Are we finally emerging from the economic crisis?
IT is almost two years to the day since the unprecedented run on Northern Rock and one year exactly since investment bank Lehman Brothers filed for bankruptcy.
The two events will forever be viewed as landmarks of the current global financial crisis, which has had a massive effect on Northern Ireland.
The causes of the meltdown were complex and have been discussed at length by commentators.
They included not just excessive lending by bankers and excessive borrowing by consumers, but also the global imbalances in the world economy. The first rumblings of a crisis came on August 9, 2007 when French bank BNP Paribas said investors couldn’t take money out of some funds because of a lack of liquidity in the market — a clear indication banks were not lending to one another.
But it was not until Northern Rock’s perilous situation was revealed that it became clear the problems of City highflyers were spilling over into businesses that affect people’s daily lives.
The run on Northern Rock was the first on a UK bank in over 100 years, caused by its high leverage and reliance on the markets to fund mortgage lending, rather than savers deposits.
Such was the panic that the Newcastle-based lender would collapse and account holders were flying back from as far away as Australia to join the queues outside their local branches.
‘The Rock’ was quickly left with no option but to go cap in hand to the Bank of England for a liquidity injection, a move that |ultimately saw the lender |nationalised in early 2008.
Northern Rock’s troubles stemmed from involvement in the so-called subprime mortgage market — lending to buyers at risk of defaulting on loans and often without any deposit.
Defaults in the US sub-prime market had been increasing throughout 2007 and caused trouble across the financial system as many of these mortgages had been bundled up, given credit ratings and sold on to banks and investors as securities.
Fears then arose among banks over their contemporaries’ abilities to cover these bad loans. That increased costs on the wholesale markets — with overnight rates that banks charged one another to borrow money rising sharply.
That in turn saw lending to businesses and individuals quickly dry up.
The lack of liquidity exposed many of the excesses of the City and Wall Street, and the complex, risky instruments which were being traded on the markets.
Suddenly people wanted to know what exactly a collateralised debt obligation or credit default swap was.
The US government took the decision exactly a year ago to make an example of Lehman Brothers and let the 158-year old institution fail amid huge debts, a drastic drop in the value of its stock and marked devaluation of its assets.
As it turned out Lehman was to be a lone scapegoat, and both the British and Irish governments joined the US in bailing out other institutions to the tune of billions, rather than risking the collapse of the whole banking system.
Inside a month the giant US lender Fannie Mae had been |nationalised, Lloyds took over HBOS, the US authorised a $700bn bailout plan for most of its major banks, Bradford and Bingley was nationalised and the UK government had to rescue both Royal Bank of Scotland, the parent group of Ulster Bank and the combined Lloyds-HBOS.
By the middle of this year stock markets were down as much as 40%, UK unemployment was over 2.4 million, house prices were down as much as 30% and the world had entered its steepest recession since World War II.
While many in Northern Ireland were initially confident that ructions on the financial markets wouldn’t have an impact here, it was not long before the effects of a full blown recession outweighed any perceived cushion provided by our large public sector.
According to the latest Department of Enterprise Trade and |Investment figures, the number of people claiming unemployment benefit in Northern Ireland stood at 51,000 in July, up almost 90% from a year earlier, and the overall unemployment rate is 6.7% and forecast to keep rising
Once celebrated companies like Bombardier, FG Wilson, Seagate and Nortel all axed jobs, while others such as Visteon closed down.
Household names including Woolworths, Zavvi and MFI disappeared from the high street, adding to the jobs gloom.
And as bank lending dried up, house sales ground to a halt, invoices were taking longer to pay and small businesses began to fail at an alarming rate.
Richard Ramsey an economist at Ulster Bank believes the housing market slump most clearly illustrates the impact of the financial |crisis at a local level.
“A lot of people have learnt the hard way that property prices are not a one way bet but can go down as well as up,” he said.
“The other main impact of the financial crisis was it shattered the belief that the Northern Ireland economy was recession proof.”
One of the biggest victims of the economic downturn at a local level has been the construction industry, which in turn has impacted on other professions.
John Armstrong from the Construction Employers Federation says the fallout has hammered the province’s building industry.
“The official unemployment figures show 14,000 people from the construction industry are signing on. But we estimate from research we’ve done that it is nearly double that amount given the high level of self employment in the industry.”
He said there has been “stirrings” in the housebuilding sector but added “the order books for general construction and civil engineering projects for the start of next year are empty,” he said.
And the rising rate of unemployment is fuelling fears that key skills will be lost in sectors such as construction and manufacturing. On Friday Employment Minister Sir Reg Empey voiced concerns for the future of workers at east Belfast firm Hughes Christensen after it said it had plans to axe 98 jobs.
Ann McGregor, chief executive of the Northern Ireland Chamber of Commerce said: “The damage inflicted on these and other sectors has undermined attempts in the past to transform Northern Ireland into a private-sector led economy.
“It has shown just how weak and vulnerable our private sector really is and that we need to work even harder to strengthen and broaden our business base in terms of industries, especially locally-owned companies, and in the export markets they serve or have the potential to serve,” she said.
“Worryingly, Northern Ireland is now the UK region with the lowest percentage of its working age population in employment.”
Nigel Smyth from the CBI believes Northern Ireland businesses have learned that cash is king during the crisis. “You can’t do a lot in business without access to credit. Looking beyond the extremely tight credit conditions which businesses are continuing to face, in the medium and longer term companies with growth potential will have to look beyond traditional borrowing mechanisms.
“Without greater access to equity, and the development of a larger equity market in Northern Ireland, the growth potential of the region will be curtailed.”
Jonathan Walmsley from the Federation of Small Businesses in Northern Ireland agrees, saying pressure on cash flow is still forcing many firms out of business.
“The banks are telling us the money is out there and they are making it available but our members are telling us they are still having huge difficulties accessing these funds.
“The money may be available but our members are saying the hurdles they have to jump to get it are incredible — we are hearing horror stories of long term overdrafts being turned into loans and healthy viable businesses being pushed to the brink through credit refusals,” he said.
With the FTSE 100 index climbing back above the 5,000 mark for the first time in a year last week and a series of more upbeat economic indicators, hopes have been raised that the worst is over.
However, Ann McGregor does not believe there is cause for excitement just yet.
“The global recession appears to be bottoming out, but this is unlikely to have much impact on Northern Ireland in the short-term,” she said.
“What we are probably looking at is an anaemic global upturn later this year. To add some strength to recovery, the UK government in particular must encourage and support business as the primary growth engine. This means resisting the temptation to raise taxes and other burdens on companies, especially the SMEs on which the economy depends.”
The FSB’s Mr Walmsley said it seems unlikely the recovery will occur overnight given the sustained period of economic decline.”Recovery depends on consumer confidence and spending and without jobs there is no money and without money there is very little consumer confidence,” he added.
Mr Smyth also believes the recovery will be fragile as the credit crunch has led to a major decline in business investment over the last 12 months.
“In Northern Ireland there are encouraging signs of stability across key markets — housing, manufacturing, business services, and in retail. Internationally there is some reasonably positive news, which in turn should help drive an export led recovery.
“Confidence is starting to return, though from very low levels. The likely scenario is a modest return to growth in the final quarter and into 2010.”
Ulster Bank’s Mr Ramsey equates the current situation to the local economy having gone “Back to the Future”, with many sectors now starting from positions they were at four or five years ago.
“Getting growth and seeing a rise in business activity is the easy bit but it is going to be growth from extremely weak levels across all sectors of the economy.
“Even the growth we will see won’t be sufficient for many firms to avoid further cost cutting and job losses in the year ahead,” he said. “It is going to be a long slow road to recovery.”