| News > Friends First Economic Outlook: Is The Irish Consumer Spent? Key Points
After a prolonged period of buoyant consumer spending, fuelled by excessive borrowing, rising house prices, strong growth in wages and employment, an expansionary fiscal policy and excessively low interest rates, the party is now clearly over, according to Jim Power, Chief Economist with Friends First, who published his Quarterly Economic Bulletin today. Speaking at the event the economist warned that while 2008 has been challenging, with consumer spending weakening significantly, he predicts that 2009 will be even more challenging, with little chance of confidence returning before 2010. The drivers of the current weakness are the ending of the residential property boom, rising oil prices, food inflation and the global credit crunch. "To emerge from the current difficulties it is clear that the housing adjustment will have to run its course, oil prices will have to fall and the external economic cycle will have to improve. Most of these developments should happen, but not before 2010 at the earliest." However the Friends First economist rejects suggestions that the Irish economy is returning to the dark days of the 1980�s and advises that with the correct fiscal response from Government the Irish economy can emerge from its present difficulties. "The fundamentals of the economy are stronger than they were two decades ago. Employment is still at record levels, Government debt levels are very low and the economy now has a much stronger base of wealth than in the past. The key vulnerability is that excessive public sector debt in the 1980s has been replaced with excessive personal sector debt today". Mr Power warns that the Irish consumer has ceased to be a driver of the Irish economy and is now moving into a period of serious retrenchment that is set to last for the foreseeable future. Consumers are responding to the tightening economic climate by reducing levels of personal debt and curtailing spending habits. Consumer confidence is being destroyed by rising interest rates, rising oil and food prices, an exorbitant cost of living, a housing market that is weakening steadily, an Irish equity market crash, soaring unemployment and a sharp tightening of credit availability. All of these factors look set to get considerably worse before they get better. Commenting on the Government�s response to the crisis, Mr Power welcomed the prudent measures announced by Taoiseach Brian Cowen last week but warned that tougher decisions will have to be made next year. "From a Government perspective it is important not to panic and to take a longer-term strategic view. Cutbacks in wasteful spending across all sectors are essential. However, the continued delivery of the crucial elements of the National Development Plan is essential, but there is justification for project prioritisation. Delivery of the physical infrastructure, the IT infrastructure and focused investment in education and training must continue. Postponing some 'nice to have' elements of the NDP would also be prudent in the current climate." On the international situation, Mr Power expects global liquidity issues to persist. The unusual inter bank interest rate situation, and the irrational ECB decision to increase interest rates in July, are imposing considerable pressures on mortgage lenders and borrowers, because the banks are passing it all on. However, he stressed that those who were willing to lend to fuel expansion in the good times should now hold their nerve. "The difficult liquidity conditions are unlikely to dissipate until we have much greater clarity on the sub-prime issue. Many small businesses and indeed first time buyers will be under pressure in the months ahead to meet all of their financial commitments and I would urge financial institutions to work closely with customers who might be experiencing difficulties at this time." Mr Power believes that a swift recovery in equity markets is unlikely. All of the major global markets have shed considerable ground in 2008, with the Irish market dropping by almost 54% since the spring of 2007. "International investors have ended their love affair with the Irish market and have clearly decided that on a 'risk-reward' basis there are now less risky markets, offering greater potential returns. Irish investors are also reducing their exposure to the market against this backdrop the Irish market can certainly go lower. It is likely to take a strong international recovery to lift the Irish market in any sustainable way." However, it is not all doom and gloom and according to the Friends First economist the current correction in property values is a positive development in the longer term. "A correction is desirable and warranted and will put the economy on a stronger footing for a likely economic recovery in 2010 and beyond. The consumer is going into hibernation...but has not died." To access the complete report and other commentaries from Jim Power click here.
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