The Draft Partnership Pact referred to in today’s Irish Times states, in the section on “Stabilising the Financial and Banking Sector”, that government action will seek to “assist those who get into difficulties with their mortgages. In early 2009 a new statutory Code of Practice in relation to mortgage arrears and home repossessions will be brought forward and the mortgage interest scheme will be reviewed”. I’d be interested to hear people’s opinions on this.
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I found this quite depressing. He doesn’t want to cut interest rates further for fear of falling into a liquidity trap???
In addition to harming the overall Eurozone economy, this sort of attitude, if it prevails, will be particularly damaging to Ireland because of its implications for exchange rates. And it will I think set in motion serious protectionist forces in this continent, with the potential to do great damage to the international economy in the years ahead.
I wrote a short piece in yesterday’s Sunday Independent that illustrates why bank regulators must think beyond International Financial Reporting Standards in judging the health of the banking system. The link is here.
Today’s installment in the Irish Times is written by John McHale: Minimising the Pain.
The CSO Index of Retail Sales had been rising to mid-Summer 2007, flattened for a few months and has been falling since October 2007, which was (just marginally) the sa peak. November 2008 was 8.1% off the peak, and October plus November combined down just under 8% on the same two months of 07. Today’s Sunday Business Post reports a survey by Retail Excellence Ireland and CBRE for the full fourth quarter. They believe that value of sales was down 10.7% over Q4 2007, and that the figure would have been even worse (14%) if the DIY and electrical sectors had been included in their survey, which seems to have a somewhat narrower coverage than the CSO’s inquiry. Nonetheless, the survey confirms anecdotal evidence that December was dire, and that Q4 volumes could be down anything up to 10% on Q4 2007. Some sales were brought forward into December, and the January figures could well be pretty poor too.
Notwithstanding the diversion of trade into NI retailers, consumer spending must be falling faster than household disposable income. There will have been a hit to income in Q4 from job losses, but not yet from tax increases. Pay rates (outside the construction sector) were still rising in Q4 so far as I can see, although they may fall in the private economy overall in Q1 2009. The implication is that the household savings rate rose sharply in Q4 08, and that the marginal propensity to save must be high. This is also consistent with the historic lows in the consumer confidence indices.
If the consumer has decided that it’s time to repair the balance sheet, the case for fiscal stimulus is even weaker than normal, which in Ireland is pretty weak to begin with. The corrolary is that fiscal tightening has even less output cost than the macro models indicate.
(Cliff, an SBP headline today contains the coinage ‘oversaturated’. Is this overexaggerated? When will the slaughter cease?).