| Click for the Finfacts Ireland Portal Homepage |

Finfacts Business News Centre

 Irish Economy
 EU Economy
 US Economy
 UK Economy
 Global Economy
 Asia Economy


How to use our RSS feed

Web Finfacts

See Search Box lower down this column for searches of Finfacts news pages. Where there may be the odd special character missing from an older page, it's a problem that developed when Interactive Tools upgraded to a new content management system.


Finfacts is Ireland's leading business information site and you are in its business news section.


Finfacts Homepage

Irish Share Prices

Euribor Daily Rates

Irish Economy

Global Income Per Capita

Global Cost of Living

Irish Tax - Income/Corporate

Global News

Bloomberg News

CNN Money

Cnet Tech News


Irish Independent

Irish Times

Irish Examiner

New York Times

Financial Times

Technology News




Content Management by interactivetools.com.

Analysis/Comment Last Updated: Aug 23, 2010 - 8:24:15 PM

Recession Ireland 2008: It may be like a Feast and a Famine as Celtic Tiger declared dead but all is not lost
By Michael Hennigan, Founder and Editor of Finfacts
Jun 24, 2008 - 8:19:05 AM

Email this article
 Printer friendly page

Department of Finance, Merrion Street, Dublin 2
Recession Ireland 2008:
The Celtic Tiger is declared dead today and while it may be like a feast and famine, all is far from lost but the illusion that the free lunch had been invented, has also crashed to earth.

The forecast of a recession in 2008 by the Economic and Social Research Institute (ESRI), coming in the aftermath of the Lisbon Treaty rejection, is a deep psychological blow to Ireland Inc., on the world business stage. The confluence of an inevitable bursting of a housing property bubble with the international credit crisis and both the UK and US economies on the brink of recessions, together with rising inflation that will result in interest rate hikes, is the perfect storm.

The ESRI expectation of a contraction in both GNP and GDP of 0.4% in 2008 will likely result in adjustments in private sector forecasts by even the most ardent optimists.

The ESRI, as a publicly funded but independent institute, was the inspiration of TK Whitaker, the architect of the modern Irish economy, whose seminal work, Economic Development, was published fifty years ago this year.

"Everyone knows the downturn in the public finances is because government blew the finances from the boom which everybody knew would be temporary," Dr. Alan Barrett of the ESRI said on Monday.

The biggest indictment against the Government is that during a period of a manna-from-heaven of riches,  the opportunity was not used to seriously reform governance, public sector and barriers to competition in the private services sector.

Labour Finance Minister Ruairi Quinn had announced a restrained budget in advance of the 1997 general election but his successor Charlie McCreevy opened the throttle with an wide extension of property related tax incentives, when they were not needed coupled with a cut in capital gains tax for property investment to 20%, and an ECB interest rate of 2% from mid 2003, property became a "slam dunk" to borrow an expression from George Tenet, George Bush's Iraq invasion era CIA chief.

The Central Bank could have done much more as the frenzy gathered pace:

European report says Irish house prices should be left fall further; Real mortgage rates in Ireland were zero or negative between 1999 and 2005

I was advised by the Central Bank last year that they did not keep any data on interest-only lending by the banks, for example.

During the recent partytime, anyone who questioned the conventional wisdom was "talking down the economy" and last July, former Taoiseach Bertie Ahern, wondered why "cribbers" from the sidelines didn't commit suicide.

Property man Ken MacDonald lamented in the Sunday Independent in March 2007: Why do we allow scaremongers and doomsayers with unfounded pessimism and unbridled negativity dictate our thinking and blunt consumer confidence? The Irish economy is the envy of the world. Job creation is phenomenal with more than 7,000 new jobs being created each month - despite the gloomy attention given to periodic job losses in some sectors.

Unemployment stands at 4.1%, the lowest in Europe; there are 750,000 more people in the workplace than a decade ago. We have revitalised cities and towns, a conveyor belt of entrepreneurial business people operating successfully on a world stage, a rich cultural and artistic heritage, a vibrant talented young population, rising by almost 100,000 per year, confident in their own and their country's destiny. We should be celebrating our success on a daily basis. In any event, the Irish love affair with property will continue undaunted despite the knockers.

The forecast of a recession should help the Government in the current pay talks and the ESRI says that any increases to public servants under the pay round should reflect the likely developments in the private sector. "While the argument will be made by public sector unions that allowance should be made for inflation, we would argue that the economy generally and the public finances in particular are in a vulnerable state and that national interests would be best served through wage restraint in the public sector," the Institute says.

Some people unfortunately did  fall for the Government spin in past years that the philosopher's stone had been found to engineer a permanent prosperity.

Our membership of the European Union had little to do with our good fortune and we were storming new overseas markets like China but the truth was a little murkier and less self-serving.

More than 90% of our total exports are made by foreign-owned firms and we are more dependent on the sector than at the start of the Celtic Tiger.

Financial Times columnist Wolfgang Münchau wrote on Monday on the aftermath of the Lisbon Treaty rejection: What strikes me the most about this extraordinary turn of events is the perception in Ireland that a break with the EU would be no big deal. I received a large number of letters from Ireland last week from readers who steadfastly maintain that the country’s economic success had nothing to do with the EU and everything to do with domestic policy – in particular with low corporate taxes and skilled labour.

The view expressed by those correspondents is as wrong as it is revealing. If so many people are delusional about their country’s economy, then we should perhaps not be surprised about the outcome of the referendum. It is therefore perhaps worth looking in some detail at the nature of Ireland’s economic success over the last 30 years to gauge what life might be like outside the EU.

There are several interactive factors. The importance of EU subsidies is almost certainly overrated. They played some part, especially in the early phase of the country’s economic renaissance. In any case, Ireland is on the verge of becoming a net contributor to the EU budget. But one would be even more mistaken to conclude the opposite: that the EU matters nothing or little.

Ireland was one of the early and enthusiastic members of the European Monetary System in 1979, which brought much needed macroeconomic stability. Membership of the eurozone in 1999 led to lower interest rates, which have contributed to the economic growth ever since. Low corporate tax rates certainly helped Ireland attract foreign investors. But never forget that Ireland is also the only English-speaking member of the eurozone, the one place where eurozone and Anglosphere meet.

The country naturally benefited from membership of the EU’s internal market. Without it, Ryanair, the Irish low-cost airline, would not be able to offer its popular flights across Europe. The Irish have also proved influential in the management of the internal market, not least through Charlie McCreevy, the Irish commissioner in charge of the EU’s internal market and financial services. As a member of the EU, Ireland has been in a position to veto motions that would have impaired the country’s economic success. Without steadfast opposition from Ireland, the EU would have made more headway in imposing corporate tax harmonisation.

Ide Kearney and John Fitzgerald write in today's Irish Times that the the huge cost of the excessive housing boom is now being laid bare.

They say that over the coming two or three years, as the building sector contracts, the economy needs to price its way back into a competitive position to allow new activities in the manufacturing and services sector of the economy to grow, providing a full recovery in 2010 or 2011.

The problem is that when firms have to cut employment this happens very rapidly, as is the case today, while it may take a few years to grow the new firms providing the employment of the future.

The ESRI's Quarterly Economic Commentary says that the economy is experiencing considerable difficulties right now: The forecast for the re-emergence of net outward migration is possibly the most vivid illustration of this and may give rise to comparisons with the 1980s. Given the likelihood of such comparisons, it is worthwhile stressing that the economy is better placed today to emerge from these difficulties than it was in the mid-1980s. However, a return to higher growth rates is predicated on ensuring that public expenditure is both efficiently provided and effectively managed. In such a context, a return to positive growth in 2009 and 2010, forecast both here and in the   Medium- Term Review 2008-2015, can be expected with a reasonable degree of confidence, something which could not be said in the mid-1980s.

The top earning US fund manager in 2007said last week that the credit crunch has much further to run.

In addition to a rate hike by the ECB to 4.25% on July 3rd, the key 3-month Euribor inter-bank rate is likely to retain its premium of about 0.8% over the benchmark rate well into 2009. Commercial loans in particular, have been hit by the equivalent of 3 typical ECB rate hikes since last August as such loans are priced at Euribor +

Funds for lending will remain tight while past investors in second houses/apartments in the expectation of making a quick profit within a few years, will be under increasing pressure to sell.

For example, many investors got five-year interest only loans and capital repayments will now start to put pressure on owners.

As to where the money has gone, much of it from developers and farmers on EU welfare, who benefited from the rezoning system, has gone to purchasing most of New Bond Street in London for example.

Irish investment of €13.9 billion was put into European property deals last year. In contrast, the Irish business sector does not even get a total of €200 million in venture capital investment. The Irish have invested about €60 billion in commercial property - mainly overseas - since 2001.

Property dominates the news on Irish investment. Last month, a consortium of Irish investors led by Ulick and Des McEvaddy acquired a majority interest in an 86-acre site beside the new airport in Berlin. I guess that Ulick gets help in reading or depends on advice in respect of the legal documentation!

A report on investment intentions among corporates in 15 countries, relating to the coming five years, which was published last week, said that had "the research been carried out five or ten years ago, Ireland might have expected to feature as a preferred place to invest for many respondents looking for a business-friendly, low tax environment.

Today, corporations are looking elsewhere, and Ireland is not cited in any of the areas covered by the study."

Irish land prices are the highest in Europe and Dublin office rents are among the highest in the world - - - more than double Toronto's and almost twice the level in Brussels - capital of the European Union.

Troubling times indeed, but what is needed is political leadership to match the challenges ahead.

Related Articles
Related Articles

© Copyright 2010 by Finfacts.com

Top of Page

Latest Headlines
Disastrous 44-year War on Drugs and ignoring the evidence
HSBC & Tax Evasion: France/ Belgium issued criminal charges; UK/ Ireland nothing
Analysis: Germany world's top surplus economy; UK tops deficit ranks
Facts do not always change minds - can even entrench misinformed
Finfacts changes from 2015
Facts of 2014: Guinness not Irish; 110 people own 35% of Russia's wealth
In defence of dissent and Ireland's nattering nabobs of negativism
Dreams of European Growth: France and Italy facing pre-euro economic problems
Globalization's new normal needs permanent underclass - Part 1
MH17 and Gaza: who is responsible?
Israel vs Palestine: Colonization set for major expansion
Aviva Ireland's 'fund' runs dry and life cover to die for
We wish Martin Shanahan - new IDA Ireland chief - well but...
Ireland as an Organised Hypocrisy is in lots of company
Dr Peter Morici: Friday’s US jobs report won’t alter Fed plans to raise interest rates
Own Goal: Could FIFA have picked worse World Cup hosts?
Ireland: Spin and spending will not save bewildered Coalition
Irish Government parties set for 2-year vote buying spending spree
European Parliament: Vote No. 1 for Diarmuid O'Flynn in Ireland South
Dr Peter Morici: US April jobs report may show 215,000 added in April
Dr Peter Morici: Hardly time to call Obamacare a success
Celtic Tiger RIP: Change in conservative Ireland six years after crash
Dr Peter Morici: Five things to know about the Fed’s obsession with inflation
In age of acronym/ Google, Trinity to rebrand as 'Trinity College, the University of Dublin’
Hoeness case part of ‘painful’ change for Swiss bankers
Dr Peter Morici: The Cold War was only on vacation
Dr Peter Morici: US economy drags on Obama's approval ratings; Don’t look for changes in Washington
Dr Peter Morici: Bitcoin debacle shatters the myth of virtual money
Dr Peter Morici: US Tax Reform: Eliminate the income tax and IRS altogether
Wealth threatens the simple life in Gstaad, Switzerland
Irish journalists get cash payouts over 'homophobic' defamation claim
Irish academics get lavish pension top-ups as private pensions struggle
Dr Peter Morici: Inequality is President Obama’s highest priority, but solutions are naive
The Finfacts Troika: Better times ahead and a hangover to forget?
Dr Peter Morici: Volcker Rule arrives with the hidden jewel in Dodd-Frank financial reforms
Ireland's toothless fiscal watchdog threatens to bark
Analysis: Germany's current account surplus - - Part 2
The end of western affluence?
Bono's hypocrisy on Africa, corporate tax avoidance in Ireland
France like Ireland is run for the benefit of the old