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The Prospects For Recovery In Ireland In 2011 Look Slim

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Interesting blog on Ireland's situation in the Grauniad.

I reckon points 1 and 2 are relevant to a great extent to the UK, as well as point 6 on reform. I know the UK has a more diverse manufacturing sector than Ireland, but nontheless the point about production becoming more labour intensive is well made.


The prospects for recovery in Ireland in 2011 look slim

Guest blogger Stephen Kinsella, economist at the University of Limerick, believes 2011 won't show the green shoots of recovery

Go we must. Stay we can't. Ireland has to move forward, but what are the prospects for Ireland in the new year?

If – and it is a big if – parts of the world economy recover and begin to grow again, then what can Ireland expect from 2011? Where will the recovery come, if it comes at all?

There are signs of weakness in the global economic recovery and any slide into a global recession would be a disaster for the Irish economy, as the IMF acknowledges.

Here are six key themes surrounding Ireland's prospect for recovery in the next 12 months.

Ireland's four-year stabilisation plan depends on two main pillars: export-led growth, and domestic investment. As I've shown in a previous post, that plan's assumptions don't stack up. I'm not alone in thinking things might not be so rosy in 2011, either.

In Ireland's case, export-led growth essentially means increased demand for medical and pharmaceutical products. Over 60% of Ireland's exports comes from this sector, which employs roughly 48,000 people directly, less than 2% of the workforce.

1. Exports increase won't lead to jobs

Unless medical and pharmaceutical production (or some other high-growth export sector) becomes much more labour-intensive, export led growth won't lead to a significant reduction in the unemployment level. Any growth strategy predicated on export-led growth will lead to a jobless recovery. Sod that. I want a strategy that delivers jobs to those who don't have them.

In 2011 look for: growth in net exports of 3–4%

2. Poor prospects for private sector recovery

Domestic investment is supposed to create new businesses or add capacity to older ones, and these businesses, if any, that are going to hire the unemployed people who haven't emigrated yet.

The prospects for increased domestic investment over the next three years are pretty poor, after you factor out replacement of broken plant and natural depreciation. Ireland is a demand-deficient economy: there aren't enough people willing to spend what they've got, which is keeping investors away from investing the money that will create these jobs.

This circularity is one of the many paradoxes in economics. The two most important indicators of the Irish economy, in my opinion, will be new business formation, as measured by the Companies Registration Office, and net private sector job creation. There will be no recovery unless those without work find work in the private sector.

In 2011 look for: net private sector job creation of -2 to +2%, net new business creation of -2%

3. Consumer spending won't recover

Consumer spending has been sliding for some time. The chart below shows two things.

kinsella table Photograph: guardian.co.uk On the left axis, in millions of euros, the blue line shows personal consumption in the domestic economy. Personal consumption is a key component of any economy's growth. This blue line is the effect of people running out and buying big screen TVs and new cars when they feel wealthy, as well as Mars bar purchases, and other mundane items.

The slide in personal consumption is clear from around the end of 2006. The level of personal consumption in Ireland at the middle and end of 2010 was roughly the same as the level of personal consumption at the end of 2006.

The red line is the percentage change in the blue line. There's a clear pattern caused by the seasonal nature of consumption, but there are also two distinct trends we can discern. The pattern in the red line looks like a heartbeat on a hospital monitor.

Can you see where the beat slows down? Right around the end of 2006. The economy's spending has been slowing over the recessionary period, for obvious reasons. The hope is that consumer spending will increase above the trend in 2011, that the heart will beat faster, if you will. Personally, I can't see that happening, because of the:

• reduction in consumer confidence caused by the economic downturn;

• level of indebtedness of the average Irish household;

• deflationary impact of the government's budgetary strategy;

• increase in emigration, taking workers out of the state. (Up to 58,000 young jobseekers are likely to emigrate in the first six months of 2011 according to a report by the National Youth Council brought out in early December.)

In 2011 look for: personal consumption to reach 2007 levels

4. Emigration

Historically, when large scale unemployment has become a societal problem in Ireland, emigration, rather than job creation, has been the means by which unemployment levels are reduced.

This year I'd expect to see emigration increasing, as foreign nationals, who came to Ireland for work, leave. As parts of the world economy recover and demand for workers increases, I'd expect to see Irish nationals finding work abroad.

So it is, so it has been. The "pull" factors increase as international economies recover, and the "push" factors increase as the domestic economy, and new job prospects, stagnate.

These economic migrants will also have effects on the countries they move to, as this Guardian report by Alan Travis shows.

In 2011 look for: unemployment at 12-13% of the labour force, emigration to increase by 3%

5. Debt restructuring hasn't gone away

This is the big one. Will Ireland's vast private and sovereign debts be restructured, or will they remain a drag on growth?

Ireland's banks are being nationalised, and in 2011, they will be restructured, presumably with the intention of selling off profitable parts, and normalising the balance sheets of the remaining banks.

The simple fact is that Ireland can't pay its debts as they fall due without economic growth.

Hopefully, somewhere, behind the most closed of closed doors, serious people are having serious discussion about what to do with Ireland's debt mountain.

Ireland doesn't have to access the bond markets for funds for the next few years, so there is breathing room there, and time to work out a solution. I don't see Ireland restructuring its sovereign debt. Its debts from banking are another matter.

Right now they are one and the same, but the banking guarantee is not forever, and arguments against restructuring grow weaker by the day.

It simply boils down to this question: can the people who currently have the debt repay it in the time allotted? If the answer is no, as most people believe, then some restructuring, via some mechanism, must be countenanced. The key issue is the mechanism by which the debt is restructured, and when that takes place.

In 2011 look for: talk, whispers, and rumours, about an EU package for debt restructuring for Ireland. Expect to see very little of substance until a concrete plan is ready to be executed.

6. Election will not bring necessary political reform

Ireland's next general election will result in the immolation of Ireland's current ruling coalition. The electorate will naturally express its anger at what has come to pass.

The worry for me is the political reform that Ireland clearly needs will not come to pass, simply because finger pointing and textbook electioneering will steer the two main opposition parties into government with little effort.

A project to debate and push for political reform, championed by leading political scientists is currently gaining momentum, but there are signs that any reform of the political process may already be stalling among the incoming government.

Hamstrung by the policy straightjacket of the EU/IMF bailout terms, as well as the fiscal constraints any government will have, the chances for reform and real change are slim, at least in the short term, and this is a cause for real concern.

In 2011 look for: rowing back of sweeping statements of political reform, as Ireland's new rulers see the books and appreciate the bleak task they have set themselves.

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