That crystal ball… cloudy, murky, depressing. January 13, 2010
Posted by WorldbyStorm in Economy.trackback
Ah, Dan Smith in the Herald, and hat tip to Leveller for this. For Dan has seen the future, and it ain’t pretty. Dan covers the economic beat, and has brought us such gems as ‘Our retailers should quit moaning and cut prices’ and How slump turned us into shoppers who demand value
Or, in many cases, shoppers who have to make do with the amount of money we’ve got.
His thoughts this last week? “The bad news is more cuts, falling house prices and rising interest rates but the good news will see a cheaper euro kickstart the economy at last”
Hmmm… not as cheery as I’d have liked. Tell us more Dan.
1 Public sector numbers will be cut
HAVING already imposed an average public sector pension levy of 7pc and wage cuts of between 5pc and 15pc the scope for further cuts in public sector pay is limited. However, with Brian Lenihan looking for a further €3bn of spending cuts or extra tax revenue in the next Budget, the pressure will come on public sector numbers instead. Having already dropped by 9,500 in the third quarter of 2009 expect further steep cuts in 2010.2 Welfare rates will be cut even further
THE Government cut most social welfare payments, except pensions, by 4pc in the Budget. However, even after the Budget cuts, the basic weekly welfare payment for a single person in this country of €196 is almost treble the £64 paid in the North.3 The minimum wage will be cut
AFTER the Budget cuts in public sector pay and social welfare rates, the minimum wage is the last surviving sacred cow from the Celtic Tiger era.
[Leveller, rightly, points to this as a key one - a sacred cow - eh? ]4 Interest rates will start to rise
INTEREST rates have been on the floor ever since the emergency rate cuts that followed the collapse of US investment bank Lehman Brothers in September 2008 with the official ECB rate at all-time low of just 1pc.
Not for much longer. Eurozone rates will start rising from the autumn at the latest, further increasing the pressure on hard-pressed homeowners.5 House prices will continue to fall
WITH stocks of unsold houses at record levels and interest rates set to rise, house prices will remain under pressure. House prices fell by 12.7pc in the first ten months of 2009.
Expect further falls in 2010.6 A Spanish banking crisis will trigger the moment of truth for the eurozone
FORGET about Greece. Like ourselves, the Greeks are no more than a pimple on the elephant’s hide. Spain is, however, along with Germany, France and Italy, one of the eurozone’s “big four”. The higher-than-expected third quarter loan losses at both of Spain’s major banks, Santander and BBVA, indicate that their loan loss reserves are being exhausted and that the country’s property bust is now making itself felt.
This could trigger a Spanish banking crisis in the New Year. This would be good news for Ireland if it forced the ECB to print more money, allowing us to gradually inflate our way out of our debt prison.7 The euro will fall against sterling and the dollar
THE markets are already betting that the ECB will be forced to adopt a more inflationary monetary policy to save Spain with the euro slipping against both sterling and the dollar in recent weeks.
This trend will continue in the New Year with the single currency losing even more of its value against the other major international currencies. Good news for hard-pressed Irish exporters but bad news for anyone planning a shopping trip to Newry or New York.8 There will be just three Irish owned banks left by the end of 2010
LAST month, members of the EBS and Irish Nationwide building societies voted to allow the state to take effective ownership of the two institutions while shareholders of Irish Life & Permanent voted in favour of a corporate restructuring which will facilitate the demerger of its Permanent TSB mortgage banking subsidiary. The result is likely to be a threeway merger creating a state-controlled banking “third force” capable of competing with AIB and Bank of Ireland.9 Either or both AIB and Bank of Ireland will be in majority State ownership by the end of 2010
AS loan losses continue to mount, AIB will have written of €7.1bn in the two years to the end of December 2009 while Bank of Ireland expects to write off €6.9bn in the three years to March 2011, the Government will have to inject even more capital into the two large banks. With NAMA demanding much bigger discounts on the loans it buys from the banks than most analysts had expected, this would trigger even further losses. making it virtually inevitable that AIB will fall into majority State ownership this year. With its cleaner loan book, Bank of Ireland might, just might, stay out of majority State ownership but it will be a damned close-run thing.10 The economy will begin to recover in 2010
A CHEAPER euro and a stronger global economy will help lift the Irish economy in the second half of 2010.
However, unemployment is likely to stay high for the foreseeable future, so it won’t feel much like a recovery any time soon.
It’s a most interesting exercise to compare and contrast his thoughts for next year with his predictions for last…
Inflation will fall to zero or even lower
With consumer confidence on the floor and commodity prices falling, the annual inflation rate is already dropping like a stone, having halved to just 2.5pc over the past six months.
By early in the year prices will have stopped rising and I expect prices to start falling later in the year.The Government will be forced to cut the VAT rate
The 6.5pc gap between the Irish and British VAT rates is not sustainable.
With tens of thousands of shoppers heading North every day, Finance Minister Brian Lenihan will be forced to perform a humiliating U-turn and bring the Irish VAT rate into line with the 15pc British rate.Second 2009 Budget before Easter
With public spending running at more than €10bn ahead of tax revenue the Government will be forced to introduce a second 2009 Budget, probably before Easter.
This second Budget will feature brutal spending cuts. If you think the October Budget was bad, you ain’t seen nothing yet.The national pay deal will be scrapped
With prices set to fall, the latest national pay deal, which provides public sector workers with a 6pc pay rise over 21 months, is now unaffordably generous.Public sector pay and numbers will be cut
With public sector pay gobbling up almost two euros in every five of public spending, slashing the €19.6bn public sector pay and pensions bill is essential if the Government is to get even close to balancing its books.
This is likely to include both a reduction in the 372,000 workers currently on the public payroll and pay cuts for those who hang on to their jobs.House prices will continue to fall even lower
Already house prices have fallen by 15pc from their 2006 peak. Things are going to get much, much worse in 2009.
With rents falling and the banks forcing cash-strapped landlords to sell rental properties, there will be a wave of forced sales in 2009. This will push house prices even lower than most pessimists expect.Ireland could be forced to leave the eurozone
While the euro at close to parity against sterling is great news for shoppers heading North to Newry, it is catastrophic for Irish exporters.
Britain remains our largest market, purchasing almost a fifth of our exports, including most of our indigenous exports.
With Britain already in the grip of the worst economic downturn since the Second World War, the last thing Irish exporters need is the euro close to parity against sterling. If the euro stays at its current level against sterling beyond the first quarter of 2009, the pressure to leave the eurozone could become irresistible.The Government will close a number of banks
Having already botched recapitalising the banks once, the Government has to get it right next time.
AIB and Bank of Ireland have to be saved while Irish Life & Permanent and EBS can be merged with one of the larger banks.
That leaves Anglo Irish Bank and Irish Nationwide, both of which are stuffed to the gills with toxic property loans. These will both have to be closed and their loans transferred to a “bad bank”.The Government will reform the pension system
Public sector pensions will be reined back to free up resources to plug the €30bn hole in private pensions.Unemployment will continue to rise
The imminent closure of Dell’s Limerick plant will only be the first high-profile factory closure in 2009 as a combination of the economic downturn and an over-valued exchange rate send unemployment soaring to levels last seen in the early 1990s.
Bar the modish euro withdrawal and pensions he’s not been too far off. Still, note that he somehow seems to ignore a dissonance in 2009/10 about welfare rates in the North, as against his thoughts about VAT rates in 2008/2009.
I don’t know how you can justify the Euro loosing strength against the GBP.
The dollar will soon head into hyperinflation, and with a civil war ready to erupt, other countries like japan and brazil will be seeking to reduce risk of hyperinflation contamination by exiting the dollar as a reserve while creating a new world currency: a mixture of gold, yaun euro etc.
The euro is likely to gain strength over the next year. Making exports even more difficult for our country. Farmers are already being hit are a hint of the what is coming.
Perhaps I’m wrong?
Great. As my paypacket has shrunk over the last year, there’s been one consolation: work takes me to the Uk frequently and I return with tales of reasonable hotel rooms and fairly-priced magazines. Everything financial was gainst me except this little thing of the exchange rate – bad for exports, but good for me. Now Dan Smith is taking even that away.
The dollar will soon head into hyperinflation, and with a civil war ready to erupt
Yessss…
What’s the winter like over on your planet?
And BTW, it’s Dan White.
Ooops… my mistake…
I forgot to save it but the UCG economist who predicted the housing collapse has a Weimar scenario in his piece in the Irish Times.
“With construction output and employment at record levels, earlier fears of a property price crash have proved to be wide of the mark. Instead, with housing demand being further boosted by near-record levels of employment creation, house prices look set to rise even further…
For the average punter, property shares are a mug’s game. With most of the institutions no longer interested in these shares, and the few companies that remain on the market dominated by a handful of shareholders, most of us would be better off buying a house instead.”
Dan White, “Don’t buy the shares, buy a house instead”, Evening Herald, 8 January 2006.
Yep. The guy’s a genius.
Great catch, Conor.
Well if you like that you’ll love the latest stuff from Brendan O’Connor. Well spotted Conor…
“Sure, a house price crash would be deeply unpleasant for both homeowners and lenders. But the experience from other countries suggests that, even if the worst came to the worst, most homeowners would keep paying their mortgages most of the time and that the banks could muddle through with acceptable losses.”
Dan White, 15 January 2006.
He did say this though:
“While most of the main banks no longer published detailed sectoral breakdowns of their loan books, you can take it as read that they are all up to their oxters in property lending of one kind or another. This means that when the Irish property market turns down, it will hit all of the banks hard. If you still believe in the Irish property market, hang on to your bank shares; if you don’t, then sell now. ”
This, though, I love from the Irish Independent, 27 October 2004:
“PROPERTY professionals will be able to look into the future and catch a glimpse of what’s in store for the Irish property market at the first ever Irish Property Convention.
The convention, organised by the Irish Independent and Property Week, will reveal the results of new economic research into what the next few years hold for the property world in Ireland. The information should prove to be a useful tool to companies planning their future business strategy.”
wonder if the Irish Independent, which is so good at predictions, told all the property investors at the conference it had organised that within 36 months the whole thing will start to go belly-up?
Acceptable losses… hmmm… sounds a bit like ‘an acceptable level of violence’…no?
Was the idea of “acceptable loses” not meant to reflect the fact that in a dollop of mortgage holders who owed money, n % could be expected to have a serious accident or die and cause a loss on their deal.
I think you’re right.
If a mortgage holder dies, the burden is taken up by the insurance company, no? Shifting the risk away from the lender?
If borrowers start dying off en masse, that’s the banks’ problems neatly solved….