This is an extended version of my column in the Irish Examiner 30 December 2013.
So, what will 2014 bring on the economic front, for Ireland? Will we continue to turn corners without ending up back where we started or will we slip back into the chilly embrace of the Troika so recently departed? The government and the economy face a number of challenges, all of which will have to be overcome to ensure that we move forward.
The latter half of 2013 has seen the economy stabilize if not actually begin to show improvement. If we are to have any hope of regaining actual economic sovereignty then we need to see this continue and more especially deepen. A real sustained economic recovery will only become evident when we see a stabilization of domestic demand, and that demand being broad based. Right now there is stabilization but it is patchy and by no means broad based. The recent Q3 2013 data showed that personal consumption is essentially flat. There has been a pickup in domestic fixed capital formation and a reduction in the net outflow of profits as well as a fall in imports. Retail sales remain very depressed.
There has been a welcome uptick in jobs in the economy. Since the start of 2012 we have seen 74000 new persons in employment. Digging into these however we see that over 1/3 of that is made up of self-employed with no staff. While entrepreneurial setups are great, these will not , in any feasible amount of time, result in significant economic growth. These TINAEs (There is no alternative to entrepreneurs) are microbusinesses and not huge job creators. Another 5k are assisting relatives – working on the farm or on the shop for low wages. We are an eyewatering 270k lower in terms of total workers now (1.899m Q3 2013) compared to the peak in Q3 2007. While a large part of that is down to the contraction of the overly large construction and related sectors, it also represents a loss of productive and retail posts. The government ambition of full employment will require that these and more are recreated.
We have already seen that we will have a lost decade in employment. We are now back, and this is with an upswing as noted, at mid 2004 levels of jobs. The composition of the workforce however has changed . Comparing Q1 2008 to Q1 2013 we have fully 60k more persons in Health and Education, 90k less in construction, 35k more in residential and social care and what may surprise people, we have 20k more persons in financial services. Manufacturing areas have taken falls of between 20 and 60%. A careful eye on the structure of employment to ensure we do not become imbalanced is essential. We have never really focused on the creation and sustaining of a domestic manufacturing base – this does not have to mean big metal bashing but it should be possible to merge quality irish design sensibilities with niche products.
The banks are a long long way from fixed. The halting nature of the repair job, with the banks unwilling to write down residual SME and mortgage debts, the government unwilling to force this for fear of the blowback from repossessions and emergent capital holes, and the EU unwilling to countenance any form of retrospective funding, has left the economy like Mr Orange in the climactic scene of Reservoir Dogs – bleeding out on the floor while vested interests hold each other at gunpoint. . Of gross new lending to SME’s in the first three quarters of 2013 only approx. 10% went to manufacturing and 10% to services. The largest single amount – 35% – went to agriculture. While a vital industry, this to my mind reflects the incapacity or unwillingness of Irish banks to lend absent ‘real’ security. Steps will have to be taken to ensure that credit flows to the areas that will create sustainable employment in the large numbers needed. And then of course there is the tracker mortgage loan book which while no longer making massive losses is not generating any net income flow for the banks.
Within Europe the debate on the banks continues. The present state of play enshrines the bail-in principle, where Cypriot style resolutions to failing banks may result in deposits being subject to writedown before taxpayers are involved. The proposed rules, complex and circular, are subject to political agreement of public funds being invested and there is every likelihood that when a large bank gets into trouble first there will be calls from the markets (blessed be their name) that bondholders cannot be burned for fear of Lehmans and second there will be rigid teutonic unwillingness for community funds to be invested. Thus failing banks will continue to infect the sovereign and the doom loop remains intact. With Greece at the helm of the EU council in 2014 it would be nice if Ireland could play a part in breaking this doom loop, but given that the principle of depositor bailin was agreed and implemented under our presidency that is too much to hope for.
Across the water the increasingly less black swan of UK exit (Brexit) from the EU continues to lurch forward. Fanned on by a mouth foamingly xenophobic gutter press, the Tory right are ever more strident in their demands for the return of the glory days of …well, some imagined period. Assuming, and it is still a big assumption even with an improving economy, that the Tories win the next election, they are committed to a referendum on EU membership. It would be a calamity of the first water for them to vote out of the EU – but it would be an even worse one for us. Europe is not in a particularly forgiving mode at this juncture and it is highly improbable that a soft exit would emerge. An isolated UK (perhaps reduced to England and Wales, with an increasingly unwanted Northern Ireland ) would be poorer and thus less amenable to Irish exports. It would be more closed, resulting in it becoming a less effective safety valve for Irish migrants. Soft power if it means anything should mean that the 400k Irish diaspora in the UK be reminded of how useful a UK in the EU is to them and to us.
The Irish economic model remains one that in essence entices FDI into the country on the basis of a combination of tax incentives. We are not a tax haven per se, but do form a crucial link in the worldwide tax arbitrage chain. Willingly or no, this will have to change. We will have to ensure that stateless companies do not operate from our jurisdiction, but more importantly we need to face up to the fact that a large part of our services exports are based on tax arbitrage sand. Pretending that this is not the case is folly. Much real work is done and exported but this tends not to be sexy techy household name stuff. We need to take heart from the success of Storyful for example and focus on growing more of these and less iBoxGoogleFace. The recent Italian decision on google should tell us the way that the wind is blowing.
A, if not, the key, to success in the modern world is a well educated society. Government needs to bang business heads together and suggest that they cannot blather and bleat about the lack of skills in the graduate workforce without taking a lead in the debate on solutions. These will involve a refocusing away from level 7 and 8 Higher Education courses (great for massaging the aul dole queue numbers) and towards the reintroduction of proper business-education apprenticeship structures in all areas of the economy. It will also require the government to accept that there are levels, specializations and tiers in higher education. It will require the government accepting that educaition has a long payoff and telling business same. Most of all it will require a societal acceptance that education, from primary through higher, is as vital as power for the modern economy, organizing the sector thusly and with appropriate structures.
There is throughout the Irish economy a focus on the glitz and glamour of exporting to the BRICS. Yet, areas such as Latin America and Africa, sub Saharan Africa in particular, have shown remarkable resilience and growth in the last decade and forecasts are for this to continue. While small in aggregate terms there are deeper cultural links than to China. A wider more adventurous approach to our exports would pay dividends. These peripheral markets are growing rapidly and leapfrogging many technological bottlenecks.
Finally, as we run towards the election season, there will be a massive temptation in government to find sweeties for all and sundry. Even with all the work done there is still a massive hole in the budget ; we have a chronic lack of joined up thinking; insider elites scoff at the notion of change and wonder ‘what recession’ and the government shows worrying signs of reigniting a property bubble-een. A focus on reform and good governance would be nice to see. But we probably wont see it. Happy New Year