Post- this, post- that, post- the other, but in the end not past a thing.
--Seamus Heaney, The Spirit Level
2009 was the year that wasn't. We expected to get past our difficulties in 2009. Instead, our economy's difficulties multiplied. Forecasts for Gross Domestic Product in January 2009 were for -2.5%. By December 2009, forecasts put the drop at somewhere between -7.5% and -9% of inflation-adjusted national output.
The economy is in a deflation-a drop in the general price level for goods and services. Deflation is a bad thing when the ratio of household debt to disposable income is something like 176%, because deflation makes the cost of debt repayment higher. I'll return to this point at the end of the post.
Nationally, the need for fiscal contraction has been accepted by the body -public. Ireland's citizens have braced themselves for the pain Minister Lenihan's December budget will inflict on their pay packets in January. Efforts to reduce the scale of that fiscal contraction by unions were staunchly resisted, partly because of the widespread acceptance that the route to recovery will come from cuts in expenditure, and a widening of the tax base, in 2010 and 2011.
What did we achieve this year? When the video boffins at RTE decide to do a 'Reeling in the Years' of 2009, what highlights will they pick? Did we get past any of the difficulties that beset us as a nation in December 2008?
Any review of 2008 would include the collapse in world credit markets, the bailouts and nationalizations of banks all over the world, the unfolding of the construction bubble in Ireland, and a sure sign that Irish banks' toxic loans must be dealt with in some way to ensure a functioning and stable economy.
In 2009, the debate began in earnest on what to do to clear out the banks' toxic debts in order to free up credit to the 'real economy'--that's Pat the Plumber, who needs a 20,000 Euro overdraft one month to pay wages and costs, and who gets the overdraft at a good rate of interest if the banks are working well, and who doesn't if the banks lending activities are stalled due to the presence of 'toxic' debts.
The fiscal crisis facing the state unfolded properly in 2009. In January, debates raged on what to do with the banks, and their liabilities now guaranteed by the Irish taxpayer. Dell made moves to leave Ireland, with the loss of some 1900 jobs. Waterford Wedgwood was in the news in January, because its workers would not, seemingly, get their pension entitlements.
In February the scale of the banking crisis became apparent. Arguments over how to regain Ireland's `competitiveness' kicked off. March saw CSO figures showing government tax revenues were way down from their expected levels, showing the economy was contracting at a very fast rate. The scale of the 2009 budget miscalculation was now clear--Ireland would be spending at 2009 levels, but taking in taxes at 2007 or 2006 levels. Our national borrowing would have to increase to cover the shortfall. A certain `deficit fetishism' crept into Irish political and economic discourse as a result. Every man, woman and child seemed upset that Ireland was borrowing 400, then 450, and then 500 million Euros a week to fund the daily activities of the State. Unemployment offices became part of weekly life for thousands of Irish citizens. Their claims on the exchequer drove national spending higher again.
In April a supplementary budget tried to get the nation's finances on track again, cutting expenditure slightly, and increasing taxes, especially on public sector workers. An IMF report harshly criticised the government's management of the public finances during the boom years.
In May we learned that our banks would require more cash injections. The row over 'long term economic value' and 'market value' for banks toxic assets began. It continues to this day. Many economists, including myself, were publicly concerned over the type of asset management vehicle being used to help our economy recover.
In June an Innovation task force appointed. It spent most of 2009 arguing within itself, and has yet to produce a single piece of worthwhile advice for the government. We also discovered that, compared with the corresponding quarter of 2008, GDP at constant prices was 8.5 per cent lower in the first 3 months of 2009.
July and August were unquestionably NAMA months. The debates around NAMA raged up and down the country, and brought the Irish Economy website to national prominence. Irisheconomy.ie is now the premier space for economic commentary in Ireland, and regularly influences the news cycles around economic events.
NAMA's potential treatment of property developers was contrasted with the court's treatment of Liam Carroll's Zoe group, where an 85% haircut may have been applied to some of the group's properties. Special mention over this period should go to The Story, a website set up by two journalists to promote transparency in public life. They covered the Carroll case extensively.
September saw the full details of NAMA revealed. A relatively small haircut would be applied, with little changes to the draft document circulated in the summer, despite rivers of ink being spilled on the issue.
November and December saw the nation setting its collective jaw against the cuts we were assured would come in the budget. And these cuts did come. Tax increases were largely absent, but a 4 billion Euro package of cuts was secured, though not without great political cost. Electoral immolation now seems unavoidable for Fianna Fail and their Green partners. Flooding all over the country exposed the inadequacy of the Irish government's response to crises, as well as our need for flood protection infrastructure in the coming years.
The big international story of 2010
Internationally, the big story of 2009 was China’s aggressive stimulus package, which helped change the direction of the world economy. The big story of 2010 should be the broadening out of the global recovery. This should benefit both exports and domestic demand in Ireland, providing a supportive backdrop for markets. Key issues that I see mattering to the Irish economy are:
(1) “unpegging” the renminbi;
(2) Japan’s macro policy and economic recovery;
(3) rising inflation in China and rising inflation in India;
(4) and finally rising asset prices, driven by capital flows, low global rates, excess liquidity.
Two political stars moved in opposite directions in 2009. Mary Coughlan's credibility as second in command of the country and Minister for Enterprise, Trade, and Employment was severly dented by a sequence of gaffes, beginning with her non attendance at the announcement of Dell's closure, and ending with a farcical display of ignorance around who, exactly, Einstein and Darwin were, and what they did. Her tenure as Tánaiste has been a further weight for the Taoiseach to bear. In contrast, Brian Lenihan, whose picture could easily have been put beside the dictionary definition of the term 'at sea' in late 2008, came into his own as Minister for Finance, as he got to grips with a huge ministerial brief during a time of unprecedented challenge and change.
There are many reasons to be positive coming into 2010. The standard of living may have fallen back to 2003 levels, but these are still some of the highest in the world, and represent a huge increase in living standards over, say, 1990, when Ireland was already a very wealthy country in a global context.
Even if the worst predictions for 2010 come true, there will still be 85 per cent more people employed in 2010 than there were in 1990 - a huge increase seen in its historical context.
The vast majority of people are still in employment, and have experienced a fall in the cost of living, and hence a significant rise in living standards. Overall I'm hopeful for 2010, and deeply happy to be past 2009, even if we are not quite past the problems we created for ourselves during the boom years.