Exports have risen in February of 2011 increasing by 11%. However, over the same time period imports have actually decreased by 3%. It can be seen in Figure 1 that exports in February of 2011 are substantial higher than they were in 2010. This indicates a strong performance by Irish exporters, and is a turnaround from a dip in exports in January 2011. This slight dip in exports in January 2011, coupled with an increase in imports, resulted in Ireland’s trade surplus decreasing slightly. However, due to rising exports, this has trend has been reversed and in February Ireland’s terms of trade surplus increased to €3.8 billion.
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The latest release of the Consumer Price Index (CPI) from the CSO suggests that prices in Ireland are on the rise. From March 2010 to March 2011 the overall price level in the economy has increased by 3%, with March 2011 seeing a 0.9% increase in prices. But what are driving these price increases?
Looking into the figures it is notable that a number of categories have been driving the rising prices over the last year. One of the biggest increases was observed in the Housing, Water, Electricity, Gas and Other Fuels category. This category measures the amount which s rents, mortgage interest repayments, local authority service charges, goods and services for maintaining, decorating and repairing dwellings and domestic energy products such as electricity, gas and solid fuels increase or decrease. In total this category increased by 12.5% in the year to March. This is not good news for house owners as it reflects the higher mortgage repayments they have had to make due to increase in the interest rates charged by banks. Likewise, it reflects the increases in prices in domestic fuel consumption which places additional pressures on home owners. Increases have also been observed in the transport category which covers the purchase of new and second hand vehicles, spare parts, car maintenance, fuels and lubricants, public transport and services such as parking, motor association subscriptions, car wash, toll charges, driving tests, licences and car hire. This has increased by 4.1% in the last year reflecting the increased charges in public transport, parking and driving tests. While the price of food and non-alcoholic beverages, purchased in supermarkets, small shops, speciality shops and petrol station forecourt outlets but excluding meals out which are covered under Restaurants and Hotels, has increased by 1.6% the price of restaurants and hotels, which covers meals in restaurants and hotels; fast food and takeaways; cafes; canteens; alcohol consumed on or within a licensed premises and accommodation services supplied by hotels, guesthouses and hostels, has fallen by 1.3%. This suggests that supermarket prices are on the rise while prices in restaurants are still falling. Overall, there is an upward trend appearing in prices, however, the areas in which there are increasing prices appear to exist in areas where individuals are currently under financial pressure such as in the mortgage sector. With the European Central Bank expected to increase interest rates in the near future, this suggests further increases in the costs of mortgage servicing. There is a lot of discussion in the media about bonds, bond yield and the negative implications these have for countries. But what do these terms actually mean and why are they important and worrying for Ireland? Bonds are essentially a contract between a government and an investor. Generally, they are assumed to be one of the safest forms of investment. They are also a major source of income for governments seeking to raise funds. An individual invests an amount with a government, lets say €100, and in return for this they will get a fixed interest repayment for a period of years, lets say 5% a year for 10 years. At the end of the investment period the investor will have received the yearly interest payments and will also receive back his initial investment. So he will receive €5 a year for the 10 years and at the end of the 10 years he will get back his €100.
However, the individual has the choice, rather than holding onto the bond for 10 years, of selling the bond. He can do this on the bond market. However, the price he will get for the bond will not always be the same as the price he paid for it. Lets take Ireland as an example. There are now doubts as to whether Ireland will be able to repay its bonds. Essentially making people who own the bonds unsure as to whether they will get their money back at the end of their investment. Understandably, this makes these people concerned and makes the bonds less valuable as they may not be worth the full value. Therefore, on a bond market they may be sold for less than the initial investment, so the €100 bond may be sold for €50. Bad new makes the value of bonds fall. Good news makes the value of bonds rise. However, someone who purchases the bond at €50 from someone who had initially paid €100 still receives the same rate of interest. So as the interest was 5% on €100, even though the bond has been re-bought for €50 the new owner still gets the benefit of the 5% interest on the initial €100 investment. This is where bond yields come in. Effectively, the yield, or return, on the bond is now 10%. This is because the individual is receiving €5 a year (5% of €100) for a €50 investment (essentially yielding 10%). Therefore, as Irish bonds would yield a return of 10% on the market when the Irish government reissues more bonds, in order to make them attractive to investors, they must sell them with an interest rate close to the yield on the market. This process has resulted in the developments which have been observed in the Irish bond market. Initially, yields on Irish bonds were low because during the Celtic Tiger and construction bubble there was little doubt in peoples minds about Ireland’s ability to repay its debts. However, as the economy declined and the government failed to control its budget balances, this resulted in investors getting nervous about the ability of the government to pay them back. This developed over time until Irish bond yields climbed to over 8% towards the end of 2010. As the amount we had to pay increased. Investors thought it increasingly unlikely that we would be able to repay our debts and the crisis became a self reinforcing problem. This continued until Ireland was bailed out by the EU and IMF, effectively providing us with sufficient funds so that we would not have to go to the bond markets for funds and providing their funds at a much lower rate than the market was demanding. The latest figures from the CSO suggest that the pattern of emigration from Ireland is continuing and is increasing in pace. Looking at Figure 1 it is clear that the decline in the number of people emigrating which occurred during the Celtic Tiger and the subsequent construction bubble has well and truly reversed itself. The level of emigration in 2010 was almost as high as it was in 1989, with an estimated 65,000 people leaving the State. The opposite pattern is occurring when immigration is occurring. The vast number of people entering Ireland during the economic boom has fallen off sharply. This has resulted due to changes in the jobs market. When employment was plentiful, there was an increase in the number of people entering Ireland, which filled the need in our labour market, However, as Figure 2 shows, as the market has contracted, less and less individuals are coming to Ireland. This has had a dramatic effect on our net emigration. This net figure is the number of people who are entering Ireland minus the number of people who are leaving. Historically, Ireland has suffered with net emigration, with more people choosing to emigrate as oppose to coming to Ireland. This is due to Ireland’s continuing failure to provide sufficient employment for its population. This trend was reversed in the boom years, with more people actually coming to Ireland than leaving. However, net migration has been falling since 2007, turning negative in 2009 and remaining negative in 2010. This is a sign of Ireland’s economic decline. Again, we are returned to a position where there is insufficient employment to meet the needs of the population, and as a result emigration is occurring.
The number of new cars sold in January 2011 was up 30% on last years figures while February 2011 also proved to be a good month for car dealerships as sales increased by 15% on last February. Figure 1 displays the total number of new private cars licensed per month from January 2009 to February 2011. While the seasonal pattern of the industry can clearly be observed in the graph it is clear that each year since 2009 has seen an increase in new cars licensed. In 2009 only 54,000 new cars were licensed however in 2010 this figure increased to almost 85,000 and already this year new car licenses have reached 27,000. These increases would appear to be the result of the government’s move to introduce scrappage for new cars when trading in a car 10 years or older. If this is the case we can undoubtedly deem this policy intervention a success. The numbers of new car licenses proves this point. However, what is the benefit of this policy to Ireland?
Two positive externalities were identified as arising from the introduction of the scrappage scheme. Firstly, that it would save Irish jobs in the car dealership sector. This would prevent further job losses and additions to the dole. Secondly, it was also to provide a mechanism through which individuals would switch from older, more polluting cars to modern, more environmentally friendly cars. However, are these really worth the government getting involved to artificially support a market? The reason why the car dealership industry was struggling was due to the current economic downturn and subsequent decline in disposable income available to the Irish population. This has general implications for a number of industries across the economy. However, Irish car dealerships have been singled out for specific, advantageous treatment. Why is this the case? Presumably it is because they have a powerful lobby group with which to put forward their arguments to policy makers. The intervention in the market is keeping dealerships open which would not have been able to survive without government support. However, what will happen when this support is removed? Will the dealerships still be able to survive? If not, then the support is providing nothing more than a short lived reprieve. The levels of consumption and spending experienced during the Celtic Tiger were unsustainable and will not be available to Ireland again in the future. Therefore, it could be argued that the intervention in the car dealership market provides little long run economic benefit. The dramatic decline over the last number of years in the number of planning permissions granted can be viewed as another barometer of how far the construction industry has fallen. Figure 1 charts the total number of planning permissions granted each quarter from quarter 1 2002 to quarter 4 2010. It can be clearly seen that from 2002 up until the height of the construction bubble in mid 2007 the number of planning permissions granted increased dramatically from just over 10,000 in Q1 2002 to over 17,000 in Q3 of 2007. This dramatic increase in granted permissions derives directly from the property bubble which took hold in Ireland post 2001. Easy access to credit, a desire to get on the property ladder and a miss guided belief that house prices could only go up drove the demand for new houses to excess. Attempting to capitalise on high prices and satisfy the ever increasing demand for property, record numbers of planning applications and approvals were made.
However, from Q3 2007 onwards the dramatic fall in the granting of planning permissions symbolises the bursting of the property bubble and the subsequent collapse in the demand for new properties. From Q1 2002 to Q3 2007 planning permission approvals increased by 70%. But it only took from Q3 2007 until Q3 2008 for the number of granted permissions to fall from their highest point back to 2002 levels. Even given this dramatic decrease, the decline failed to bottom out and by 2009 the number of granted planning permissions had fallen to half of the number granted in 2002. This downward trend shows little sign of abating, with figures indicating that the number of granted planning permissions in 2010 was 37% less than those granted in 2009. These figures highlight how far Ireland’s property sector has fallen from the heady heights of 2007. They also show the detachment from reality which was prevalent during the property bubble where unsustainable levels of property development were undertaken. Irish exports have increased by 6% during 2010. This is higher than the rate of import growth which stands at just 1%. Resulting from this, Ireland’s trade surplus has increased from around €39 billion in 2009 to approximately €43 billion in 2010. The overall value of our exports now stands at a little over €84 billion. This is undoubtedly good new for our economy and indeed it is the only factor which has prevented our economic decline from being worse than it already is due to a deterioration in domestic consumption, investment and government expenditure.
However, we must ask the question where is this export growth coming from? Is it sustainable? And can it drive an economic recovery? Worryingly, analysing the figures at the sectoral level would raise serious concerns. The main exporting sectors in the Irish economy in 2010 were medical and pharmaceutical products (which accounted for 28% of our exports), organic chemicals (which accounted for 23% of our exports) and computer equipment (which accounted for 5% of our exports). These three sectors account for 56% of Irish exports and are mainly comprised of multinational companies. Looking in closer detail at these sectors the exports of computer equipment are actually down 60% from last year. A substantial part of this dramatic decrease is likely the result of the withdrawal of equipment manufacturing from Ireland by Dell in Limerick. This may have had a substantial impact on this sector, as exports have fallen from over €10 billion in 2009 to just over €5 billion in 2010. This could act as a worrying omen of things to come. As a small open economy, with a low corporate tax rate and access to the European single market, Ireland is ideally positioned to reap the benefits of acting as an export base for multinational companies accessing the European market. However, as was observed in the Dell case, these multinational companies can transplant their operations should a more attractive location become available and the withdrawal of these multinational firms can have a substantial impact on Ireland’s exports. Should some of the larger medical, pharmaceutical or organic chemical companies in Ireland move their operations elsewhere this could have a dramatic negative effect on Ireland’s export sector. The reliance of Ireland on multinational exports and the ability of these companies to move their operations raises serious concerns as to the sustainability of Ireland’s export performance and whether it can in fact drive an economic recovery. The latest Quarterly National Household Survey (QNHS) indicates that unemployment in Ireland is continuing to grow. In Q4 of 2010 a seasonally adjusted total of 16,200 people lost their employment. While this is slower than the rate of job losses the previous quarter (which were 26,800) it is still a sign of the declining economic situation prevalent in Ireland. Worryingly, it is not only increasing unemployment which is a problem but the fact that the nature of unemployment is changing. Increasingly the number of people unemployed is comprised of those which can be classified as being long term unemployed. Figure 1 shows that since the height of the economy’s growth in 2007 the proportion of the number of people who are classified as long termed unemployed has increased. Long term unemployment is classified as people who are unemployed for a period longer than a year. These individuals are most likely in sectors where there has been a dramatic decline in employment which may be structural in nature. Further to this, there is an increasing trend in long term unemployment among the younger members of the Irish population. Figure 2 displays this trend. It can be noted that, of the individuals who are aged between 15 and 24 and unemployed, almost a third of these have been unemployed for over a year. This is a worrying trend and something will only continue to worsen based on the current economic situation.
Most groups within the government and opposition hold a clear position that Ireland’s corporate tax rate should be left at its current level and have opposed every motion by Irish and EU commentators to raise the rate of corporation tax. However, standing apart from their companions is the United Left Alliance (ULA). This group opposed the current corporate tax level and has been a strong advocate for raising corporate tax.
One of the more worrying promises made by this group is their statement that they will increase corporation tax so as to capture more of the share of profits made by multinational companies. While this is possibly quite a populist policy it has the potential to create extensive damage to the Irish economy. The basis for the increase, according to the ULA, is the fact that these multinational companies are still making a profit. This is said almost as if these companies are committing a crime by being efficient and generating revenue in these trying economic times. The ULA seem oblivious to the fact that, by making these profits, these multinational companies are able to provide sustainable and steady employment to a large number of people while also contributing substantially to our economy and government tax receipts. Should Ireland raise its corporation tax rate this would prove detrimental. These large multinational companies are located in Ireland specifically because they can make a profit here. It is our low cooperate tax rate which has attracted these firms to Ireland and it is this low tax rate which retains them in this country. Should the tax rate be increase, it does not matter whether this is by 1% or by 15%, it will send a signal to these companies that Ireland is no longer committed to providing stable, low cooperate tax rates for multination enterprises. And what effect do we expect this to have? This will discourage investment by these firms in our economy and will result in a relocation of firms from Ireland to other countries. Take the example of a well know computer manufacturer in Limerick in recent years. While still making a profit operating in Limerick, a better opportunity presented itself in Eastern Europe. Despite having a plant and facilities already well established in Limerick, this firm uprooted and left Ireland with significant job losses occurring as a result. It was not that there was anything wrong with the Irish plant, it could just be done cheaper somewhere else. An increase in the corporate tax rate by any Irish government would result to a similar situation occurring. Overnight, it would become more expensive for these firms to operate in Ireland. Could we expect these firms to accept this and continue to operate in Ireland even though other countries would now offer them a higher profit margin? I don’t think this is realistic. These firms will leave Ireland for more competitive economies. And, given that foreign multinationals are among the few firms in Ireland actually generating employment, we should ask ourselves do we really wish to chase these companies away? Irish GDP fell by 1% in 2010. This decrease in GDP is worse than was forecast by the Department of Finance for the most recent budget and worse than the ESRI predicted in their Winter Quarterly Economic Commentary. This has negative implications for Irish debt to GDP ratio and is a continuing sign of the still struggling Irish economy.
It would appear that the main cause of the decline has been the domestic economy with domestic consumption falling 3.4%, investment falling 29.4% and government expenditure falling 6.2% in 2010. These figures show the continuing decline in the domestic sectors of the Irish economy. The fall in GDP would have been much worse had it not been for the success of Irish exports. Exports have risen 9.4% in 2010 while imports have only risen 7.4%. Our net exports for 2010 have increased. From these figures it is clear that Irish export success has been masking the worrying decline in the domestic economy. However, a substantial component of Irish exports is comprised of the exports of multinational, not indigenous Irish, companies. These multinational companies are mainly in the areas of software and pharmaceuticals and chemicals. This makes our export success, the only positive story in our economy, dependent on a relatively small number of sectors which are subject to potential outside shocks. If, for example, cooperation tax were to be increased would these companies still remain in Ireland? It is hard to envisage that they would stay. And if these companies were to leave and exports were to suffer this would have further negative implications for Ireland’s economic recovery. |
AuthorJustin Doran is a Lecturer in Economics, in the Department of Economics, University College Cork, Ireland. Archives
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