TUMBLING property prices, collapsing consumer confidence, zero economic growth, rising unemployment and soaring government borrowing.
Sound familiar? Then welcome to Ireland, the Tiger Economy model where such things are not supposed to happen.
Last week the Irish government announced it was bringing forward its budget from December to October 14 amid mounting concern over an economic slump and fiscal crisis. Finance minister Brian Lenihan says the aim is to stabilise then restore balance to the public finances. Leo Varadkar, Fine Gael's enterprise spokesman, has accused the Fianna Fail-led government of promoting botched economics and blowing the boom.
The news from Ireland will bring little cheer for Gordon Brown. What will shock many are the extent as well as the speed of the falls. As in the UK, housing has come to a virtual standstill. As in the UK, the government is looking to a package of measures to revive the housing market despite a soaring budget deficit. And as in the UK, the government insists it is "better placed than most to meet the challenges ahead".
But it will hardly bring much comfort, either, for SNP leader Alex Salmond. Both Salmond and other SNP leaders have extolled Ireland as the tiger economy model par excellence, showing how Scotland could prosper with independence. It is a model that has turned decidedly sour. Not only is the economy in deep trouble, but the parlous state of the government's financiers suggest sharp cuts in public expenditure ahead. Ireland has swung from surplus to deficit in short order, with government spending up 11% and tax revenues 8% down. Labour unions are demanding pay increases to keep pace with an inflation rate nudging 5%.
Nor is there much comfort to be found elsewhere across the much-vaunted "Arc of Prosperity", embracing Iceland, Norway, Denmark and smaller Baltic states such as Estonia, Latvia and Lithuania. The region is now facing big problems, particularly with a banking sector facing acute stress.
But it is Ireland that has come down to earth with a bump. Small economies, particularly those undergoing developmental catch-up, can indeed outperform larger ones for a period. But even those like Ireland, with particularly benign business tax regimes, cannot offer sustained performance, and look particularly vulnerable to downturns which can smash the public finances. As a model for an uplift in sustainable growth the SNP administration has pledged to achieve, it requires closer scrutiny.
Everything that could go wrong has gone wrong. Here's how: • UNEMPLOYMENT: More than 247,384 are now "signing on", up 73,200 on August 2007. Mass lay-offs of construction workers are the main reason. But there have also been job losses in manufacturing, retail and financial services. The annual increase in claimants is the steepest since records began in 1967. and the unemployment rate, currently reckoned at 6.1%, the highest for 10 years, is forecast to hit 8% next year.
•
HOUSING: There has been a 70% drop in new home registrations and prices are down 12% from their peak. The value of mortgages advanced to first time buyers has fallen 19% over the year and a package of policy measures is now planned.
•
PUBLIC FINANCES: These have deteriorated rapidly over the summer. Less than two months ago the government was predicting a tax shortfall of ?3bn (£2.4bn) for the year. Last week it said the shortfall would be closer to ?6bn (£4.8bn). The exchequer deficit has trebled over the past 12 months. The key reason has been the collapse in the property market with a big under-shoot in property-related taxes such as VAT, Capital Gains Tax and Stamp Duty. Rising unemployment has also brought sharply higher bills for benefit payments and less income tax. Spending cuts and/or increases in taxes and borrowing now look on the way.
•
BUSINESS: Service sector activity fell to a record low in August while manufacturing employment has fallen in each of the past nine months. Firms report a drying up in demand for their goods from both home and abroad. Until recently, the Irish Central Bank maintained the country would grow at 3% in 2008 – much slower than the 4.8% registered last year. Now Bank of Ireland's chief economist Dan McLaughlin predicts that GDP growth will be zero in 2008, while inflation will average 4.8%.
Elsewhere across the "arc of prosperity" it is not looking good. Iceland's currency lost a quarter of its value against the euro earlier this summer amid rumours of a financial and banking crisis. Ratings agencies signalled concerns over the health of the country's three main banks – Kaupthing, Glitnir and Landsbanki which have expanded aggressively overseas.
Denmark is already in a fully fledged recession and appears to be sliding further into trouble. Industrial orders slumped 22% in June. The central bank has had to rescue Roskilde Bank, the country's eighth largest, after a run of withdrawals by depositors and the Danish taxpayer is now guaranteeing £4.3bn of its debts. Part of Denmark's economic problem has been the effect of the European Exchange Rate System which obliged it to import interest rates in the early part of the decade that were much too low for the economy. The resulting credit boom pushed household debt to 260% of disposable income, worse than Britain (159%) and America (135%).
Sweden's economy ground to a halt in the second quarter and through Swedbank problems have been exported to Latvia and Estonia where the bank has a huge presence, and also Lithuania, where it is the biggest lender. Fitch Ratings has warned that the Baltic trio face a high risk of a hard landing after years of blistering economic growth, with the risk of a loss of confidence in the Baltic currencies and their banking systems.
None of this should detract from the transformations that have been wrought in Ireland and across the smaller Northern European economies over the decade to 2007. Growth and improvements in living standards have been spectacular.
But the impact of the global credit crunch, coupled with the sharp rise in the price of oil earlier this year, has been consistently under-estimated by governments anxious to protect their growth story. They came to assume that their models were good for all seasons. But the scale and extent of the global downturn – with a marked darkening of the mood across markets evident last week – is making us slowly wise to the vulnerability of small country growth and development catch-up models to a downturn in general conditions.
Indeed, they may be especially vulnerable if, as in the case of Ireland, public expenditure was allowed to shoot ahead on the strength of one strong sectoral performance – housing. The Celtic Tiger has gone from hero to zero in short order.
