ECONOMICSENGLISH NOTES NOTES

© The Institute of Education 20120158

SUBJECT: LeavingEconomics Cert English LEVEL: Higher and Ordinary Level TEACHER: Denis Creaven TEACHER: Ray O’Loughlin

Topics Covered:Covered: CurrentYeats’s PoetryEconomic - Themes Topics and Styles

About Denis: Denis has been an English teacher at The Institute of Education for over 30 years and has instilled a love of the English language in generations of students.

About Ray: Ray has been teaching Accounting and Economics at the Institute for 10 years, having taught previously for over 25 years in a convent secondary school. Ray was a regular contributor to the Irish Independent Exam Brief series for 6 years and has also written a number of articles for various business publications. He is the author of Graded Accounting Questions for Leav- ing Cert published by Gill and Macmillan in 2011. Current Economic Topics Question How the Irish economy has performed in the last 12 months

Employment 265,000 recorded on Live Register / 147,000 on The Q.N.H.S . Unemployment is currently at 6.0 % of labour force expected to fall to 5 % by year end .Ireland had one of the lowest rates in the EU and now 2.2 million are in paid employment. youth unemployment however is still 14 %Global downturn has affected Ireland more radically than others due to the fact we are more of an open economy, over-reliant on construction where property was overpriced, also reliant on multinationals who are facing high costs mainly labour rent and utilities. Emigration has camouflaged these figures putting them in a more favourable light Comparable figures Greece 21 %, Spain 16% , EU average 8.6% , UK 4.3 %.

Inflation Prices in Ireland have fallen, with deflation occurring in 2009 and 2010 but reappeared in 2011 and 2012 and 2013 at approx 1-2 % pa. Prices are generally flat this year with little or no inflation . Current fig for Ireland is 0.2 % ( April 2018) EU average is 1.4 %Severe austerity measures which included reduced public service take home pay and increased ,higher mortgage costs through increased rates , electricity, together with the global downturn and banking crisis had reduced demand so any increased prices have come about through increased costs and not increasing demand. The ECB if anything is concerned that inflation is running too low in member countries as a certain level of inflation is necessary for demand stimulus hence the introduction of Quantitative Easing

Economic Growth The economy had contracted by almost 20 % from 2008 - 2012 as GNP figures remained negative while GDP figures have shown a small recovery in 2011 - 2014. The Irish economy had grown by 50 % in the 10 years prior to 2008. GDP is expected to rise by 5-6 % this year mainly due to the strong performance of FDI 's. Growth rate for 2017 was recorded at 7.8 % " leprechaun economics " GNP is also expected to grow similarly due to reduced costs and the re-emergence of dairy product demand. Agricultural are continually rising by over 20 % per year with this year suggesting an even bigger improvement . The milk quota is abandoned and the embargo on Irish beef is lifted from the US , China and many other country's. Government Finances / National Debt Government finances are improving as revenue had collapsed by 20 % since 2007 . from Budget 2018 has predicted an increase to almost € 53 billion it now seems likely revenue buoyancy will increase this figure further .Were it not for the new Universal Social Charge and Carbon taxes the revenue collected would be considerably worse. Our total national debt is currently € 210 billion with debt charges of € 6.1 b. p.a. As we have exited the bailout agreement Ireland is currently funding itself from the markets and is not reliant on external funding arrangements . Nevertheless our General Government Debt of € 208 billion is 70% of GDP but 104% of GNI which is a more realistic measure. ( Stability Pact agreement to be less than 60 % of GDP). Borrowing rate 2.8%

Interest RatesSince the beginning of 2008 the U.S. Federal Reserve has reduced its rates to almost zero.The ECB has followed suit recently with rates of zero percent.This softening of interest rates increases economic activity as consumers and investors are encouraged to borrow and are discouraged to save. As result aggregate demand in the economy increases as the economy expands. This lightening of monetary policy combined with " Quantitative Easing " was designed to kick start the economies of Europe and protect the fragile banking system which had been on the brink of collapse. Overheating in the economy requires higher interest rates though.

Question Effects of The Bailout now in 2018

In 2008 Ireland accepted an € 85 billion bailout loan from the Troika to  Restore credibility and functionality to our disgraced banking system through subprime lending and lack of regulation .  Attempt and restore order and structure to budgetary debt and fiscal problems the Government had allowed to accumulate on the strength of a property and building bubble that had just exploded.  Introduction of Austerity measures to augment and facilitate these readjustments . The banking crisis was the worst and most dangerous since the state was created. Emigration had scared Ireland once again and it seems like we are going to have to go through a long period before we can lure these emigrants back home. Exiting this bailout agreement is certainly not the end of the road for us as we are still in the suffering state of austerity measures which have involved spending cuts , reduced pensions and a host of tax adjustments and new stealth tax introductions. Returning to the bond markets can be a dangerous and nasty place to be when you lose the confidence of investors. However the good thing about bond traders is that they just want their money back . Unlike the Troika They don't tell you how to run your country. Forcing losses from failed banks on senior creditors was an anathema and was never going to work Better times bring new problems such as do we cut taxes or increase spending i.e. the classic tussle we would never have to decide on if the Troika was still calling the shots. They still exert surveillance to ensure economic recovery beds down and takes root firmly. We are still at the mercy of global factors. The main benefits of exiting the bailout are summarised as follows 1. Return to the bond market where rates of borrowing should be cheaper. 2. Increased investment attracted into Ireland with current FDI 's reassured 3. Increased demand and economic growth predicted 4. Employment opportunities and reduced emigration5 5. Reduction of debt interest from €6.1 billion p,a.

Question Testing times of economic recovery

Income tax is being reduced, activity is on the rise in all business sectors, unemployment is approx 6 % from a peak of 15.2 % , GDP is rising by over 4 % p.a. and our budget deficit has changed into a surplus with the possibility of a balanced budget again next year. Yet there are testing times ahead for the Irish economy. 1 Even though the debt to GDP ratio has dipped to 70 % having peaked at 125 % in 2013 a zone of safety would not be reached until the GNI level drops to 70 - 80 %. Ireland's debt mountain is huge. We still owe € 208 billion roughly € 160 billion more than before the crash. 2. The possibility of " Brexit " ie Britain exiting the EU. The implications for Ireland of this happening are too great to even imagine . It would mean a significant withdrawal of foreign from FDI 's with follow on problems of job losses , falling and standard of living. 3 The boom we are experiencing is helped in no small way to the existence of unprecented low interest rates which cannot be sustained into the future. The low rate with which we borrow on debt markets makes us attractive to investors as they will expect such stability to continue 4 Concerns remain that a big moderation in growth in China and other emerging markets could hit the international market in which we as an open economy are dependant upon. 5 Oil prices are currently at their lowest level for 14 years which fits into the confluence of benign external conditions. We are producing at lower costs per unit as a result , which will not continue into the future . 6. The value of the Euro is low in comparison to the Dollar and Sterling at present thereby making our exports more competitive. This situation may give us an artificial and non - sustainable advantage in international trading .

7. Brexit Major long lasting consequences for between Ireland and Britain. Britain is our single biggest trading partner accounting for almost one third of total international trade

Question Effects of Globalisation

Major dominant global firms are now treating the world as one single market, producing and marketing their product in a standardised fashion with products and services being sold under the same conditions irrespective of language and traditions

Irish exporters have now to compete with global firms with regard to price and quality such as Glanbia and Kerry dairy products in relation to the multinational that is Danone.

Whereas Ryan Air has kept its identity Irish Mist liqueur whiskey now in Germany under a different name to suit that market.

The BRIC countries more particularly China and India are now major players in the global market offering over a potential 2 billion population market. Pacific Rim nations such as South Korea , Taiwan and Singapore are now challenging this global space by providing high quality goods at very affordable prices.

Aer Lingus has formed an alliance with British Airways to share this global opportunity as has DAA with a similar alliance with Moscow airport.

Ireland has to be ready for the challenges that these emerging nations bring as they flood the Irish market with products ranging from food to furniture.

Greater economies of scale and modern technology will reduce the cost of being a player in the global economy as we adopt and adapt to newer business models to survive

Question Is the Economy Overheating !

Overheating refers to a stage in the economic cycle when demand is so strong that all idle capacity in the economy is used up and inflation is likely with prices rising everywhere. When unemployment was high a few years ago employers didn't need to coax people into a job with higher wages. Now with unemployment at only 6 % a company may have to offer higher wages to poach workers already in work to come and work for them. Dublin has shortage of software developers / engineers so and other FDI 's are making it difficult for SME 's to keep staff by offering much higher wages. We see the same thing in housing, as the market overheats without the necessary homes available , prices rise. The OECD argues that when unemployment in Ireland falls below 8.5 % Irish wages start to rise. Irish women are not working in anywhere near the same % as they do in the EU in general. 56% as opposed to 70 %. Consequently getting women back to work is very important to stop overheating as would increased immigration. Immigration however will mean more need for housing and more traffic on the roads - a sign that the economy is struggling to cope. Traffic congestion and airport capacity are also symptoms of overheating. Overall traffic congestion currently shows that it takes 43 times longer on average to travel by car on roads relative to what it would take if the roads were not full with traffic. These rise above 80 % at rush hour. Our monetary policy is decided in Germany and therefore the chances of interest rates being appropriate can be hit or miss as we seem to follow the US economic cycle more closely than the European one. Irish interest rates are low when they should be high and might end up being high when they should be low.

An overheating economy as Ireland is currently , needs higher interest rates as low rates are a recipe for instability. Ireland takes European rates which are low as set by the ECB and may be suitable for a fragile continent like Europe but inappropriate for an economy like Ireland.

Question Distorted National Income Figures ?

Economic growth for 2015 had been identified by CSO as 26% for Ireland which is statistical fact but in terms of reflecting what is actually going on it is clearly fiction. This policy nicknamed " Leprechaun Economics " shows Domestic product is being distorted for Ireland as a result of the following

(i) Contract Manufacturing This term refers to a form of outsourcing work by an Irish company (multinational usually ) to a foreign firm to manufacture component parts or products on their behalf. Irish exports have been artificially inflated by this contract manufacturing which is not a true refection of economic growth in Ireland

(ii) Tax Inversions

This refers to a smaller firm based in Ireland taking over a larger foreign based firm and relocating their head office to the more tax friendly country such as Ireland . The deal is dressed up to look like the smaller one is acquiring the larger when the reverse is the case e.g medical device firms Coviden and Medtronic.

(iii) Aircraft Leasing Investment in aircraft for leasing can add to Irelands capital stock while generating very little income here at home. Ireland is a global hub for aircraft leasing with 4,000 commercial aircraft leased through companies registered in Ireland.

(iv) Relocating Patents To avoid tax many pharmaceutical and technology firms such as Apple, transfer international patents or assets to a such as Ireland . A common way to shift profits offshore is through " "which involves multinational subsidiaries in different countries charging each other for goods and services sold within the group. Royalty payments between subsidiaries are priced in such a way to minimise profits in high countries and maximise them in low tax ones.

Question What Economic recovery ?

Ireland may well be the fastest growing economy in Europe this year and while we having falling unemployment and soaring GDP Irish consumers have yet to fully benefit from this recovery. GDP may once have been the tide that lifts all boats but with state's dependence on multinationals only some people in certain jobs, and certain sectors in certain parts of the state are benefiting . The following are the main reasons why recovery is not being felt ;  Earnings have stagnated while there have been massive increases in key areas such as rent, car insurance health insurance even though official inflation appears low.  National Debt is still too high having fallen from €225 billion in 2013 to €200 billion today which is a debt to GDP ratio fall from 125% to 70%. These figures show great progress is being made and Ireland has now become the poster boy of Europe. However Ireland's debt per head is still the largest in the Euro-zone and 3 rd largest in the world carrying a debt interest of €6.1 billion p.a. Irelands debt per head is a staggering € 38,500 whereas Greece is only € 26,600  Mortgage arrears and negative equity where one in 10 mortgages on the main family home is still in arrears.  Tax dependence on multinationals in particular. Last year 40% of all corporation tax was paid by only 10 multinationals and this accounts for 6% of the states total tax take which is very worrying. Clearly the economy could be very vulnerable if even one of these companies change their corporate strategy.

GNI -- Debt to GDP ratio tracks a country's debt to its income and is a good measure of debt sustainability to a point . As GDP has risen so sharply due to " Leprechaun economics " identified though (i) Contract manufacturing (ii) Tax inversions (iii) Aircraft leasing (iv) Patent relocation

Using GNI , a modified gross national income which is a new CSO measure designed to smooth out the impact of the above this % jumps from 70% as % of GDP to the more realistic fig of 106 % when expressed in GNI terms

Question Possible effects of Brexit Negative

1. Trade - Ireland will no longer enjoy access to the UK market.

They will face barriers which will make our agri -food goods in particular more expensive , reducing our exports and national income injection. It is estimated that bilateral trade will fall by 20% 2. Employment - Exporting firms such as Glanbia will suffer a slowdown and as sales decrease costs must be cut with a decrease in the demand for labour 3. The Border - Custom checkpoints will reappear on the Northern Ireland border. This will increase costs for Irish firms through delays administration details etc. This further limits trade with the UK. 4. Tourism - A weaker sterling will make Britain more popular and Ireland less popular as a tourist attraction for UK visitors. Both of these adversely effect out national income 5. Sterling - The UK is more important as a source of to Ireland than as a destination for Irish exports and any trade barriers would increase UK prices here and an immediate drop in the value of Sterling. A weak pound has negative effects for Irish exports.

Positives

1. Investment - Many Multinational companies will be tempted to move out of Britain as they will not benefit from free access to the most lucrative and wealthy market in the world i.e. the EU. This will help us attract more FDI's and bring capital investment here which in turn creates employment and increases our standard of living. 2. Exports - As British exports will become more expensive within the EU market due to trade barriers Irish firms have the opportunity to replace the British products with cheaper Irish quality products. 3. Cheaper UK debt - Sterling is predicted to become weaker in relation to the Euro so this will reduce the cost of repaying debt from the UK