Sunday Business Post | Irish Business News

Breaking News Business Ireland World Sport Weather

Navigation (Home)News Ireland World News Features The Market Media & Marketing Comment & Analysis Computers In Business Profile Property Motoring Agenda Letters

People In Business Budget Forum Events / Conferences Company Reports Tools Crossword Search the archives Newsletter IMODE RSS

Text-Only

Whatever way you look at it, we’re in recession now
Sunday, September 28, 2008 By Cliff Taylor
The banking crisis is the wild card in this recession, and its wider economic impact is now the key unknown facing our economy in the months ahead.

Economists are fond of theoretical arguments about what constitutes a recession.

Pretty much whatever definition you use, we are now in one. This comes as little surprise, given the extraordinary range of forces that have hit the economy over the past nine months. Nor is there much consolation to be gained from the latest Central Statistics Office figures - pretty much every sector of the economy is now under pressure.

Our only hope is that what is turning out to be a sharp recession also turns out to be a relatively short one. However, only the bravest -or most foolhardy - of forecasters would hazard a guess about how the unprecedented combination of national and international forces which are rocking our economy will develop in the months ahead.

In the toxic mix we are facing (to use the phrase du jour), by far the biggest concern is the pressure on our banking system and the risk that the cutback in the availability of credit now under way intensifies. This is the wild card in our recession.

There is nothing particularly complicated about the idea of a recession. As commonly understood, it means that the overall level of activity in the economy is shrinking, rather than growing.

There are other variants on this basic idea; the US, for example, has a team of economic gurus which judges whether a particular set of economic conditions constitutes a ‘‘recession’’.

But there isn’t much point arguing over it here – the CSO figures published last week show that Gross Domestic Product (GDP) in the first two quarters of the year was lower than in the corresponding period last year. Pedants may argue that Gross Nat ional Product - perhaps a better measure of economic activity here than GDP, as it excludes multinational profit repatriation -w as actually slightly ahead in the first quarter before falling in quarter two. But it will surely be well down in quarter three anyhow. We’re in recession and we’d better get used to it.

The overall level of economic activity is calculated by adding up a few different things - consumer spending, investment, government expenditure and net exports (in other words, exports minus imports).

In Ireland’s case, the recession is being driven primarily by the construction-related collapse in overall investment. Overall investment in the economy was 19 per cent lower in the first half of the year than in the same period last year. For every €5 spent on investment, just €4 was spent in the same period this year.

The predominant factor here was, of course, the collapse in housebuilding. However, perhaps not surprisingly, business investment is also on the decline, with investment in plant and machinery 30 per cent down in the second quarter from the same period in 2007.

Part of this is due to lower aeroplane purchases but, as economist Austin Hughes of IIB Bank commented in an analysis of the figures, ‘‘the broader picture appears to be one in which companies are battening down the hatches, rather than adding or replenishing capacity’’.

In terms of future growth and job creation, this is a worrying trend, particularly as even those companies now wishing to invest will find it more difficult to get access to finance. The only thing supporting the overall investment figure was higher spending on government investment projects.

The other main revelation from the latest figures - and again one which is little surprise, given the decline in retail sales in recent months -is that overall consumer spending in the second quarter was 3 per cent down on the first quarter and 1.4 per cent down on the same period last year.

Consumers are cutting their spending due to concerns about the economy, their incomes and their jobs. The fact that their houses and investments are worth less will not help, and neither will the international financial turmoil of recent weeks.

Consumer spending is not collapsing, but more retrenchment is surely likely in the months ahead, at least until there is some indication that the recession is not going to get any worse.

The trading part of the economy has held up a little better, despite the fall-off in international growth. The volume of exports in the second quarter was up 2.4 per cent on the same period last year.

However, pressure on prices and exchange rate movements means the actual value in euro terms of what we sold abroad was up just 0.8 per cent in the same period.

Little surprise to hear the chief executive of Tyco, which announced its closure in Cork last week, referring to exchange rate movements as a key pressure. Anyone exporting to Britain, in particular, has faced a horrendous squeeze on margins over the past couple of years, as the euro rose and rose against sterling. Imports, meanwhile, are falling, dragged down by lower demand from consumers and businesses.

The final part of the growth equation is net spending by the government. Here, there is a rise of around 4 per cent in the volume of cash spent in the first half (after adjusting for inflation), as the government spends more on the day-to-day provision of services, such as health and education.

This will continue into this quarter but, with tax revenue growth collapsing, the government is now under intense pressure to cut its spending plans for 2009.

The government sector will still probably be growing in size in cash terms next year, given the pressure on spending, but the growth rate after adjusting for inflation may be zero or close to it.

Unfortunately, as the rest of the economy falters, the government has no shots in its financial locker to try to boost economic activity.

Nor do the portents for the rest of the economy look particularly good, in the short term at least.

Housebuilding could contract further next year, judging by recent housing start figures, and this will continue to depress investment spending.

Consumers will remain extremely cautious as unemployment continues its relentless rise. And it is difficult to see any big take-off in exports in the current international climate, particularly as the eurozone economies now appear to be following Britain and the US into periods of recession or very slow growth.

If you took all these factors together, you might speculate - and speculation is all it would be - that the recession might bottom out in 2009 and that, by this time next year, things might be looking a bit better. However, a nasty twist to the outlook is provided by the ongoing credit crunch.

Banks - both internationally and here in Ireland - have abandoned any pretence of it still being business as normal. They are having huge problems raising funds, and bad debts are rising - exacerbated here by loans extended to property developers.

The inevitable consequence of this is a restriction in lending across the economy as banks struggle to get their balance sheets back in order.

In the months ahead, this is the most worrying threat facing our economy. The housing downturn will reverse in time as prices fall and buyers return to the market to run down unsold stock.

The public finances are in for a very difficult transition to a lower rate of growth, but this too can surely be completed successfully, albeit with some pain for all of us.

All in all, these factors will cut our living standards, and a key job of the government will be to allocate the pain. However, the banking crisis is unprecedented and its wider economic impact is now the key unknown facing our economy in the months ahead.

Perhaps a US rescue plan can lift some of the pressure but, unfortunately, our own banking sector still has to face up to the skeletons in its own cupboard.

So while there will be a lot of headlines in the next few weeks about what will or will not be cut back in the budget, the key crisis facing us is the one in our financial and banking sector.

Some other recessionary years

1956/58:
Hitting the headlines: Sputnik launched; Fidel Castro seizes power in Cuba; Manchester United Munich plane crash; Suez crisis; Ronnie Delaney wins gold at the Olympics.

In the charts: ‘Rock Around the Clock’ – Bill Haley and the Comets; ‘Heartbreak Hotel’ – Elvis Presley; ‘Why Do Fools Fall in Love’ – Frankie Lymon and the Teenagers; ‘Peggy Sue’ – Buddy Holly; ‘Great Balls of Fire’ – Jerry Lee Lewis.

All the rage: Frisbee; hula hoops; Matchbox cars; the first Barbie dolls.

In fashion: teddy boy haircuts; blue jeans; Brylcreem; hairspray. At the movies: Bridge on the River Kwai; Cat on a Hot Tin Roof; The King and I; Around the World in Eighty Days.

1982/83:
Hitting the headlines: GUBU; the phone-tapping scandal; Shergar; Falklands war; US invades Grenada; Lech Walesa wins Nobel peace prize.

In the charts: ‘Don’t You Want Me’ – Human League; ‘Ebony and Ivory’ – Paul McCartney & Stevie Wonder; ‘Come on Eileen’ – Dexy’s Midnight Runners; ‘Every Breath You Take’ – The Police; ‘Uptown Girl’ – Billy Joel. All the rage: Sinclair ZX Spectrum computer; BMX bikes; My Little Pony.

In fashion: big hair; leg warmers; shoulder pads; sweat bands. At the movies: ET; Gandhi; Tootsie; Raiders of the Lost Ark; Return of the Jedi.

Interesting times . .

Recessions
1983: The last full-blown year of recession was 1983, when all the main measures of economic activity (GDP, GNP and national income) declined.

This was in the wake of the international downturn that followed the second oil crisis.

The national debt was soaring following the expansionist budget of 1977, and the Irish pound was overvalued following entry to the European exchange rate mechanism in 1979.

Effectively, it was a two-year recession, with the economy also declining by most measures in 1982. Unemployment started to shoot higher in 1983, creating a jobless crisis that continued until the Celtic tiger years.

1956 and 1958: Full and comparable sets of GDP and GNP figures are not available before 1970. According to the Central Statistics Office, available data since 1949 suggests that the only other two years in which economic activity actually declined were 1956 and 1958, by around 1 per cent and 2 per cent respectively.

The 1950s were a time of massive economic reversal and emigration, when – behind tariff barriers – the economy failed to benefit from the international postwar recovery.

A change of direction, outlined by TK Whitaker’s 1958 paper on a programme for economic expansion, led to strong export-led growth during much of the 1960s as the economy opened to the outside world.

Near misses
1986: There was no quick recovery from the 1983 downturn. By some measures, economic activity declined again in 1986 though, as GNP and GDP edged upwards, it was not officially a recession.

However, as the national debt soared, a change of direction emerged from the crisis in 1987. Public spending was cut and order was restored to the public finances.

1975: Growth slowed to a crawl as the world economy struggled with the fallout from the first oil crisis.

Again, GNP and GDP rose slightly – so the economy was not technically in recession – but investment and consumer spending suffered.

Click here for Sunday Business Post stories before this date