Is this why you stopped listening to economists?

By Susan August 8, 2012 21:15

Is this why you stopped listening to economists?


On the one hand, you have this article. And then on the other hand, you have that article.


This is the problem with economists!! On one hand, things are good and on the other, things are bad – which is it?!


During conflicts of communication like this, it’s important to look into what is behind the headline.



“Economy remains on track to expand by about 1% this year despite difficult international market conditions”


The IBEC headline reflects the fact that the euro has weakened significantly over the year. In fact, the euro is 18% weaker against the dollar than this time last year.


This means that if I’m selling goods in dollars, I have seen an 18% increase in revenue, assuming I don’t import US goods or that the volume sold hasn’t changed.


To put this in a macro-context, according to the Irish Exporters Association, “the current rate (in May 2012) is 7.9% below the monthly average across last year, and represents a €1.7 billion gain to Irish goods export companies.” Given that €1.7 billion is equal to a little over 1% GDP and that the euro has fallen significantly again since May, it’s not difficult to see just how impactful this weakening exchange rate is for us.


To put this headline in perspective, it means that the expansion that it trumpets is located in the sector of exports, not the whole of the economy. It is due to increasing competitiveness, greater sales growth and it is boosted immensely by the weak currency. However, this money may not necessarily find its way into the domestic economy (via greater consumption in shops and restaurants).



“Falling interest rates will also cut average mortgage costs by €2,000 this year, increasing the spending power of households”


Indeed, this statement is correct; and if you look into the mortgage market a little further, it’s interesting to see who is benefitting from these rate cuts. According to the Central Bank, in 2011, 53.3% of the mortgage market was availing of tracker rates and polarised towards the larger, more recent mortgages.


This data means that those people are being given a small break, who are most likely to need it. On a macro-level, given that confidence is below floor level and this demographic is also likely to have other financial constraints, it’s unlikely that this extra spending power is going to find its way into the tills of the local economy.


It is much more likely to pay down debt or be squirreled away into savings instead, as exemplified by the CSO telling us last week that “gross household savings increased from €2,439m in Q1 2011 to €3,209 in Q1 2012. The derived gross savings ratio, which expresses savings as a percentage of gross disposable income, increased from 11.2 per cent in Q1 2011 to 14.2 per cent in Q1 2012.”



“Ibec said last week’s successful bond auction also shows the substantial improvement in Ireland’s reputation with international investors over the past year.”


In particular, we can graphically see the great fall and rise of Irish international investor confidence over the past three years. We sold half a billion T-bills, and also made significant progress regarding our funding situation.


Indeed, we were faced with the massive repayment of a multi-billion obligation in 2014, which we took care of by selling €4.19 billion of longer term money last week.


However, one has to ask why such a large amount was borrowed from the international markets at a (still) elevated level, when it wasn’t quite urgent. Given that 75% of the money came from international interests, this means that roughly 75% of that interest (funded by taxpayers) will leave the country also.



“The major task for Government now is to restore activity in the domestic economy and get more people back to work.”


In this regard, the government and indeed, the wider economy is still struggling. We have had some genuine bright moments with the announcement of the stimulus a couple of weeks ago, the NAMA injection of €2 billion and all of the FDI.


However, the number of long term claimants on the Live Register has seen an annual increase of 5.3%, with a double digit percentage rise in females. This is the most destructive way to lock in a recession as existing skills aren’t used and new ones go unlearned, confidence falls and reliance on social welfare increases. This is a key problem to address in this country as it has a very negative impact on the ability of an economy, and the people within it, to grow.


So, is it all bad? How about that other article?



“The Central Bank said the external environment remains very challenging. It noted further strains in financial markets and weakening consumer and investor confidence”


The Central Bank is pointing to the fact that the Spanish and Italian bond yields can’t seem to be held back. These economies dwarf the existing bailout countries and it appears to the world that even with the full calendar of EU Summits that we have lived through, the “big bang answer” isn’t politically motivated to happen.


The Bundesbank has made it abundantly clear that its patience and money are not available in unlimited capacities to countries who are not willing to adopt fiscal, banking and political reform. If the polls are anything to go by, the Dutch people are suffering bailout fatigue and potential political extremism. On top of that, Hollande and Merkel certainly don’t seem to be on the same hymn sheet, as was the case with Hollande’s predecessor.


The markets were very happy with the surprise proposal in June that banking debt could bypass governmental balance sheets and instead be borne by the Eurozone as a whole. That enthusiasm was quickly dampened as we were told that this was only a possibility if a banking union could be agreed, predicated on a political union. The Financial Times journalist, Wolfgang Munchau, took a stab at guessing how long this would take and came up with approximately two decades – and we would all expect a change of faces at the helm by then….


The Central Bank also highlighted the weakening trickle of credit into the economy as lending to households was down 3.7% in June, but tried to point to the silver lining: “the annual rate of decline in loans to households eased to 3.7% in June from 3.9% in May”.


No matter which way you put it, the amount the banks are offering is falling and that is having a detrimental impact on the property market, small businesses, employment and indeed, the wider issues of economic growth and the tax take.



And what do we do with all this?!


In general, and this is where the “Positive Economist” attitude comes into play(!), the macro-economy contains lots of news, data and statistics that we, as individuals, have little control over.


However, your own economy is what’s important. How can you take what’s in the news and use it to your advantage?


Given the weakness of the euro, could you look at exporting your goods to the UK and the US? There are lots of funding opportunities, training, mentoring and support available to companies who want to start exporting.


With the level of savings in the economy at the moment and the pressure that banks find themselves under, ask your financial services providers for the best possible rate on your money and shop around to see if you can get a better deal elsewhere.


If you are unemployed, you can avail of a lot of heavily subsidised education that is provided by the state. Remember, 80% of the employment market is hidden: positions are often filled without being advertised in newspapers as this can be quite expensive. So take advantage of the grapevine and join LinkedIn Groups, networking groups, job boards and build your C.V. up to where you want it to be.


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By Susan August 8, 2012 21:15