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News : Irish Economy Last Updated: Apr 5, 2013 - 11:45 AM


Irish Economy 2013: IMF warns of "unemployment crisis"; Broad jobless rate at 23%
By Michael Hennigan, Finfacts founder and editor
Apr 4, 2013 - 8:36 AM

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Irish Economy 2013: The IMF (International Monetary Fund) in its latest review of Ireland's bailout programme, has warned that the country faces "an acute unemployment crisis" saying the broad jobless rate is at "a staggering 23%" despite emigration.

In the US, the Bureau of Labor Statistics defines the broad rate of unemployment as "total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percentage of the civilian labour force + the marginally attached [persons not in the labour force who want and are available for work, and who have looked for a job sometime in the prior 12 months (or since the end of their last job if they held one within the past 12 months), but were not counted as unemployed because they had not searched for work in the 4 weeks preceding the employment survey. Discouraged workers are a subset of the marginally attached]." The broad rate  was 14.3% in the US in February 2013.

The review says that since the recession started, "employment has fallen by 15½%, pushing the unemployment rate close to 15%, the share of workers unemployed for over 1 year to 60%, and the share of very long-term unemployed (over 2 years) to 30%. If involuntary part time workers and workers only marginally attached to the labour force—two groups that registered significant increases—are also accounted for, the unemployment and underemployment rate in Ireland stands at a staggering 23%."

The Fund says the high share of long-term jobseekers increases the risk that unemployment will remain high even after the economy recovers. Experience from other European countries facing high unemployment in the 1980s is that long spells of joblessness increase the probability of permanent skill loss and exit from the labour force (OECD, 2012), raising structural unemployment.

It says activation and training policies need to be refocused on the long-term unemployed to help them to remain in the labour force and adapt their skills to market needs.

Burton pushes EU Youth Guarantee; Irish apprenticeship system a shambles

At policy level, the delusionists are still expecting university research to become a jobs engine and an Irish Examiner editorial made some pertinent points yesterday on moving around in circles:

"Over the last five years, since our economy was destroyed, we’ve had analysis after analysis, strident declaration after strident declaration and, if there was a market for delusion, more than enough of it to fund a spectacular and more or less immediate recovery. 

Surely, after half a decade of public discourse on the crisis it is reasonable to hope that contributions should be in some way connected with reality? Surely the great, magnificent right of free speech is balanced by an obligation to accept some of the basic, grinding realities of our situation?

One could start with Richard Bruton, minister for jobs, the Oireachtas, media, social partners and so on.

There will be no rocket growth, pre-2008 is not going to return anytime soon and relying on US FDI will not sustain a high standard of living. Ireland already ranks with Italy in actual  individual consumption per capita. It's realistic to ask what will the challenges be over a decade of low growth?

Those who are comfortable with the status quo today, of course would prefer not to talk about the future.

The Irish jobs crisis bring to mind the comment in 1958 by Harry Truman, the 33rd US president who had left office 5 years before: "It's a recession when your neighbour loses his job; it's a depression when you lose yours."

The ninth review highlights the risks facing Ireland’s economic recovery, despite acknowledging solid progress to date but warns that "assuring the durability of Ireland’s exit hinges on the timely delivery on European leaders’  commitment to enhance the sustainability of the program. The recent promissory note transaction provides a significant reduction in Ireland‘s net debt issuance needs over the next decade, but the outlook for high public debt is little affected. Profitability challenges in Ireland‘s financial sector undermine its capacity to support economic recovery, and, at the same time, contingent liabilities from the financial sector in a weak growth scenario overhang public debt sustainability. In tackling this bank-sovereign loop, the ESM (Eurozone rescue fund) direct bank recapitalization instrument that is under development could play an invaluable role in making prospects for recovery and debt sustainability more robust...Breaking the sovereign-bank link would complement  banks‘ restructuring efforts by improving funding access and costs, supporting recovery and thus reducing risks to debt sustainability that could later threaten market access."

The review calls for an acceleration in home repossessions and the resolution of mortgage debt.

It also wants legislation to enable quick repossessions where borrowers have not paid any substantial part of their mortgage or agreed to a plan of repayment.

The IMF says the baseline projection for a gradual recovery over the medium-term hinges on a combination of trading partner growth, renewed domestic confidence, and steady improvement in lending. A protracted recovery process is to be expected in the wake of  Ireland‘s severe financial crisis in 2008–10, as seen in the low growth realized in 2011–12 and also expected in 2013. By 2014, external recovery is expected to support a more significant strengthening of export growth, and net exports remain the main contributor to growth.

Review [pdf]

The main risks to medium-term recovery prospects include the situation of  Ireland’s financial sector:

  • Trading partner recovery. Net exports remain a key engine of growth in the medium term, and sustained recovery hinges on euro area, UK and US developments.  
  • Fiscal drag. Fiscal consolidation will continue to be significant in coming years, with the growth impact depending on the composition of measures among other factors.  
  • Financial reform benefits. Implementation of loan restructuring has lagged to date, and the benefits of improved asset quality in terms of funding access and costs are uncertain, depending in part on funding market trends in the euro area.  
  • Debt overhangs. The envisaged easing in household savings and firming in SME investments may not be realized if households and firms maintain their emphasis on debt reduction, perhaps owing to renewed euro area uncertainties or downside in house prices.  
  • Bank-sovereign loop. High public debt stocks are compounded by still large contingent liabilities from the banking system in a scenario where weak growth reduces asset values and heightens loan arrears, implying vulnerabilities for the cost and availability of funding for both the public and private sectors.

The Fund says the "downtrend in debt in the baseline is contingent on a pick up in GDP growth and the avoidance of additional fiscal costs from financial sector support; if the above sources of risk keep growth in check, say at ½% in coming years, Ireland‘s debt ratio would continue to rise, reaching some 134% of GDP by 2018. Moreover, higher loan losses associated with rising unemployment and weaker asset prices would generate new capital needs once banks‘ buffers are exhausted, which could further raise debt ratios in the medium term. Were such a scenario to arise, Ireland‘s ability to rely fully on the market to cover its large post-program financing needs could easily become strained."

The Fund hasn't factored in the reality that services export growth in recent years has been dependent on tax-related accounting transactions by large US multinationals, not on economic activity in Ireland.

Irish Economy: No growth in 2012; 6,500 direct jobs account for 52% of services exports

Reform Irish style --  respond to a crisis only when it becomes dire.

Ireland ranks with Greece for having the lowest level of generic drugs used.

The cost of Irish State financed drugs schemes doubled from 2002 to over €1.6bn in 2008. Fees and other income earned by pharmacists doubled accordingly. It cost the taxpayer an exorbitant €640m to get €1bn of drugs from factory gate to patients in the community in 2008.  

The drugs bill grew further to €2bn by 2012 and  generic drugs accounted for only 5% of the value according to the Department of Health. Why does it take so long to implement change that would bring big savings? - -  The pass the buck culture that is unlikley to change.

In the IMF review, the Government has given itself a deadline of June 30, 2013 to legislate for greater use of generic drugs.

"Crisis, what crisis?"

Bureaucrats love that word 'process' and here it is:

"We are in the process of  implementing the remaining key pieces of the budget package: legislating to effect higher charging for private patients in public hospitals and to mandate greater generic drug use (by end June); seeking an agreement with public sector unions on reductions in the pay and pension bill (by end-February, as discussed below); and preparing for the roll-out of the property tax on July 1."

At present, pharmacists are precluded from substituting prescribed branded drugs with a suitable generic. So, if your prescription says Lipitor for example, then this is the drug you must get, even if there is a cheaper alternative.

While this is an unwelcome expense for private patients, for the State, which is paying out on behalf of medical card patients, it means that its drugs bill is a symbol of gros incompetence at a time of austerity.

Dermot O'Leary, chief economist of Goodbody, comments  -- "The IMF, sends a very clear message to Irish and European policymakers. On the positive front, the report suggests that recent events support Ireland’s capacity to exit the programme on schedule. However, in a reminder that the job is far from done, the IMF were keen to point out the many risks that still exist and have the potential to make Ireland’s full bailout exit more difficult.

The IMF believes that balance sheet adjustments in the private and public sectors continue to be key constraints on domestic demand. Among these balance sheet adjustments, it points out that: (i) household debt remains high and household debt distress continues to worsen; (ii) the SME debt overhang continues to act as a constraint on job creation; (iii) banks remain loss-making and have only begun to tackle NPLs (non-performing loans), and; (iv) high public debt remains an issue. Against this background, the IMF believes that the recent positive economic data must be treated with caution.

On the growth front, the IMF expects the economy to grow by 1.1% this year (Goodbody 1.6%) and 2.2% in 2014 (Goodbody 2.6%), but it also points out that there may be potential upside risks due to better consumption and investment trends in particular. In this regard, the assumption of a 1.5% investment decline in 2013 looks especially pessimistic in our view. Nevertheless, the debt sustainability analysis confirms that Ireland’s debt trajectory remains vulnerable to lower growth assumptions; for example, if growth were to average 0.5% over the coming years, debt would rise to an unsustainable 150% of GDP by 2021.

The risks highlighted by the IMF yesterday are not new. However, it is clear that the IMF wants to convey the message that continued efforts by domestic and European policymakers is necessary. On the domestic side, the key areas of focus are mortgages, the labour market and public spending constraint. At a European level, the IMF continues to push for direct recapitalisation for the banks. There is no room for complacency."

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