August 13, 2017
Economic 'Golden Age' on horizon... if we can get our house in orderPosted in Irish Independent · 166 comments ·
Did you know that Limerick has seen the biggest jump in income in the past decade? Not Dublin. Limerick.
After-tax income in Limerick rose by 14pc between 2005 and 2015, according to the CSO. This is a huge figure given the collapse in incomes experienced across the country during the crash and the extent of extra tax increases over the past decade.
A few years back, after a wonderful Saturday morning spent in Limerick’s Milk Market, this column made the unfashionable case for Limerick. It always seemed to me that Limerick got an unfair rap, and in 2014 it appeared that Limerick had so much going for it and would be well placed to benefit from the recovery.
The Limerick article was intended more as a conversation starter; little did I know that this was happening in a much more significant way than I’d thought.
In contrast, disposable income in the commuter counties around Dublin — specifically Meath and Kildare — experienced falls in after-tax income of 13pc and 10pc. These are large contractions in income and are, of course, related to the substantial drop in house prices in the commuter belt. In Ireland, rising house prices drive demand and demand drives income.
The data show that with the exception of Roscommon, which has seen a drop in income of 10pc over the decade, the major economic losers in this lost decade were not counties deep in rural Ireland (as is claimed relentlessly in the media) but rather the suburban counties in the “baby belt” around Dublin.
While income is rising now, it will take another few years to get back up to pre-crash levels.
This week, Goodbody stockbrokers referred to the period since 2007 as the lost decade in an otherwise optimistic outlook for the economy. Looking forward, Goodbody has got it right.
In fact, it’s quite likely that Ireland could enter a “Golden Age” of economic expansion, if we get a few things right.
Strategically the reason for optimism is based on Ireland being an excellent place to locate for international firms. If domestic Irish firms can supply these new companies, they will feed straight into the global corporate supply chain.
In the past few years, the global economy has changed dramatically and the key to understanding the world economy is an appreciation of the importance of the global supply chain.
In the past, resources — people, raw materials and capital — tended to determine a country’s wealth, but these constraints have been lifted in recent years as globalisation has globalised every business. The sweet spot for any trading country is to become an indispensable cog in the global supply chain. This means that the economy has to host the best companies and the best people.
A way to think about this hosting model of economics is to think about the Monaco Grand Prix, which is the most glamorous, most prestigious of them all.
It generates enormous revenue for the principality and is a must on the calendar for petrol heads the world over. But Monaco has no drivers and no car industry. It doesn’t compete in the sport but it hosts the best race. People don’t show up to see local drivers or cars; they show up to see the best.
Countries, too, are hosts and the small country that wins in the future will be the best host. If a country can host the best and have free access to all markets, then the reduction in transport costs does the rest.
Strategically, Ireland is in that place.
From here, we just have to sort out what could be described as internal management issues, rather than strategic issues. The main management failures in Ireland are housing and, relatedly, transport. The country is small so transport should be simple and efficient and for a nation that built most of America and Britain, it can’t be beyond us to build Ireland.
So we have a management problem and we need to fix it because the prize is huge and, in a sense, we’ve done the hard part.
Right now the economy is motoring. Bank of Ireland is forecasting GDP growth will be 4.8pc this year. This makes Ireland Europe’s fastest-growing economy — for the fourth year in a row.
However, the notion that Ireland is a European economy in the true sense of the word is a bit far-fetched. As I’ve sketched out above, we are part of the global economy, an Atlantic trading economy with three critical relationships: the US, the UK and the EU.
As the economy has grown, debt as a fraction of GDP has also contracted rapidly to 74.3pc in the first quarter of 2017. This is down from a height of 124.2pc in early 2013. So while people and companies have been paying back debt, it is the growth in GDP that has driven the debt ratio down. But GDP is not a reliable indicator of how an individual’s personal situation has changed. A much more reliable indicator is the after-tax income figure I’ve used.
While income is rising, in order to get a real kick taxes, and particularly income taxes, have to fall. This will mean at some stage taxing the least productive asset in the country: property. There’s no other way.
Employment growth is extremely strong right now. It is running at 3.5pc, with 2,063,900 people employed as of the first quarter of 2017. That’s 96,400 off the peak reached in the first quarter of 2008. But because so much of this activity back then was in construction, employment in 2008 was extremely fragile. This time it is more broadly based.
Unemployment dipped down to 6.4pc in July — that’s down from a height of 15.2pc in January 2012 and 2.1pc off the low of 4.3pc in November 2006. Expect unemployment to fall further in the years ahead. As a result of falling unemployment, retail sales and volumes figures have grown rapidly in the past three to four years.
Strategically we are in good shape to play a small but significant role in the global economy. The product is good. The brand is strong. The balance sheet is improving each quarter. However, we have a local management issue. It’s a technical issue called housing. Good managers fix problems.
Do we have such a management team? Maybe we should advertise for one.