While the economy is likely to start growing again next year, recovery will largely be confined to the multinational sector with no return to Celtic Tiger years.
Feb 17 2010 By Dan White
At last, almost two years after the Irish economy entered its worst downturn since the 1930s, there is some light at the end of the tunnel. A modest economic recovery is now likely to begin next year with stronger economic growth kicking in from 2012 onwards.
The latest word from the ESRI is that there will be vigorous 5% annual economic growth between 2012 and 2015, with the economy then reverting to 3% annual growth from 2016 onwards.
But will it feel like growth? While any bottoming out in the economy, which has shrunk by up to a sixth over the past two years, is good news, it might not be a good idea to lose the run of ourselves.
For a start unemployment is unlikely to fall rapidly any time soon. At least half of the increase in the numbers of those signing on the live register has come from the construction sector, where the number of jobs has fallen by at least 130,000 since the top of the boom, with a further 50,000 to 60,000 job losses likely before employment levels bottom out.
With the country awash with unsold houses and apartments, empty office blocks, shopping centres and industrial units, and with the new motorway network likely to be substantially complete by the end of this year, construction employment is likely to be permanently lower, probably no more than 100,000 workers as against more than 280,000 at the end of 2006.
Finding jobs for all of those ex-building workers, many of whom have relatively low skill levels, is going to be very difficult.
The property dilemma
Not alone will the property bust leave us with a rump of almost 200,000 former building workers looking for jobs, it has also left hundreds of thousands of homeowners stuck in the negative equity trap.
Negative equity, where a homeowner’s outstanding mortgage exceeds the value of their property, is rapidly shaping up to be the economic story of 2010. A paper published last October by the ESRI calculated that at least 196,000 homeowners would be facing negative equity by the end of 2010. However, that number could rise to almost 350,000 if house prices fell by 50%. That’s more than half of all the 650,000 homeowners in the country with mortgages on their homes.
Since the recession first struck in early 2008 nervous consumers have been saving record amounts. This has been one of the major contributors to the collapse in retail sales, down by over a fifth since their late 2007 peak.
A central plank of the thesis being advanced by those predicting a resumption in economic growth next year is that consumers, who have been busily squirreling away cash since the downturn struck, will start spending again. Me, I’m not so sure. Look around you. The country is awash with unsold houses and apartments. While there might be a partial recovery inside Dublin’s M50 and Cork’s M25, that’s not where the real problem is.
The real problem is the hundreds of thousands of new homes and apartments that were built in the outer commuter belts of our major cities and the ghost estates which seem to haunt every town and village, no matter how remote, in the country.
The ESRI has calculated that at least 196,000 homeowners will be facing negative equity by the end of 2010, and that number could rise to almost 350,000, more than half of all homeowners in the country, if house prices fell by 50%
Ghost town
A recent report by NUI Maynooth estimated that there were over 300,000 empty homes and apartments in the country. That’s the equivalent of one vacant home for every five of the 1.5 million households in the country.
With the Construction Industry Federation estimating the underlying annual demand for new houses at 45,000 units and independent economists putting the figure at somewhere between 20,000 and 30,000 units, this means that, depending on who one talks to, we are confronted with somewhere between seven and 15 years excess housing supply.
For what it is worth, I reckon that the NUI Maynooth researchers were, if anything, being conservative in their estimates. As far back as the April 2006 census, the CSO reckoned that 266,000 houses and apartments were vacant. Since then we have built a further 250,000 new houses and apartments. The notion that a net 215,000, over 85%, of these new houses and apartments have found occupants strikes me as being absurdly optimistic.
While this massive glut of unsold stock overhangs the market any significant recovery in property prices is years, perhaps up to a decade, away. A depressed property market is likely to remain a millstone around the neck of the domestic economy for years to come. Until there is an appreciable recovery in property prices, consumer spending, the lynchpin of the domestic economy, will go nowhere.
Exports key to success
Far more likely is an export-led economic recovery. The savage wage cuts of the past year are already feeding through into greater international economic competitiveness with Irish unit labour costs falling by approximately 7% in 2009. Despite the strong euro, the Irish-based multinationals are once again gaining market share in world markets – unfortunately it’s a different story for indigenous exporters as last year’s €1 billion decline in food and drink exports testifies.
What all of this means is that when growth resumes things won’t feel like they were back in the “good old days” of the noughties where everyone with a pulse was more or less guaranteed a job and we all had money to spend freely.
A far better parallel is likely to be the so-called “jobless” growth of the late 1980s and early 1990s. In those years, despite apparent strong economic growth, the number of jobless remained stubbornly high and, outside of the multinational enclave, the domestic economy remained chronically depressed.
With the several hundred thousand homeowners stuck in negative equity watching every penny, and most of the rest of us still bearing the scars of the great bust of 2008/9, what are the odds of something similar happening again?