Patrick Honohan: Sketching a broad economic picture including
employment prospects
Address by Mr Patrick Honohan, Governor of the Central Bank & Financial Services
Authority of Ireland, to the Trinity Alumni Career Network, Trinity College, Dublin, 9 February
2010.
* * *
What can I say to graduates seeking employment in this, the deepest of recessions in living
memory? There is much to talk about. In these opening remarks of your sessions, I will
confine myself to sketching the broad economic picture in which your employment prospects
will be determined.
First let me confirm that, in my view, the overall thrust of macroeconomic policy and the pace
and scale of budgetary adjustment seems about right to me as a basis for building a
sustained recovery. Few are now tempted here to suggest a Keynesian demand expansion
fuelled by a larger budget deficit. Of course it would be nice to have the additional demand
injected into the economy, but this cannot come from the budget in our present
circumstances.
If we needed any reminder of how impossible such an approach would be, we need look no
further than the recent movements in interest yields on the government debt of some other
euro-area countries. Whether we like it or not, governments need to keep convincing the
markets that their budgetary and borrowing plans are viable and will be delivered.
Interest rates on Irish government bonds, much lower than they were only a few months ago,
have remained relatively unscathed during these past weeks of heightened tensions in the
international markets for sovereign debt. This is clearly because of the degree to which
foreign confidence has been building in Ireland's ability and determination to restore the
public finances along a clearly defined strategy, as exemplified by the relatively tough
measures already taken.
Continued adherence to this disciplined path will result in lower borrowing rates for the
government - and will help accelerate the budgetary correction and reduce the long-term
drag of debt servicing as we come out of the recession. The broad consensus on this need is
one of Ireland's great strengths in tackling the recovery.
One of the factors keeping borrowing rates higher than they might be is the financial market's
concern about the future costs to the Government of recapitalising the banking system. This
cost will become clearer over the coming weeks, as the NAMA purchases clear the way for
capital-raising exercises by the banks. It will of course be a sizable sum, though some of
what is needed may be raised by the banks themselves through such steps as asset sales,
new issues of equity, and discounted debt buybacks. Still, it is pretty clear that the
government will be acquiring additional equity stakes. While I'm not yet in a position to put a
number on it, I can say that the overall net cost to the State of recapitalisation will be
manageable.
Indeed, the recapitalisation will ensure that the banks are clearly seen as strong, financially
self-reliant entities able to fund themselves in the market into the future. By the same token,
the overhang of the banking situation on the state's finances will be removed. These
transactions are thus a key ingredient in moving both the banking and the budgetary situation
forward. As the market digests and acknowledges these new realities, we can expect a
further tightening of borrowing spreads.
This may all seem a little removed from your immediate preoccupation, which is the job
market. But I think you will agree that an overall economic pick-up in Ireland offers the best
route to improved job prospects here for yourselves, and that pick-up will depend on a
speedy resolution of the budgetary and banking problems.
Those of you who have the ambition and capacity to start on a career of entrepreneurship
have an even more direct interest in ensuring that the banks are functioning providers of
credit. I think it's fair to say - and what data we have seems to bear this out - that banks in
Ireland have reacted to their own difficulties and to the downturn by greatly reducing their risk
appetite. Some of this was a necessary adjustment, but the result has been limited
availability of credit for start-up firms and SMEs. Indeed, I have the impression that, during
the years of property-based lending, the banks have lost their edge in small business
lending. This is something that they need to pay more attention to, not just for the sake of the
economy, but for their own business performance in the years ahead when property-based
lending will be on a much more limited scale. A number of new initiatives have been floated
in this regard. It is important that the banks get going now on improving their techniques for
making sound small business loans.
At the aggregate level, the pace of economic activity and the trend in unemployment still
remain weak. The decline in aggregate income is bottoming out, but (in the second quarter of
2010) at a level perhaps 16 per cent lower than at the peak. (That's GNP: economic activity,
measured by GDP it is about 11 per cent down). Unemployment we think will continue to rise
somewhat during 2010, though a reversal of net migration flows will serve to limit this.
The current recession has resulted in a significant deterioration in the labour market position
of the young in the worst affected countries. In Germany, the unemployment rate has hardly
moved during the recession, whether at the aggregate level or among the under-25s. In the
USA, which has seen its aggregate unemployment rate double from about 5 to about 10 per
cent, youth unemployment went up only slightly faster from 12 to 19 per cent. But in Ireland
youth unemployment has jumped from less than 10 per cent to over 31 per cent in the past
two years - much faster than the aggregate rate which has gone from 4.7 to 13.3 per cent.
(Spain has had an even worse experience). This has to be turned around: and that will
require determination.
Some lessons can be learnt from past experience here.
This is the fourth major recession I have lived through, though I was only in Primary School
for the dip of the mid-1950s which prompted the sea-change in economic policy and gave us
the outward-looking globalised society we live in today. Globalisation has allowed us to
converge in average living standards to the European frontier, but globalisation also does
seem to be associated with heightened volatility, and the depth of the current downturn
reflects the over-heated expansion that preceded it, which in turn was fuelled by credit
sucked-in to Ireland all too readily from the globalised financial system. In short, we did not
manage our engagement with the global economy in a manner consistent with stable growth.
But if globalised economies can fall far, their recovery can also be vigorous.
The spectacular recovery of employment and fall in unemployment after the deep recession
of the mid-1980s has rightly been attributed among other things to the wage restraint that
characterized the social partnership from 1987 on. Wage restraint is all the more important
now, when price levels have been falling, with the result that nominal wage rates that might
have been viable a couple of years ago, no longer make commercial sense. The problem is
even worse because of the unsustainable upward drift in wages that occurred in the mid
2000s. I am sorry to bang on about this, but Central Banks aim at overall price stability to
help ensure that wage and price planning can be carried out in a manner that ensures stable
growth. When, as in Ireland today, inflation undershoots the target and goes negative, it is
incumbent on me as a central banker to alert workers and unions to the consequences. I
interpret the recent reductions in the net pay of public servants not only as a significant
contribution to correcting the budget deficit, but also as a signal of the realignment of overall
wage rates in the economy that is needed to restore employment growth.
The employment boom of the 1980s and 1990s also owed a lot, I think, to an emergent
cando attitude and a new willingness of the younger members of the Irish labour force (who are
now, of course, in their 40s and 50s) to exploit an innate flexibility and turn their hand to any
likely type or location of employment, without standing on ceremony, and without adopting an
attitude of entitlement. It helped too that already third level education had become so
widespread. For me, third level education at its best conveys much more than specific
discipline-related skills. It enables the consolidation of generalised job-market relevant
capabilities and understanding. These are what, perhaps unknowingly, you have to offer to
the economy today. The openings may not be obvious, but seize them when they come,
regardless of how ephemeral they may seem likely to be, how poorly remunerated at first, or
that they do not yet fully exploit your hard-earned degree-specific qualifications. The speed
and solidity of the economic recovery will in fact depend to a considerable extent on the
enthusiasm and application of people like you in finding and working on the opportunities that
do exist.
If you do go abroad for better immediate prospects, I hope you will not turn your back on
Ireland. I have worked abroad for a few years at a time on more than one occasion. I found
returning after one or two years easy; after a third year the new roots were harder to pull up.
Some authoritative analysts are forecasting quite strong growth in output and employment
already in 2012. Should this materialise, it will be good news both for those who stay and
those who, like so many Irish over the years, leave to explore possibilities abroad.
Meanwhile, it is for us in the older generations to re-establish the conditions for this stable
growth. That is a task to which, both in its monetary policy role, and in relation to financial
regulation and supervision, the Central Bank is renewing its efforts.