Tuesday, December 29, 2009

Economics 29/12/2009: Looking back at 2009

For those of you who missed my article in the Sunday Times last weekend (December 27, 2009) here is, per usual, an unedited version of the text.

By all possible measures 2009 will go down as yet another annus horribilis
in the history of Ireland. Some 29 months since the inception of the crisis there is hardly any sight of the end of our depression – the worst on the record that any Euro area state has endured in modern history.

In 2008-2009 Irish economy has lost a compound 9.6% of GDP and a whooping 13.2% of our GNP. Over the same period of time, Eurozone economy has contracted by the total of 3.3%.

Based on Department of Finance latest projections, by the end of 2010, our gross domestic output will fall 10.8% and GNP will have declined by 14.7%, against the European Commission forecast for the Euro area income contracting by 2.65% on 2007 levels

Put into perspective, assuming the current crisis runs its course as projected by analysts, the US will regain the 2007 levels of real annual income in late 2010. For Euro area, this moment will arrive in 2012-2013. Ireland is going to return to the 2007 level of prosperity in 2015 in terms of GDP and 2016-2017 in terms of GNP. And this is under optimistic assumptions of relatively robust growth post-2011

These figures only begin to describe the extent of our economy’s collapse in 2009. It is now a common realization amongst the economic forecasters that whatever growth we might achieve in the next few years, unemployment will remain at extremely elevated levels

In Q3 2009 official employment fell 40,200 on Q2 2009. This means that in 12 months to the end of September 2009, Irish economy shed some 183,400 jobs - the highest rate of jobs destruction on the record. In the course of this recession, we have now lost some 236,300 jobs

Back in December 2007, the live register stood at 173,200. A year later, it rose to 293,000, up 119,800 or 69.2% in 12 months period. This December, live register is lingering at 423,400 – an increase of 44.5% on 2008 levels. Sounds like an improvement? Not really. Such is the nature of statistical optics that an 8.8% rise in the number of people on unemployment benefits looks like an improvement in the rate of unemployment growth.

If in the mid 2008 Irish economy had 17th highest unemployment rate in the EU27, by the middle of this year it was the 5th highest

Do the math: the above jobs losses imply that in 2009 some €13.5 billion was lost in employment-related economic activity in Ireland. This translates into an additional €4-5 billion in lost private consumption while our welfare bill rose by some €3.5 billion

All of these jobs losses (save for ca 5,900 jobs eliminated through natural attrition in the public sector excluding health services between the end of 2007 and the end of 2009) came out of the private sector. In terms of the drain on Exchequer revenue these losses simply cannot be offset through wage bill cuts imposed by Budget 2010 onto public sector.

Even more problematic is the trend of falling labour force participation rate which has contracted from 64.2% to 62.5% in a year to Q3 2009. This change is extremely hard to reverse within a given generation. Much of the fall in 2009 has been driven by rising long-term unemployment, pushing people into permanent welfare traps, and net emigration.

In 2009, some 45,000 non-Irish nationals left the country. I would estimate that at least 20,000 Irish natives did the same. On the net, CSO data shows that while unemployment climbed by roughly 120,000 over the last 12 months, the actual fall in employment was 185,000

These people have left their productive employment in this state and moved on to work elsewhere. Many worked in the construction and domestic services sector and had skills beyond their jobs. Many worked in industry – where their skills and future productivity were being enhanced by on-the-job training and through experience. In Q3 2009, industry displaced construction as the leasing source of new unemployment. Quarter on quarter, industry lost 12,200 jobs in Q3 2009 relative to Q2 2009, while construction sector lost 8,700

But scores of those who are now emigrating out of Ireland worked in traded services and here the losses to our productive potential are even greater. 2,300 jobs were lost in professional, scientific and technical activities in Q3 alone. The future of Irish economy is in traded services – the elusive 'knowledge' economy we've been pursuing. This economy requires more people with cultural, linguistic and skills sets that are distinct from our 'national' averages. Given that we cannot hope to retrain lower skilled workers to take up jobs in professional services exports, the loss of junior non-national staff in finance, professional services and ICT is doing irreparable damage to our international competitiveness.

The good news, of course, is that we are now starting to see some re-hiring in financial services (600 net jobs created in Q3 2009 relative to Q2 2009) and MNCs-supported employment remains strong. The bad news is that serious layoffs are yet to materialize in the state-supported banking.

Lastly, 2009 was another year of banking sector disasters. Irish banks began 2009 teetering on the verge of full blow bankruptcy – with our third largest bank falling into the hands of the state and two largest banks seeing their shareholders’ capital virtually wiped out. The crisis of the early months of 2009 was temporarily resolved by the introduction of Nama, leading to a robust, but short-lived rally in banks shares. The real problems – weak balance sheets, pressured deposits, precipitously collapsing asset valuations, rapidly deteriorating loans performance and dwindling capital reserves – remain unaddressed

Thus, as was predicted by this column in May 2009, the Nama solution turned out to be nothing more than an expensive means for delaying the inevitable. It is by now an accepted consensus that nationalization of the main Irish banks is an inevitable denouement to the saga of misguided banks rescue measures that began with the regulatory Green-Jerseying of the banking sector against the short-sellers in the late 2007, progressing to the wholesale banks guarantee scheme in September 2008, and via nationalization of the Anglo Irish Bank, on to Nama passage in 2009

All along, Irish Government and banking sector have made all efforts to evade and silence critical independent analysis of the causes of the current crisis: inept regulation and enforcement, reckless risk-taking in lending and funding, and wrong-footed solutions advanced by the State. The Irish taxpayers are now facing a bill of tens of billions of Euros, as well as the decade-long prospect of zombie banking, development and property markets and construction sectors – courtesy of Nama

Just as in the end of 2008, only the stock markets are now capable of reflecting the extent of the expected Nama damages back to the economy. AIB shares are now trading some 36% down on their January 2, 2009 levels and 67% down from their 12-months peak. Bank of Ireland shares, having gained 32% on January prices are still down 66% on the 12-months peak

As Winston Churchill said once: “Courage is what it takes to stand up and speak; courage is also what it takes to sit down and listen.” One can only wish our policymakers discover the second half of this dictum in the New Year


Per latest CSO data, average weekly earnings in the Public Sector (ex Health) rose by 2.5% in 12 months to September 2009, reaching €969.11 per week. While the lower rate of increase is a welcome sign of some moderation in public sector pay, the numbers reveal a farcical nature of the Government’s efforts to date to control its own expenditure

Weekly earnings for the Regional Bodies rose by 4.6% (from €815.58 to €852.71), the Education Sector by 3.0%, from €944.49 to €973.10. An Garda Síochána weekly earnings excluding overtime decreased slightly by 0.1% from €1,077.55 to €1,076.22 for the same period. Now, compare this record with the rates of increases between September 2005 and September 2009 when average weekly earnings in the Public Sector (excluding Health) rose by 14.2% from €848.94 to €969.11 per week

The same lack of progress on reducing public expenditure is manifested in the numbers employed in the sector. Natural attrition with recruitment bans has produced a decline in Public Sector employment from 369,100 in September 2008 to 360,900 in September 2009. Just 8,200 or 2.22% fewer people worked in the Public Sector in this country despite the nearly total collapse in the Exchequer revenue. In the four years to September 2009, employment in the Public Sector rose by 17,300 to 360,90

If Ireland’s public sector employment pay and numbers were to be benchmarked against the UK levels, it would take some 15-20 years before these rates of ‘moderation’ bear the fruit of reaching parity with our next door neighbors.


patrick1978 said...

2009 was a real eye opener for me Constantin.
Greed is everywhere in Ireland now. Ireland is becoming more like America, a country I totally despise. NAMA incorporates America's
"socialism for the rich, and capitalism for the poor."
In 2009 EU rules on state aid were broken,
RBS and Llyods TSB received illegal loans from British government.
" Free market ", without government interference,
now there is BRAINWASHING

TrueEconomics said...

Patrick, I don't share your distaste for the US.

May be I have spent too much time there, but having lived across the entire US - West Coast to Midwest to Eastern Seaboard, I became a big fan of the US.

Of course, the US is not perfect. America's 'socialism for the rich and capitalism for the poor' is really elitist Democrats' 'socialism for the rich and welfare for the poor'.

A much better formula, of course, would be 'capitalism for all'.

The real problem for the poor in the US, as Regan and later Clinton through his reform of social welfare have illustrated is not enough capitalism for the poor.

Capitalism provides social mobility (most efficiently so when there is equality of opportunity) and incentives to pursue such mobility (when capitalism also reaches to the top, so there is displacement of ruling classes and wealth to reward more worthy newcomers).

Socialism, favored by the wealthy leftists from the likes of the Kennedy clan, means no real opportunity or mobility. Status quo preserves their wealth, while paying off the poor with social welfare traps.

Alas, the capitalist system of incentives and mobility is being dismantled by the current White House.

And this process is less pronounced in the case of the US rescue of the financial system. The rescue was driven by two main principles. Shut down the least sound institutions (hundreds of banks went under and countless wealth management / investment banks and brokers followed) and provide liquidity in exchange for strict loans or equity. Nama does neither. This is why US financial institutions are now actively repaying the funds, while Nama will see complete waste of taxpayers resources.

Where state aid did apply was in the case of Detroit and here the socialist Democrats are to be blamed for doing what they do best - throw public money at the insolvent, unions-controlled industry only to preserve traditional Democratic votes. Kennedy clan stands tall once again.

And let us not forget those State-Supported Lending giants - Fannie, Freddie and Ginnie - which were created by the left, mandated to start subprime lending bubble by the Democratic president, and were overseen by the Democrats-controlled Congress...

As big of a mistake as it was to rescue Citi (perpetually incompetent to put together a functional bank), and AIG (which should have been broken up) it pales in comparison with the rescue of the socialist cronies of the traditional Democrats.

Now, I would not claim that the Republicans are perfectly innocent in the process of undermining the basis for US economic and social identity - the vibrant, dynamic, socially mobile economy of capitalism.

All I am saying is that your diagnosis of the main ills of the US society today - 'socialism for the rich, capitalism for the poor' is simply wrong. The problem is that while there is socialism for the rich, there is also socialism for the poor. The United Socialist States of America. There is just not enough capitalism left for both - the rich and the poor.

Paul said...

Dr. Constantin Gurdgiev, forgive me if i'm wrong but for Capitalism to work one must capitalism at another persons expense, weather it be a mega rich property developer or builder selling a vastly over priced property to some poor person trying to buy a home, or a multi national sucking a poor countries resources at a grossly undervalued price through bribing the corrupt political government in that country, this is the true face of pure capitalism, it does not have the general populations well being at heart, just a lust for greed and profit at any expense, this is what happened with the banks the last 10 years, pure capitalism, except it was a few thousand bankers profiting over the general population of there countries by getting huge bonuses paid for short term profits, who cares about the average citizen, once I capitalize right?

Joseph said...

I thought this was a great article. I originally read it in the Sunday Times and accidentally used it to get the fire going (oops) so I'm glad there's a 'soft' copy of it here. I would be interested on your views as to where interest rates are going in Ireland over the course of 2010 (and subsequent impact on society). I greatly fear a lot of mortgage defaults next year as savings and/or redundancy payments run out for the large numbers of newly unemployed people you have highlighted in this article. Many thanks, Joseph Morgan