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A day after the turbulent opening for business in 2008, no economist back in 1980 would have bet that it would have taken 28 years to scale the record heights that were achieved by gold and oil in the early months of that fateful year (SEE: Oil price passes $100 a barrel for first time - close to 1980 all-time real dollar high; Price was at $10.72 in December 1998). In Ireland, who would have thought even in those poorer times, that 28 years after the town of Naas, located 20 miles south-west of Dublin, was bypassed, that a 160-mile motorway link to the country's second city Cork, would not yet available? Writing in today's Financial Times, European Editor John Thornhill says: The senior Chinese official did his best to be polite. When, at a recent conference on Europe and Asia, I asked him how the Chinese viewed Europe, he chewed thoughtfully on a canapé before replying: “Europe needs to rediscover its entrepreneurial spirit.” Some of us Irish may believe that Ireland shouldn't be included in this categorisation but they would be mistaken. The property boom has helped camouflage realities that will become evident in coming years and the €50 billion that has been invested in commercial property since 2001, mainly overseas, compared with the €1 billion in venture capital that has gone to Irish business, speaks for itself. Economic Outlook Some of the dismal scientists are paid to sell a sunny scenario but the wishes of Dan McLaughlin of Bank of Ireland and Austin Hughes of IIB Bank that the European Central Bank will cut its benchmark rate, currently at 4.0%, twice in the first half of 2008, will not be met. A cut in March would have to be telegraphed to the markets, beginning on Thursday, January 10th, when the Governing Council will meet. Such a sharp reversal on the current stance is not expected as the ECB is keen to keep control on inflation expectations. A gloomy economic outlook in the Eurozone later in the year would of course increase the likelihood of rate cuts. Euribor inter-bank interest rates are expected to remain elevated in the coming months until at least the extent of bank exposure to subprime-related securities is known. Joachim Fels of US investment bank Morgan Stanley, who is based in London, said last month that he expects the global macro environment in 2008 to be characterized by an unpleasant mix of relative economic stagnation in the developed countries and continuing global inflation pressures. This stagflationary environment creates a dilemma for central banks. If they play tough on inflation, stagnation may turn into a full-blown recession. If they decide to stimulate the economy, inflationary pressures may intensify. Central bankers are acutely aware of this dilemma, which explains why many have been reluctant to ease monetary policy so far. However, more signs of economic slowdown or even recession in early 2008 are likely to swing the balance towards more aggressive monetary easing in the advanced economies. "Thus, I expect 2008 to mark the beginning of another global liquidity cycle that is likely to lift most boats again in the following years," Fels said. Morgan Stanley's Gerard Minack, who is based in Sydney says that the US Fed always cuts aggressively in a recession. The real Fed funds rate over the past 50 years has fallen to zero or below in every recession. That suggests that the minimum target for the funds rate in this cycle is 3%. It is currently at 4.25%. Minack says that earnings always get hit in a US recession, which Morgan Stanley expects to be mild. The median peak-to-trough decline in S&P 500 earnings in recession over the past 50 years has been 16% and over the long term, real S&P 500 earnings have fallen to below-trend levels in every recession in the past 50 years, except the brief 1980 downturn. Minack says that earnings are now 62% above trend. If history repeats, there is a huge earnings shock coming. To get real earnings to (the rising) trend by end-2008 would require a 38% decline. Morgan Stanley's Stephen Jen, global head of FX, says that a recession always triggers a dollar rally. Irish Public Sector Reform in 2008? Whatever the uncertainties of ECB monetary policy in 2008, there is little likelihood that the Irish Government will show rare political courage and begin serious reform of the Irish public sector. The Paris-based think-tank for 30 governments, the OECD, will present proposals on reform to the Irish Government soon and the best that can be expected is the establishment of an "Interdepartmental Committee" that will take years to consider the recommendations. In a country of 4.2 million, we have 35 ministers and the majority have made-up jobs. 130 full-time staff work on the typical "messenger-boy" routine in their political constituencies - claiming credit for local authority house allocations; checking death notices for the issue of letters of sympathy and so much more dross. One minister was both brave and honest in saying that the lack of reform in the public service, "is a joke." But, no worthwhile change will happen. Climate Change Last month, in a special article published by the Economic and Social Research Institute (ESRI), it was claimed that Ireland's estimated economic growth will be reduced by up to 20% a year as a result of the Government's planned reductions in carbon emissions. The Government's climate change policy, which requires CO2 emission reductions of 3% a year to 2012, would require "draconian measures" across all sectors of the economy, and should be abandoned, says ESRI senior researcher Richard Tol. He says that carbon taxes be introduced, but only on emissions from sectors not already covered by the EU's Emissions Trading Scheme - the power generation, iron and steel, glass and cement industries. Inconvenient truths for a minister who finds platitudes more palatable than producing a credible plan. A Government publicity campaign was launched in November but don't expect hard decisions from an Irish politician. Like so much progress in Ireland, decisions made by the big European countries will provide the cover. Irish Housing For those who now publicly welcome the return to a "sustainable" housing market but who secretly pine for the days of raging boom, the following words on the impact of housing on an economy, are taken from Scottish philosopher-economist Adam Smith's Wealth of Nations, which was published in 1776: "A dwellinghouse, as such, contributes nothing to the revenue of its inhabitant; and though it is, no doubt, extremely useful to him, it is as his clothes and household furniture are useful to him, which, however, makes a part of his expense, and not of his revenue. If it is to be let to a tenant for rent, as the house itself can produce nothing, the tenant must always pay the rent out of some other revenue which he derives either from labour, or stock, or land. Though a house, therefore, may yield a revenue to its proprietor, and thereby serve in the function of a capital to him, it cannot yield any to the public, nor serve in the function of a capital to it, and the revenue of the whole body of the people can never be in the smallest degree increased by it." Another non-financial service economist talking down the economy!! A boost to housing of course can have a short-run economic impact and it's akin to what the renowned British economist John Maynard Keynes had in mind in its seminal 1936 book, The General Theory of Employment, Interest and Money, when he wrote, in tongue-in-cheek mode: "If the Treasury were to fill old bottles with bank notes, bury them at suitable depths in disused coal mines which are then filled up with town rubbish, and leave them to private enterprise on the well-tried principles of laissez faire to dig them up again… there need be no more unemployment and, with the help of the repercussions, the real income of the community and its capital wealth also would probably become a great deal greater than it actually is…" What is the short-run and the long-run is a pertinent question? In Ireland, the long-run is a strange notion to politicians and policymakers and Keynes famously said that "In the long-run we are all dead." His theory was that the government should actively intervene in the economy in the short-run to manage the level of demand. That of course did not mean that policy should be just tied to an election cycle. The late American monetarist economist Milton Friedman, who gained renown when Keynesian economics was seen to have run its course, with the political ascendancy of Ronald Reagan and Margaret Thatcher, popularised the expression: "There's no such thing as a free lunch." It's good to keep in mind during the good times, that the free lunch has yet to be invented. RELATED Philosopher-economist Adam Smith : A patron for 21st century trade unionism? © Copyright 2007 by Finfacts.com |
