The economic conundrum that is Ireland

Let us take a brief break from the affairs of the UK and tomorrow’s Brexit referendum to take a look at an economy which bears many similarities but one crucial difference. That is the green island of Ireland where the crucial difference is that via its membership of the Euro it has an official deposit rate of -0.4% and 80 billion Euros a month of QE or Quantitative Easing. So we see that the monetary policy taps are open wide but we also see that Ireland is in a boom at the moment. This brings back some old memories of how it all went wrong last time so let us investigate further.

The Irish boom

The Irish take the slow road to producing economic growth ( GDP) numbers but here is the latest release.

On a seasonally adjusted basis, constant price GDP for the fourth quarter of 2015 increased by 2.7 per cent compared with the previous quarter while GNP increased by 3.4 per cent over the same period.

As you can see these quarterly numbers are ones which many of its Euro area partners ( Italy and Portugal spring to mind) would love to have. If it was a game of economic football being played between Ireland and Italy tonight it would be a landslide. The annual data only reinforces this view.

Preliminary estimates indicate that GDP in volume terms increased by 7.8 per cent for the year 2015.  GNP showed an increase of 5.7 per cent in 2015 over 2014.

The good news story continues as the growth is both investment and export driven. Indeed Ireland is doing its bit for world trade.

Import growth during the year of 16.4 per cent outpaced that of exports at 13.8 per cent.

Care is needed as Ireland has quite a current account surplus according to the official data so that net exports grew.

Also there is the perennial GDP/GNP issue which I have explained before. In 2015 GDP was 203.5 billion Euros and GNP (Gross National Product) was 171.9 billion Euros. The difference is that a lot of businesses in Ireland are non-domiciled there and send the money home. They want to take advantage of the low corporation tax rate and other benefits but do not consider it to be home. As you can see it is a big deal.

The problem that is housing

This intervenes on several levels. Firstly there was the boom which rather like in Spain led to houses and towns being built but ended up being like the “Road to Nowhere” sung about by the band Talking Heads. According to Vincent Boland in the Financial Times this happened.

A decade ago, Ireland was building many more homes than its demographic trends warranted: 90,000 a year at the peak of its building boom in 2006.

There was a consequence to this and as boom turned to dust Shane and Maria Bradshaw have experienced this.

It showed a newly planned town — the first in Ireland for 50 years — with a projected population of about 25,000, within easy commuting distance of the city and a high street lined with shops, restaurants and a cinema.

Seven years later, that glossy brochure offers a picture not so much of a suburban dream as a national nightmare…..
Only 15 per cent of Adamstown’s planned 10,000 homes have been built. Its 3,000 or so residents are surrounded by fenced-off fields where houses were by now supposed to be. The train station linking the town to central Dublin is eerily underused. And the Bradshaws are still waiting for their high street.

Actually some commuters would love the idea of an “underused” railway and developers not fulfilling their promises is hardly new but there is an element here which sings along with The Specials.

Do you remember the good old days
Before the ghost town?
We danced and sang,
And the music played inna de boomtown

Yet let me move this to economic measurement and GDP/GNP. As you see back in the day the houses referred to below would have boosted those numbers. Is that right?

Moreover, it is happening in a country that has 230,000 vacant homes. Some are in “ghost estates” in far-flung towns where few Irish people now wish to live — if they ever did. Even some of the half-finished developments can feel ghostly.

So there is the question posed today. Should these fully count in GDP? Someone like Paul Krugman with his call for “Space Aliens” would say yes but I think we need some sort of measure of what happens afterwards. After all it is a waste of finite resources to build houses that nobody lives in. Also we learn that Kevin Costner was not always right in the film Field of Dreams.

If you build it, he will come

Also with so many empty house this seems rather shameful.

A report by a cross-party committee of MPs last week says there are over 1,000 homeless families in Ireland today, compared with 400 at the beginning of last year.

A Monetary Problem

We know that Mario Draghi and his colleagues have turned the monetary taps open to boost Euro area economies. We also know that the housing market in Ireland tends to respond strongly to such a stimulus. Otherwise there would have been no boom and then bust. How is that going?

Last year fewer than 13,000 new homes were built, while demand is running at 25,000 a year, the majority of it in the capital Dublin.

Indeed this bit will echo around ECB Towers.

a scarcity of development finance,

There may of course be a case of once bitten twice shy at play here but this does pose a real question for the ECB and its policies. Also there is something awkward for the theme that there is no inflation.

According to the Society of Chartered Surveyors
Ireland, it costs €330,000 to provide a standard family home, a figure that appears to have changed little despite the deep recession.

This is a familiar echo of the UK exceeds what can be afforded by the majority.

especially for first-time buyers, most of whom can borrow no more than €300,000 .

Now I realise that inflation is a flow and that the price level is a stock but there is a problem here in telling people there is no inflation and yet despite extraordinarily low official interest-rates they still cannot afford property. After all the economy and their position is supposed to be booming. Oh and fans of macroprudential policy might like to mull that particular side-effect of it.

Oh and there is another problem shared with the UK.

It is becoming clear that Ireland may need to build a different, more affordable and higher quality product than it has offered up to now.

Comment

There is much to consider here as the official view is of a Phoenix rising from the ashes of the bust. Last year’s surge means that both GDP ( 43,906 versus 42454 Euros) and GNP ( 37,077 versus 35,657 Euros) per head  have passed the peak seen in 2007. All good so far even if we are returned by default to the GDP/GNP gap. But like in the UK there is often expressed a view that reality is not quite represented by that. Well Phillip Kinsella makes an offer of why.

Ireland and Luxemburg showing a very large difference between these two measures of household welfare. Using the AIC measure, Irish households are closer to Italian than Danish levels of welfare.

Economics imitates football as we note the Italian link. But let me explain. If you use GDP per capita then Irish eyes are smiling as in 2015 it was 1.45 times the European Union average. However if you switch to actual individual consumption or AIC  it is only 0.95 times the EU average. Whereas Italy is at a more stable 0.95 times and 0.97 times respectively. For comparison purposes the UK is at 1.1 times and 1.16 times which is consistent with our consumption culture. So the question for Ireland is posed by the late great Marvyn Gaye.

Oh, what’s going on?
What’s going on?
Ya, what’s going on?
Ah, what’s going on?