December 21, 2015
This Christmas, many of us are heading to family in different parts of the country, lots are returning home and yet more are coming back to Ireland from abroad. Conversations in houses will vary, but lots of families, particularly those from the country, will look around their hometown or village and speculate as to what has changed.
In the past seven years, most of those conversations will have centred on what place closed up or who has left for where.
Might this year’s conversations be the first in a decade that talk about what businesses have opened up, who has bought something and who is coming home to start a new business?
The latest figures on the economy definitely suggest that the national conversation is beginning to change.
Last Friday, the ESRI published its most optimistic forecast in years.
The institute now believes that the domestic economy grew by 5.2 per cent this year and it forecasts that this will continue again next year. (I’m using GNP here, not the more distorted GDP figure.)
Most encouragingly, it forecasts a drop in unemployment towards 7 per cent next year, bringing the total number of people working to above two million.
These types of numbers have led to the usual warnings about overheating. Such worries are premature.
When you still have an unemployment rate twice that of your two biggest trading partners, the US and Britain, there is plenty of capacity in the economy.
We are in a deflationary world and this looks set to last.
Even the latest evidence about the amount of wages paid out in the economy shows that although the economy is growing and employment is rising, wages aren’t going up.
In fact, last week numbers published on the total amount of wages (compensation of employees – as it is known in the jargon) shows that total wages peaked at an average of €21 billion per quarter at the end of 2008 but are now €18.1 billion, having slipped down to around €17 billion in 2010.
Given we are seeing wages not taking off and unemployment still high, this slack in the economy suggests it is far too early to worry about overheating.
Until the rate of unemployment is down to as low as possible, there can be no talk of overheating. And this expansion should be allowed to go for some while yet.
But why is it happening in Ireland when the rest of Europe remains firmly in the doldrums?
Aren’t we supposed to be linked to these countries? After all, we are in a currency union with them.
The reason for this divergence between Ireland and the rest of Europe is that Ireland isn’t a European economy in any meaningful sense. As a result, it’s hardly surprising that we diverge economically.
We are an Atlantic economy, not a continental economy. We have deep trade, investment and family links to the English-speaking world.
Most of our imports come from Britain, Dublin-London is the busiest air route in the world and over 85 per cent of our exports are generated by American multinationals based here.
Our world is the Atlantic world. When we lose our jobs we don’t emigrate to Italy or France – we go to Britain, the US or Canada. This is our world and it is forged by deep historic, financial and human links. The Atlantic is and has always been our trade route.
We are not a continental race, but an Atlantic one.
So when the Atlantic English-speaking economies are doing well, we do well. In the past few years the US and Britain have been growing strongly and they have helped to drag us out of recession.
There can be no better indicator of how divergent the European and the US economy is right now than the fact that last Wednesday the Americans raised interest rates, while the ECB is still cutting.
Quite how we ended up using a continental currency is beyond me, but that’s what has happened and this means the economy will always be a bit lopsided.
Right now when Europe is weak we get very low interest rates and a currency that is falling against our major trading partners.
This makes us hyper competitive – as evidenced by the huge increase in British and US tourists in Ireland this year.
The lower continental interest rates will also coax people to spend if they feel a bit more confident.
Confidence is the other part of the jigsaw, which explains why the consumer is back in significance in Ireland.
I have always believed in “the buzz”. There is an economic buzz, like there are all sorts of other buzzes.
When you are self-employed, the economic “buzz” is perceptible. You know when it’s not there and, if the buzz returns, you can sense it too.
This isn’t the most scientific approach to the economy, but economics isn’t too scientific.
In fact, I’d go so far as to say that in economics what is important is rarely complicated and what is complicated is rarely important.
We are irrepressible social animals, prone to bouts of optimism and pessimism. We are deeply irrational and emotional.
We are the polar opposite of what economists contend we are, beings driven by rationality and calculation.
We are profoundly affected by each other’s moods and we get giddy together and depressed together too.
The confidence thing, or the buzz, is the collective feeling that only the deeply irrational get. And this giddiness is infectious on the up and the downside.
It’s the same giddiness that prompts us to fall in love, follow ridiculous football teams and be enormously influenced by each other’s moods, attitudes and notions.
The buzz is what Keynes referred to as the “animal spirits”, which dictate the ebb and flow of the economy.
Once people become confident after a long period of financial depression, the buzz is infectious and it spreads like a virus.
In the bust, people with money saved and those with debts tried to pay them back; the buzz disappeared and risk-taking plummeted. Bank deposits rose in tandem.
Now these savings are being dipped into as the buzz takes hold. This could go on for some time.
Happy Christmas, and let’s see if those conversations are changing?