Sometimes it's hard to judge who is the biggest indentured servant of our time – the Irish consumer or the Irish state. Both are miserably in bondage to debt, but it may surprise many to learn that the Irish exchequer is in a healthier position than the Irish citizen when it comes to paying off the communal credit card.
At present and before Nama, the Irish state needs 11% of its total tax revenue to service its debts. However, for Ireland's consumers the problems are a lot less manageable, with 19% of after-tax income needed to meet debt re-payments.
Also in favour of Ireland Inc is that the interest rate it pays on its debts – set in the sovereign debt markets – is falling at present, whereas Irish consumers are heading into a period of monetary tightening, with Irish banks, and possibly the ECB itself, planning to raise interest rates.
Clearly a lower debt burden for the state is ultimately of benefit to the consumer, but that benefit seems less tangible when placed alongside the weighty burden that is a tracker or variable mortgage.
These problems are not currently occupying economists or those who watch the Irish stock market. Instead, they are being cheered by last week's bullish outlook produced by Davy chief economist Rossa White, who surprised many with a forecast of 4% GNP growth in 2011. This caught many economists by surprise, with John FitzGerald of the ESRI not prepared – at this point – to quite forecast that scale or speed of recovery.
Rossa White was one of the most accurate forecasters last year (or least wrong), although like everyone in his profession he was not able to capture the sheer scale of economic damage wrought by the credit crunch in 2008. Nevertheless, not too many of White's peers have so far been prepared to shoot down the assumptions which lie behind his 4% GNP forecast.
However, reaching a 4% growth figure is not going to be easy when the chief engine of economic growth is going to be sitting out the recovery, at least for some time. To get a sense of how important the Irish consumer is to the Irish economy, take a look at the national accounts produced by the Central Statistics Office.
Ireland's inflation-adjusted GNP currently stands at €156.7bn, and of this just short of 60% is represented by the consumer or personal consumption. This segment is dormant at present and is recovering from a severe shock. For example, in the first quarter of this year this segment of the economy plunged by 9.1% compared to the same period in 2008.
It's no surprise that Irish consumers decided to exit the high street in the first quarter of this year, when unemployment figures were simply horrifying. In January, a staggering 30,000 people joined the live register. By March, some British papers were talking about the IMF being called in as Ireland's bond spread ballooned out compared to other EU sovereigns. The current savings rate can be sourced back to that period.
In 2007, Irish consumers barely knew what saving was, with only 2% of after-tax income being put aside for contingencies. But from this low point in early 2007 the ratio has been ticking upward each month, with the biggest shifts occurring in late 2008 and early 2009. Clearly, the collapse of Lehman's and the nationalisation of Anglo Irish Bank triggered a culture of fear among Irish consumers which eventually pushed the savings rate to over 12%.
The 4% growth forecast now pencilled in by Davy is based around a decline in this vital savings ratio. This part of the forecast is crucial – each percentage point drop in the savings ratio drives up GNP by 0.4%.
So in theory, if the savings ratio dropped from 12% to 8%, it would provide a GNP boost of 1.6%, which would be a very significant sum.
To be fair to the Davy analysis, it does not rely on a massive plunge in the savings ratio (it envisages a decline from 10.5% to 9.5%), but nevertheless many believe the savings ratio is here to stay.
Concerns over the plans by the Irish banks to shortly raise interest rates on variable mortgages is likely to be a spur to extra saving in the months ahead. In this context, the recent 0.5% increase in variable rates by Irish Life & Permanent has probably done considerable economic damage, even though it only impacted on a relatively small number of borrowers.
While those on tracker mortgages are – for now – protected from the increases, a series of ECB rate hikes would likely put this group into the savings camp as well. Also certain to boost the savings ratio is a ferociously austere budget in December, which is likely to hurt consumption and boost savings going into the first half of 2010. The chief fear of 2010 is likely to be a property tax, again a measure almost naturally designed to spread concern among middle-class consumers.
Even the Davy forecast only envisages a 1.5% increase in consumer spending in 2010 and a 3.8% rise in 2011. If the consumer is going to remain that undependable, any GNP increases are going to have to come from other quarters – government, investment or exports.
Government, even by 2011, will still be in the middle of its fiscal consolidation period and by then will be taking some of the toughest measures of all in terms of spending reductions as a percentage of GDP.
Investment looks set to plunge for the next two years because the construction industry is in the doldrums and only going to get worse.
This leaves the last remaining great white hope of the Irish economy – higher exports. But growing this segment of the economy can only happen in broad terms if wages fall and so far they have fallen nowhere near enough, according to official figures. Yes, nominal wages are down all over the economy (just ask your nearest friend of neighbour) but in real terms wages have not fallen all that much, thanks to deflation.
But given that wages have tumbled, there is still a sizeable gap compared to our competitors in other markets. The IMF earlier this year looked at the key measure of annual gross wages and found that, apart from Luxembourg, we had the highest wages in the eurozone. Big exporters like Germany, for instance, had an average industrial wage pitched at a much lower rate than Ireland.
The obvious thing then is to lower wages, but wages tend to be 'sticky' and forcing cuts through in Ireland won't be easy. Which comes back to the debt-laden consumer once more. It is estimated that household debt as a percentage of after-tax income now stands at about 170%, far higher than most eurozone countries.
This means Irish people are already servicing debt with wages that are effectively not high enough. This does not sound like a recipe for compromise or wage reduction. In that event, it is difficult to see how either exports or consumer spending can grow as long as the burden of debt of the Irish consumer is so high. A formula may yet be found to allow this to happen, but for now no one has quite cracked it.
Signs of rigor mortis
• Ireland still has 12.6% standardised unemployment rate, the highest in five years, with the under 25s bearing the heaviest cost in proportionate terms.
• There remains a difference of €20bn between the government's tax receipts and its revenues, an alarming gap that must be plugged by borrowing.
• Tax receipts remain behind the target set by the government in its April budget and even the receipts to date are flattered because corporation tax payment dates have been brought forward.
• The full cost of the bank rescue plan has yet to be revealed. Nama loans have yet to be officially valued in their entirety and the government has refused to disclose the likely capital shortfall which exists at individual banks.
Signs of life
• The rise in monthly unemployment figures have now slowed to a trickle, with the live register only creeping up by 600 last month.
• Retail sales, the monthly measurement of goods sold by retailers, have actually started rising again using month-on-month data. For example the figures for July were up 0.2% on June.
• The risk premium charged on Irish government debt has started to fall back.
• In March, 10-year Irish government paper was trading at 2.85% over the German debt, but this has now narrowed to 1.44%.
• Exports actually grew by 2% in the first six months of 2009 compared to the same period in 2008. Medical and pharmaceutical exports increased by 22%, chemicals by 19%.