Global meltdown

We'd be glad to see the back of 2008 if only 2009 wasn't looking even more grim, writes Dominic Coyle

WITH THE markets in meltdown, the financial system in turmoil and the broader economy tumbling into recession, there would be a widespread sense of relief at seeing the back of 2008 . . . if it wasn't that 2009 holds little prospect of any providing any better news.

If anything, the outlook looks even more grim. For large parts of last year, even with the collapse of the Irish property market, many of those managing or analysing the economy operated under the expectation that Ireland Inc could engineer a soft landing.

As we enter this new year, no one is labouring under any false optimism. Even before 2009 opened, the Economic and Social research Institute (ESRI) was projecting record growth in unemployment - with up to 120,000 joining the Live Register over the coming 12 months. Ireland is currently enduring the most rapid slowdown in modern times.

It was, to some extent, our bad luck that reality caught up with the global financial services sector at the same time, triggered by the willingness of US banks to fund mortgages for people who had no realistic prospect of paying back that money.

The banks, which had been cheerleaders for the debt-fuelled economy of recent years, suddenly took fright and, fearful of further exposure, largely stopped lending - even to each other.

But Ireland has not simply been the victim of external forces. The domestic property boom, sustained by easy credit and unnecessary tax incentives, finally came to an end. From a position where the construction sector was building 80,000 homes, this year saw fewer than 50,000 completions, and developers are sweating as many of those lie empty.

And, as the economy slowed, commercial property was unable to take up the slack and National Development Plan projects felt the squeeze.

The ease with which this caught many by surprise indicated that it was not only Irish banks that had been living in denial.

But it is the banks which inevitably dominate the agenda and will continue to do so into this new year. Now that the Government has decided it cannot countenance a bank failure, bad debt is the problem, and how long it will take until some measure of confidence returns to the banks themselves and their customers.

As of now, there is no clear sign of an end to the tumult, and that poses problems especially for the small businesses sector, which is currently starved of funds.

Elsewhere, the property sector remains in the doldrums and all current forecasts indicate that 2009 will see even less activity than the year just gone.

A business sentiment survey published just before Christmas suggested the retail sector was also heading for a particularly challenging 2009. This will come as little surprise to those whose children had to squint between the giant "Sale" posters in store windows to glimpse Christmas displays.

The final exchequer returns for 2008 are not yet in but the Government acknowledged last month that they will offer little respite. "We're down €8 billion on our tax receipts this year," Taoiseach Brian Cowen said in an interview just before Christmas. "Next year is going to be difficult as well."

This was echoed by Minister for Finance Brian Lenihan who made it clear that further spending cuts are on the way. Speaking last month, he said: "I am saying to people that we are living beyond our means and we have to face up to that. We won't be able to compete if we don't."

Doubt surrounds the sustainability of the most recent national pay agreement, with many companies in the private sector already announcing moves to freeze, or even cut, pay in the face of the economic downturn.

And there won't be much help from abroad either if the latest forecasts are to be believed. Economies across the European Union are in recession, as is the United States.

The inevitable reduction in demand is being exacerbated by the continuing strength of euro relative to sterling and the dollar.

In any case, economist Jim O'Leary has argued in this newspaper that we cannot simply wait for the economic cycle to turn. Public spending in recent years has been predicated on the windfall taxes of the property boom. That is gone and we will have to adjust to a lower tax base.

If there is good news, at least for those companies strong enough to survive the recession, it is that the downturn will provide the conditions needed to engineer a return to competitiveness that will allow the economy advance, hopefully, from some time towards the end of 2009, if only slowly.

If 2008 was the year when reality kicked in, 2009 seems certain to be the year when we endure the pain necessary to put in place the conditions that will allow Ireland Inc return to prosperity.