Economics 22/8/10: Fundamentals of investing in IRL Inc - IV

This is the last post in the series of four that presents fundamentals comparatives between Ireland, Switzerland and Luxembourg. The first post (here) covered analysis of current account dynamics, the second post (here) dealt with General Government balance, third post (here) highlighted differences in GDP and income. This post deal with residual fundamentals such as inflation, unemployment and population.

In terms of inflation we are not doing too well. Since 2000 Ireland remains expensive. More expensive than Switzerland, despite our massive bout of deflation. This, of course, does not account for the fact that Swiss residents get much better quality public sector services than we do, for less money spent. But that's a matter of a different comparison that I touched upon earlier (here, here and here).

So Chart 12 shows our inflation performance.

Chart 12:

You wouldn't be picking Ireland for your investment if you were concerned with real returns or with effects of inflation on economy's ability to carry debt.

If population growth is really a longer term dividend, we should expect Ireland Inc to overtake Switzerland by now in terms of prosperity (Chart 13). After all, our 1980s and 1970s'-born cohorts are currently at the peak of their productivity. But recall per capita GDP... so far, there isn't really any evidence that growth in population leads to higher growth in GDP once scale effects are taken out of equation.

Chart 13:

Would you have invested in Ireland's debt if you were thinking about Ireland's ability to repay on the basis of lower costs of unemployment and greater proportion of labour force at work? Take a look at Chart 14.

Chart 14:

Well, not really. Swiss and Lux make for a much more compelling case here and not just in the current crisis environment.

So here's our real problem that is not a function of cyclical dynamics, but a structural one. Our employed are carrying much greater burden of providing for the rest of our population than Switzerland (Chart 15).

Chart 15:

Factor in that Irish public sector is larger, in relative-to-population terms than Swiss... and you have an even greater discrepancy in terms of the true earning capacity of the Irish economy.

Which brings us to the issue of productivity and back to the topic of exporters carrying the burden of the entire economy out of the recession. Apart from the construction boom, economy-wide income per person working is lower in Ireland than in either Switzerland or Lux since the 1980s. Even at the peak of the largest real estate bubble known to any other European country in modern history, our 2008 GDP per person employed was still not that much greater than that of Switzerland (Chart 16).

Chart 16:

May be, just may be it was because our wealthy developers all wanted a fine Swiss watch, while no Swiss investors wanted our bungalows in Drogheda or apartments in Tallaght? which is the same as to say - the Swiss are productive to the point of the rest of the world wanting their goods and services. We are productive only to the extent of the rest of the world wanting goods and services produced by MNCs and few indigenous exporters based here. But their productivity is high in gross terms and low in net terms (recall current account analysis in the first post). Unless we can dramatically increase the number of exporters while simultaneously upping the net value added in their operations to Swiss levels, there's no chance external trade can carry this economy out of the recession.