Tuesday, June 24, 2008

A Great Future Behind Us

Since the No vote on the Lisbon Treaty I've had that feeling in my stomach that you get when go over a humpback bridge a bit too fast. You know the one where you and the car part company with the road for a moment before coming back down. Except I don't feel we've come back down after Lisbon. If anything, after today's ESRI report, it's beginning to feel like the road's just taken a sharp turn left and we're gliding towards the ditch.

It seems we're now heading for a recession twenty five years after the last one - and it's almost entirely self-inflicted. Indeed the ESRI expects Ireland will be the only EU or OECD country to experience a recession in 2008. Some achievement.

The culprit is a collapse in the housing sector: with the ESRI forecasting a 41.4% decline in the value of housing construction this year. Enough to drag total gross fixed capital formation down by 15.1%: far too much to be offset by modest but positive forecast growth for exports and consumer spending. The speed (if not the scale) of the collapse has caught just about everyone by surprise (including me) - one of those 'several standard deviations outside the range of expected outcomes' that Nassim Taleb describes as Black Swans.

The consequences will be grim: rising unemployment, a return to emigration and a legacy of malinvestment unprecedented in the history of the state that will take the best part of a decade to unwind. Plus the sickening realisation that it didn't have to be this way. And with that realisation will come a search for someone to blame and, if we're lucky, the correct culprits will get the blame. To my mind the culprits are those politicians who introduced and promulgated a set of tax incentives for developers and land owners that gave them a carte blanche to build more houses and apartments than were actually needed. Not so much market-led as donation-led.

Sure the banks loaned the developers the money, but banks make lemmings look like rugged individualists and they were only doing what banks do. That is, following the herd to where they thought the easy money was. The banks took their cue from Government: with the builders making so much tax stimulated money from construction why wouldn't the banks lend to the developers and to the borrowers buying the houses and apartments they were building? And weren't the Government then coining it at the other end with vat and stamp duty paid by the buyers? A win-win-win situation - or so it seemed.

But now we have a lose-lose-lose situation: with Government, the banks and the construction industry hurting. And, as ever, the taxpayer will pick up the tab - just as the taxpayer paid for the boom. A tab that may well include the price of rescuing one or two of the same banks.

How's your stomach?

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