The Irish economy and what it means to you by Neal Kelly

The Irish Economy and what it means to you

By N e a l K e l ly

Opening the business and financial pages of any Irish newspaper these days is a sure-fire way of raising your blood pressure. All too often the headlines are filled with, waffling politicians, redundancies, business closures, wage cuts, union negotiations, plunging asset values, property repossessions, plus, of course, the four-letter word that those in the know mutter under their breaths: NAMA. So what does all this bad economic news mean to the man or woman in the street in Ireland?

To understand why things are so bad at the moment, it helps to understand a little of what made things so good before. In very simple terms, the Irish economy rose in the 1990s on the back of a well-educated, highly-skilled workforce, a ready supply of labour, internationally competitive wage levels, and an open economy that actively welcomed inward investment. These qualities made Ireland a very attractive place to do business and multi-nationals seized upon Ireland as the perfect hub for their European operations.

However, by 2000 another industry was taking over as the key driver of the economy: construction and property. The Irish had discovered credit and were using it to snap up houses, apartments, offices, shops and factories at home and abroad. Fast-forward to 2007 and the Irish were amongst the best paid workers in Europe and living standards and house prices were near the top of the international league table. Crucially, however, the cost of running a business in Ireland of any size was sky-rocketing.

The international financial crisis of 2007 choked off credit supply. As that dried up so too did demand for property. Because so much of the State’s tax income was dependent on property-related taxes

such as stamp duty and capital gains tax , when that slowed so too did the amount of money available to the State. Very soon the State was spending far more money on essential services and welfare than it was taking in.

Which is when the brakes were applied.

A series of budgets saw the Government attempt to raise its tax take at the same time as cutting spending. The collapse of the property market threatened to undermine the security of the major Irish banks, and the Government established the National Asset Management Agency (NAMA) to manage the banks’ crippled property development loan assets. NAMA will acquire billions worth of the banks’ bad loans in return for the banks buying Government bonds. This is designed to free up the banks to begin lending to Irish businesses again.

Some of what all of this means to the Irish man and woman in the street has already been seen in the form of income levies and welfare benefit cuts as the Government seeks to shore up the tax take and balance the books.

The Government has been careful, however, not to attempt to raise taxes on businesses so that internationally Ireland can compete as a business location. Combined with private sector pay cuts

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and public sector wage restraint, Ireland should begin to creep back up the international competitiveness tables once more. The hope is that this will eventually lead to greater inward investment, although not, perhaps, at the levels witnessed in the 1990s.

As the Government continues with its efforts to balance the books, it is unlikely that consumer demand for goods, services and property will rise significantly over the next couple of years or so.

All of which means that we can expect another two or three years of relative austerity. Then, with a predicted global economic recovery under way, the hope is that Ireland’s renewed competitiveness and low corporation tax rates should again serve to attract inward investment which will create jobs and get money flowing through the economy once more.

Until that happens, and consumer demand picks up on the back of it, we can expect a period of job insecurity, wage and price deflation or stagnation. On the taxation front it is unlikely that the Government will reverse or ease the income levies and welfare cuts in the foreseeable future.

Such a scenario suggests just one thing: financial prudence for everyone. This means ensuring that loans and debts such as mortgages, credit cards and personal loans continue to be paid off and new borrowing and discretionary spending kept to an absolute minimum.

Interest rates have remained low for the last two years as the European Central Bank looked to stimulate its members’ economies. There is little solid evidence of growing pressure to begin raising rates again - which is good news for Irish mortgage holders.

There is much evidence that people have indeed curtailed their spending and that savings levels have risen over the course of the last two years, possibly in tandem with the fall in mortgage repayments brought about by the interest rate cuts. With less job security it seems that ‘rainy-day’ money is being set aside in increasing amounts.

The downturn in Irish and global stock markets has also affected the value of many Irish people’s investments and pension plans. However, such plans are usually based upon long-term growth and investors can take heart from the continued recovery in the markets from the record lows of January and February 2009.

Your financial adviser can tell you more about how your pension or investment has been affected by the economic situation and if there are any steps you can take to ensure that your financial ambitions are realised. Equally they can help you find the best place for those ‘rainy day’ savings so that while you sit tight waiting for the economic storm to blow over, at least your money is working as hard as it can.

About Neal Kelly is a Co-Founder and Director of Thomond Asset Management and can be contacted @ neal@thomondam.com 82 O’Connell Street, Limerick | T +353 (0)61 462 024 | F +353 (0)61 312 055 | E info@thomondam.com www.thomondam.com Folk Asset Management Ltd t/a Thomond Asset Management is regulated by the Central Bank of Ireland.

Warnings: 1. The income you get from an investment may go down as well as up.

2. The value of your investment may go down as well as up.

3. Benefits may be affected by changes in currency exchange rates.

4. Past performance is not a reliable guide to future performance.

This outlook does not constitute an offer and should not be taken as a recommendation from Thomond Asset Management. Advice should always be sought from an appropriately qualified professional