Let’s not get carried away with misplaced optimism

Thursday 17 January 2013 15.25

2013 is being defined by economic signals which indicate that the worst could be over

By David Murphy, Business Editor

There is a definite change in the air. The beginning of 2013 is defined by economic signals which indicate, at least, that the worst could be over.

Unemployment remains extremely high, although steady, at just below 15%; house prices show signs of stabilisation after an enormous 50% collapse; and the economy is no longer shrinking.

The relentless demise of recent years would appear to be coming to a halt. In a sense, it is like somebody who has fallen down a well – just because they have stopped falling does not mean it’s time to start celebrating.

Taoiseach Enda Kenny rightly describes the situation as “fragile” when he seeks concessions from European politicians. There are still a host of factors that could go wrong.

Perhaps the most serious issue is the mountain of debt left in the wake of the economic and banking catastrophe. When the substantial contribution from foreign multinationals is stripped out from the economic figures, the debt is startling: it is 40% larger than entire economy (as measured by Gross National Product).

Many people don’t think that is sustainable.

Reducing the debt and making it more manageable is critical. This means selling stakes in the surviving banks to Europe and rescheduling the promissory note payments for the deal banks.

Even after the 50% drop in house prices, the ratings agency Fitch believes a further fall of 20% is possible. If that were to happen, it would cause further problems for banks with impaired mortgages, and for those struggling with mortgage debt. Fitch’s view is not shared by everyone, but it shows some observers continue to see big risks.

Six out of ten people without jobs are long-term unemployed or have been out of work for more than a year. Experience from the dark days of the 1980s recession suggests such a problem will take years to resolve.

Meanwhile, Irish people are increasingly irked at being told they must continue making huge sacrifices, when many bondholders in the banks should have been the ones to take the pain instead.

However, it is important to acknowledge the progress. The deficit is going to be smaller than expected at less than 8% for 2012, while tax revenues seem to be stable.

The National Treasury Management Agency is continuing to raise money on the financial markets and the cost of borrowing for Ireland is falling.

Politicians, who have been trying to sell the virtues of higher taxes and cost cuts, might find it convenient to promote the notion that Ireland is in recovery mode. But the reality is that the crisis has merely entered a new phase.

Green shoots may be emerging, but they are still a long way off flowering.

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