Belfast Telegraph

Monday 28 July 2014

No light yet, but the end of our woes is in sight

I have done a bit of bottom-fishing - the real kind, not the financial thing. But they have at least one thing in common.

The fisher is apt to get snagged on the bottom and lose some expensive gear. The difficulty for both is knowing where the bottom is. Any ordinary punter still with the nerve to trade shares could have made spectacular profits over the past year. But the losses could have been just as great, with many shares finding new bottoms, often below what seemed possible.

Wise folk take no part in such risky activity. But all of us have an interest in identifying a bottom for the economy. And perhaps - just perhaps - we now can.

Certainly, there have been signs of stabilisation. Statistical data is of little use when looking for a turning point. Figures even three months in the past are too old.

The most up-to-date indicators for the economy are probably Exchequer tax returns and the monthly surveys of managers and consumers. Both seem to be saying that, while the economy has not quite stopped sinking yet, it is close to doing so.

Tax returns for the first three months were broadly on target. The NCB survey of manufacturing managers actually signalled growth for the first time in three years. The equivalent services survey showed another decline in March, but it was very small.

Consumer behaviour is harder to read from surveys, but the findings are at least consistent with little or no further decline in personal spending. After its 8% real fall last year, one might say one certainly hopes so.

Of course, there must always be a bottom - or, indeed a peak. This mathematical truism was regularly pointed out during the boom. The phrase, 'If something can't go on for ever, it probably won't', was quoted frequently. Not that it did much good to change people's behaviour.

In the opposite vein, we may be inclined to read too much into the resumption of economic growth, when it becomes clear that it has finally occurred. That merely marks the turning point. What happens next is what matters.

To take an extreme example - although one that is not that far off the truth - if no houses at all were built this year, there cannot be any further decline in house-building next year. Another year of total inactivity would subtract nothing from growth. It would be a turning point, but not one to bring any cheer.

A sinking ship settles on the seabed in the end. There are fears - expressed regularly by the credit rating agencies - that Ireland may enjoy only a cyclical turning point of this kind, with no great resumption of solidly based structural growth.

One small reason for not taking quite so gloomy a view of the Irish economy's trajectory is that these early signs of stabilisation are coming pretty much at the predicted time.

The consensus from the forecasting models was that the economy would turn around in the middle of this year. Further shrinkage in the first six months would be replaced by growth in the second.

If a way out is found, it would be intolerable if Ireland lost on the recovery for lack of bank finance. There is a credit crisis, but debate on it has been banal to the point of absurdity.

There was no intelligent discussion in the political arena, even over the Financial Regulator's decision that the banks must move swiftly to grade-A levels of capital.

Having done so, at great expense to the taxpayer, the banks must fully leverage that capital into lending if the economy begins to grow strongly. If necessary, they should be made to do so.

How to make them, will require a bit of thought. The Quinn Group saga shows once again that government - this Government especially - cannot be let near individual cases. Risk management should be the preserve of the banks. But their balance sheets will have to be stretched as far as prudently possible to finance an investment and export led recovery - the only kind we are going to get.

It is the old banking story. They stretched their balance sheets when they should have fattened them, and now they will want to fatten them when they need to be stretched. Averting this counter-cyclical danger will require a great deal of ingenuity. And fewer vacuous phrases like "getting credit flowing again".

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