Yesterday, in rural Kilkenny, a man stopped me and asked me when the recovery would be felt in the countryside. He told me he was watching the TV and listening to the radio about the recovery in Dublin and Cork, but he wasn’t feeling it.
His question was whether this recovery is real. By this he meant, is it well founded or just hot air – and more importantly, can it spread from Dublin to the rest of the country?
My sense is that it is real and it will percolate down to the rest of the country, but it will take time. National income figures released on Thursday, along with inflation figures, suggest that the opposite is the case. They point to an economy slowing sharply in the last three months and one where retailers and manufacturers can’t pass on price increases because people simply don’t have the spare cash. However, I feel these numbers will prove to be an aberration and that the underlying economy is moving forward reasonably swiftly.
Big-ticket items like new car sales and house prices all suggest demand is strong. Anecdotal evidence like hotel room rates, advertising rates, traffic jams and crowded restaurants argue the same. Also, critically, taxes are up across the board. Unemployment is falling – and as unemployment is always the last thing to fall in a recovery, this is also suggestive of stronger demand.
Unemployment is a lagging indicator in a recovery and a leading one in a slump.
The reason is that when demand slumps, the employer has a choice: either to reduce wages across the board for all employees, or to save on labour by letting the last in go first. Normally, the unions in the firm refuse to countenance an across-the-board wage cut, so the employer fires some employees to save other ones.
As a result, unemployment spikes early in a downturn. In an upturn, employers regard an extra job as an extra cost which has to be more than covered by revenue – both actual revenue and expected future revenue. So people are employed late, not early.
Looking forward, the Irish economy is a function of the global economy, and more specifically the Anglo-American economy. As long as the English-speaking world is doing well, we are going to participate. And equally because our debts are priced in euro, we do well when the eurozone is doing poorly because interest rates remain low in euro.
For the past five years, interest rates all over have been kept extremely low as the central banks try to re-float the battered, debt-ridden balance sheets of the world economy. In Britain and the US – particularly the US – this period is coming to a close. As it does, it should push the two currencies, sterling and the dollar, upwards. This will have an added positive for Irish exporters because these are the places we export to and we will become more competitive as their currencies rise against the euro in 2015. So internationally, things look bright both for local producers and the multinationals.
Now we come to the central issue: what happens with the local economy?
For the local economy to grow, we need ‘animal spirits’ to be released. This means that people have to be prepared to open a business, take a chance and dip into savings to finance something, or borrow to invest.
It is very difficult to explain why animal spirits are released. Context is key. Humans are incredibly sociable animals and we are all affected by each other’s actions, even if we don’t know this. In the economy, when we get depressed, we get depressed together – and when we get giddy, we get giddy together.
The best way to look at this context process and how it takes hold is to consider being at a match in the Aviva. When the guy in front of you stands up to get a better view of a crucial moment, you have to stand up too. And the people behind you have to stand up as a result of you standing up – and so on until we are all standing when we actually paid to sit!
Similarly, when the price of one house rises, the prices of other houses rise because we all change our view of the world – not because anything fundamental has changed, but because other people have changed theirs. We want things not because we actually need them, but because others want them. This is context in economics. I sense it happening now in the economy.
Because of this herd impulse, the macro economy is more group psychology than personal finance. All recessions end because pessimism ends eventually. Similarly, at the top of any boom, people get far too optimistic and make mistakes that look incredibly silly with the benefit of clear hindsight. But when the animal spirits take over, we are not clear.
I liken it to falling in love.
This loved-up economic buzz is all-consuming, devoid of logic and devoid of an ability to assess risk or project ahead to assess whether this is really the right one.
The economy is only us, all of us with our flaws, mood swings, loves, madness, hunches and beautifully human, buzz-loving irrationality.
The buzz was destroyed by the implosion of the country’s balance sheet after the property crash. Nothing wrecks the buzz like debt, and too much debt eviscerates the buzz.
However, in time, as asset prices rise – which they are doing – the memory of the crash fades and people’s personal balance sheets repair themselves. In a country blighted by negative equity, rising houses prices solve a lot of these legacy problems. (They create lots of others, but let’s come back to that again.)
Very low interest rates also reduce the real cost of debt, allowing the buzz to take hold. This is happening right now.
Finally, it is often forgotten that there is a generation coming up for whom the boom period was something that happened when they were in primary school. They are unencumbered by the legacy of the 2000-2008 episode. Therefore, they live in a country which is outward-looking and full of immigrants and they have no reason to believe that they can’t take risks here and trade with the rest of the world.
Taken together with pent-up demand (as evidenced by the massive over €90 billion of personal savings in the country) and the animal spirits, this will drive the economy, because this is what always happens. It’s called the cycle.
Expansions are self-reinforcing: initially, at least. With so many people still looking for work, there are no capacity constraints in the economy right now.
The recovery will broaden outside Dublin in time. However, this too will be a function of what happens to house prices in the countryside. Recoveries always start in urban areas – economic history attests to this. They tend to spread too, but it won’t happen overnight.
By ‘buzz’, it looks like you mean property prices, and by ‘recovery’ you mean increasing debt.
Call me old fashioned, but I have an idea we’ve seen this before. I’m sure it’ll all end well this time.
I am unsure that the intended conclusion is here, “The Buzz” is an uncontrolled herd stampede that will drive another bubble? Surely this needs to be avoided at all costs, I imagine heavy handed actions like the central bank to put limits on loans are the start of trying to control the herd. But already this is showing signs of being worked around with parents being shanghaied in to shore up the deposit and the likes of PTSB saying that their offer letters are good for 10 months, instead of the standard 6 (more to come I have no doubt).… Read more »
“This loved-up economic buzz is all-consuming, devoid of logic and devoid of an ability to assess risk or project ahead to assess whether this is really the right one.
The economy is only us, all of us with our flaws, mood swings, loves, madness, hunches and beautifully human, buzz-loving irrationality.”
Great quote David. More important than a driving text for the post boom generation you mentioned…have you a name for this Irish ‘sub’ generation yet ?…I suggest the “cycler’s”…as that’s what their in without knowing it ?
For ‘text’ read ‘test’ :-)
‘For the local economy to grow, we need ‘animal spirits’ to be released. This means that people have to be prepared to open a business, take a chance and dip into savings to finance something, or borrow to invest.’
ok…. any ideas what kind of businesses in what sectors are going to thrive if opened now? Or are we talking about coffee shops, hairdressing salons and tattoo parlours?
Saw all of this before in 2006 – 2007. Remember saying to a colleague on a development in Howth in 2007 – ‘What this country needs is a good old-fashioned depression’. Well we got it. And sadly I must say it again – we are heading for another recession with the stupid property prices and the incompetence and corruption of the past and present governments. I’ll give it maybe 3 to 4 years.
Buzz on Steroids Fantastic article and enjoyed reading it . I believe that the terms of engagement with the rural man from Kilkenny are flawed and should he borrow money to buy a house then he is mad . His question was ‘when’ and he was not given that answer .Instead he was made to believe he was wiser than he is . Economist have used and abused the catalysts of the embryonic word that gives growth from nothing . Buzz is on the caption here , animal spirit is added later ‘loved-up’ continues this path .Sex is more appropriate… Read more »
I see McWilliams has moved from Cassendra of the bust to Pollyanna of the Boom.
I am more an AEP man, tightening in the US will cause fairly large problems for the world economy.
Does this mean that we should be expecting thousands of our Irish young workforce flooding back Home from Australia, Canada and UK.
I think David has overdosed on ‘Behavioural Economics’ as peddled by its current star Dan Ariely who I saw last year at Kilkenomics. Such a disappointment of anecdotal mumbo jumbo. Honestly, astrology has more scientific grounding that Behavioural Economics.
Also David’s article doesn’t mention the several international train-coming-down-the-tracks crashes that could KO our ‘recovery’ in 2015.
Sorry. Meant to say recession but what’s the difference?
Subscribe.
13 comments and not one agreeing with David. Is that a record?
Unfortunately, I agree with the other comments. The article basically seems to say that our economic recover depends on young adults repeating the mistakes of their elders. Is that really a plan??
DAVId – ALLOW ME TO DIVERGE WATER IS A STATE RESOURCE IF WE PRIVATISE IT WHO BENEFITS? THOSE WITH MONEY CAN HAVE BUT MORE IMPORTANT -> THOSE WITHOUT CAN NOT. THIS IS THE “ROSETTA” KEY TO PRIVATISATION. NOW SAME GAME DIFFERENT STATE RESOURCE -> CREDIT THE BANKERS MADE SURE THEY PRIVATISED THIS RESOURCE LONG AGO. “YOU HAVE TO HAVE MONEY TO GET MONEY” “THE RICH GET RICHER THE POOR GET POORER” THE MORE MONEY INCREASES IN VALUE THE RICHER THEY GET. AN INVISIBLE MONOPOLY -> IN FRONT OF YOUR EYES. A MAN ONCE SAID “GIVE ME CONTROL OF A NATIONS… Read more »
Feta Cheese Bad Feta Cheese smells so bad it makes others seem like a gouda delicacy and you would wish you could disappear . Mario Draghi now just feels like that and wants to embrace the art of a real illusionist only that what he shows you to appear from nowhere is already there and convinces you that you cannot see it and that it is not there . His face never moves and retains that cold stone motionless Italian sculpture and full of intrigue as he battles the intricacies of currency control .His greatest solitary act is about to… Read more »
Hi,
“Yesterday, in rural Kilkenny, a man stopped me and asked me when the recovery would be felt in the countryside”
When the fella who stopped you has more moola in his arse pocket.
That wasn’t too hard was it?
“With so many people still looking for work, there are no capacity constraints in the economy right now”
Morbid statement Dathi. People differ. There was plenty of capacity during the famine. Sure the place was a hive of obesity. So much so in fact food exports continued during the whole episode.
Michael.
I call it extrovert behaviour because, well, that’s what it is. I was convinced about it a few years ago by studying the good people on this site. Dorothy Rowe, the psychologist, writes a good bit about them and understands the dynamic well. Her big insight is that every couple has one extrovert and one introvert (even, mysteriously, arranged marriages). In the five or six years I have spent checking this I have never found an exception. Rowe (oddly, I find for an introvert) seems to have embraced pc. What I have noticed, and nobody else has it seems, is… Read more »
Nice panel showing the depth of the meltdown of the fiat currencies. There is a currency war on and the perceived results are higher prices. This has little regard to increased of improved economic activity and everything to do with inflation as defined as expansion of the money supply. It is no surprise that four euro countries have asked for repatriation of their gold from the US and the UK. Germany, Netherlands, Belgium and now Austria. This tells us that they consider gold as real money. and that they trust not the US or UK to be a safe trustee.… Read more »
http://vidrebel.wordpress.com/2011/07/24/25-reasons-to-absolutrly-despise-bankers-and-their-minions/
I’m reluctant to admit that we have gotten off to a new beginning . Folks still saying things like “my house is worth 25 grand more t Han last week . We got ta kill this attitude by only using borrowed money for productive purposes . I see great kids all around me with grea t ideas failing to get seed capital , and yet others who are doomed to fail in six months getting the cash from suits in Banks who couldn’t fry an egg let alone vet a Resturant Project . Mentors are very scarce . Real mentors… Read more »
Posted at Midas, http://www.lemetropolecafe.com Behavioral Finance *The yield of the 10 yr T note fell to 2.05%. That is no vote of confidence in the U.S. economy, or many other economies for that matter. *For two days in a row The Gold Cartel has been front and center, awhile their counterpart PPT was doing their thing too. The difference was that the PPT FAILED today, BIG TIME! Crude oil was last up .03 cents per barrel to $56.29. While WTI came WAY back off its lows, Brent crude oil was down 2%. The dollar fell .37 to 88.11. The euro… Read more »
“We create our own buzz”
Do we?
Tell the Russian citizens in the following video which gives an excellent demonstration of how catastrophic deflation and runaway inflation can occur concurrently.
Blather Obarasement is like the scorpion in the fable the frog and the scorpion Dathi.
http://en.wikipedia.org/wiki/The_Scorpion_and_the_Frog