Jim Power: Removing the obstacles to growth: Restoring a functioning economy to Ireland
“Ireland will clearly face immense challenges over the coming years in re-establishing a functioning business and economic model. Unfortunately the rehabilitation process is being seriously complicated by the ongoing Euro Zone crisis”, warned Jim Power at the publication of the Friends First Quarterly Economic Outlook today. According to the economist, Ireland’s fate over the coming years will be largely decided by external forces, but it is critical that the government addresses the issues that are within our control.
According to the Economist, the economy is clearly still in a very difficult place. Credit conditions are extremely tight; consumer confidence is very fragile; labour markets are very difficult; personal debt problems are mounting; and the public finance position is unsustainable, with the result that taxes are being increased and government expenditure cut in the midst of the deepest recession that the country has ever experienced.
The key issues which need to be addressed in order to re-establish a working business and economic model for the state are:
The creation of a sustainable public finance position
Ireland has a fundamentally unsustainable fiscal position – too much money is spent on running the country, with too little taken in taxation.
The re-creation of a functioning banking system
The Irish banking system is not performing its role as an intermediary that channels capital from those who want to save, to those who want to borrow for investment or working capital purposes. The banking system is currently totally dysfunctional.
Improve international and domestic competitiveness
Although improving, the costs of doing business in Ireland are still too high and must be taken down further. This will require a co-operative and co-ordinated approach from employers, trade unions, government and the public.
A reduction in the level of bureaucracy and red tape
Licensing requirements and regulatory compliance remains a big issue for small businesses; the burden of regulation is very costly and needs to be streamlined, without undermining standards.
A substantial easing of the commercial rates burden
Local authority commercial rates, local authority charges and other state costs now represent one of the key impediments to the survival of thousands of businesses all over the country. There are too many local authorities in Ireland. Local government must be rationalised in order to improve efficiency, reduce costs and eliminate duplication of roles. Savings should be passed back to the business sector in the form of lower commercial rates. Furthermore, local authority funding must be put on a sound footing.
2011 is turning out to be another very challenging year for consumer spending power and confidence remain under pressure from ongoing weakness in the labour market, downward pressure on earnings, the increased personal tax burden, cutbacks in government expenditure, rising interest rates and basic uncertainty about the future. He noted that consumer spending looks set to decline by around 2 percent in 2011 as consumers remain in a justifiably cautious frame of mind. “Although consumer confidence has somewhat recovered, it remains very fragile”, added Mr Power.
Inflation will continue to be pushed up by higher prices for food, insurance, fuel and energy, health, education and mortgage interest costs. And while the reduction in VAT will alleviate some of the pressure, average prices still look set to rise by 2.7 per cent in 2011 and 2.5 per cent in 2012. “It is certainly arguable that the fact that prices are rising is not a positive development”, said Mr Power. “Price rises will further undermine discretionary spending power and will further pressurise consumer spending”, added the Economist.
Mr Power also observed that receiving prompt payment for goods and services provided has always been an issue for small businesses in Ireland, but that this has been seriously compounded by the difficult economic and business climate which now prevails. He called on state bodies in particular to ensure that they pay promptly, saying; “The reality is that many small businesses operate on very tight cash flow and any delay in payment can create serious difficulties”.
Labour market conditions remain difficult in 2011. Total employment in the Irish economy has declined by 345,600 between the high point of the overall labour market in the third quarter of 2007 and the first quarter of 2011. Some of the sectors worst affected include the construction industry, manufacturing industry, wholesale and retail trade and accommodation and food services. “It is likely that average employment across the economy could decline by around 30,000 in 2011, before stabilising in 2012. Taking emigration into account, the unemployment rate should average around 14 per cent in 2011 and 13.8 per cent in 2012”, said Mr Power. The Irish residential housing market continues to remain under intense pressure from the point of view of prices, activity levels and lending. “The fundamentals of the Irish housing and mortgage market remain very weak and are unlikely to get significantly better in the foreseeable future” said Mr Power before adding; “Credit availability is the biggest issue for the market and this is not likely to change anytime soon. National average prices could fall by around 12 per cent in 2011 and could fall by up to eight per cent in 2012. New home completions could be as low as 9,000 in both 2011 and 2012”.
Internationally, in the first half of 2011, the global recovery remained on track and continued to become more broadly based, with stronger domestic demand supplanting strong export growth in the developed world. However as the year progressed, some signs of stress have started to emerge. The key factors contributing to the modest easing of activity, says Mr Power, are “the Japanese earthquake; the tightening of fiscal policy as many countries strive to reduce unsustainable government deficits; high oil and commodity prices; and the escalating sovereign debt crisis in the Euro Area”. The solution reached by the EU last week is not likly to represent the final solution. Debt levels are still unsustainably high in Greece, Ireland, Portugal and Spain. A close eye should be kept on bond yields in Spain and Italy over the coming weeks. Economic growth would alleviate the Euro Zone problems, but unfortunately growth everywhere is now starting to come under pressure. ‘There are a few more chapters left in this particular book’, Power said.
The Friend’s First Quarterly Economic Outlook also included a discussion on risk, provided by Nick Bullman of CheckRisk LLP, which concluded that the risk of super-correlation in the markets is increasing. CheckRisk point out that the risk of super-correlation, where virtually all asset classes correlate downwards, has increased in the past two weeks.
Bullman also says that the ECB’s refusal to provide liquidity to Greek banks if there is a sovereign default of Greek bonds would ripple through the whole of the European banking system, as both French and German banks are heavily exposed to Greece, Portugal, Spain and Ireland. The European Bank Authority stress tests, with the failure of eight banks out of 91 and only €2.5bn, may end up achieving precisely the opposite effect of that intended. “Markets have been spooked by the results, which on face value look too soft”, states Nick Bullman. “CheckRisk analysis indicates that if a proper haircut is applied for Greek, Portuguese, Irish, Spanish and Italian debt, the undercapitalisation of the banks tested could be as high as €70bn or thirty times the number released by the EBA. Our estimates show that as many as 25 banks may have failed under a more realistic and up to date scenario. Banks that would fail under our stress test include Allied Irish Bank, Bank of Ireland, RBS and BNP Paribas. The only banks still passing with large margins of safety in our test were HSBC and Credit Suisse”, he concluded. In conclusion to his forecast Jim Power noted; “Restoring a healthy and functioning economy will prove very challenging for Ireland. Ireland will need external assistance in the form of lower interest rates on bailout funding, an increase in the debt maturity profile and bond losses for private investors”.
He added; “The key obstacles to economic and business recovery are credit conditions, the unsustainable nature of public finances, general cost competitiveness, regulation and bureaucracy, late payment and an unacceptable local authority commercial rates burden. It is incumbent on policy makers to address all of these issues and seek to remove the barriers and obstacles to economic and business recovery”.
