Economy to grow by 3.5% in 2008 and closer to 4.5% in 2009
Consumer spending set to increase
Employment will continue to grow
Interest rates have peaked
Housing affordability is improving
Consumer debt remains low, given the young age profile of the Irish population
The emphasis placed on the decline of the housing market misses the point about the overall health of the Irish economy, according to a new report published by NCB today.
According to the report, the Irish economy will grow by 3.5 percent in 2008, reflecting solid growth in consumption, exports and business investment. The Report's authors point out that housing has not been a large contributor to economic growth in Ireland since 2005 and that in 2007 housing output made a negative contribution of close to 1%, in a year when the economy is still estimated to have risen by about 5.6%.
"The construction sector did not lead the economic boom in the early 1990s and the housing market has not been the dynamic factor in the economy for the past two years. Therefore the Irish economy will not experience a serious setback on account of the current rebalancing phase in the property market," saidEunan King, Chief Economist, at NCB.
King maintains that household disposable income is expected to continue to grow solidly in 2008 along with personal consumption. He points out that against a background of continued growth in employment, the fall off in demand for property is likely to boost spending in 2008, as consumers use some of the money they would have otherwise spent on moving house.
"At the same time, employment in Ireland is expected to grow by 2 per cent in 2008 and there is little evidence supporting concerns of a decline in total employment on account of the weakness of the housing market," said King.
The report says that against a background of continued growth in employment, the fall-off in demand for property is likely to boost consumer spending in 2008 as consumers utilise some of the money they would have otherwise spent on moving house. While there may be a slowdown in spending on furniture and appliances for new homes, this is likely to be somewhat offset by existing home owners seeking to upgrade their houses. The significant impact on consumption could come from spending on discretionary items such as holidays, leisure and cars.
While car sales according to the Society of the Irish Motor Industry fell by 1.5% in January and February, this is being attributed to the postponement of purchases because of changes in vehicle registration tax which are to take effect from July
The report says that house building which currently accounts for about 10% of GDP, contributed about 1% p.a. to annual GDP growth of about 8% p.a. since 1997. Far from leading the boom in the economy, housing output lagged demand during the late 1990s, resulting in very sharp acceleration in house price inflation. House price inflation was in the region of 20% per annum between 1998 and 2001. Were it the case that house building led the boom then housing supply would have been expected to be ahead of demand and house prices consequently soft. The main driver of the acceleration of growth in Ireland was the expansion of the population of working age and the resultant augmentation of the size of the domestic market. Demand for a wide range of goods and services grew on the back of this demographic change.
Demand for accommodation was a clear beneficiary of this growth in the working age population. Chart 3 plots the broad relationship between the annual growth in the over-25 population, which is a proxy for the demand for accommodation, and housing completions. The growth in this age cohort picked up rapidly from the early 1990s and housing output was at first slow to respond and then much of the latter part of the 1990s and the early part of this decade was a story of builders struggling to match demand. It is implausible to suggest that because credit was available and interest rates falling, there was a largely speculation led boom in housing output over such a protracted period. Were that the case an oversupply situation would have emerged much earlier, according to the report - -this point ignores supply issues such as planning, the system that makes land scare in a country that is 4% urbanised and the time it takes to ramp-up production in construction. A dualcarriageway on the Dublin-Cork road link was opened in 1968 and forty year later despite the Celtic Tiger, there isn't a motorway between the two principal cities.
SEE: International House Price Comparisons 1970-2006: Irish price growth in 36-year period third highest among 18 Developed Countries - -Irish house price inflation headed Developed Counry rankings even when we had large-scale emigration.
Housing output has not been a large contributor to GDP growth since 2005
Employment in the private sector grew by over 450,000 between the first quarter of 1998 and the end of 2007.
Private services accounted for 330,000 of this and construction 150,000 (agriculture and manufacturing declined). The growth in private services and construction has been driven by demographic change, in our view.
There are now 2.1m people at work in Ireland compared to 1.5m in 1998. Of these almost 1m are employed in private services.
Housing Affordability is Improving – No Crash is on the Cards
Housing affordability is likely to improve in 2008, according to the report, if prices continue to soften and the European Central Bank (ECB) proceeds with two interest rate cuts of 0.25% expected later this year – one in June and another one in September. Combined, these factors could reduce the mortgage repayment burden sharply to almost 25% of disposable income.
"The conditions for what could be described as a crash in the housing market do not appear to be in place. Interest rates have peaked at a relatively low level, fiscal policy is mildly expansionary and employment and earnings are still rising. At the same time the underlying demand for accommodation, driven by demographics, remains strong," said Eunan King.
Levels of Debt & Inflation
The NCB report highlights how the pace of credit growth has eased since the dramatic rise in early 2006. The growth in consumption in Ireland has not been based on borrowing and Credit Card debt shows no signs of increasing. Consumer debt is mostly mortgage borrowing and is not high compared to other countries, considering the low average age of the Irish population and high rates of home ownership.
Mortgage credit in Ireland accounted for 86% of personal credit outstanding in 2007 compared to a Euro area average of 71%. While mortgage credit growth in 2008 is expected to slow it is likely to pick up again in 2009, with NCB projecting growth of about 12% in 2008 and around 18% in 2009 and 2010.
Inflation is forecast to ease from 4.9 per cent in 2007 to 3.1 per cent in 2008 with food prices expected to rise 7 per cent.
Finfacts Comment: This sanguine analysis should be music to the ears of Micheál Martin T.D., Minister for Enterprise, Trade and Employment and his three helpers/Minister of State in his Department who spend their time making sunny announcements.
One is reminded of that profound question- which comes first: The chicken or the egg?
The housing boom has only been a byproduct of a population and migration surge while the huge rise in foreign direct investment and its impact on the economy barely merits mention.
How many jobs in the private services sector are dependent on construction? It is difficult to say but whether it's advertising revenue of the Irish Times or the business level in the local pub, it is likely to be more than armchair economists would guess.
Eunan King focuses on housing and does not address the impact of the further contraction of the construction sector post the completion of the major infrastructural programme.
He exudes confidence that the €8.2 billion spent on developing a "knowledge economy" that lacks credibility, will improve competitiveness.
It doesn't matter that Irish-owned "knowledge economy" firms such as Iona and Trintech are struggling. We will always get American firms to establish in Ireland! Another NCB economist said two years ago that the importance of Intel, Ireland's largest industrial employer, is exaggerated.
Ireland will continue to attract migrants to maintain the domestic economy while the focus of Irish investors with money, supported by lending, is to put it into property overseas. It doesn't matter that venture capital gets small change by comparison. Not to worry - Micheál Martin can be relied on to produce a superlative!
SEE:Irish investors were the second biggest net investors in commercial property across Europe in 2007
The drag of an expanded public service with payroll costs much higher than the private sector, does not merit any attention.
Dr. Garret FitzGerald wrote in the Irish Times in 2006 that during the brief Celtic Tiger period from 1993 to 2001, our living standards rose by one-half. But this was due to two special factors - both of which were essentially temporary in character.
The first was the impact upon our national productivity of a quite exceptional inflow of new US investment. For a number of years Ireland, with only 1 per cent of Europe's population, attracted up to 25 per cent of all US greenfield industrial investment in our continent. The new technology and skills that this inflow brought contributed to a 4 per cent annual increase in output per worker at national level, ie productivity.
The second factor, which played an even larger role in boosting our living standards during this time, was the huge increase in the total number of people at work, and the corresponding drop in the proportion of dependants in our population. Several factors contributed to this: the exceptional inflows of young workers emerging from the educational system and of women transferring from "home duties" to the labour force, and also the flow of unemployed people returning to work and of recent emigrants coming back to jobs here.
Within a decade these inflows into our labour-force reduced from 230 to 115 the number of dependants that every 100 workers had to support, either directly within their families or indirectly through taxation.
FitzGerald wrote that the huge increase in the proportion of our population engaged in work, and the consequential drop in our dependency ratio - more rapid than had ever previously been seen anywhere in Europe in peacetime - accounted for more than half of the improvement in our living standards. But that extraordinary combination of productivity growth and reduced dependency, which distinguished the 1990s in Ireland from any other decade, was a temporary phenomenon.
“In future, our standard of living is likely to rise much more slowly than we became accustomed to during the 1990s. However, I don't think that with most people this particular penny has yet dropped,” FitzGerald wrote. “Since the end of 2003, output per worker in Ireland has been almost static. It seems to have risen by only 1 per cent in 2004 and not at all in 2005. Even if the CSO was in due course to revise upwards its current estimates of economic growth in those two years - which is quite possible - any such revision is unlikely to be on a scale that would show any appreciable rise in productivity…. in the absence of improvements in output per worker, the current spending spree, financed by borrowing, could not continue indefinitely. And, on top of the uncertainty created by our huge growth in dwelling construction, this new factor introduces a further element of uncertainty into our economic prospects in the latter part of the current decade.”