July 7, 2014
There are good things happening in the Irish economy. Now is the time to protect them. We have heard a lot about the GDP figures and the tax data in the past few days, but these things tell you what has already happened, rather than what is going on right now. My hunch is that the economy is getting stronger faster than many people think.
We are seeing a significant turnaround in the fortunes of Irish exporters, particularly exports to our biggest neighbour and single most influential trading partner, Britain. This is invaluable.
The Brits are booming. There is currently much debate over there about how long this can last, and whether or not it is just yet another property and credit-fuelled upswing, but the fact remains that when Britain does well economically, so do we.
If you look at the chart on this page, which maps changes in firms’ expectations about the future, you see that the confidence of Irish companies and the confidence of British companies moves in tandem. In contrast, the confidence of EU firms lags well behind.
This shows you that the fortunes of Irish and British companies are intertwined. This is not just because we export so much to Britain, but also because we both export disproportionately to the US. The Americans have just had their best month for job creation in the past six years.
This entwined relationship is likely to continue. Speaking to a number of friends whose companies export services to Britain, they are all telling me that they are having their best run of orders from there in years. There is no real reason to believe that British demand will let up. In fact, the big change on the landscape is the fact that the Bank of England looks set to be the first major central bank to raise rates since the financial crisis began. This will have an effect, but a muted one.
Higher interest rates will drive up sterling even further, which is good news for Irish exporters and, given that Irish domestic demand is still subdued, the ability of Irish importers to pass on imported inflation in higher local prices is likely to be restrained. In short, the influence of Britain for the next few months is likely to be more positive for exporters selling to Britain than negative for Irish people buying British goods in Ireland.
But, looking a bit deeper at the Irish GDP figures, we see that local demand is still on the canvass. The reason for this is clear: Irish real incomes are still falling because income tax is still rising and, while unemployment is falling slowly, it is still twice as high in Ireland as it is in England.
In addition, we are still the country with possibly the highest level of personal debt in the world – the legacy of the housing boom.
At the moment, because the eurozone is in a bad way, the monthly cost of this debt is as low as it will ever be. But this will change. Economies move in cycles. Right now, the eurozone is a mess of deleveraging, deflation and policy madness. However, this won’t last for long. Europe will recover in time, because that is what economies do.
The ebb and flow is the business cycle. Most economists like to describe the economy as a business cycle. I think it is better to describe these cycles as ”human nature and can be explained by how we move from optimism to pessimism and back again. Because we are also part of the herd, we all tend to behave in a similar fashion. This is why the economy moves from optimism to pessimism, sometime inexplicably.
So all economies recover from recessions. Take Britain. Four years ago, it was on its knees. Today, it is up again. And policy lags behind these fundamental changes in human nature, so that now the British will have to raise interest rates to burst the very optimism that the rest of Europe craves.
Eventually, Europe will do the right thing, and gradually the demand for loans will increase as people get more optimistic. At this stage, interest rates will rise again in Europe. What happens to Ireland then?
Unfortunately, we are likely to see a tsunami of mortgage defaults because so many hundreds of thousands of people who are meeting their mortgage repayments now will not be able to when rates rise. Even if there are not so many defaults, the impact of higher mortgage bills on consumer spending will be profound. Remember that people’s monthly mortgage payments have been falling, not rising, since 2006. Imagine what happens when that changes?
So what should we do? We should take the opportunity now, when our economy is doing better than the rest of Europe, thanks to our natural dependence on the Anglo-American world, to strike a debt deal for mortgages in Ireland.
The government used an fictitious IOU called a promissory note to pay the creditors of Anglo. Through a financial sleight of hand, it pushed the payment of this out for another 20 years, if not longer. Why not do something similar for the hundreds of thousands in negative equity?
We could orchestrate a large debt for equity swap between the banks and the people, where the banks take equity in the now-rising house market. The promissory note is used to plug the gap in the banks’ balance sheets, and the Central Bank in Dame Street simply ”credits’ the banks the cash.
In this way, we might use the present good luck to our advantage. The good luck is that our English-speaking world is doing well and the eurozone isn’t. But this will change.
The British and Americans will rise interest rates, and so too, eventually, will the Europeans. When the Europeans do it, our house of debt will come tumbling down – at a time when everyone else is recovering.
Will they care about Ireland then? I doubt it. The European reaction might be one of resignation: ”Haven’t the Irish sorted their house out yet? And we could see our fledgling recovery knocked back again.
There are lots of good things going on now in the economy, lots of new businesses opening. There’s a new generation coming up who knew nothing of the boom and all the attendant nonsense.
We owe it to them to sort out the personal debt legacy once and for all. To lose one generation to recent economic mismanagement is bad enough. To lose two would be unforgivable.