Why 2013 will be the most crucial year of all for the poster boy of austerity,Ireland

It is not only the UK today that will be facing the consequences of the cold wind of austerity as Ireland also has a budget statement for 2013. For those looking for my views on the UK Autumn Statement I gave them on Monday and today I will peer under the bonnet of the Irish economy and her public-sector finances. Like the other Euro area countries which have been hit hard by the crisis Ireland will announced further austerity for 2013 and we know that an extra 3.5 billion Euros has been inked in for today under her bailout plan.

How are Ireland’s finances doing?

Yesterday we received the latest numbers from Ireland’s Exchequer and they told us this. Up until the end of November 2012 she had spent 59.89 billion Euros and received 46.9 billion Euros of revenue leaving a deficit of 12.97 billion Euros. There is a grim reminder of the costs of her increased national debt from bailing out her banks in that nearly half of this is for debt interest ( 5.66 billion Euros). So a fiscal deficit which is still large relative to her economy and high debt costs are a dead weight for her going forwards.

On the positive side revenues were 6.2% higher than the same period in 2011 but this statement did also tell us this.

Income tax is now €231 million (1.6%) behind profile cumulatively at end-November, following a €300 million shortfall in the month.

So a good performance if we compare to my subject of yesterday,Portugal, has in the last month seen a downturn and in the detail we see that it is mostly a reduction in payments by the self-employed. It also provokes the question of whether there has been recent economic weakness in Ireland to explain this change.

Industrial production in Ireland has plummeted

From the Irish Central Statistics Office

On an annual basis production for October 2012 decreased by 17.9% when compared with October 2011. The seasonally adjusted volume of industrial production for Manufacturing Industries for the quarter period August 2012 to October 2012 was 9.1% lower than in the preceding quarter

As you digest these heavy falls let me give you the explanation for this which is that it is Ireland’s pharmaceutical industry which is responsible with (lack of) production of the drug Lipitor getting the blame. And it  looks as thought it will not be alone as according to Chemistry World.

Seven of the top 10 drugs going off patent between 2011 and 2014 are produced in Ireland

And in particular they highlight these.

Also due to come off patent and manufactured in Ireland are Singulair (montelukast) from Merck & Co and Zyprexa (olanzapine) from Eli Lilly, each with estimated annual sales of $5 billion.

And in an example of Shakespeare’s sorrows come in battalions we are told this.

The effect for the Irish plants which are producing mainly for European markets is still to come

If we look at the underlying level of manufacturing production we see that it fell back to the levels of 2005 in October as it registered 100.1. Unfortunately industrial production was worse as it fell below the levels of 2005 to register 99.1.

So we see that not only has Ireland taken a lurch downwards in this sector but that other lurch downwards are not only possible but likely in the months and years ahead.

Purchasing Managers Indices for manufacturing

If we look at the recent numbers for this series they have been misleading as it has been positive for quite a few months now whereas production has plumetted! A clear fail. I have investigated this and the answer is that each company is asked its questions and replies but a down for example for Lipitor production is only one down in a series whereas in the real world it is a much higher percentage.

So thier relatively good credit crunch has seen some of the shine taken off them and they have slipped down the Premiership table somnewhat.

What about her services sector?

With the cautionary note above let us consider her latest purchasing managers index.

The seasonally adjusted Business Activity Index  remained at 56.1 in November, equal with the five-year high seen in October. Respondents indicated that rising new orders had led to the latest sharp expansion in activity.

So as you can see there remains a high degree of optimism in Ireland’s services sector which is reinforced by this.

Forecasts of improvements in economic conditions led companies to expect activity to rise over the coming year.

So I think that we will have to take this sector under advisement so to speak. It is good that it is optimistic but if we look at the industrial numbers it looks rather Dr. Panglossian to me.

Ireland’s house prices

Here we see another deteriorating trend as after three months of rises they turned downwards again in October according to the Central Statistical Office. On a national basis house prices fell by 0.6% in October and compared to a year ago this has happened.

In the year to October, residential property prices at a national level, fell by 8.1%.

And this means that on an overall basis they have fallen in total by this.

Overall, the national index is 50% lower than its highest level in 2007.

If anything these numbers are likely to understate the falls as they do not include cash purchases which are likely to be on average at lower prices.

Household net wealth

I spotted a consequence of the house price falls in the numbers calculated by the Irish National Treasury Management Agency for household net wealth. It has fallen according to these figures from 725 billion Euros in 2007 to under 450 billion Euros now.

Those 2007 numbers were pure illusion were they not? Or to put it another way it shows the fallacy of using a marginal price for an average calculation.

Also if we do get a property tax today is that not ten years too late?

Comment

In my past analysis of the Irish economy I have regularly mused on the fact that she has had good news from sectors such as exports as well as an increasing debt burden from her collapsed banks. So unlike the other two countries that have received Euro area bailouts there were signs of hope in Ireland’s economy. Unfortunately the lurch downwards in her industrial production has turned out one or two of the lights in the distance. Whilst the exact impact may ebb and flow we can see that other patents will expire for pharmaceutical products and so further problems are likely. Even her proud balance of payments record looks likely to weaken and in time we may even see a deficit.

Against this backdrop it seems incredibly unlikely that the Irish economy can expand by 2.5% in 2014 and 2.9% in 2015. If we now add in her austerity plans which after today’s 3.5 billion Euros is supposed to have an extra 3.1 billion in 2014 and 2 billion in 2015 we see that she is in danger of foundering under the sea of debt that her banks have left her with.

There are always two sides to every story and on the upside she has seen interest rates on her debt fall and not every economic number is grim as for example retail sales rose by 1.7% in October on September and by 3.1% on the year before. Also her unemployment rate has just edged lower from 14.7% to 14.6% in November.But we also have signs that what her low corporate taxes brought her such as booming pharmaceutical production are fading just as other countries are also questioning the impact of such taxation regimes. So to get out of this morass Ireland will need to find new things to produce especially drugs. Can anybody think of likely ones?

2013 looks like being the most crucial year for a country which has been lauded as the poster boy of austerity.

Also I see calls in the UK for a type of sovereign wealth fund based on pension fund assets. It sounds great but if we look across the Irish Sea we see that such a great idea (NRPF) has been tried and that has been ruined by her politicians using it to back up their rhetoric and promises.

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  • forbin

    Hello Shaun,

    the thing that bothers me about finding thing to produce for Ireland also applies to us…

    Why make it here?

    its cheaper in china or india

    There is absolutely no way we can compete on their costs!

    you can’t cut our wages down to their levels without a major change in costs here, everything need to go down , housing , food, fuels and so on.

    And if we drop housing prices – the banks will need to be bailed out yet again!!

    Ireland and the UK , and the majority of European countries will wallow in the malaise for a good few year yet – until it gets worse….

    I ask – what is the solution to this if there’s no growth ?

    Forbin

  • http://www.facebook.com/jason.aris Jason Aris

    I still cannot for the life of me understand where it is written that banks must be ‘saved’ by the taxpayers of their host nations even if they are global insitutions with massive overseas liabilities (think RBS for the UK).
    I never agreed to that as a UK taxpayer surely the investors/bondholders should take the hit hold on a minute these are overwhelmingly in the 1% so of course that cannot be allowed to happen.

  • skangerland

    “Her”? “She”? I know there’s a recession but we needn’t recede to the language of the 1970s.

  • DaveS

    For 30 years we’ve steadily replaced production with consumption (financed largely by foreign borrowing) – but that was fine because with all that consumption GDP was “growing”.

    And we measure debt as %GDP, which is just great – because the more we borrow, the more GDP goes up and the more we can borrow – what could possibly go wrong.

    Now all we need to do is stimulate consumption to get GDP growing again so we can borrow some more.

    What we need is some more debt……………

  • Drf

    Uh: that is the correct grammatical usage! You must be a really PC nutcase. Shaun is perfectly correct in his grammatical usage.

  • forbin

    Hello Jason,

    Of course we shouldn’t have to have saved the banks but thats not what was really happening/happened ( or will happen again – soon ).

    The scare at the time was that we were going to get a 1930′s style depression or worse if we let them go to the wall, you know like Capitalism supposed to work and all that….

    But just like Saddam and WMD debarcle ( anyone brought to task on that lie ? no ? surprised ? NOT! ) what is portrayed to us “pond life ” is different to what actually happened and was intended ………

    Just follow the money as they say

    Forbin

    PS: when you realize there’s little to nothing you can do – sit back, popcorn in hand and watch the show…….

  • forbin

    Hello DaveS

    indeed if we use GNP percentage to people in the country , it aint good at all.

    Don’t know about increasing consumption , can’t see where that’s coming from , wages down ( for us “norms” ) and house prices stagnant or declining so I cant use my house as an ATM anymore ( foolish if I did anyway)

    How about making something others will buy ? just pointed out we’re stuffed on that route , so yes……….

    Borrow we will ! ( or print ) Great isn’t it?

    Forbin

  • DaveS

    Only joking Forbin – just trying to point out the foolishness of GDP calc.

    I’m afraid economics has been used as a quasi-religion to quell the population. We have Pope Mervyn promising us perpetual growth and low inflation, but we must borrow and spend to be happy – he will punish the sinners that don’t

    In meantime the theft of their futures continues but at an accelerated pace.

  • SteveD

    I seem to recall that oil was found in the Celtic sea some 280M barrels of recoverable oil – that might help a bit?

  • Alex

    Potatoes.

    Not just any potatoes, but modern equivalent of of the old potato.

    Just like not good old education upon which Great Britain was built, modern economics or old fashioned potatoes. It needs something new and with complicated technology to make it believable. That’ll be the Genetically Modified Potato then. That’ll be good for us.

    I happened to watch some cookery program where the chef wished to recreate the old style sweet shops aka Willy Wonker’s Chocolate Factory. But all those sweets were ‘bad for us’ and unhealthy.

    Instead now I look at obese people waddling down the street, something absent from the streets from the time we had sweet shops like that.

    Same thing with obese waddling bankers who can hardly walk for the fat in their wallets and their cookie jars of pension pots.

    Lets go back to the future.

  • pavlaki

    Good analysis and I am glad that someone else has a degree of scepticism about the Irish economy. I visit Ireland, Spain, Portugal and Greece frequently and see (and hear) the real economic misery in each country. Ireland is hanging in there by the skin of it’s teeth but problems are looming. If Ireland were all that the Eurozone had to worry about then there would be hope. Portugal you analysed yesterday and I commented on what I find ‘on the ground’ which is not good news. Greece is in deep doodoo as we all know with absolutely no hope of getting out of it.
    The country that really worries me is Spain. It is failing on almost every measure and yet there appears to be no political acknowledgement of this and a ‘head in the sand’ approach – at least publicly (and by the Eurozone financial organisations). Unemployment is going up at a steady rate and by now one would have expected this to plateau at least. How long can this continue before the economy collapses? At what level of unemployment is an economy no longer sustainable? I don’t know the answer but surely it can’t be far off as far as Spain is concerned. I hope Spain is next on your list to analyse and I would be very interested to know if you think it’s situation is as bad as I do!

  • Drf

    Hi Forbin,

    It is not only the wages of unskilled workers to produce, it is also the problem of the tax overhead to support excessive Western government spending, and the cost of housing due to their deliberate limiting of supply and the past easing of ludicrous levels of mortgages to make the bankers wealthy, and thus escalating house prices. Workers have to live somewhere. These are what together prevent us being able to compete with low-cost economies.excessive

  • http://twitter.com/notayesmansecon Shaun Richards

    Hi Forbin
    To put it another way we need to innovate and then once we have it we need to manage to keep it and produce it efficiently. Actually we do that but not on enough scale. Innovate or die? Perhaps not that dramatic but innovate or decline is certainly on the cards.

  • http://twitter.com/notayesmansecon Shaun Richards

    Hi Jason

    If we look at Ireland we in essence see a whole nation which has been put in “hock” in an attempt to save its banking sector which then promptly collapsed anyway. Meanwhile in January alone some 2.45 billion Euros of bonds from the bust Irish Life and Permanent wil be repaid which is 70% of the whole years austerity.
    It is a bankocracy….

  • http://twitter.com/notayesmansecon Shaun Richards

    Hi skangerland and welcome to my part of the blogosphere
    You may fear the 1970s as I hope is clear from my blogs I fear a re-run of the 1930s…..

  • http://twitter.com/notayesmansecon Shaun Richards

    Hi Steve

    Good point, with the only concern being the use of words like “might” in the reports. It looks like there is some oil there the question is how much.
    So yes it would certainly help a bit and the Irish need to cross their fingers that it is not a unique find and that one or two others might be in the same area.

  • http://twitter.com/notayesmansecon Shaun Richards

    Hi Alex
    Actually when I hear what my parents ate such as bread and dripping and the like it is interesting to think that as you point out its is nowadays which has the obesity problem. It is perhaps not just finance which has taken the wrong road…

  • http://twitter.com/notayesmansecon Shaun Richards

    Hi pavlaki

    Spain is like a slow motion car crash. Ironically what she was praised for at the beginning (a central bank which kicked the can in effect into the future) is what is building her problems now.

    As for me I set out my stall in January

    http://www.mindfulmoney.co.uk/wp/shaun-richards/spain-is-already-in-recession-and-the-danger-for-2012-may-be-an-economic-depression/

  • http://twitter.com/BradMcEvoy1 Brad McEvoy

    Of course every country in the world wants to innovate, which is essentially the same as everyone wanting to be cleverer then everyone else. Which is the same as saying they really dont have a plan…