As 2009 draws to a close, there must be very few who are not glad to see the back of possibly the toughest year in Irish economic history since independence. No matter what way one looks at the statistics, the hardship is there. What makes the numbers even more startling is how they compare with the economic fortunes we enjoyed up to 2007. In this post, I look at the huge changes in fortune in three key areas of the economy – the labour market; income and output; and price changes – and go all out, put my head on the block and make predictions for a dozen key economic indicators for 2010.
Employment & unemployment
In the labour market, the average unemployment rate between 2000 and 2007 was 4.4%. The average for 2009 is likely to be 12%. Whereas about 20,000 redundancies were registered each year with the Department of Enterprise Trade & Employment pre-2007, about 80,000 will be registered this year, while the total fall in employment will actually be much larger, at 165,000. Next year, the drip-drip of redundancies and job losses is likely to continue, but at a slightly slower rate. This is because the economy had a sizeable chunk of jobs a good bit downstream from construction but ultimately dependent on the boom in expenditure it helped create.
Linked to changes in employment and unemployment is a flipping of migration trends. Net migration into Ireland between 2000 and 2007 averaged 45,000. The estimate that the CSO put on net migration in April 2009 for the previous 12 months was emigration of 7,800 – the figure for April 2010 is much more likely to be -45,000, as large amounts of new-EU migrants as well as a growing number of footloose young Irish move abroad.
- Number employed, i.e. full-time and part-time (not under-employed): 1.825m (compared to 1.925m in 2009 and 1.875m 2000-2007)
- Redundancies: 60,000 (compared to 80,000 in 2009 and 20,000 on average, 2000-2007)
- Net migration: -50,000 (compared to -7,800 in 2009 and +45,000, 2000-2007)
- Unemployment: 14% (compared to 12% in 2009 and 4.4%, 2000-2007)
Income & output
One of the most important headline indicators that markets and governments look at, when analysing economic health, is GDP or economic output. GDP rose hugely in Ireland in the years up to 2007. Between 2000 and 2007, the average rate of growth in GDP – stripping out inflation – was 6%. In other words, the economy was 50% bigger in 2007 than it was in 2000. This year, GDP is likely to fall by about 8%. Next year, it is likely to be static, as plateauing and gentle recovery in some areas of the economy is cancelled out by further falls in the worst affected sectors.
Figures for GDP also mask the differing performances of the domestic and internationally trading sectors of the economy. Astonishingly, Ireland’s exporters have, in aggregate, been largely unaffected by the worst contraction in world trade since World War II. This is just the continuation of a long-running trend which has seen domestic income (GNP) grow at a very different rate to total activity in the economy (GDP). Whereas GDP will contract by about 8% this year, GNP will fall by one and a half times as much. Next year, while GDP is likely to be static, GNP will probably fall further, although only by a couple of percentage points.
For most countries, GNP and GDP are for all intents and purposes interchangeable. For Ireland, though, GNP is significantly smaller than GDP. In 2000, GNP was about 10% less than GDP. By 2007, it was 15% less. Over the course of the recession, GNP is going to fall by significantly more than GDP, meaning that by 2010, it is likely that GNP will be 20% smaller than GDP.
The reason that this technical distinction is relevant is because the most common shorthand for comparing living standards across countries is to use GDP per head of population (usually also corrected for the relative cost of living in the country). One of the major boasts in Ireland during the boom years was that output per head was almost 50% above the EU average by 2007. This figure was based on the full EU, whereas comparisons pre-2004 were based on the EU15 group of countries. It is also based on GDP, rather than GNP, arguably the more appropriate figure for Ireland.
Looking instead at GNP per capita, relative to the EU15, we had indeed become richer than our peers by 2000 (about 2% richer) and the income gap grew to 13% by 2007. The sharp fall in GNP since then, however, particularly compared with much milder falls elsewhere in the EU, means that per head of population, compared to our EU15 neighbours, we are going to be about 4% poorer this year and that gap will double next year to about 8%.
- GDP growth: 0% (compared to -8% in 2009 and an average of 6%, 2000-2007)
- GNP growth: -2% (compared to -11% in 2009 and an average of 5.4%, 2000-2007)
- Ratio of GNP per capita in Ireland to EU15: -8.2% (compared to -3.7% in 2009 and 7%, 2000-2007)
Prices & inflation
Between 2000 and 2007, the average rate of inflation in Ireland was 4%, about twice the average rate elsewhere in the EU. This year, as prices have been static in the EU, inflation in Ireland, as measured by the CPI, is likely to be -6%. (Using the EU-comparable HICP measure, which leaves out mortgage interest, the rate is closer to -3%.) The primary factors driving down prices this year were low interest rates (and therefore cheap mortgage repayments) and low oil prices (and therefore cheap petrol and electricity).
Neither of those factors is going to be driving down prices next year but the deflationary pressures they’ve unleashed this year will continue – at least in non-state controlled sectors – for at least the first part of 2010. For that reason, consumer price inflation is likely to be only about 1%.
In the property market, as least as measured by the ptsb index, next year is going to be one of price falls, probably in the region of 15%. The fall in property prices has been uneven across different segments, with most believing that prices have fallen far more from the peak than the 25% or so suggested by the ptsb index. In effect, that index, and certain parts of the country, will spend 2010 catching up with those areas where prices have fallen by more already.
What is likely to determine at what level house prices stop falling is where rents level off. Again, rents in Dublin have fallen by a lot more than rents elsewhere, suggesting that the sheer volume of transactions in Dublin will help it find its new level first, possibly by mid-year. Other parts of the country will more than likely use percentage falls in Dublin as their benchmark but it will take longer for national averages to catch up and level off with leading areas.
In terms of output and transactions, house completions next year are unlikely to top 15,000, while the car scrappage scheme will not be enough to stop registrations fall to about 100,000, compared to an average of 170,000 pre-2008.
- Consumer price inflation: 1% (compared to -5.5% in 2009 and 4%, 2000-2007)
- House price inflation: -15% (compared to -15% in 2009 and 9.4%, 2000-2007)
- Rental inflation: -10% (compared to -16% in 2009 and 4.2%, 2000-2007)
- House completions: 15,000 (compared to 25,000 in 2009 and 70,000, 2000-2007)
- Car registrations: 100,000 (compared to 125,000 in 2009 and 170,000, 2000-2007)
Economics is, as the last few years have shown, an almost entirely unpredictable sport, so I look forward to finding out over the coming 12 months just how wrong I am in each of the above predictions! For any would-be detractors, all the predictions from above that are percentages are below, in one handy sheet…
Happy new year to one and all, and here’s hoping 2010 and indeed the new decade ahead has some pleasant surprises in store!