The Irish Economy

Over the years there has been lots of discussion about the “fundamentals” of the housing market. Our “strong demographics” were often cited as contributing to the buoyant demand for housing. By this was meant that the rapid growth of the numbers in the household-forming age groups – relative to the number of units being vacated by deaths etc – translated into a firm demand for additions to the housing stock.  On this site, Colm McCarthy looked at the impact of demographics on the demand for housing yesterday, referring to recent evidence on the resumption of net emigration. Some of the ensuing discussion tended to get bogged down in trying to interpret very short-term indicators. I thought it would be helpful to provide a medium-term perspective on this aspect of the housing market.

The point of departure is that over the past ten or fifteen years Ireland’s population has been growing faster than that of any other OECD country. For example, our population grew by 14 per cent between 2002 and 2008 when the population of EU15 managed only a 4 per cent increase.

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Most of the Irish academic economists contributing this site are anti-NAMA in its current form, and Karl Whelan has expressed an interest in giving more balance to the site by generating some pro-NAMA threads.  Goldman Sachs’ chief European economist was gracious in allowing me to quote his recent email on Irish bank bailout policies including NAMA (the email was mentioned in today’s newspapers).  See below the fold.

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One of the things that has been heartening about the current crisis is that the world has not lapsed into wholesale protectionism, as occurred during the 1930s. However, this observation, which is frequently made (including by myself), ignores the fact that it actually took a while before protection really got going after 1929. Smoot-Hawley (passed in June 1930) is not really a counter-example, since this represented the culmination of a process that had been in the works since the Presidential campaign of 1928. Elsewhere, the British only broke with free trade in 1931, and Ireland held out even longer. If the world economy were to keep falling at its 2008-9 pace for 2 or 3 years — a scenario that seems to have been averted (touch wood) — who knows what would happen.

That politicians would in such a scenario find it difficult to hold out against the pressures to which they would be subjected is reinforced by this report on the creeping protectionism which has been occurring around the world. The column uses the word ‘juggernaut’, which is presumably a reference to Richard Baldwin’s point that over the past few decades, free trade has been gathering momentum as it creates new outward-oriented constituencies with a vested interest in maintaining open markets. Historically, this juggernaut has more often operated in reverse — think of the long run effects of the Napoleonic Wars in France or the US, or World War I, or the Great Depression. In these cases, disintegration created new companies selling to internal markets who depended on protection for their future well-being — and thus created a powerful political mechanism for ‘locking in’ disintegration.

I don’t think that the juggernaut, which has been rolling in a free trade direction for decades now, has changed course yet. However, the Baldwin analysis suggests the possibility of ‘tipping points’ which might occur in various (hopefully unlikely) states of the world. Things which would make such states of the world less unlikely include major and persistent increases in unemployment, exchange rate misalignments perceived as conferring ‘unfair’ advantages on particular trading partners, and (especially) a combination of the two.

Here’s an interesting speech from ECB Executive Board member Jurgen Stark about the plan for an exit strategy from the current non-standard operational framework.  Two quotes stand out for me:

As regards our area of responsibility, we are well prepared to phase out the measures we took in response to the crisis. The way these measures were implemented provides us with reasonable flexibility in unwinding them. For example, unless we decide otherwise, the maturity and size of our operations will automatically decrease, starting next year.

And, more interestingly,

It is therefore crucial to monitor the sources of funding constraints for banks. We need to judge whether these funding constraints relate to individual banks rather than to the functioning of the money market and the banking system as a whole. Our operational framework is not designed to counter funding problems at the individual bank level. Rather, our funding support is designed to alleviate funding risk to the extent that it is systemic.

After a somewhat unsatisfactory appearance together on Prime Time last week, in which we got to share fourteen minutes of airtime with a trade union leader and a property developer, I asked Donal O’Mahony (Global Strategist with Davy’s) if he was interested in writing a guest post on NAMA for this blog. Donal agreed and his post is below the fold.

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The ECB has just released the book version of its 2008 Central Banking Conference, with the theme of ‘ten years of the euro.’  It includes a range of interesting papers and discussions, plus a contribution by myself on ‘EMU and Financial Integration.’   You can download the book here.

The analytical chapters from the new WEO are now online here.

Chapter 3 is on “Lessons for Monetary Policy from Asset Price Fluctuations”

Chapter 4 is on “What’s the Damage? Medium-Term Output Dynamics after Financial Crises”

The presumption that Irish housing demand is somehow underpinned by favourable demographics has always been suspect, but recent data are unambiguousdly negative. The headline pop estimate for April shows population growth at 37,300 on the year. But the QNHS, also published this morning, gives figs for the 15+ population which show that growth ceased last Summer. The last five obs on seasonally adjusted 15+ pop are: Q2 08 - 3520.5; Q3 08 - 3529.5; Q4 08 - 3530.0; Q1 09 - 3529.9; Q2 09 - 3529.5.

Thus the growth over the year in the adult population all took place in the first quarter, and was in any event less than a quarter of the growth in total pop. Children don’t buy houses. The figs imply substantial out-migration of adults, at the rate of about 7 to 8000 per quarter recently.

Today’s release also gives pop estimates for April by age-group. The age groups up to 14 show healthy increases. But the groups 15-19, 20-24 and 25-29 are all falling. The 20-24 group fell, between April 2007 and April 2009, from 347,800 to 304,800, that is, by 12.4% in two years. Difficult to see how estimates of strong underlying flow demand for housing can be sustained.

Fintan O’Toole is a thoughtful and eloquent commentator on arts and social trends, and sometimes he gets things right about economic issues too!  Today in the Irish Times he has a compelling piece on bank bailout policies toward Anglo Irish.

The Migration Information Source provides a nice overview of recent immigration and emigration patterns for Ireland: you can read it here.