Encouraging figures not enough for optimism
In recent decades, most governments in the rich world have become borrowing addicts. Many have got themselves into such pickles that they need their economies to grow continuously and open-endedly just to remain solvent.
Ireland was among the most heavily indebted states in the world as recently as the mid-1990s. Very fortunately, more economic growth than anyone could have anticipated came along in the shape of the Celtic Tiger. Although the national debt never declined by much in cash terms between 1995 and 2007, it shrivelled relative to the size of a rapidly growing economy.
But then came the hardest of hard landings. Public debt soared again, mostly because tax revenues collapsed. Gaping spending-revenue deficits emerged which have been filled with enormous sums of borrowed money.
This disaster has been made considerably worse by the huge costs of bailing out the banks.
Whether today’s budget targets for 2013 and beyond are met depends more than anything else on economic growth. Without growth, tax revenues will not rise, outgoings will not fall and the State’s debt mountain will rise ever higher.
So what are the prospects for growth next year? Consider first the reasons for cautious optimism. For the first time since 2007, the property market has been stable for a sustained period, with no downward trend in residential property prices for more than six months. Risks of further declines are real, but the fundamentals of the market tentatively suggest that a bottom may have been reached.
This is important for many reasons. All economies need a properly functioning housing market. Ireland’s market has been dysfunctional for half a decade. An end to deflation should mean more homes changing hands as those who fear buying into a falling market take the plunge.
This would fuel spending in the wider economy on refurbishments, furniture, electrical goods and the like. A functioning property market would also boost employment by allowing people greater freedom to move home to take up jobs.
An end to falling prices would halt the wealth erosion that has inhibited spending. Households collectively hold about half of their total wealth in property. The more property prices fall, the more household wealth is eroded.
People are more likely to spend if they are not becoming less wealthy. That may be happening already. In the four months to October, retail sales registered their strongest uptick since the recession began.
If domestic confidence has strengthened, so too has international confidence in the Irish economy’s prospects. The most obvious manifestation of this has been the cost of Government borrowing, which has undergone a near-miraculous decline since the middle of last year. That allowed the Government to dip its toe in the bond market earlier this year. It is now in knee-deep and, if progress is maintained into next year, it could be fully immersed by this time next year.
Changed investor sentiment has also benefited State-linked Irish corporates. Bord Gáis, ESB, Bank of Ireland and even AIB have managed to persuade foreigners to lend money to them in recent months.
Investors’ willingness to take a punt on the Irish economy has been helped by a calming of the euro crisis since September. That happened as the European Central Bank belatedly put in place a mechanism to prevent financial market panics emanating from Italy and Spain spinning out of control.
If Ireland Inc has been reintegrating itself into a becalmed international financial system, its integration into globalised production chains continues apace. Exports of goods and services hit yet another half-yearly record in the first six months of the year and foreign companies created more new jobs between January and June than in the same period a year earlier, according to IDA Ireland. That multinationals are expanding their operations is particularly good news, given that they account for nine-tenths of the Irish economy’s total exports.