s weekly hassle, rather than somewhere you visit once a year before your hols. Now that construction is ebbing away fast, where are we going to create both the jobs and, more importantly, the sustainable markets over the next ten years?

The beauty of an idea like Good Food Ireland is that it is a simple fusion of two existing industries. No one is reinventing the wheel here. Ireland has the infrastructure, the contacts, the networks and the products.

Of course, that’s not to say that this is a guaranteed business. On the contrary, as the aim of Good Food Ireland is to put food up there with golf, the scenery, the pub and the people as part of the Irish tourist experience, they clearly have their work cut out for them. We are way behind the likes of Tuscany, Burgundy and Galicia, but that’s the challenge.

Now that the economy is moving into a new phase, we have to go back to basics — and what could be more fundamental to Ireland than food, drink and hospitality?


  1. A weeks wages (for some) for a meal for two in a good Dublin restaurant? The dollar in free fall?
    Fresh fish for 18-25 Euros a kilo in the irish supermarkets. meat an untold luxury despite the “pensions for life” subsidy decupling, farm support schemes.
    The tourists may come once to see the place. They wont make a return visit. Unless they have their own private jets.

  2. Hey swotboy, shut the f*** up about Galicia or I´ll kick your ginger ass into next week.

    We like the place as it is. The last thing we want is bloody property developers coming anywhere near our Celtic shores (Galicia is green like Ireland but with sun and amazing seafood) … I mean there are beaches with actual sand dunes have not been turned into golf courses.

    But seriously, David nice name check but Galicia is along way from Tuscany or Burgundy as far as developing its tourism potential. Camino de Santiago apart.

    So stick to the chatting up the Polish girls in Spar at early hours of the morning and not a word more about Galicia .. do you hear me, McWilliams … do you?

  3. JJ Tatten

    Ooooooh!
    Saucer of milk for the lady at table citrus.

  4. Nick

    subscribe to thread

  5. Here is a (two year old) price comparison I did between two Lidl stores,one in the south of France, and the other in Dublin.
    http://www.soldiersofdestiny.org/lidlpricecheck.htm
    Some people blame Lidl and Aldi for abetting the economic refugee influx.If these cheap stores did not have a foot hold in Ireland most of the cheap, agency contract, labour utilized by industry, hoteliers, and the farming sector would have starved-or left the country! Standing in a checkout queue in any of these irish stores is truly amazing .All human life is represented.Every colour, creed, language, and nationality on the face of the earth.

  6. American Outsider

    As a foreign outsider looking at Ireland’s economy I’d like to play devil’s advocate if I may as I get conflicting reports about what is happening from those “on the property ladder” and those “off the ladder”.
    So… indulge me, if you will (facts and stats are more then welcome rather then bar stool econometrics of “hearsay” regarding the following Arguments / myths;

    (Argument/Myth 1.) “There was, and still is, a shortage of housing in Ireland. There is too much demand and not enough supply. Once the wealth effect kicked in from the Celtic Tiger this was the chief driver of the surge in demand for property and the high prices. It was simply time that the Irish economy came of age. Rising property prices are a sign of a healthy economy and greater net wealth. House prices are now at their “normal level” for an economy like Ireland.”

    QUESTION – Are there any good, accurate, REAL figures outlining what the actual demand and supply of housing is in Ireland today? If so, are these figures broken down into investment properties and dwellings and/or owner occupied or rentals?

    (Argument / Myth 2.) “The current blip in the property market is a short term thing and once the Govt fixes the stamp duty question in the next budget the market will pick up again and stabilise itself allowing all these people to lock in or sit on their gains. A housing crash of more then 5/10 pc is just scaremongering by the doom merchants.”

    (Argument / Myth 3.) “There is still huge, untapped demand in the commuter belts due to the lack of supply and growing demand for housing esp from the new immigrants.”

    (Argument / Myth 4.) “Mum and Dad / Young property investors who invested into the property market a few years back and are still holding 1/2 investment properties will be fine because interest rates are not going up anytime soon and surely the banks and building societies would not recklessly lend to ALL these people if they thought the risk of default was high or beyond their own risk scenarios. Besides, people’s income and wealth has risen by more then enough to easily offset any rising interest rates. Yes it might be a bit more to the mortage going forward but no risk, no reward and people will still be able to offload at a profit.”

    (Argument / Myth 4.) “All this talk of 100pc+ mortages being lent was and is a fallacy and was the exception rather then the rule. Lending prcatices were adjusted to their times and given the exceptional nature of the sudden wealth effect that allowed such lending to happen back then.”

    QUESTION – are there any figures on what the breakdown of mortages lent are?? How many mortages are 100pc+ financed??

    (Argument / Myth 5.) “The Irish Economy is now in the best shape ever – the workforce is highly skilled, highly educated, flexible and will roll with the punches that any deteriorating global economy can thrown at it”.

    As I said at the beginning I am trying to play devil’s advocate here and put out thee questions because whilst I hear many “opinions” I don’t see or read many HARD FACTS OR FIGURES.
    In answering any of the above questions, please hold yourself back from just giving a rant in slagging off the Irish banks, builders or government but rather please back up any opinions with hard facts.

    Cheers.

  7. VincentH

    In answer to the American. No one knows a thing, why you say, because to know something one has to ask for information. And the Gov as of to-day has not asked.
    But here is another, cheap labour. When the employment ends, is there enough going into the Exchequer to cover their costs, and for how long.

  8. Its certainly “back to basics” for the workers manning the hotels across Ireland if the latest challenge constitutional to the minimum wage legislation, by wealthy businessmen/hoteliers nationwide, in the courts ,is successful.
    That should help to keep down costs for the influx of tourists whom David hopes will be serviced by the new small businesses sector.
    http://www.examiner.ie/irishexaminer/pages/story.aspx-qqqg=business-qqqm=business-qqqa=business-qqqid=48892-qqqx=1.asp
    As for the construction industry statistics, those who have missed a recent article in the Sunday Business Post could do worse than read it:
    http://www.thepost.ie/post/pages/p/story.aspx-qqqt=NEWS+FEATURES-qqqm=nav-qqqid=28502-qqqx=1.asp

  9. Ed

    For the American

    There is a reported 13% unoccupied housing in Ireland – this is either an indication of wealth or of stupid government policy. Which ever way you look at it, it smacks of excess. The country has been obsesses with property ,to the exclusion of everything else, for the past 10 years. A considerable number, including myself, have made virtual gains from this run – the gains, however, are only realisable if I move to France or some other Country where property is relative cheap. In the meantime, the Industrial base is American and for all intents and purposes is like another state within a state – the boom that it initially enabled is now coming back to haunt it in terms of high costs and housing is the principle cuprit. Now that saturation has been arrived at, the indigenous tank is empty and because so much of our resources have been assigned to the property sector and the resulting high costs are now threatening the foreign industrial underbelly. So, whether there are many 100% mortgages or not, is totally irreverent at this point.

  10. Donal

    What the government doesn’t realise that our “Boom” is just money that was invested from elsewhere and those investors borrowed it from questionable sources with shady practises.

    The exact same thing happened in Thailand when they were an economic tiger in the 80′s and 90′s, houses were springing up all over the place from Bangkok, Chiang Mai in the north and Koh Samui. The problem was that they were building houses much faster than there was demand and they of course were very expensive for the idigenous population. Any similarities here?

    Then all of a sudden in the late 9o’s the economy crashed and the housing market plummeted, there are still thousands of homes which are either unoccupied, half finished or housing the homeless who’ve taken squating residence.

    The Thai Government believe that this was a blessing as it removed thousands of homeless people off the streets, this is remarkably similar to our situation and we are heading down the same road.

  11. The thought of our homeless (itinerants?) moving into posh apartment blocks-left empty by developers so as not to flood the market- and squatting in places like Dublin 4 is too much-even for my imagination. Great idea though!

  12. Donal

    It would probably give people like Sean Dunne a taste of their own medicine and Albert Reynolds, the entire bunch of fraudsters who are dishonest trypes on the countries honesty & Integrity.

    Finally the Old Wesley Disco will have met their match and have a higher age bracket to deal with and not “Spoilt D4 Brats” who aren’t even old enough to rent a video.

    That might tumble the D4 Tower idea that is planned and will hopefully fail.

  13. American Outsider

    From what I can see it would appear that the lack of numbers, stats and facts of what is really going on in the REAL Irish economy points to a probable scenario where, yes, there will be a downturn due to the micro and macro factors currently at play but I don’t think Ireland is looking at a Thailand-like collapse scenario…the Irish economy and Irish workforce are far more flexible then that. I suspect a slowdown followed by a short-medium downturn will be on the cards resulting in the irish economy going back to “normal’ levels of growth. Hardly a doomsday scenario but perhaps rather then doomongerers getting a little ahead of themselves? Happy to be proved wrong but show me the proof. Sure the economy is over-reliant on property and construction sector but I’d wager it will work itself out in the upcoming wash…some will suffer but it’s just collateral from the creative destruction that was required. Destruction probably being too strong a word.

  14. With reference to the American Outsider above, the problem for the Irish property market is such that, the average wage must be around €40,000, when the banks go back to normal lending practices, that is two and a half times your income plus if your lucky once your partners wage of lets say €35,000.

    Equals to €40,000 X 2.5 + €35,000 thats the possibility of getting a mortgage of € 135,000.

    Thats it, thats all you get when house prices are €300,000 for the national average. So it wont be possible for people to buy much over €150,000 with their deposit. The National Property Slide begins.

  15. MK

    Hi again David,

    I agree that Ireland Inc can do more with both tourism and food and leverage Ireland’s advantages in thaht area, open green county-side and artisan micro-producers of food products. However, the county cant live on that, I dont think a boutique-like food-agri economy could be the mainstay of an economy in Europe. Every little bit helps though. However, I had always thought that we are already good at this and have been exploiting it already. Tourism is more difficult as the cost of living is a factor. But in the general scheme of things Ireland will attract a certain type of tourist, even if it is just for one visit. In thaht way, prices aren’t so much a bearing. People do not come here for cheap prices, or the sun!

    One thing I would disagree with though is the hypothesis that property people have hedged with shorting bank shares. It would be rare for property moguls to hedge in this way, to short or invest in shares. Cash is their king and any hedging is done in property in another market that is rising elsewhere. Its a bit like the Frogger game, which you may remember,. there is always another log to jump into if your log is going slow or to use the metaphor, sinking!

    One thing is for sure, Ireland is in a new economic phase for now with property going down stickily and slowly. Where and how far it goes down to is another story, and anyone’s guess really. Just like property prices (as a share of disposable income/affordability) cant keep going up forever (at fast rates), they also cant keep coming down (in real terms adjusted for real inflation) forever. We, the market, are lemmings or perhaps like those large shoals of fish (sprat?) which twirl and twirl, and move yet without a central brain. Borg we are not!

    MK

  16. Nick

    Good synopsis of current capital markets crisis..

    For those who may be interested this is a relatively good (and shirt) summary of the current global financial credit crunch taking place….

    ‘You gotta know you’re in real trouble when the New York Post starts talking about the inability of investment banks to price their CDO holdings. (The Post says they may be out by as much as 20%, so it’s probably far worse than that.) Ok, so they’re some 3 months late with the news, and it’s something we market pros have been going over with a fine tooth comb since the Summer, but it tells you that the American tabloids are now shifting focus away from Britney’s latest antics to Wall Street’s biggest ever crisis of confidence.

    The term ‘perfect storm’ is much over-used, but refers to the simultaneous occurrence of events which, taken individually, would be far less powerful than the result of their chance combination. Why this markets crisis is like no other is because the coincidence of MESS is so perfect!. You have CDOS (just think BONDS) that were basically badly rated and represented, some say, in a fashion that points to collusion between investment banks and rating agencies. You then have new FASB 157 rules (just think INTERNATIONAL REPORTING STANDARDS ) which meant the banks had to report DAILY the swings on their portfolios, which adds to the fear factor. You also had monoline insurance companies (which insure bonds using their AAA status) slapping more AAA ratings on esoteric instruments, and receiving fees for doing so that now seem pretty paltry – given the risks they were taking.

    But by far the biggest problem in this whole mess is LIQUIDITY. And Liquidity is the sine qua non that broke the camel’s bac, and was behind the fall from grace of Northern Rock. Because, in the event of a liquidity crisis, even if a bank holds CDOs which merits their triple-A rating, if you rely on market funding (rather than your depositors) in order to finance these positions, then you are staring a mathematical problem in the face – as it will start to cost you more to finance these positions than the return you receive from the CDOs themselves (something called a negative carry trade).

    And then there’s another problem. Since there’s now a buyers strike because people can’t finance their positions, you can’t really put a value on these investments. So you have to keep marking them down. And FASB 157 is pretty strict about when and how you mark your positions to market. Assets are then sold at fireside prices to raise money. And more mark downs and forced asset sales, of course, result in increased fear, and less liquidity – so the whole thing keeps feeding on itself. So here we are in the midst of the proverbial perfect storm (only this time it’s not actually proverbial).

  17. Glen Quinn

    Average Industiral wage in Ireland is at 32,000 euros and minimum wage is at 17,500 euros.

    All central banks calculate that the average price of property should be equal to five times the average Industrial wage.

    Average House price = 5 * Average Industrial wage
    Average House price = 5 * 32000
    Average House price = 160,000 euros

    If the property market moves above this figure then the property market starts to become overvalued.
    It is also important to note that if the jobs market goes into free fall then the average industrial wage start to come lower which in turn then should pull down the average house price therefore there is a link between jobs security and house prices ie as more jobs gets lost this will lead to heavier falls in property.

    It doesn’t take a mathematican to add up that the current property market is overvalued by at least 40%.

  18. laura

    If small business is so important and critical in Ireland then why, why have the self employed been demonized and stigmatized in Ireland for so many years?

  19. MK

    Glen Quin> All central banks calculate that the average price of property should be equal to five times the average Industrial wage. 5 * 32000 = 160,000 euros. It doesn’t take a mathematican to add up that the current property market is overvalued by at least 40%.

    The ’5 times’ rule is an over-simplification, a rough rule-of-thumb instrument at best. But property markets do not move in unison with average incomes (isnt average income now 36,000 and some evidence of it being closer to 40,000), they are subject to the vagaries of supply and demand and even lemming-effects. Bubbles (over priced markets) are a common occurrence, and corrections follow. But unlike say tulip bubbles, people need houses to live in, they are an essential item rather than a nice-to-have, and have different properties than say share values, so as long as there are people wanting property the property will have an underlying support of some sort. Nominal prices will go down stickily, as inflation eats in year by year into real value, as average incomes gradually increase, etc. How the prices vary will be anyone’s guess, but whether they get back to 5 times income or not remains to be seen. It may never happen, or it may go to 4 times. Many economists measure property prices in terms of affordability.

    MK

    ps: David, I presume you will have a lot to say about the budget. Other years as far as I can remember you proposed the theory that the budget didnt matter as it was only a certain percentage of the economy. I dont subscribe to that proposition as I think it is a major component (and an inefficient one) and a very influential part, but I would agree that it is not the be-all and end-all.

    The figures with the budget does highlight though the worrying position we as a country have gotten ourselves into. Now borrowing 5b out of a gross budget of 57b, thats nearly 10%, capial spending is about 9b, so its a fair wad. Also, the budget increase is of the order of 8-9%, which far outpaces the expected economic growth, which is also being forecasted at a measly 3%. That’s the Celtic Tiger officially over now. So, now what do we label our economy? The Celtic Kitten perhaps!

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