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Our ‘Phoenix’ economy will be more myth than miracle if wages don’t rise with rents

You may not have noticed it but you are living through an economic miracle – apparently. The chief economist of the Central Bank, Gabriel Fagan, introduced the country to a new economic term last week called a “Phoenix Miracle” which is how he described Ireland’s rapid economic recovery since the depths of the recession.

Among the literature on a phoenix miracle is a book called ‘Phoenix Miracles in Emerging Markets’. The authors say it occurs where “recovery to its pre-crisis output is swift and creditless” and output goes back to pre-crisis levels “without any significant recovery in domestic or external debt”.

Based on the fact that our GDP is back above pre-crash levels, unemployment has dropped dramatically, and this has all been done without personal and corporate borrowing going through the roof, Ireland does appear to fit the bill.

But as with most things in economics, there is always another view or even a set of “alternative facts”, as the Trump White House might call them – which suggest it isn’t quite as rosy as it sounds.

Here are five positives about the Irish economy that, under the microscope, have a bit of a soft underbelly.

1. GDP

Finance Minister Michael Noonan has just increased his GDP forecasts for the Irish economy for 2017 to growth of 4.3pc. This is up from 3.5pc last October. It is more good news – assuming he is right. But there are questions about the veracity and relevance of our GDP numbers. Last year Leprechaun Economics seriously undermined the application of a traditional GDP figure to describe Irish economic growth and the health of our economy.

For example, the NTMA, which manages our €180bn national debt pile had this to say about using our GDP figures: “Ireland’s GDP and GNP are exaggerated by new multinational companies’ activity … the national accounts are distorted by several companies and their assets being reclassified as resident in Ireland. GDP and GNP series have little information content as a result.”

However, we can take the revised forecast as an indication that the economy is growing and that is positive but the scale and extent of the growth isn’t always clear.

2. Falling unemployment: This has been one of the genuine success stories of the recovery taking place. Our unemployment level peaked at 15pc in 2012. Just five years later, it is now down to 6.4pc, its lowest level since 2008. This is a real economic achievement.

But what kind of jobs are we creating? Foreign Direct Investment has continued to bring a variety of well-paid and not-so-well paid jobs to Ireland. However, our exchequer figures published last week showed we were behind target on income tax take. Something about the figures didn’t add up, given the continued fall in unemployment in the first quarter of this year. One explanation is that we are creating lots of new low-paid jobs. This would tally with a less-than-expected income tax take because of the levels of pay at which income tax and USC kick in. It is always better to have people working in a society than not. However, many might not feel like they are in a “miracle economy” if they are paying massive rents and earning very modest wages.

3. The cranes are back

The crane count in Dublin is massive. I was on the seventh floor of a building in Dublin the other week and counted 31 cranes in one direction alone. The quarterly crane count from the top of the ‘Irish Times’ building in Tara St in Dublin has gone to more than 90.

It is a sign of growth in construction which is good for employment – and it is a sign of confidence. However, what are they all building? It seems they aren’t building enough residential units as the housing crisis continues. This will come back to bite our economic competitiveness.

Dublin’s tourism industry is booming but they aren’t building enough hotels. This is causing hotel rates to soar, which will also come back to bite us. The country’s largest hotel chain, Dalata, pointed out that banks are seeking 50pc equity before lending the other 50pc for new hotel builds. This points to an extraordinary cautiousness and it doesn’t augur well for the number of hotels that will be built. Hotel prices will keep rising.

As for the cranes, developers will tell you that they only make their money when the cranes come down -up is a sign of confidence but not yet profit. Unless of course you are in the crane-hire business, in which case its jam today and jam tomorrow.

4. Pressures on exchequer spending

The Government has been tempted to loosen the purse strings quite a bit on public expenditure in recent years. Some of it was needed after the recession but some of it was short term political expediency. From here on, the pressures to increase public expenditure will just grow and grow. Minister Noonan’s GDP forecast increase will be seen as an opportunity to push harder for more spending increases.

The wriggle room or fiscal space available for higher spending or tax cuts had been put at around €1.2bn. That might now go up to €1.4bn. But will that money be spent wisely, productively and fairly?

The turn in the economic cycle also means the era of public sector and fiscal reform is over. There will be no more reforms, only spending increases. Clearly, some reforms were achieved during the years of austerity but not enough.

We may pat ourselves on the back if we run a 0.5pc budget deficit in the next year or two in line with EU rules, which will put us from the “bold step” of the Troika years to being best boys in class. But the economy remains vulnerable to outside risks. Our debt levels are still extremely high and we may waste some of our financial headroom.

5. Brexit

There is widespread debate about whether the Government has done a good job in vocalising the challenges Brexit will pose for Ireland. Taoiseach Enda Kenny helped to get Ireland mentioned front and centre in the UK Article 50 letter and Donald Tusk’s Brexit negotiation guidelines. But we appeared to be trumped by the veto to any deal secured by Spain.

Either way, the signs are now that we are moving towards a general election. We will have a new Taoiseach, irrespective of the outcome of the election. There will be a new make-up to the government either way. These are real uncertainties that will make it a little less predictable when it comes to the new government’s stance on Brexit. It might be better, it might be worse. Ireland will have very little say in how Brexit shapes up.

Fine Gael made the mistake last year of assuming there was a recovery for everybody that had to be “kept going.” Despite the headline evidence to support it, the Phoenix Miracle narrative takes that to a whole new level.

Looking around at how the main parties are fighting over how not to charge people for water, we begin to look like a country once again, that is beginning to believe its own hype. The swagger and hubris is returning among politicians.

We have one of the highest national debt-per-capita rates in the world. We have one of the highest rates of personal indebtedness in the world. One quarter of SME bank loans remains non-performing nearly a decade after the crash.

The economy has performed better than so many expected. We have to consolidate and build on the extraordinary gains we have made, otherwise our phoenix could turn into a dodo.
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