Recession ‘ends’ but problems persist 

JM Thorn 

9 July 2010

After contracting for almost two years the Irish economy has finally returned to growth.  Figures released by the CSO show that economic output as measured by GDP grew by 2.7 per cent in the first quarter of 2010.  Technically this means that Ireland is out of recession.  The return to growth was hailed by finance minister Brian Lenihan as providing “concrete evidence that the co-ordinated measures taken by government to address competitiveness, the public finances, and the banking system are paying off.”

However, when we examine the figures in more detail we find that claims of a recovery are rather tenuous, and that deep problems and potential risks to the economy still persist.  Firstly, the return to growth has to be set against the 15 per cent contraction in output in the past two years.  The revised figures for 2009 published by the CSO, alongside those for the first quarter of 2010, reveal that Ireland’s GDP fell 7.6 per cent last year, while GNP fell 10.7 per cent. Such figures expose the fact Ireland has suffered an economic fall that qualifies not just as a recession but a depression.  Secondly, while the headline figure for the first quarter appears relatively strong, certainly in comparison to what went before, the actual rate of growth is much lower.  This is because growth data in is presented in “real” terms, a measurement of activity that eliminates the effects of inflation.  However, Ireland is experiencing deflation, a generalised fall in prices.  The “real” term data does not take this into account.  So to get a more accurate measurement we need to look at the “nominal” figures, the actual euros produced or spent in the economy.  On this measure, GDP grew by just 0.1% in Q1 (€38.752bn compared to €38.715bn in Q4 2009- that's just €37m) and GNP contracted by a massive 6.8 per cent in the quarter.  Personal consumption, government current spending and investment fell by more than €2bn in the quarter. Nominal GDP fell 4.4 per cent year-on-year and is now 20.2 per cent below its end-2007 peak, while GNP fell 8.6 per cent from a year ago and is now 27.6 per cent below its peak.  These figures emphasise not only the catastrophic decline of the economy but also the weakness of the recovery.  One indicator of that weakness is the continuing rise in unemployment.  On the same day as the figures purporting to show the end of the recession were released, the CSO also published figures showing that the numbers signing on grew by a further 5,800 in June and now stand at almost 445,000.  At 13.4 per cent (up from 13.2% in May and 12.9 per cent over the first quarter of 2010) unemployment is now at its highest since September 1994. If it weren't for the estimated 60,000 non-nationals who have left the country over the past year, the numbers on the live register would almost certainly exceed 500,000 by now.

The figures also reveal the varying performances of the different sectors of the Irish economy, with the multinational export orientated sector far outstripping the domestic.  This accounts for the divergence between GNP (which excludes the profits of foreign owned companies and continues to contract) and GDP (which has recorded some growth).  Net exports more than accounts for the entirety of quarterly GDP growth, €2,137bn of a total improvement of just €37m.  Ireland has a two-speed economy in which an (largely foreign owned) export sector growing on the back of a rebound in global demand exists alongside a domestic sector (dominated by property and finance) that remains mired in recession. The domestic slump is evidenced in the continued poor state of the construction industry.  In the first three months of the year, quarterly housing completions plumbed depths recorded only twice before in the 35-year history of the data series.  In April, they fell further, to stand at 1,166, almost one-tenth of their monthly peak at the end of 2006.  More widely, the number of companies going into insolvency was 27 per cent higher in the first six months of this year compared to the same time last year.  The gap between the two sectors within the Irish economy is wide and getting wider, with figures showing that GNP is now more than a fifth smaller than GDP.   Ireland is completely dependent on foreign capital for any sort of economic recovery.  However, due to its capital-intensive nature, dependence on imported materials and very low taxes, the benefits of an export sector led recovery to wider Irish society will be limited. 

Ireland’s recovery is very weak and faces real risks.  These stem mostly from the ongoing banking crisis and the poor state of public finances, and operate at an international as well as a domestic level.  Despite the measures announced by EU countries in May and the interventions of the European Central Bank, the crisis afflicting the weak member states of the euro area has not been eased.  These states (including Ireland) now pay interest on their new borrowings in excess of that paid by Greece under the terms of its bailout.  Such rates of interest are not sustainable, and have the potential to create a debt dynamic that will spiral out of control. Even if Ireland and the other weak euro zone states can avoid defaulting and having to be rescued, the chronic weakness of Irish and European banks could trigger a crisis in the months ahead. 

In Ireland and across the euro zone the fiscal and banking have become one – a sovereign debt crisis could trigger a banking crisis, and a banking crisis could trigger a sovereign debt crisis.  The funding needs of the Irish banks in the coming months and the fate of Irish sovereign bond rates are intimately linked.   A recent estimate has put the cost of refinancing the banks at €74bn – this is capital that will have to be raised on the international bond market, and will be added to the state’s already high level of indebtedness.  The size of these borrowings and the level of interest rates upon them would certainly push the Irish state beyond its financial capacity.  In this scenario a default would not be a case of if but when. 

Ireland’s domestic economic still being in recession and the state approaching bankruptcy exposes claims that the worst of the economic crisis is over and that the sacrifices made by the Irish people have been worth it.  The conventional wisdom, repeated by ministers and various experts, and echoed by the trade union leadership, was that the acceptance of austerity would serve to reassure the markets and stave off the threat of even more savage austerity.  But this has not transpired. 

If it is to be judged on economic grounds then the strategy of the Irish government and the capitalist class for recovery has to be judged a complete failure. The domestic economy is continuing to contract, unemployment is rising and the deficit is increasing.  The combination of austerity and the financial bailout is retarding growth and increasing the debt.  However, capitalism is not just an economic system, it is also a system of class rule.  From this perspective the strategy is having some success, in that much of the burden of the crisis, with the collaboration of the trade union leadership, is being put onto the working class.   This is why the government will continue with the financial bailout and the programme of austerity, even though it is failing to produce a recovery and increasing the risk of state bankruptcy.   The government is looking for further reductions in public spending of €2bn in 2011 and 2012 and €3.5bn in the two years to 2014.  However, these budget reductions are based on the assumption that the economy returns to a growth rate of between 3 and 4.5 per cent over the period.  But such forecasts are unlikely to be realised, and even if they are, the export led nature of that growth will not generate the expected tax revenue.   This means that the cuts will be even deeper than those proposed.

For the Irish working class the worst of the crisis is not over – it is facing demands for even greater sacrifices for years to come.  Whether these demands come from the Irish government or the IMF or EU their essential content will remain the same.  If this is to be stopped Irish workers have to resist, and the phoney patriotic arguments from the trade union leaders about sharing the pain have to be rejected.