| 1.1°C Belfast

End of bloated building bubble heralds a return to normality


Abandoned: Just one of the many ghost estates left unfinished by building firms after the property bubble burst in Ireland

Abandoned: Just one of the many ghost estates left unfinished by building firms after the property bubble burst in Ireland

Abandoned: Just one of the many ghost estates left unfinished by building firms after the property bubble burst in Ireland

So far, so good, may seem a strange way to describe the state of the economy. But you know, it could be worse.

True, according to the new economic report from the Department of Finance last week, it is worse than they hoped.

They now expect the economy to grow by just 0.7% this year instead of the 1.7% hoped for at the time of last December's Budget.

Others are more gloomy. The document quoted the IMF's 0.5% forecast. Moody's credit rating agency recently went for 0.4%. It is indeed a bit rum when a 0.7% forecast is seen as optimistic but other forecasters say the economy will shrink again.

Expansion and contraction of GDP are not the whole story, though. We are in a public finance crisis and the public finances deserve more attention than the raw GDP numbers. One reason is the impact of investment on the performance of GDP.

In this context, investment largely means construction. The baleful influence of the building boom and bust was highlighted last week by economist Daniel Gros of the Centre for Economic Policy in Brussels, in a more dramatic way than most Irish analyses.

I may have been more impressed than most because Mr Gros endorsed my view, expressed before the crash, that the building bubble was more dangerous than the price bubble.

The latter gets more comment because it affects every property owner. Even those with no mortgage and no plans to sell - such as your correspondent - muse on the price they could have sold for, and what their house would fetch now.

Others are trapped in the horror of negative equity.

This has a "wealth effect," affecting the propensity to consume but the construction story is the main reason why the Irish crash is one of the worst ever recorded.

Mr Gros compared France and Spain, where property prices rose by similar amounts, but where only Spain had a construction bubble. One economy has been forced out of lending markets while the other, at least for now, seems largely unscathed.

Mr Gros points to one reason: putting the excess of building in Spain at up to 35% of GDP, but the Irish "overhang" at 60%.

This vast quantity of unwanted houses, apartments, offices and shops will take a decade to absorb.

The cost of building it destroyed the banks and then wrecked the public finances when it was decided to save the banks.

As we know, there is more to come as many households find they cannot service their huge mortgages.

What about "so far, so good?"

Well, further declines in construction will depress the GDP numbers. But there is no good moaning about that.

The fact is that the building industry has not collapsed. It is the building bubble which collapsed, as it had to.

The contribution of construction to the economy is now the same as it was in the mid-1990s and on a par with that in the rich EU states, although it would have to shrink further to reach German levels.

This is the great difficulty with a business like this. The bubble conditions, which lasted for five to 10 years, depending on who you want to believe, seem like normality.

Government politicians yearn for all the jobs which could be created if even half the lost output in construction could be restored through the building of worthwhile projects.

Everyone wants an increase in consumer spending - the best job creator of all.

From an Irish perspective, one of the more intriguing aspects of the economy is that it is behaving much as one would expect from models of its past behaviour.

It is not lying in bits all over the floor.

Part of the evidence for that is the good performance of the export sector.

In one sense, it is not as remarkable as some of the commentary would suggest.

The depressed state of the domestic economy makes the external side look better. The encouraging bit is not that it is a great performance, but that it is much as would have been predicted.

It raises the possibility that the same models, which suggest a return to reasonable growth next year, could be right about that too.

Given that, by then, the country is expected to be earning more abroad than it is spending - unlike its bailed-out companions - such an outcome would transform attitudes at home and overseas.