Crystal Ball Gazing: Economic Forecasts and Commentary for Ireland and Beyond (updated 31st December 2008)

Latest News: "Our Civilisation will Crash" (see 19th December entry at bottom of page)

For 2009/2010 forecast click here:

2009/2010

Economic Forecast

Forecast January 3rd 2008. See below for April, July,October and November forecasts

.Commentary

Ireland 2008

General picture: The economy will continue to be dominated by two interrelated factors; the level of activity in the construction sector and debt. The large surplus of dwelling units in Ireland will result in further falls in the value of property. These falls are expected to be most severe in the coming few months and again towards the end of 2008. In contrast to the norm in recent years of the most completions occuring in the final quarter of the year, construction activity in the domestic sector is expected to decline throughout 2008 and by the final quarter figures are expected to be as low as 7,000 - the lowest quarterly total since 1993.

The growing number of empty unsold dwelling units will result in a considerable expansion of the rented sector.By the end of the year, the surplus of rented acomodation will have led to a sharp decline in the price of rented property.

The decline in construction activity will result in 40-50,000 redundancies over the course of the year and will knock 3-4% off economic growth. While some new jobs may be created in other sectors, overall unemployment figures will grow.

One of the consequences of the reduced construction activity will be a sharp reversal of immigration. Many foreign nationals from Eastern Europe will return to their native countries as employment prospects in Ireland dry up and those at home improve. In particular, many Polish nationals will return home to find work in the newly emerging Polish tiger. The population of Ireland will fall in 2008.

While both food and energy are expected to rise sharply in price during 2008, overall per capita spending will increase only slightly. Spending on non-essential goods and services will fall.

Europe, Britain and the USA

The growing crisis in the financial sector is expected to result in a slight lowering of the ECB interest rate. In both the United States and Britain however, the more serious exposure of financial institutions is expected to result in a further significant reduction in the lending rate of the US Federal Reserve and Bank of England respectively. This will be reflected in falls in the exchange rate of the dollar and pound against the Euro. It is predicted that many of Western lending institutions will experience serious financial difficulties during 2008, leading to a number of spectacular takeovers by Far Eastern financial institutions.

The price of crude oil will be very volatile during the next twelve months. The continued fall in value of the dollar is expected to push prices up to new highs during the summer period when US demand for refined product is traditionally highest. However, the severity of the increases may be tempered by the worsening financial situation. Prices may fall slightly during the third quarter.

Update 15th January

Well it's early days in what promises to be an interesting year but already there has been quite a lot of action in commodities. After peaking at about $100 dollars a barrel at the start of the year, oil has slipped back to about $94 amid growing concerns of a recession in both the US and Japan. Between them, these two countries account for about 30% of global oil demand. It raises the question of whether oil can rise in price even during major recessions. We believe it can.

Gold also reached an all time high - of $891 an ounce - last week, an event which had little to do with global demand for jewelry or gold for industrial purposes and everything to do with the failing confidence in what used to be called paper currencies but are now literally virtual currencies.

Almost all metals are rising sharply in price on global markets. This is in response to growing demand and increasing scarcity of high quality ores, but also a result of the rising energy costs of mining and processing. Perhaps alarmingly, Uranium is growing in attractiveness as a traded commodity. In July 2007 it reached a new high of $136/lb. Given that the world currently uses more uranium annually than it produces - relying instead on stockpiles accumulated during the boom years of uranium exploration and before the price crash of the eighties - any upsurge in demand (or even the likelehood of it in the future) could see something akin to a 'uranium rush' as world prices rise by a factor of 5 or 10.

Unfortunately for the pro-nuclear energy lobby, any new phase of uranium mining is likely to be short lived as once the relatively high yielding ores are exausted, the lower grade ones will require so much energy to get out of the ground (or be extracted from sea water) they simply won't be viable.

Meanwhile on exchange markets, the relentless rise of the Euro against Sterling continues. On friday 11th January the Euro reached a new high of 75.66 pence Sterling... already above our forecast for the end of the year!

28th January

One gets this sense that we are witnessing the beginning of the end of era. In the last week global markets have suffered shock upon shock as more information leaks out about the black hole of debt into which many major Western financial institutions are rapidly disappearing. Another analogy is that of a leaky and dangerous canal, maintained on a whim and a prayer for decades, and in contravention of all common sense, health and safety regulations or appreciation of the bigger picture, which has now begun to catastrophically fail.

Last week the US Federal Reserve cut interest rates by three quarters of one percent - the biggest cut for 25 years - in a bid to keep canal traffic moving at any cost. However, its intention to encourage further borrowing is fraught with risk, for who now can afford to lend recklessly, and equally, who can afford to repay?

The seriousness of the situation has been demonstrated by the recent fall in oil prices - now back around $90 a barrel - which have occured because of a perceived oversupply if there is a global recession. Whether oil prices continue to fall is debateable however, because recent production levels were completely unsustainable. What is now likely to happen is that Opec will act to rein in production to more sustainable levels ( ie ones that can be maintained for more than a few months) and this will prevent oil prices falling too far.

Meanwhile, the gamblers on the world's markets are backing their old favourite - gold - and prices of precious metals have reached new highs in recent days. The currency of choice for hundreds if not thousands of years of pre-industrial history is looking like making a spectacular return to prominance.

If not gold or platinum, then what does have any value? Community perhaps, local resources, food supplies even. It is not inconceivable that an Argentina type situation will descend upon the United States, with the eventual rescue package , if it arives at all, coming from Chinese financial institutions. But Argentina was far better equiped to deal with a currency collapse, and its people far more psychologically prepared for hardship than the United States. Perhaps the United States will be obliged to give up Alaska and Hawaii as part of the bale out package. Things could be that bad.

Looking for more postive indicators, its hard to see how this problem can have any sort of happy ending from a business as usual perspective. If the economy tempoarily picks up, both fossil fuel depletion and global warming will accelerate, meaning that the the eventual crash will be that bit more severe and prolonged.

From a sustainabillty perspective however, the raising of awareness which will inevitably occur if the economic downward trajectory steepens into a death dive, gives some hope that our species - or enough of them to make a difference - might possibly wise up and demand an alternative to the now failed and discredited 'market forces' economic model.

3rd February

In response to the growing fear of economic meltdown in the United States, the Federal Reserve cut interest rates by a further half of one perecent on 30th January. It is expected that the dollar will fall to a new low against the euro within the next few days. Meanwhile, the Interrnational Monetary Fund ( IMF) has warned that the Irish economy was very vulnerable to any downturn in the United States. It predicted that each 1% drop in annual growth in the United States would lead to a 1.75% drop in growth in Ireland.

Although Irish Central Bank economic predictions remain relatively optimistic for 2008, its forecasts appear to be based on out of date information. The alternative explanation is that it is simply incapable of delivering seriously bad news. Certainly, recent reports from the ERSI and elsewhere that Irish house prices fell by 7.3-10% during 2007 suggest that the downward economic curve is still steepening. The Central Statistics Office unemployment figures for January have shown a sharp increase in unemployment. On February 2nd, Goodbody Stockbrokers were quoted in the Irish Times as predicting unemployment levels would rise to 6% by the end of 2008.

Update 28th February

After a relatively quiet few weeks, oil slipped past $100 a barrel almost unnoticed last week, illustrating just how quickly the world's markets have accepted this situation is 'normal'. Back in early January, when oil first breached the $100 barrier, the 'business as usual' fraternity were quick to write this off as a freak occurance caused by just one trader who paid over the odds for a small quantity of crude. During January oil prices did indeed fall as the growing likelihood of a global recession suggested demand for oil might go down, albeit temporarily.

However, in the last two week oil prices have begun their relentless upward trajectory, and reached a new high of $102.08 on tuesday 26th Feb. This latest rise has been explained in some circles as the consequence of investors moving into out of the dollar - which hit an all time low of $1.51 against the Euro on wednesday 27th February - into commodities. This may well be true, but it only confirms that oil is more and more widely perceived as a scarce - and therefore - valuable - commodity. It seems likely the US dollar will fall further in the near future. Meanwhile, sterling also hit an all time low against the Euro, at almost £0.76.

A whole deluge of bad economic data fell on the US this week, as house prices in the 4th quarter of 2007 were found to have fallen at the fastest rate for 20 years. Other data showed that bank repossessions up by 90% on twelve months ago, food and energy prices rising rapidly and economic confidence down even further than expected. None of these figures will reflect any change in economic fortures which might result from the spectacular cutting of the Federal interest rate back in January - it is still too early to tell - but the rising rate of inflation in the US suggests that the cutting of interest rates is a bit like sticking a Band-Aid on a severed artery.

If you think our prognosis is unduly pesimistic, try this one from Dmitri Orlov:

The 5 Stages of Collapse

8th March

As if to prove that last week's highs and lows weren't temporary aberrations, the dollar slipped to a new low against the euro of $154 while oil rose to a high of $106.31 a barrel. With the financial sector abandoning the dollar like rats leaving a sinking ship, it also was inevitable that gold and other metals would rise in price. Gold hit a new high of $988 an ounce early in the week.

14th March

Oil reached $111 a barrel on March 13th, while the dollar slipped further against all other major currencies. It now stands at $1.56 to the Euro, well on course to fall to $1.85 or lower by the end of the year. The latest rescue package - this time of $236 Billion -by the Federal Reserve has only served to hasten the panic.

The so called experts who said back in January that the price of oil was artificially high [at $100 a barrel] have been conspicuously quiet. Hello?

18th March

The big news over the weekend was the disintegration of Bear Stearns, the fifth largest investment bank in the US. According to Will Hutton writing in the Guardian newspaper, the bank had '$11.8bn of capital and $395bn of debt'.

As reports of the bank's insolvency began to filter out last week, the value of shares plummeted, obliging the Federal Reserve to intervene. The Fed invoked depression era legislation to channel stop gap credit through an intermediary bank -JP Morgan.

By the monday it was all over bar the shounting. JP Morgan had put in a bid to purchase Bear Stearns for just 6% of its estimated value at the start of last week.

The Federal Reserve, which at an emergency session over the weekend had cut interest rates by a one quarter of one percent, made a further cut of three quarters of one percent today. The Federal Reserve rate is now down to 2.25 percent, far below the European Central Bank rate of 4 percent and even further below the Bank of England rate of 5.25 percent. It is likely however that the Bank of England will follow suit and cut interest rates before the end of the month.

George Bush is urging calm, but this is a bit like telling Hurricane Katrina to head back out to sea. This crisis will not be solved simply by slashing interest rates, though that conceivably could soften the blow. Instead of an AK47, its a round of plastic bullets at short range. Unfortunately however there is no means of reversing the steps which led to millions of people being encouraged to borrow ludicrously large sums of money - often at low interest honeymoon rates which concealed the much higher rates to follow - which they had no realistic chance of repaying.

There was more bad news in the construction sector in the US today, with the latest figures for building permits down to the lowest level for 17 years. House prices in the US are expected to fall by another 10-15% this year.

All that can be done now it let events take their course, and set up the soup kitchens for the millions who will need them.

The talk in the United States is not will there or won't there be a recession, but how severe will it be? All the indicators are that it will be severe. Parallels are now being drawn with the Great Crash of 1929-33, when the value of the markets fell approximately 90% in 5 years.

Although it has been pointed out that wealth - and debt - was concentrated in the hands of far fewer people in 1929 , this does not necessarily mean that the world economy now is any more robust. Indeed, it could be argued that the dispersal of excessive debt through a large segment of the population of many Western countries means that the problem may be more serious and potentially more far reaching.

UK

The news from the United States has tended to dominate the headlines but all is not well in the UK. Sterling is currently at its lowest level ever against the Euro ( £0.78) and was one of very few currencies to perform even worse than the dollar in the last week. The UK financial sector is every bit as deep into the doo-dah as its US cousin.

Ireland

New house registrations in January were at their lowest January level since 1996, and anecdotal evidence in the construction sector shows contractors and builders alike desperate to find new work. Anyone calling into builders providers can testify just how quiet things are, with an unseasonally large number of promotions, special offers and 'sales'.

House data for January released at the start of March by the ESRI showed a fall in prices of 0.7%, rather less than expected. However, any hopes that this reduction in the rate of fall might herald further good financial news were quickly dashed by the Homebond new house registration figures for February, which showed new house construction activity at a 15 year low and 65% down on 2007. Meanwhile, the Irish Government reported a €513 Million shortfall in tax revenues in Ireland for January and February.

The ESRI has substantially revised its economic forecasts for 2008. It now predicts economic growth will be 1.6% (down from their last prediction of 2.3% but still well up on the Sustainability Institute's prediction of only 0.3%), and that unemployment will rise to 6%.

Speculation is growing that the first Irish casualties in the banking sector are only around the corner. High up on the' most at risk' list is Irish Nationwide, which until recently was offering 100% mortgages to all and sundry. It is unlikely however that casualties will be limited to just one financial institution.

21st March

All is calm again, for the moment.

One has to smile at the image of the UK Financial Services Authority running around trying to locate the 'source' of the 'malicious rumours' of insolvency which caused a 20% fall in value of HBOS shares last week. One wonders about the unsubstantiated and completely baseless rumours - as echoed by George Bush among others - that the economy is 'just fine'. Er, no, that's not quite true. A year ago all the talk was of robust economic growth. Now its about foreclosures, repossessions, and redundancies. When the best case scenario is a recession more severe than most people have witnessed in their lifetime, 'just fine' doesn't really seem to fit the bill.

What is positive however is the fact that recessions are great levellers which re-align goods and services to their true worth.

Investment opportunities? Try bicycles.

1st April

The demise of the dollar and pound sterling against other world currencies continues. On 31st March, sterling fell to £0.79 against the Euro while the dollar was at a new low of $1.58. It is interesting to see that there is very little acknowledgement of how serious the falling dollar and pound are for Ireland. Over three-quarters of Irish exports go to the US and UK, and the relative price of these exports have risen by almst 20% in the last year. Equally, the Irish tourist industry - an important component of the Irish economy - is heavily dependent on visitors from Britain and North America. This year, many regular visitors simply won't be coming.

Forecast April 4th 2008. See below for July and October forecasts

" No Congress of the United States ever assembled, on surveying the state of the Union, has met a more pleasing prospect than that which appears at the present time. In the domestic field there is tranquility and contentment... and the highest record of years of prosperity"

US President Coolidge 4th December 1928, the year before the beginning of the worst recession in US history.

Commentary

The remainder of 2008 will see great volatility in global markets. The two main drivers will be the price of food and energy. Both of these will continue to rise steeply.

Ireland

As a result of the strong Euro, Ireland will suffer declining markets both in the US and UK. Simultaneously, the sharp rise in the price of wheat, rice and fossil fuels will impact heavily on an economy already under pressure from an increasing trade deficit and a growing level of domestic debt. The number of mortgage defaults will reach record levels. There is a high probability of Irish financial institutions experiencing problems similar to that of Northern Rock or Bear Stearns, albeit on a smaller scale and possibly less dramatically.

Activity in the domestic construction sector is already some 60% down on 2007. Coupled with a fall in consumer confidence, this will result in a severe reduction in revenue for the exchequer. A government deficit of €7-8 Billion can be anticipated.

The rate of economic decline will continue to worsen for the remainder of 2008 and into 2009. Some levelling off will begin to occur by the end of 2009, though by this time Ireland will find itself in the grips of recession. One of the good outcomes will be a continued fall in the price of property, accompanied by a sharp decline in price in the rented sector.

Europe, Britain and the US

The US recession will continue to worsen for the remainder of 2008. The full impact of the growing number of defaults in the sub-prime mortgage sector has yet to be felt, but is likely to be a major economic factor over the next 12-24 months. The dollar will continue to decline, and the risk of a run on the dollar in world markets is now higher than at any time in the last 50 years. Rising energy and food prices will cause increased hardship in some areas. The Federal Reserve is expected to reduce interest rates further, possibly to 1.5%. This however will have only limited success in warding off recession, because a population which is already maxed out on credit will have little taste to borrow more. Equally, financial institutions will be wary of lending to high risk clients.

The economic problems facing Britain now appear much more serious than they did six months ago. Again, one of the crux issues will be the price of food and energy. The high level of personal debt among the general population will be another major influence. Britain may be in recession by the end of 2008. The pound Sterling will continue to fall against most other currencies.

The EU will be adversely affected by these same issues but it appears that it has not progressed quite so far down the slope. There may be some short term benefits from the decline of Sterling and the US dollar, as other major trading nations - including members of OPEC - increase their holdings of euro.

Rest of the World

The soaring cost of wheat and rice is going in impact massively on many people in Asia, Africa and Latin America during 2008. The increasing world population, coupled with adverse weather conditions and man-made environmental problems such as depletion or contamination of subterranean aquifers in producer countries, has meant that world grain production has been unable to keep up with demand.

The wholesale price of rice has risen by 50% in just a few weeks, leading to panic buying and food related protests in a swathe of countries across Asia. Already, expectations are that this year's harvest will be inadequate to meet demand.

At the same time, forecasts for the 2008 wheat harvest are also very pessimisitic. The wheat situation is further complicated by the growing demand for wheat for biofuel production.

In addition to causing much hardship and misery among the world's most economically vulnerable, the food situation will have a number of serious knock-on effects. Firstly, it will politically and economically destablise the countries most affected by the recent food price increases. Secondly, the growing economic hardship in the low wage economies - where people already spend a large part of their income on food - will force up wages, which in turn will affect production costs. These knock-on effects will seriously impact on exports from these countries, leading to higher prices and disruption in supply chains. This will amplify the economic problems of the countries buying these goods, and will be most notable in countries where there is already a high level of credit.

Forecast for 2009

April 4th 2008. See below for July and October forecasts.

Update 9th April 2008

Amid more gloomy economic forecasts - this time from the International Monetary Fund (IMF) which gave odds of 4 to 1 on a full blown global recession this year, Sterling fell to a new low against the Euro today and now stands at about £0.80.

The IMF went on to describe the situation in the United States as "the largest financial shock since the Great Depression", and listed the UK among other high risk economies. It stated that property in the UK was 30% overpriced.

Earlier this week, the 100% mortgage ceased to be available in the UK when the Abbey Building Society - the last remaining financial institution to offer this faciity - changed its lending rules. It now requires a 5% deposit from borrowers. Some other mortgage providers in the UK have already set a cap of 90% on mortgages.

Meanwhile, the price of oil reached a new record high - almost $112 a barrel - on world markets.

16th April

Amid another wave of bad news from the US, the dollar fell to a new low against the Euro. At one point today it stood at close to $1.60 to the Euro, and is expected to fall further in the next week in the wake of further damaging reports from the banking and housing sectors. The falling dollar helped push oil to a new high of $114 a barrel. No one seems to be taking much notice of claims of a 'huge' oil find off the Brazilian coast. We doubt it exists.

24th April

Oil surged to yet another high yesterday, in spite of the dollar unexpectedly holding ground in the last few days. This confirmed that the rising price of oil on global markets cannot be explained simply by the falling dollar. Oil reached $119.50 a barrel at one stage, and may rise further.

Meanwhile, concerns about food prices worldwide continue to grow, as energy prices coupled with local shortages push prices beyond what many of the world's poor can afford. In the United States, it was reported that some stockpiling and hoarding of grain has been taking place in the last few days, forcing some wholesale outlets to ration supplies to customers.

26th April - Ireland

A report by Goodbody Stockbrokers, published yesterday, predicted economic growth in Ireland would fall to just 1.1 percent in 2008, less than half the rise forecast by Goodbody at the start of the year. Goodbody also revised their forecasts of growth in consumer spending in 2008 downwards to 1.6 percent. House completions were estimated to reach 48,000, while Goodbody predicted unemployment to grow to 6.6 percent this year. This latter forecast represents the first prediction from within the financial sector that is actually more pessimistic than the estimates made by the Sustainability Institute at the start of this month.

3rd May

A week of good news for the dollar and sterling as both recovered from all time lows against the euro. The price of oil dropped too, and is now back to around $110 a barrel. The current situation, namely that the words 'only', 'oil' and '$110' could appear in the same sentence would have stretched the imagination of Wall St not so long ago. However, its a no win situation really. If oil falls in price, demand goes up again, strategic reserves are reduced and suddenly oil hits a new high. Possibly we are seeing the end of a temporary spike, which will now be followed by an even more temporary trough.

Ireland

The big story is the latest forecasts for economic growth made by Ulster Bank. Their prediction for 2008 is now just 0.5 percent, down from a previous forecast of 2 percent. We are noticing something of a convergence of projections with our own forecast of 0.4 percent. People laughed at this not so long ago.

Of this projected growth, most of it has probably already taken place, leaving very slim pickings for the rest of the year. We also note that exchequer revenue in 2008 is down €927 Million ( 6.5%) on the same period in 2007.

Another prediction we are making is that the State forestry company Coillte will go bust later this year or early into 2009. In truth the company makes very little from forestry and is more involved in the manufacture of panel boards, the market for which is soon to become non-existant. Coillte's hopes now rest on getting big bucks for the erection of huge wind farms at prime locations on its 400,000 odd hectares of real estate.

9th May

The falls in oil prices were short lived. Oil has jumped by $16 dollars a barrel in one week, and now stands at $126.

22nd May

Oil hits $135 a barrel as the dollar weakens on world markets and rampant speculation add further to the growing sense of impending collapse. Think summer of '29.

16th June

Three days ago the euro suffered a spectacular reversal against the dollar and dropped three cents in as many hours. This notable event, which added billions of dollars to the US economy, had been triggered by a referendum on the other side of the Atlantic. When it became known on friday that Irish voters had rejected the Lisbon Treaty in a referendum the previous day, it threw the whole of the EU into turmoil. For the Treaty - which defined how the EU should conduct its business and make decisions - to be passed, it required all 27 member States of the EU to ratify it. Hence end of Treaty, at least for the moment.

Good news for the US perhaps - and adds credence to the rumour that US interests secretly funded one of the groups campaigning against the Lisbon Treaty in Ireland - but it was short lived. More bad manufacturing data from the US caused the dollar to lose some of friday's gains and helped the price of oil reach a new high of almost $140 a barrel.

Ireland - Latest ESRI Forecasts (June 24th )

The latest quarterly commentary by the ESRI paints a bleak economic picture for Ireland for the remainder of 2008. According to the report, economic growth will be negative in 2008 and there will be an additional shortfall of €5 Billion in the Government coffers.

Ireland - House Prices

According to the ESRI/Permanent TSB House Price Index, house prices fell by a further 1.2 percent in May. Traditionally, the period February to August is the most buoyant period of the year in terms of house prices. So far this year, these months have seen a gradually accelerating decline in prices. Given the increasing evidence that Ireland is either in recession or close to it, a further and sharp correction in house prices seems almost certain this autumn.

2008 Forecast

6th July 2008. See below for October forecast

Commentary

Ireland

At the start of the year, when the Sustainability Institute posted its forecast of 0.3 percent economic growth in Ireland in 2008, this prediction was laughed at in many circles. At the time, the Institute's forecast was a full two and a half percent more pessimistic than the Irish Government's. The reality now, however, is that Ireland will be doing extremely well if it achieves any economic growth at all this year, and many analysts - including the ESRI - now believe the economy will contract during 2008.

All the indicators are of a still worsening situation. One of the best barometers of Ireland's economic fortunes in the coming 2-5 years is the number of registered house starts. The main registration body in Ireland - Homebond - reported only 812 registrations in June of this year. This represents a fall of 66 percent on 2007 and 87 percent on 2006. A lower number of registrations has not been recorded in June since 1990.

The full consequences of this greatly reduced construction activity will not be felt until 2009 or 2010. However, unemployment can be expected to increase for the remainder of 2008. Also, the amount of money in circulation this year in Ireland is likely to fall by around 5 percent.

While the consumer price index has been pushed up by the price of food and energy, the Institute expects prices of almost all non essential goods to fall during the remainder of this year, as retailers attempt to clear stagnant stock and maintain a viable cash flow. However, as people find they have less disposable income, sales of non-essential goods will fall. There are many indications this fall is already occuring.

One real concern is the continued denial of the scale of the problem by the Irish Government. This is likely to delay the implementation any meaningful strategic planning to deal with recession, and will only compound the problem.

Global Picture

There is very little good news globally, as the consequences of rising energy and food prices are nothing short of disaster for many of the poorer nations. A recent report by the World Bank cited biofuels as the main factor in the soaring price of grain on world markets.

The heavy rain and floods in many parts of the United States last month destroyed significant areas of crops and earlier predictions in the US of record harvests can now be discounted. Harvests will be well down and this will contribute to further food shortages this winter.

The Institute expects that the price of crude oil, which has risen by 50 percent since the start of the year, will level off towards the end of the summer and will fall slightly during the autumn. All bets are off however, if there is any increase in political tension in the Middle East or Western Asia. There are still concerns that the United States and Israel could launch a preemptive strike on Iran. Such a move would precipitate a global energy crises far worse than the crisis of 1973.

The price of coal has also risen dramatically this year. The spot price recently reached $200 a tonne on some markets. This represents almost a tripling in price in the last 3 years. The price of gas is also close to record highs.

Europe

The latest reports from Europe suggest the main contintal European economies are in considerably poorer shape than three months ago. Industrial output in Germany fell during the second quarter. Data from Spain, France, the Netherlands, Italy and Denmark shows a similar story of declining industrial production.

The European Central Bank is caught between lowering interest rates in a bid to stave off recession, and raising them to curb inflation. Last week it opted for the latter option when rates were raised to 4.25 percent. It seems likely however, that rates will be lowered again either later this year or early in 2009.

Britain

In spite of the idea of recession being dismissed by the British Governement as scaremongering, the reality is the British economy is already begining to contract. Manufacturing output in May was down on the same period last year, while consumer spending is falling. It is likely the pound sterling will fall further against most other currencies. The Instutute believes that serious difficulties will be experienced by UK mortgage providers and other financial institutions.

United States

One interesting features of the last three months has been the relative stability of the price of the US dollar when measured against other currencies. The fluctuating fortunes of the main economies in the euro zone is believed to be a major contrbutary factor.

While the Institute now believes the dollar will finsh the year in a stronger position than forecast earlier, further falls in the value of the dollar are predicted this autumn as the credit crisis in the US worsens.

Forecast for 2009

July 8th 2008. See below for October forecast.

Next forecast 7th October 2008

Commentary

Ireland

The main feature of 2009 will be a deepening recession. The knock on effect of the contraction in the construction sector, which is beginning to mainfest itself in rising unemployment and diminishing consumer spending, will only be felt in full during 2009 and 2010.

The continual falling off in new house registrations suggests the rate of economic decline is still increasing. The maximum rate of decline is expected to be reached in approximately 18 months time, after which there will be a very gradual levelling out. However, even in the most optimistic scenario, the Sustainability Instutute does not expect per capita economic activity to return to positive figures for another eight to ten years.

In the soon-to-be published Mayo Energy Audit ( see below), we look at 4 possible scenarios for Ireland 2008-2025. Or rather, three believable - if potentially unpleasant - scenarios and one fantasy. The fantasy is the current Irish Government position, eternally trapped in a hallucination of economic and energy-demand growth of 3-4 percent per annum for the foreseeable future, and predicated on cheap energy - in this instance oil at under $62 a barrel throughout the period 2008-2020.

The current 'downturn' is thus explained as a temporary aberation which ignores the underlying 'strong fundamentals' and implies a quick resumption of normal service.

This scenario is of passing historical interest - and perhaps should be documented in case it becomes necessary to hold those in power accountable what may follow in the years to come - but offers no further insights into how society may deal with a prolonged and severe recession - or worse.

The three scenarios are listed below and are predicated upon the following price of crude oil ( per barrel):

2008-2009:    $100                           range $80-125

2010-2015:    $150                           range $100-200

2015-2020:    $250                            range $150-300

The prices are based on 1 euro = 1.6 dollars and are inflation corrected.

1        Head in the Sand

No severe supply constraints initially but energy prices as outlined above.

The initial outlook is for a sharp shock as Ireland adjusts to the collapse of the construction sector, unsustainable levels of debt, and the rising cost of food and energy.

This however is followed by a short lived recovery period as attempts are made to revitalise the economy by encouraging further consumer spending in domestic goods and housing. Possible incentives include abolishing stamp duty, reducing          fuel tax and corporation tax, and providing low interest rate loans to insolvent financial institutions and construction companies.  For a while, such measures will maintain a business as usual, high energy consumption society but provide nothing to long term  investment in strategic post-oil infrastructure such as railways, canals, steel producing capability and above all, food production.

This  'keep-the-show-on-road-at-all-costs strategy may keep the economyrelatively buoyant for a few more years but will not be sustained in the face of rising unemployment, collapsing markets and soaring energy prices. During this period, it is likely the global supply situation will  deteriorate further. The lack of strategic planning will condemn Ireland to a second economic crash, albeit a  more severe and prolonged one which will continue well beyond 2020.

2         Lean Economy

Economic growth and energy prices as above, but additional supply constraints imposed by supply chain collapse and global shortages of fossil fuels.

This model is based loosely on the Fair Shares model used by Feasta in its Energy Futures scenarios, but with a sharper decline in energy use.  Primary energy requirements are projected to fall by 40 percent by 2020, with final energy demand falling by 30 percent

It assumed that renewable energy and other strategic resources will be developed in an optimal way based on society's needs rather than profit for large corporations.

Initially there is a sharp correction as Ireland adjusts to difficult economic circumstances. However, no attempt is made to artificially boost the contracting economy. Instead, important strategic resources are carefully nurtured. Towards 2020, some equilibrium is re-established as society begins to achieve its goal of living within its ecological means.

This scenario is regarded as the best outcome achievable, but only attainable with a massive and immediate mobilisation towards developing  the necessary strategic infrastructure in relation to energy, transport and key industries.  

3        Enforced Localisation

Extensive supply chain collapse (based on Feasta scenario of same name but with more gradual contraction of production capability).

In the Feasta scenario of the same name, the collapse is total and production capability falls to around zero by 2022. In our scenario, production capability falls    to 20-30 percent of 2007 levels by 2020. Historically, such catastrophic circumstances are generally only found in countries experiencing famine, severe civil conflict or military oppression. Four such examples are Nicaragua, Ethiopia, Zimbabwe and Iraq. Less extreme examples include Bulgaria, Romania, post-Soviet Cuba, and Argentina.

In Ireland's case, the very high level of dependency on imported fossil fuels raises the likelihood of an enforced localisation scenario occurring. In our scenario, it is assumed that some production capability will be retained and that beyond 2020 a       degree of recovery will be possible. However, it will be a long and hard road, with the attendant risks that the institutions of democracy will be undermined along the way and that resources will become increasingly concentrated in the hands of the    privileged.  

The Sustainability Institute believes that the Lean Economy Scenario is by far the preferred option, and that with the right forward planning and investment in strategic assets, it might still be achievable. Unfortunately, it is very hard to see how this process of 'building resiliance' can begin without regime change.

For more insights into the implications of economic collapse for a modern industrial society, read Re-inventing Collapse by Dmitry Orlov (New Society Publications June 2008). Orlov draws extensively upon his time in Russia during and immediately after the final days of the Soviet Union to graphically describe what can happen when an ecomomy disintegrates.

He compares what happened in Russia with the outlook for the United States once it can no longer obtain the enormous amount of energy it requires to maintain itself. Russians were used to hardship and has survival mechanisms - like small vegetable plots - already in place. The Russian population was largely debt free, and had almost zero reliance on car for transportation.

The United States is in a far worse predicament. While it is hard to accept there is no alternative to Orlov's apocalyptic total systems failure, nevertheless the grim picture he paints is entirely believable.

This publication - one of the most important post-oil book written to date, is available to readers in Ireland from the Sustainability Institute, price €18.00 including postage.

Also available: The Transition Handbook by Rob Hopkins (Green Books February 2008). Hopkin's offers the alternative vision: a grass roots initiated transition to a viable post-oil future.

Price €20.00 including postage.

Both titles can be ordered together at the reduced price of €36.00 including postage. At the present time, payment can only be made by cheque or postal order. Please make payable to the Sustainability Institute.

July 13th

Unless pigs start flying very soon, the coming week will see the start of a further serious deterioration in both the US and UK economies.

Last week, the Federal Reserve intervened to take over Indymac, a Californian mortgage provider, after a run by investors saw $1.3 billion withdawn in the space of less than two weeks. Indymac is the second largest bank in US history to close.

Later last week, news emerged that that America's two largest mortgage lenders, Fannie May and Freddie Mac, are also in extremely serious difficulties. Between them, Fannie Mae and Freddie Mac account for 40 percent of all mortgages in the US. Their combined debt amounts to $5 Trillion (In US parlance, a trillion is a million times a million).

The share value of both companies fell by almost 50 percent in early trading on friday amid rumours of nationalisation by the Federal Reserve. Friday also saw a run on many other financial institutions on both sides of the Atlantic, as panic grew of a 1929 style meltdown.

July 15th

The United States has seen queues grow outside the offices of Indymac, as worried investors attempt to withdraw their savings. Meanwhile Ben Bernanke, the chairman of the US Federal Reserve, has warned Congress worse is to come:“The possibility of higher energy prices, tighter credit conditions, and a still-deeper contraction in housing markets, all represent significant downside risks to the outlook for growth". In normal English, it means he thinks the US is stuffed. This view was reflected in currency trading when the dollar dropped to an all time low against the Euro - $159.75.

It promises to be an interesting week.

July 19th

The US economy lives on - for the moment. However, spare a thought for the beleaguered British chancellor Alistair Darling. It just seems everything is going south on his watch. Not only has he to contend with record levels of government debt, soaring unemployment, the construction industry in freefall, and the drying up of consumer spending, his party have established new lows in the popularity stakes. The mob is baying at the door. Ireland take note.

August 8th

Hardly the summer of discontent but it is after all, the summer. However, one would be ill-advised to expect an autumn of roses and bumper economic windfalls. In Ireland, unemployment has already passed the Government's end of year forecast made at the start of the year, and with the rate now rising at over 0.2 percent per month, is definately on course to reach the 6.8-7.0 percent.

Although house completions have been surprisingly consistant through the first 7 months of the year, and the yearly total will certainly exceed the Sustainability Institute 2008 forecast of 34,000 by a number of thousands, the number of new houses being started has continued to plummet. In July, only 481 new houses starts were registered with Homebond, compared with 2575 for the same month in 2007 and 4099 in 2006. That's a fall of almost 90 percent over 2 years. The July 2008 figure is the worst July total recorded by Homebond since its began its home guarantee scheme back in 1978, and the worse total for any month since December 1992. The seven month total for 2008 so far of about 8000 compares to 20100 for the first seven months of 2007 and 32900 for 2006.

It is easy to see that construction activity in Ireland is close to an all time low. When it hits bottom in 2009-2010, it will have wiped anything up to 10 percent off economic growth. Given that economic growth was only around 6 percent in 2006, that means a 'growth' of minus 4 percent. Best case scenario is about minus 2 percent.

Unlike the last time Ireland was in recession, there will be no, foreign investments, EU subsidies, or tanker loads of cheap energy to set things back on track. In the economic doldrums of the late 80s and early 90s, oil was at under $20 a barrel. Even corrected for inflation it was under $40. Now it is three times that.

The two countries which might have been expected to help, namely the US and UK, will be every bit as badly off.

This time round, Ireland will have to sort it out unassisted.

Click below for a graph of GPD, house completions, and registered house starts in Ireland.

Another Scary Graph

August 18th

Economic data released this week confirmed that the Eurozone economy is now contracting.The three biggest economies - Germany, France and Italy - all saw negative growth during the second quarter this year. A recession is normally defined as two consecutive periods of negative economic growth. On that basis, one can expect the Eurozoen recession to be confirmed at the end of the autumn.

Meanwhile in Ireland, Morgan Kelly - professor of economics at University College Dublin and one of the very few voices of wisdom on the economy over the last few years - has predicted a decade long recession in Ireland and a very sharp fall in house prices over the next 2-3 years as developers come under increasing pressure to repay the "scarcely believable €25 billion that banks lent to builders back in the days when nobody thought the boom would ever end".

The full story is in the Irish Times:

Ten Year Recession

5th September

World View

One of the more unexpected developments over the last two months has been the fall in value of the Euro against the dollar. From an all time high of almost $1.60 the Euro has dropped back to around $1.45 ...in other words to roughly where it was a year ago. The principal reason for this is the changing relative fortunes of the economies of the United States and the Eurozone. The US economy, although precarious, continues to hover above the zero growth threshold while the Eurozone economy is already contracting. The data from Europe suggests the rate of contraction may steepen this quarter.

The picture from the US is less clear. In the long term, the intractable difficulties posed by the unequal balance of trade, and the increasing dependency on fossil fuel imports will eventually have to be faced.

In the medium and shorter term, the price of energy and the collapse of the speculative bubble in the property sector will cause serious and worsening hardship for many US citizens. Also, it must be acknowledged that the inequal distrbution of wealth is so extreme in the US, that the economy can continue to grow simultaneous to the deterioration of the personal circumstances of the majority of its citizens.

Meanwhile, the perceived reduction in demand for energy caused by the combination of economic downturn in North America and Europe, and recent soaring energy prices, has now impacted upon the price of energy commodities. As widely suspected, part of the increase in the price of energy commodities on world markets was purely speculative. These same speculative forces are now betting on global energy demand falling, by selling energy futures and buying back into the old faithful, the US dollar. Hence the price of crude oil is now falling.

At best however, this reversal in energy prices is only likely to be temporary. Demand may fall, but supply will eventually fall too as the major oil fields become depleted and output falls. Once the downward slope of the peak oil curve is reached, global energy production will be in terminal decline.

UK

Events in UK also deserve mention, simply because the rate of deterioration has surprised many people. Unlike in Ireland for example, there is no massive surplus of recently constructed and unsold housing stock, yet house prices are falling at unprecented rates, and consumer sentiment is at an all time low. The official line in both Government and financial circles is that things are going to get worse.

This growing sense of crisis has been reflected in the value of the Pound on world markets. At £0.81 to the Euro, the Pound is at a new all time low, and may fall further in the short term. A significant proportion of the UK economy rests upon the financial sector, a sector which did very well in recent years but now looks dead and buried.

Soaring unemployment is the big fear, and seems inevitable.

Ireland

The recent announcement by the Irish Government that it would bring forward the date of the budget from December to mid October, in response to the deteriorating economic situation, suggests that there is now an official acknowledgement that the problem is no temporary aberation with a happy outcome only just round the corner.

Recent data shows that business activity in Ireland is at an 8 year low, while numbers unemployed have increased by 40 percent in the last 12 months. The level of unemplyment now stands at 6.1 percent, the highest level for ten years, and continues to rise at 0.2 percent per month.

Another economic indicator is the number of new house starts. In August, only 510 new house starts were registered with Homebond, compared to 4020 for the same month in 2006. The total house starts registered with Homebond for the first 8 months of 2008 is around 8500, compared with 37,000 two years ago.

The Irish Government is now predicting a tax revenue shortfall of upwards of €5 billion in 2008. Independent estimates suggest the shortfall may be as high as €7 billion.

September 16th

The collapse of Lehman Bros- the fourth biggest investment bank in the United States - over the weekend and falling share prices across a wide range of sectors has raised fears of a complete global financial meltdown. The plummeting price of oil, which at $92 a barrel is now lower than at the start of the year, reflects the growing belief that a severe contraction in the global economy will occur in the next 24 months, and that energy demand will follow the same downward curve. The logic is that if energy demand drops there will be a temporary surplus in oil production, and the price will then fall to a level that can encourage a growth in demand.

However, all the interest is not focussed in the price of energy, but on which major financial institution will implode next.

September 22nd

On Wednesday 17th, the day after the American International Group - the biggest insurance company in the United States - went bust, the Federal Reserve moved in to take over the company. This so called rescue of AIG, which essentially has nationalised the AIG debts, has cost the citrizens of the United States a further $80 billion on top of the hundreds of billions ploughed into the nationalisation of mortgage giants Freddie Mac and Fannie Mae earlier in the month.

The Fed then asked the US treasury for a further $200 billion to help shore up other major financial institutions.

Then on saturday, US Treasury Secretary Henry Paulson proposed an additonal $700 billion rescue package for all the remaining insolvent financial institutions in the United States. This package has been carefully dressed up as a measure which will help the citizens of the United States through difficult economic times, but in effect is exactly the opposite. It will use borrowed public money to bale out huge corporations that are now collapsing under the weight of the greed of their CEOs, directors and shareholders.

Paulson's proposed measure, which will involve the US in further borrowing - will bring the level of US external debt to approximately $11 trillion, while doing little or nothing to prevent the same scenario happening again in the future. It also sets worrying precedents for the State intervening to prop up failed corporate enterprises that it previously allowed or even encouraged to engage in reckless, irresponsible, unethical and possibly criminal behaviour.

Perhaps more pertinently, even $700 billion won't be enough to stop the rot.

The latest event in this sequel was the announcement, earlier today that Goldman Sachs and Morgan Stanley, the last two major investment banking institutions left standing in the United States, are to be placed under State supervision and re-designated as traditional banking institutions. It is interesting to note, in passing, that both institutions pre-date the 1929 Wall Street Crash, and both did very well out of it.

26th September

Irish Recession Official

Data released by the irish Central Statistics Office yesterday confirmed what had been suspected for some time - Ireland is in recession. The figures showed that the Irish economy contracted by about 1 percent in the first two quarters of 2008. Meanwhile the Irish exchequer has revised estimates for the 2008 tax revenue deficit from €5 billion to €7 billion.

Such is the rate of decline in the Irish economy however, that estimates of economic performance are being revised downwards on almost a weekly basis. Fourth quarter figures are expected to be particularly dismal, while the first quarter of 2009 is likely to see a further deterioration.

According to economist Alan Ahern, in an address given to the Fianna Fáil faithful on September 15th :

"The outlook for growth here over the next couple of years implies that, with one or two exceptions, we will record the largest cumulative drop in national income in an advanced economy since the second World War."

One hopes the Irish government is taking this stark warning on board.

29th September

More on the US plan to give a $700 billion dig out to its insolvent financial institutions:

Its a rip off not a bail out

The latest news tonight was that the US the House of Representatives has voted down the $700bn proposal, by a vote of 228-205.

Meanwhile the UK Government has begun steps to nationalise Bradford and Bingley. Trading in B&B shares was suspended this morning. The shares were worth just 20p: 7 percent of their value a year ago. The UK State takeover of B&B will cost the UK taxpayer £43 billion. It has been known for some time that the bank was in trouble, having over extended itself in mortgages to ill-advised buy-to-let schemes, and failing to adequately check the financial status of those seeking mortgages.

Europe

Moves began today in Belguim, Luxembourg and the Netherlands to nationalise Fortis, one of Europe's bigest banks.

Ireland

Iseq, the Irish Stock Exchange, suffered its biggest ever losses today, falling in value by some 13 percent. Irish financial institutions took major hits. There is growing speculation that Anglo-Irish bank may not survive the latest crisis.

What will happen now?

1 Collapse of a national European currency

Highly likely in the case of the Icelandic krona. The Romanian leu looks vulnerable too.

2 Collapse of a major currency.

In the immediate short term there is not much to choose between the US dollar, the UK pound and the euro. In spite of recent falls against the dollar, the euro still looks the strongest. However, all three could go down together (see below).

3 Global Financial Crash

Hard to assess the likelihood but with each passing week, 1929 looks ever more close. We give it a 50/50 chance of happening in the next 6 months.

30th September

It was announced earlier today that the Irish State would guarantee all deposits in Irish banking institutions. Although this might appear to be an eminently sensible move, the majority of these deposits are not savings from people in Ireland, but are made up of large deposits from foreign investors. Further, it is believed the guarantee extends to the foreign subsidiaries of the banks.

So if the banks go down as a result of their own irresponsible practices of recent years, corporate investors and subsidiary companies will be bailed out by the Irish public. The amount of money involved is potentially greater than the annual turnover of the Irish State. Hence, any mass bail out of foreign and corporate investors, should it be required, would effectively bankrupt the Irish State.

Alternative Scenarios

Let us look at an alternative scenario is which there is no further State intervention in the banks. Investors have the choice whether to stay or go: they always did.

As personal savings of up to €100,000 are already guaranteed by the Irish State, the individual saver need not fear the collapse of their chosen financial institution, though perhaps they might consider what alternatives are available.

Given the great need for solvent financial institutions, the simplest solution is to form a raft of new ones: cooperative banks and credit unions with strict rules to avoid future speculative investment, and fully controlled by their members.

The demise of the main Irish banks, far from threatening the Irish economy as has been suggested in Government circles, would be a most welcome development. At a single stroke it would relieve the country of the some of the biggest impediments to an essential re-orientation of it's internal economic structures.

Even the expression 'Irish banks' is a misnomer: these institutions are not owned by the people of Ireland, as any examination of the key shareholders would reveal.

The Corporation Tax Scam

A further measure absolutely crucial if the Irish State is to regain some vestige of influence over the running of its economy is to immediately raise corporation tax to a level more in harmony with the EU average (about 25 percent). Ireland's low corporate tax regime attracts the worst sort of foreign investment: namely huge corporations that move their headquarters into Irish territory simply in order to avoid paying tax elsewhere. This might create a few jobs in Ireland, but these jobs are taken from other people somewhere else. There is a net loss to the ordinary citizen of the world however, because a higher proportion of profit is retained by the corporate sector.

It creates a 'race to the bottom of the barrel' situation where rival free market economies vie with each other to see who can offer the most lucrative financial arrangements to the world's biggest and most powerful multinationals. Only a few weeks ago, Microsoft claimed Ireland needed to lower its rate of corporation tax (currently 12.5 percent) even further, as it ran the risk of being undercut by several eastern European states. The subtext was that Microsoft was on its way out of Ireland to Estonia or Bulgaria unless Ireland cut it a better deal.

The only winners in this sort of price war are the multinationals. Once a country becomes dependent on this sort of tax evasion-inspired investment, it then becomes beholden to it. As amply demonstrated by Microsoft, the parasitic corporate entity eventually begins to dictate the terms of its residency to the host country.

3rd October

Irish bank "bailout inept and potentially dangerous"

The Irish State has underwritten the banking sector in Ireland to the tune of €420 Billion. But according to Morgan Kelly, professor of economics at University College Dublin, and author of a 2007 report warning of the likelihood of a crash in the Irish construction sector, the emergency legislation rushed through by the Irish Government is ' the wrong solution to the wrong problem'. For the full article, which featured in the Irish Times on Oct 2nd, click below:

Bailout Blues

Meanwhile the quarterly report published by the Irish Central Bank today has forecast a contraction in economic growth of 0.8 percent GDP in 2008. The report also predicts that Ireland will experience further economic contraction in 2009. Given the research resources available to it, it is quite remarkable it took the Central Bank so long to add up the figures.

The Sustainability Institute will be issuing its quarterly economic forecast within the next few days.

6th October

Another disastrous day on world markets with stocks and shares tumbling everywhere. In Ireland there was a further run on the banks, suggesting that the so-called assets of the banking institutions are really irredeemable liabilities in the domestic and UK property sector.

7th October

Sinking Icelandic Krona heralds sunset on model economy

The Icelandic krona fell by 45 percent against the Euro yesterday, prompting an emergency address to the Icelandic people by prime minister Geir Haarde and the passing of legislation giving the Icelandic government powers to force national banks into mergers, or if necessary, declare them bankrupt.

Although a tiny country with a population of just 300,000, Iceland is in many respects an outlying weather station for the broader world economy. The country has enjoyed a very high standard of living in recent years, and has prided itself as a model of social democracy combined with free enterprise.

A closer examination of Iceland however would reveal that the lure of easy money had made people reckless. Much of the recent exponential growth in the economy has been built on foreign debt. Now those debts are being called in. The very factors that gave rise to Icelandic entrepreneurism, namely its small population and geographical isolation, now threaten to bring it to ruin.

Updated Economic Forecast 2008

October 8th 2008.

Updated Economic Forecast 2009

October 8th 2008. Next forecast 10 November 2008

8th October Update

The Federal Reserve, European Central Bank and Bank of England all cut interest rates by half of one percent today in an attemThesempt to breath new life into the failing global economy. Th ECB rate now stands at 3.75 percent while the Bank of England rate is now 4.5 percent. The US Federal Reserve interest rate, which had already been cut aggressively earlier this year, now stands at just 1.5 percent.

The cuts did not prevent further falls on global markets, particularly in the banking sector. Meanwhile, there are indications that falling world demand for oil has created temporary over supply. The price of crude oil has fallen blow $90 a barrel and is now at a ten month low. A cut in global production seems likely.

10th October

Further spectacular falls in the US stockmarket yesterday suggest the global financial crises has a long way to go before it hits bottom.

Meanwhile in Iceland, the government has nationalised Kaupthing, the country's biggest bank. This comes only days after Landsbanki and Glitnir, Iceland's second and third biggest banks were nationalised, with the boards of directors being dismissed or asked to resign. These moves may go some way towards preventing a complete collapse of the Icelandic krona. However, with a national debt 12 times larger than its GDP, Iceland is now facing into a long and sustained period of austerity measures. One possible redeeming feature is Iceland's excellent health and education system, which should be at least partly immune to an expected fall in per capta income of at least 33 percent.

Commentary 11th October

Global Situation

Plans announced by the G7 countries to part nationalise the main banks may help reduce the rate of fall in the markets, but is unlikely to get at the main root of the problem, which is excessive debt. This debt was manageable providing there was some measure of expectation that it would be repaid. For the debt to be repaid, however, economies needed to grow.

Up till now, this economic growth was financed by borrowing more heavily and even further into the future: the debt of next week was being financed by borrowing a larger amount from next month. And so the growth illusion continued.

This growth mirage created additional problems.The perception of continued economic growth made the fossil fuels- which are finite in quantity - appear far more valuable, encouraging a spate of speculative buying of energy futures and resulting in the price of crude oil rising from $55 a barrel at the start of 2007 to $147 earlier this year. The market however, was simply unable to absorb a price increase of this magnitude. Energy use began to fall and with it economic activity. Once current economic activity begins to fall, it is very hard to maintain the illusion of future economic growth.

Now it appears that the debts at the very bottom of the pyramid - which are essentially bad debts that have little hope of being repaid - cannot be repackaged and sold on any longer. The combination of irredeemable debts and contracting economic activity can only have one outcome: a severe correction.

Given the rate of change in the last few weeks - and the rate at which assets are being converted in liabilities, it is hard to predict just how far global economies have to fall in order to purge themselves of the burden of irredeemable debt and begin the process of rebuilding, but it could be in the region of 30 percent. It may be more.

Ireland

Ireland is fortunate in some respects in that the amount of national debt is still small compared to GDP. However, burgeoning budgetary deficits will add considerably to that debt over the next 4 or 5 years. While this is largely unavoidable, a number of measures could be taken to help the rebuilding process. For example, the Irish State should not tie itself into any arrangement to underwrite investments in the Irish corporate banking sector, as the outcome of this is unpredictable. It could also encourage asset stripping and other unethical behaviour.

However, the State could intervene at a different level by taking over the assets of bankrupt developers - namely the unfinished and unsold housing stock - and converting it into social housing. This housing stock could be owned and controlled by local council and rented out at an affordable price.

The expectation is that Ireland will experience a steepening economic contraction throughout 2009 and possibly into 2010. Forecasts made by the Sustainability Institute of a 3.4 percent contraction in economic growth in 2009 may prove unduly optimistic. The full range of scenarios covers a spectrum going from a modest contraction of 2.5 percent to one of 10 percent.

Beyond the steepest part of the curve, which may be reached in the 3rd quarter of 2009 or the first of 2010, there will be a gradual levelling out. However, no significant economic growth is envisaged in the next 7 or 8 years.

Given these expectations, severely cutting back on social spending in an attempt to balance the books is not a good option. Certainly, some cutbacks may be both desirable and necessary. It is important however, that there is State investment in social infrastructure of long term strategic value. In addition to social housing, investment sectors should include education, sustainability-related research, transport infrastructure and above all employment.

Some political courage is needed to, in order to help redistribute wealth between the corporate and public sectors. In Ireland, expenditure on social protection, education and health is about 28 percent of GDP, compared to an EU25 average of 41 percent. The difference (12-13 percent) is also the same difference between the rate of corporation tax in Ireland (12.5 percent) and the EU average (about 25 percent). Although the two sums of money involved are not the same, the conclusions are obvious - money which is used for social spending in other EU countries is given to the corporate sector in Ireland.

Up till now, successive Fianna Fáil administrations and their junior coalition partners have enthusiastically endorsed low rates of corporation tax. Recent statements by leading fgures in the Green party - notably chairman of the party Dan Boyle and deputy leader Mary White - have reaffirmed Irish Green party policy in favour of low corporation tax.

It is disappointing that any attempts to debate this issue are denigrated as being 'anti business' or 'extreme left'. Any society aspiring towards sustainability must have mechanisms for ensuring that the corporate sector properly pays its way. This should include the paying of compensation for environmental 'externalities' arising from corporate activity. It is not much to ask.

Doubling the rate of corporation tax in Ireland would bring in an extra €6 Billion in revenue per annum.

15th October

Ireland delivers 'Business as Usual' Budget

A budget brought forward from December in a response to deal with Ireland's economic meltdown has offered little to suggest the scale of the problem is understood by the Irish government. Economic growth has plunged from a growth of 5.3 percent in 2007 to an estimated contraction of 1.3-1.9 percent in 2008, with a steeper contraction expected in 2009.

This contraction will be reflected in a sharp rise in unemployment and a worsening of the financial circumstances of most citizens. However, wealth is very unequally distributed in Ireland. The 2007 'Wealth of a Nation' report by the Bank of Ireland estimated that the richest 1 percent of the Irish population held 20 percent of the nation's total private wealth, and that the richest 5 percent held 40 percent.

Research carried out by the Sustainability Institute largely confirms these figures: the richest 10 percent of the population accounted for approximately 52 percent of private wealth in 2004, compared to only 30 percent in 1997. The least well off 50 percent of the population collectively accounted for about 19 percent of private wealth in 2004, compared to 27 percent in 1997.

The so called economic miracle of Ireland during the period 1992-2007 was achieved on the back of a 3-4 fold increase in the level of personal debt - from around 50 percent of disposable income to 190 percent - and at the cost of much greater inequality in the distribution of wealth in Irish society. It is hard to regard this as social progress.

The budget delivered by Ireland yesterday, in attempting to balance a shortfall in 2008 tax revenues of up to €10 Billion, placed much of the burden on the less well off while studiously avoiding any measures while might have redistributed wealth more equitably. Unsurprisingly, there was little sign of new State investment in strategic infrastructure to provide long term employment, or which is geared towards adaption to the post fossil fuel era.

Global Update

A few months ago, the media reported an injection of $50 Billion into world financial institutions as a major event designed to correct 'temporary' problems in cash flows experienced by the banks. There is no better indicator of how much more serious things are in the major global economies than the €2 Trillion promised earlier this week by the European Union countries to shore up the ailing banking sector. This package, which includes partial nationalisation of many if not most of Europe's major banks, looks like being followed by similar moves in the US.

Will these measures help? The answer is no. While they might help stabilise the value of stocks and shares, they will not solve the global economic crisis.

Any sniff of a return to economic growth will simply push the price of crude oil back to unsustainable levels (it will get there anyway without any help from economic growth once Saudi production goes into terminal decline) and the cycle will simply repeat itself.

18th October

In spite of a concerted attempt by leaders of the major economies to reassure their populations that the crisis is 'over', further cracks in global financial edifices are appearing by the day. The experience of Iceland is likely to be followed by a plague of more serious speculative 'banking' collapses across Europe. Leading the fall is Ukraine, which by all accounts may have passed Iceland in the ecomonic meltdown stakes. Not far behind is Hungary, Estonia, Latvia, Lithuania, Romania and the Czech republic.

Ireland

Ireland's position in the meltdown stakes is unclear but the economic situation continues to worsen on a week by week basis. The latest indicator was a report from Goodbody stockbrokers published yesterday. Goodbody now forecast a 2.5 contraction in GDP in Ireland in 2008 - down from a growth of 1.1 percent in the previous forecast - followed by a 4 percent contraction in GDP in 2009.

Meanwhile, the foreign companies which are based in Ireland will export an estimated €40-50 billion in profits out of Ireland in 2008. One of the least commented on aspects of the recent budget was the removal of all corporation tax for a period of three years for new start up companies. While ostensibly promoted as an incentive for new business entrepreneurs, it appears likely to result in further corporate tax evasion by allowing existing companies to re-invent themselves with new names and a new configuation of directors. Genuinely new companies would have no fear of corporation tax as only rarely do new companies show a profit in the first three years of operation.

20th October

A new analysis of global and national economic data carried out by the Sustainability Institiute earlier this month suggests that the Irish economy will contract much more sharply in 2009. Preliminary results indicate an economic contraction of 7-8 percent in 2009, followed by a further contraction of 5-7 percent in 2010. Further details will be posted early in November.

25th October

The dollar made spectacular gains against sterling and the euro in the last week, defying all expectations that the difficulties experienced by the US economy would cause a run on the currency. Instead, it is sterling which is in deep trouble. It has lost approximately 10 percent of its value in one week against other world currencies and also stands at a new low against the euro. Data released this week showed the UK economy to be contracting, with a growing expectation of much worse news to come.

The dramatic fall of sterling has overshadowed the recent fall of the euro against the dollar and Japanese yen. The euro has fallen back to about $1.26 against the dollar, with further falls possible.

Meanwhile, the world's markets took another hit during thursday and friday, with banking institutions taking the brunt of the damage. However, compared to measurable assets in the real world, global stock markets are still over-valued by 100-200 percent.

Ireland

The continued fall in the share price of Irish banks underlines the growing belief that up to two third's of their so-called assets are not worth the paper they were written on. The Irish government's bail out plan - an unlimited guarantee to all savers and investors - cannot disguise the reality that Ireland's banking instutions are rapidly approaching their own 'Reykjavic moment'. Consistent to the last, Taoiseacht Brian Cowan reaffirmed yesterday that Ireland plc was 'still open for business'.

30th October

Yesterday a $25 billion bail out package was agreed between Hungary , the IMF, EU, and World Bank. Hungary is the first EU country to ask for help - both within and outside the EU - to prop up its collapsing currency. The deal agreed contains a number of 'austerity' measures, including the cutting of State pensions. Meanwhile, Ukraine is divided on whether to accept the terms of a similar loan from the IMF. Attention is now expected to turn to the Balkan countries, in particular Bulgaria.

Meanwhile, in the United States, the Federal Reserve has reduced interest rates by a further 0.5 percent to 1 percent. This comes in the wake of another deluge of bad news in relation to the US economy. Economic figures for the 3rd quarter, due in the next few days, are expected to show that the US economy contracted by around 0.5 percent between July and September. Consumer confidence is currently at an all time low.

The real elephant in the living room, however, is oil depletion.Earlier this week it emerged that global oil production may begin to decline decline more rapidly than previous expected. A draft report from the Intenational Energy Agency, which forecast a decline in production of between 6.4 and 9.1 percent per annum, cites chronic under-investment in the oil industry as a major factor. If the predicted rate of decline is accurate, this will lead to a 50-63 percent fall in global oil production by the middle of 2020. The close relationship between economic growth and energy consumption suggests the global economy will contract by up to 25 percent in the next 12 years, even if global gas production is maintained at current levels.

10th November

Both the European Central Bank and Bank of England reduced interest rates last week. The Bank of England cut rates by 1.5 percent to 3 percent, while the ECB cut rates by a more modest 0.5 percent to 3.25 percent. This follows on the heels of a 0.5 percent rate cut by the US Federal Reserve at the end of October. There is a widespread expectation that interest rates will be cut further in the US, UK and EU. Although the US Federal interest rate now stands at only 1 percent, a cut to 0.5 percent seems likely later this year or early in 2009. Now that the EU has woken up to the idea of recession, the ECB may also cut rates to as low as 2.5 percent by early 2009.

These cuts may have some minor effect in stimulating the global economy but are unable address the root problem - and for which there is no quick fix solution - namely speculative greed, excesive and unredeemable debt. Until this is acknowledged, the same mistakes will be made again.

Corporation Tax

Last week it was announced that US companies based in Ireland exported $48 Billion worth of profits out of the Irish economy in 2005. This is more than the combined profit made by US companies based in Germany, France and Italy. It is a reflection of the advantages to the corporate sector in moving to a country with a low corporate tax regime, thus evading higher taxes back home. The US president elect, Barack Obama, has expressed concern about the money lost to the US economy by US companies laundering their profits through countries with low corporate taxation regimes.

Once again this highlights the mugs game played by Ireland in its minimalistic approach to corporate taxation. The direct number of jobs created by US companies in Ireland is thought to be around 80,000. Even if each 1000 of these jobs creates another 500 jobs in other sectors, the total number of jobs - 120,000 - comes at a price of $400,000 in exported profits per job. Doubling the rate of corporation tax in Ireland would bring in an extra $4-5 billion from US companies alone. This additional revenue would create a lot of extra jobs and easily cover the job losses which might arise should some of the foreign companies jump ship. However, given the tough and uncertain economic climate, corporations will be most reluctant to re-locate.

There are many areas in which the state could create jobs, particularly in the education sector. Half of the primary school stock is decrepit and needs upgrading. Railways need to be built. Rail links should be re-establshed at key ports.

Also, the inland waterways need massive investment if they are to serve a useful role in the movement of freight in the futu. In addition, the state should initiate the building of high quality bus stations in all major towns and cities, preferably strategically situated close to railway stations and accessed by priority bus corridors.

Road building projects should be scaled down to maintenance levels, plus the completion of current projects too far advanced to cancel.

Updated Economic Forecast 2008

November 15th 2008.

Updated Economic Forecast 2009

November 15th. Next forecast 12th January 2009

Commentary 23rd November

Ireland

Figures released by the CSO this week showed unemployment reached 7 percent by the end of August, a rise of almost 50 percent from one year previously. This suggests that estimates for the end of year given above are too conservative. It also demonstrates the rate at which the Irish economy is unravelling. Given this very rapid change, it will be no surprise if the Irish government call another budget for Spring 2009. The October 2008 budget showed a lack of appreciation of the scale or duration of the recession. Also, there may be a reluctance in Fianna Fáil to paint an accurate pcture of where Ireland's economy is going, given that this will reflect very poorly on the economic policies of the previous two Fianna Fáil administrations.

The situation in Ireland will be compounded by the contracting economies of the US, UK and Eurozone. The low value of sterling against the Euro - now around €0.85 - and economic difficulties experienced by Britain will impact heavily on Irish exports, and also will have knock on effects for tourism next year.

Little is being said about tourism in official circles at present. However tourist numbers in 2008 are thought to be well down on 2007, as much as 20 percent in some parts of the West. In times of economic hardship, foreign holidays are one of the first things to go. This will be especially true of high cost destinations such as Ireland. 2009 will see a lot of grief in the tourist sector, with many hotel closures and large scale redundancies.

Contraction is also expected in the pharmaceutical and information technology sectors, as world demand falls and manufacturing capability drifts eastwards to China and India.

The fate of financial insitutions based in Ireland looks increasingly precarious. Mergers and takeovers similar to the ones earlier this year in the US now seem likely. The tempation to pour money into the banks - the 'recapitalisation' option - should be resisted by the Irish state. Unless it can aquire a 49 percent stake at little or no cost, the State should refrain from intervention. However, a review of the legislation regarding credit unions, cooperative banks and other alternatives should now be undertaken by the State. There is a growing suspicion that the same problems that have afflicated the banks - excessive borrowing coupled with speculative investment - may also strike the Credit Unions.

4th December

Amid more financial woes across Europe, the Bank of England and  European Central Bank cut interests rates today by 1 percent and 0.75 percent respectively. The Bank of England interest rate now stands at 2 percent while the ECB rate is now at 2.5 percent. These moves are seen as further attempts to halt Europe's steepening fall into recession. However, the cuts are not expected to have any significant effect on the more intractable problems of personal and institutional debt, rising unemployment, and falling manufacturing output. At best, the rate of economic contraction may be slowed.

Meanwhile in Ireland, latest official statistics show unemployment rose by over 1 percent during November - almost 4 times the rate of two months earlier - and now stands at 7.8 percent.  This unwelcome development comes at the same time as Ireland's budgetary deficit for the year has risen to €7.5 billion, with every expectation it will rise a further billion by the end of the year. The total government deficit now stands at €11.5 billion.  Theoutlook for next year is for things to get much worse, with the total deficit rising to €16-22 billion by the end of 2009.

The rapidly worsening situation suggests that the Irish economy is now spiralling downwards out of control, with the government no more than idle bystanders incapable of any decisive action.  

It is noteworthy that the arguably pessimistic scenarios presented by the Sustainability Institute during the last few months have had to be continually revised downwards as fresh information becomes available. However,  the near certainty of a recession in 2009 was flagged as far back as the autumn of 2007, a time when the Irish government was still living in make-belief land and repeating an imbecilic mantra of soft landings and good long term economic prospects. People who warned of an impending crash were accused by government ministers of talking the economy down, whereas the reality was that the Fianna Fail administration, along with its tame coalition partners and gaggle of pet independents, had been cynically engaged in talking up the economy on an altogether grander scale.  It was like a story out of Alice in Wonderland.

As late as the start of this year, the Irish government was still forecasting economic growth of 2.8 percent during 2008, with the promise of still rosier times in 2009.  These quite ludicrous predictions from official sources continued right into the summer,   even though by that time the wider consensus was that the party was over. Even now, the Irish government has yet to acknowledge the scale of the crisis. Its 'solutions' to this 'temporary difficulty' involve cutting back on funding in education - whilst simultaneously offering generous guarantee schemes to the banking institutions. 

Ireland is facing a bleak winter of harsh adjustment to changing circumstances. The prospects for 2009 are dismal. Earlier estimates of unemployment rising to 9 or 10 percent by the end of next year look like wishful thinking. However, it must be noted that there is still a lot of wealth around in that sector of the population who made fortunes in the speculative bubble which was the Celtic tiger. This sector invoke memories of Ireland's colonial past when the peasantry   were expected to be grateful for a few crumbs thrown to them by the people of the big house. Nowadays the people of the big houses are those who have a fondness for making donations to the ruling political party, and who if they can manage it evade paying tax altogether by establishing 'residency' in some other country. It is the epitome of the trickle down philosophy of economics espoused by the now defunct Progressive Democrats. Any trickles that emerge at the end are more like those which flow out of the sewage percolation systems serving the trophy mansions built like medieval castles on hilltops across rural Ireland. 

Given that money is urgently needed in order to maintain essential services, and also for education, re-training, research and other employment-related activities, one might imagine that the Irish state would seek to tap into the rich seam of under-utilised resources represented by corporate profits and individual wealth stashed away in purpose-designed tax hideaways.  In order to do that, however, the current administration would be obliged to admit its economic policies of the last 10 years are largely to blame for the problems now facing the country.

Projected Economic Growth 2009-2020

The graph below paints a picture of what Ireland might expect over the next 12 years.

Economic Growth

14th December

Currency Blues

The balance of supremacy between the various major currencies saw significant changes during the last week. The US dollar, which had been riding high in recent months against the Euro and Sterling, lost some of its sheen in the light of the worsening economic plight of the United States. Whether the leading car manufacturers go under now - or this event is postponed temporarily by the industry being given a new intravenous infusion of capital - is largely irrelevant against the wider backdrop of sharp economic contraction. There is no market for large luxury cars any more.

As a consequence of falling confidence in the US economy, the Euro has made modest gains in the last week and now stands close to $1.35. However, this is a far cry from the giddy heights of $1.60 earlier this year. At one point it looked as though the dollar was on its way to $2.00 against the Euro, before a stronger showing from the dollar undermined confidence in the Euro and the balance of power was reversed. It now appears that China saw strategic advantages in supporting the dollar, as so many Chinese exports are destined for North America. What will happen now is unclear. Possibly the Euro is looking the better in the short term, now that the Obama euphoria has worn off, unemployment continues to grow at record rates in the United States, and there is dearth of fresh ideas on how to handle the situation.

The real story however is the UK pound. Having fallen to a new low of about £0.86 against the Euro during mid-November, Sterling experienced a brief rally at the end of last month. The respite was short lived however. By friday last (12th Dcember) the UK pound was down to £0.89 against the Euro and the stuation has deteriorated further over the weekend. An article by Toby Helm and Paul Gallagher on the Guardian website reported that at some airport bureau de changes travellers were getting less than parity for Sterling. There appears to be a growing anticipation of a run on the pound when world markets reopen tomorrow.

15th December

Irish Bank Bailout

Last week saw a further collapse in the price of Anglo Irish Bank shares. They are now worth only one twentieth of their value one year ago. As reported by John McManus in the irish Times today, there is widening perception the bank is no longer viable. It was also reported in the Irish Times and elsewhere that the Irish government is considering a €10 billion 'recapitalisation' of some Irish banks. Given the continuing reluctance of the banks to consider partial state ownership, this move on the part of the State appears premature. No deal arranged now will have any impact - save perhaps on the banks share price - on the Irish economy in the short term. Who, for example would the banks lend to, even if they have the money? And who decides?  

The State holds most of the aces in this particular negotiation. It can draw up proposals for 49 percent State ownership - with shares purchased at a fraction of current market value - of the first bank to agree to these terms and in the meantime wait for the banks to come round. The other option offered to the banks, that they be allowed to recapitalise from predator companies - the so called 'venture capitalists' - should be contingent of them giving up their unlimited State protection to investors. They can either have one or the other. It's their choice.

Throwing €10 billion of public money at the banks right now is not the right move.

18th December

Interest Rates Approach Ground Zero

The US Federal Reserve cut interest rates to 0-0.25 percent yesterday, the lowest level in the history of the US. This measure may be regarded as something of a last ditch effort to shore up the teetering US economy. It also begs the question: what next? If this doesn't work - it surely won't - then what will the US try next? During Japan's fifteen year long recession, interest rates were reduced to zero but to little avail. It can be argued that the world economy was in far better shape then than now. These concerns have been reflected in sudden nose dive taken by the dollar on world currency markets. Currently the dollar is trading at $1.44, a fall of about 14 percent from the highs reached during November.

Meanwhile, Sterling continues to decline against most other currencies, and is now down to £0.93 against the Euro. The latest fall in value comes as reports in the UK press suggest that the Bank of England is considering a further interest rate cut of one percent.

Ireland

The latest report on consumer spending shows a decline of 7 percent over the last 12 months. This is widely perceived as bad news. However, it can be interpreted in a number of ways. Perhaps lower consumer spending should be regarded as a positive indicator not a negative one. A society that measures itself solely on the amount of money it can spend on (largely non-essential) consumer goods is condemning itself to a future of shallow crass and selfish behavior.

However, lower consumer spending undoubtedly is causing additional headaches for the Irish government as the assumed revenue figured highly in its plans for public spending in 2009. As estimates for next years budgetary deficit continue to rise by a billion euro per month, the Government has warned of a €900 million cut back in spending on health.

While it is understandable that in times of budgetary difficulties, cut back have to be made, reductions in public spending seems to be the only strategy of the current administration. Certainly , there is no indication that other options - increasing tax rates in the corporate sector for example -are being considered. Also, it can be argued that the €10 billion State 'recapitalisation' of privately owned 'Irish' banks is an extravagance the State simply cannot afford. Instead it should allocate this sum of money to strategic long term infrastructure in education, public transport, and new industries based around recycling, and primary or secondary manufacturing. Furthermore, any money taken out of hospital services should be immediately redeployed in the establishment of a nationwide network of primary care health clinics. The recent practice of centralising health care services in an ever-diminishing number of hospitals - the strategy of corporatisation of health - is a disaster. More then ever, health care needs to be re-localised in the community.

19th December "Our Civilisation Will Crash"

All civilisations come to an end sooner or later. The Roman empire, the pinnacle of technological achievement of its era, collapsed once supply chains could not be adequately maintained - in turn a consequence of resource depletion, environmental degredation, poor management and military overstretch.

More recently, a report recently commissioned by the Green party that is clearly not part of the Government's 'smart' solution to the economic meltdown, has the following to say:

" There is little chance we can adapt our current system to perform a 'managed degrowth', if such a thing were ever possible....Our civilisation will crash against the earth's resource limitations, the reverberations and feedbacks will bring in a period of serious, multi-faceted strife. Even the best preparations now will not mean we avoid the coming crisis, at best it will limit the most severe risks" (Economic Growth and its Future, Report to the Green Party [Ireland], 9th December 2008, David Korowicz, Feasta)

The report argues, convincingly, that global and national economic circumstances will seriously hamper investment in renewable energy technologies. Already there is a four year lead-in time for the supply of large scale wind turbines. Instead Korowicz looks at small scale solutions:

"the key to building resilience is localisation. Localisation of goods and services reduces many [supplly chain] risks discussed, it enhances local economies and employment, and makes cascading shocks to critical goods and services less damaging".

All this is eminently sensible. It begs the question, why aren't these strategies being adopted as a matter of great urgency? Instead, we find the Irish government is doing the exact opposite: it is offering lucrative tax incentives to venture capitalists - the terminators of the financial world - to 'invest' in Ireland. 'Invest' in this sense is a somewhat elastic term. In order to give the Government plan some degree of digestability, words like 'renewable energy', 'environment', 'green' are liberally sprinkled in with the more unpalatable bits. We are told Ireland will generate "40 percent of its energy" [presumably meaning electricity] by 2020, implying a 6 or 8 fold increase in installed wind capacity.

The truth is that Ireland will not come anywhere close to this figure by 2020, and probably will never achieve it - 20 percent would be doing extremely well -as it has no means of utilising an unpredictable and intermittant source of energy on this scale. The Government proposals are misguided. A penetration of wind energy above 20 percent, even if achievable, would provide little additional energy security, as the same conventional fossil fuel generating capacity will be needed to cover for periods of no wind. There is a myth being peddled that energy from the wind can be stored in huge pumped storage facilities until such time it is needed. While this is true of small quantities for relatively short periods of time, to store (for example) ten days supply of electricity would require hundreds of facilities the size of Turlough Hill pumped storage facility in the Wicklow mountains. It is a science fiction fantasy. Suitable locations do not exist.

The most worrying aspect of the latest Government plans is the reliance on obsolete free market economic theory - make conditons attractive enough to the corporate sector and let the market do the rest. Unfortunately, recent experience in Ireland and elsewhere shows the folly of such a strategy. It attracts the worst sort of corporate organisations - biotech companies involved in GM products, Big Pharma, communications companies linked to the US military, corporate money launderers and asset strippers. It reduces Ireland to the status of an aircraft carrier for the flag bearers of disaster capitalism. That such a strategy should enjoy the blessing of the Green party is quite disturbing. Given the stark warnings of the Korowicz report, ignorance is no longer an excuse.

The Korowicz report may be accessed on the link below:

Economic Growth Report

More Irish Bank Bailout Blues

Only hours after the resignations of the chairman and CEO of Anglo Irish Bank, it was announced that the Irish State would be taking a majority shareholding in the bank. The resignations, which occured after irregular accountancy practices were accidently discovered by the Financial Regulator, came against the backdrop of a collapse in the share price of the bank. In reality, the Irish State probably has little choice but to take over the bank, as it has already committed itself - albeit foolishly - to guaranteeing all corporate and individual deposits in Irish banking institutions.

In theory at least, the State takeover may not be bad news. The bank could be restructured into a conventional high street bank, thus reducing the need for the survival of other banking institutions. However, much remains unknown about the terms of the takeover. Careful scrutiny of the accounts of the bank will be necessary in order to determine whether Anglo is still a viable entity. Although the directors of the bank have been claiming that its assets easily outweigh liabilities, the collapse in share price suggests otherwise. Assets in this sense include most of the bank's current loan book. Many of these loans (to developers and property speculators for example) may have to be written off as losses.

Meanwhile, the latest ESRI Economic Quarterly Review (19 December) predicts economic contraction (GDP) of 3.9 percent in 2009, with the average unemployment rate rising to 9.4 percent. The figures for the economy are in-part predicated on relatively minor economic contraction in the US (0.9 percent) , UK (1.1 percent) and Eurozone (0.6 percent), and a slight fall (0.4 percent) in exports. This would seem unduly optimistic, especially for the US and UK.

21st December

It was announced today that the Irish State is to put €1.5 billion into Anglo Irish Bank, and €2 billion each into Bank of Ireland and Allied Irish Bank. Apparently, the State will take an 80 percent share in Anglo. Given that Anglo is only worth some €250 million in total at the present time, this seems like a poor bargain on the part of the government. Contrary to earlier reports, it appears the State is also to receive shares in return for its €2 billion stake in each of the other two banks.

23rd December

Little to Cheer about Irish Bank's Christmas Bonus

Apart from the Irish Government and certain vested interest groups, very few commentators have anything good to say about the bank 'recapitalisation' plan. Incredulity has been widely expressed at the decision to pump €1.5 billion into Anglo Irish. Morgan Kelly, writing in the Irish Times today, argues that Anglo (soon to be 75 percent owned by the Irish State) is facing losses of €15-30 billion now that speculative pyramid schemes in the construction sector are falling thick and fast. The market appears to concur, as the value of Anglo shares continue to fall.

Kelly argues that Anglo and Irish Nationwide (another investment bank engaged in very similar practices) "fulfil no role in the Irish economy and their absense would not be noticed". He concludes "Governments tend to forget whose interests they are supposed to serve. Our Government was not elected to look after the managers, shareholders and bondholders of recklessly mismanaged banks. Its sole purpose to to Irish taxpayers*: to ensure that banks that serve a useful economic purpose continue to operate, while those that serve none are swiftly closed down" [*this is slightly incorrect, the State's obligations are to its citizens not its taxpayers, an important distinction]

The €2 billion State injection into Bank of Ireland and Allied Irish, in return for preference shares and a 25 percent representation on the board of directors, appears another poor deal and suggests that the Government lost its nerve at the negotiating table. Although the State stands to receive 8 percent interest on its preference shares - assuming of course the banks actually survive - the Government could have insisted on much greater executive control over the two institutions, begining with the resignation of the existing boards of directors.

Will this intervention into the banks on the part of the Irish State do any good? It certainly won't save jobs, except for a few in the banking sector. It won't address the issue of rising household debt or mortage default. It may eventually allow some new investment in the Irish economy, though without a clear plan on what direction this investment should take, one fears the same mistakes will be made.

For comparative purposes, let us consider what €5.5 billion immediately invested into railways and canal construction might achieve: 15,000 jobs for four years; a saving of over €1 billion in unemployment-related welfare payments; increased income tax revenues of €0.5 billion, increased VAT receipts; and increased turnover for businesses providing the relevant goods and services.

The construction work would be largely completed in 4 years, meaning mass redundancies could occur at the end of that period. However as most of the money would be recycled through the Irish economy, a second phase of investment could follow. Also, some long term jobs would be created in the transport sector.

CSO data shows that the unemployment rate in November 2008 (7.7 percent) was the highest since April 1998.

29th December

Sterling continued ts spectacular fall against the Euro, and now stands at £0.98. Parity seems likely to follow. The falling value of Sterling is good news for British exporters, but very bad news for UK consumers as it impacts directly on the price of UK imports, including food. However, it is believed that the UK Government will intervene to prevent the pound falling much below parity.

Surviving and Thriving in Economic Recession

Negotiating a Financial Emergency

2009/2010 Forecasts

Further commentary will be added in the near future.

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