Monday, March 31, 2014

What's That Hissing Sound?

Ireland's economy has a flat tyre. Today's Central Bank statistics suggest that, instead of pumping air into the flat economy, it's still leaking out. Indeed, February's decline in the amount of credit advanced to Irish households was the 60th successive month in a row in which consumer credit (excluding home loans) declined. Separately, home loans have 'only' been declining for 52 consecutive months.

Just to put that in context, what it means is that Irish consumers in only the past twelve months have repaid €1.6bn more in personal loans (excluding mortgages) than they have taken out in new loans. And in case you think they're sitting on their cash you'd be wrong. The same Central Bank statistics tell us that the value of deposits held by Irish households has declined by €0.8bn over the same period. So one group of people is paying off debts as fast as they can, while another group is drawing down savings just to make ends meet.

All this should, of course, mean lots of extra money in the banks to lend to businesses. Emphasis on 'should'. In fact, again according to the Central Bank, net lending to businesses (excluding the financial sector) has declined by a cumulative €4.7bn in just the past 12 months. Indeed, repayments have exceeded borrowings for 55 straight months in a row. Amazingly, deposits held by businesses in the same banks has risen over the past 12 months by €3.7bn.

Consumers and businesses are, in fact, sucking money out of the economy in a desperate attempt to reduce their debt levels. We're liquidity trapped, even as the lions of deflation and bank stress tests are approaching.

Despite all this, we appear to be enjoying something of an entrepreneurial renaissance in Ireland - if the latest numbers on start ups are to be believed. I'm inclined to take them with a pinch of salt - a lot of these new businesses are registered for transactional/financial reasons and aren't really start ups with owners, staff and plans. But most of them probably are - so what's going on? Some of it is down to necessity - people without jobs simply starting their own business out of desperation. According to the 2013 GEM Report, about 18% of all Irish, early-stage entrepreneurs became business owners last year out of necessity than any real choice or sense of opportunity. Still, the vast majority are compelled by more than brute necessity.

But are more entrepreneurs a good thing overall? Most won't go on to hire a single additional employee - and will simply provide employment for the owner manager alone. Worse, becoming self-employed is a fast track to poverty for many. Becoming rich through entrepreneurship may not be quite up there with the odds of winning the lottery, but it isn't far off if you're eyes are set on being the next What's App. Indeed, even pure tech start-ups have a pretty dismal success rate.

My best guess is that we're stuck in a 'zero sum recovery' and will be for the foreseeable future. There are and will be plenty of opportunities to succeed for start ups and established businesses alike. But in an economy in which even the money supply (M2) shrank last month, then it's going to become a negative sum game pretty soon (if it hasn't already), and those with the most cash - or the least need for cash - will be the ones who'll survive.

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