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For economic progress, it’s the response rather than the risks that matter

Mar 12, 2020

The Irish economy is facing difficult tests, but the key challenge may not come from the shocks we have to endure but from the urgent need to forge policies that deliver greater domestic stability, says Austin Hughes.

Recently, a possible ‘crash out’ Brexit presented a clear and present danger to the Irish economy. Now, the focus is almost entirely and understandably on COVID-19, a months-old name for a major risk that wasn’t on most people’s radar a mere two months ago. Once we get through this crisis, we will return to more 'normal' worries like trade wars and mooted changes to global tax regimes that threaten further near-term economic storms.

It’s important to remember, though, that a threatening external backdrop didn’t derail the Irish economy in 2019. Instead, GDP growth of 5.5% and an extra 65,000 at work might suggest boom conditions. 

Left behind

Sustained and substantial improvements in key measures of economic performance haven’t fuelled any sense of ‘feel good’ among Irish consumers. Instead, the trend in consumer sentiment has weakened over the past couple of years. A recent KBC Bank study suggested widely-felt concerns are weighing on subjective measures of wellbeing.

In part, a problematic contrast between ‘macro’ strength and ‘micro’ strains simply reflects the fact that there are more people working and living in Ireland. Total household disposable income is now about 15% above the previous early-2008 peak but, adjusted for an increased number of households, it transpires that the average household has 2% less disposable income than in 2008.

A growing population and workforce are also putting massive strains on Ireland’s infrastructure, to a degree unparalleled elsewhere in Europe. Whereas it had been suggested that Ireland would be knocking down rather than building homes for decades, ‘rightsizing’ construction for a strong recovery has proven beyond markets, policymakers or planners.

The consequences, whether measured in terms of affordability, long commutes, homelessness or other forms of exclusion, may not show up in conventional measures such as GDP but they do figure forcefully in various barometers of the public mood.

More generally, though, an Irish recovery is seeing substantial differences in the scale and spread of improvement between sectors, places and individuals. In turn, this has prompted widespread feelings of being left behind.    

Building a stable framework

The Irish economy faces major challenges from an increasingly unpredictable global economy, but as is the case with the current health crisis, the key test lies in how we respond. We need a greater test to build a new domestic framework that is seen to fairly share gains and pains along a likely bumpy economic road while delivering the key policy outcomes that a healthy society needs.

Fiscal policy will play the primary role in this regard and must change radically if it is to be fit for purpose. We must move from an unproductive preoccupation with decimal points in Government balances to a focus on delivering plausible policy outcomes in areas such as housing and healthcare. Equally, for fiscal policy to be sustainable, we must avoid the view that instant solutions require no more than political will and an open chequebook.

In terms of economic progress, as well as current challenges, the old adage 'ní neart go cur le chéile' holds true. Building a coherent framework that enhances economic stability and social inclusion may be the major test facing Ireland’s policymakers and broader population in coming years.

Austin Hughes is the Chief Economist for KBC Bank Ireland.