Running on empty

Rather worrying news from Ireland where figures from the last quarter of 2006 show that, as expected, new building is declining, but also that exports dropped by 10% when they’d been expected to rise by more than 2%.

The last couple of years of Ireland’s economic boom have been fuelled by new home construction, much of it for first time buyers whose ability to purchase is the basis of price inflation throughout the market. As that demand is satisfied, people further up the chain have started to worry. The increasing value of bigger, more central homes has powered a massive consumer splurge. When you look at how many of Ireland’s richest 200 people are builders and property developers, it becomes obvious that our self-fuelled economy may contract or even collapse. The response? Endless newspaper articles urging people to ignore the basic economic facts of over-valued property, rising interest rates, and our vulnerable position as one-time poster child for globalised multi-nationals, and just buy, buy, buy.

There’s an inter-generational dynamic to all of this. People in their forties and fifties have done very well from rising house prices, but are also of an age to have been looking for work during the 1980s, when there was almost none to be had (and you’d be paying >60% tax at the top rate, anyway). They’ve known hard times, and are established enough to fill the media with exhortations to the next cohort down to stick our fingers in our ears, and sing a happy song about economic stability. The message is that if we all just ‘keep our nerve’, the market can stabilise with minimal pain.

The thirty-somethings, on the other hand, are mortgaged to the hilt and watching ECB interest rates like hawks. Many of this generation got their down payments from parents in the 50 to 60 something generation who cashed out some equity in their more substantial family homes. Those with children have little choice but to live on two incomes in satellite developments, miles from their extended families, leaving for work at the crack of dawn and returning to too late and too tired to spend time with their children or build a community. If negative equity hits – and it’ll hit them first – they have nowhere to go, and no one to buy their houses. They’re the people working for the Microsofts, the Intels, the outposts of Big Pharma, and they know their jobs could disappear from one day to the next.

That’s why the really worrying news is the following:

“Final quarter net exports – exports of goods and services less imports of goods and services – fell annually by 10.2 per cent, a significantly worse outturn than the 2.8 per cent growth that was recorded for 2006 as a whole.”

Aside from the property bubble, Irish economic growth has been export-led through foreign direct investment by mainly US firms. The attraction is of our English-speaking and educated workforce, EU-funded infrastructure and access to European markets. But with property prices in Dublin rising 10-15% year on year for much of the last decade, the cost of labour has risen. A sudden and unexpected drop of 10% in exports indicates that something may be seriously wrong. We need to ask why, and figure out what, if anything, we can do about it.

However, the government says hopefully that growth this year will be driven by domestic demand. But how can an export-based economy sustain sufficient domestic demand for more than months at a time? Maybe the promises and give aways of an election year will fuel our faltering economy for another while, or maybe we’re already running on fumes.

The whole country has lost sight of lost sight of the fact that house building and buying are not the keys to economic and financial success, but merely indicators of it. Our economy is distorted, and so are our politics. The establishment generation (those forty and fifty-somethings) have done very well and have the most to lose. Much of our political debate in the last few months has focused on whether and how to reduce stamp duty on house purchases, i.e. how to keep the property boom going by ensuring stamp duty reductions don’t form a simple transfer from buyers to sellers. The real question is; are we fighting an election on spending promises when there won’t be much money left to spend in a year or two? One commentator said recently that this is an election to lose. He may be right.

The generation I worry about are the twenty somethings. They’ve never known a recession, never known a life without part-time jobs and disposable income, never known Northern Ireland before the peace process. They haven’t known hard times. It’s not all doom and gloom; GDP is pretty stable, and our economy is still growing by 5-6% a year. Hard times may not be coming, but straitened ones surely are.