Government’s efforts to boost construction sector questioned

The Government’s recently announced intention to offer mortgage insurance guarantees may be “reminiscent of the bad old days” and should be matched with an appropriate supply side response.

Speaking at the launch of the Friend First economic outlook this morning, Jim Power, chief economist with Friends First, questioned whether Government should get involved in mortgage insurance guarantees given that in other jurisdictions the private sector fulfils this role more than adequately .

“The Government’s recently announced Construction 2020 plan, which includes proposals for new State support in the form of mortgage insurance for young couples, while positive, must be accompanied by a significant supply side response. Simply increasing demand without matching with supply would be reminiscent of the bad old days,” he said.

With respect to the broader economy, Mr Power said that the roots of a real recovery are evident, and, provided the external environment maintains a modest recovery trajectory, the Irish economy should continue to move in the right direction in a gradual fashion. Risks however continue to exist and vulnerabilities such as sovereign, personal and SME debt could very quickly derail a domestic recovery.

While the domestic signs of recovery are reasonably compelling, the key risk to the Irish economic recovery is posed by external factors, according to Mr Power. “While the US and the UK economy are holding their own, the Euro Zone economy remains in a very difficult place and is characterised by low growth, high unemployment, high levels of sovereign debt and deflationary threats. The ECB will have to keep interest rates at the current low levels and possibly ease further, and may have to resort to quantitative easing of money supply, to prevent the Euro Zone from becoming stuck in a deflationary spiral.”

Mr Power also noted that the overall credit situation in the Irish economy is “still challenging” and does pose a risk to the recovery.

“The overall economy is still not getting sufficient credit to fuel a meaningful and sustainable economic recovery. This continues to be a major challenge and one that need to be tightly managed. Businesses, particularly those in the SME sector need access to fresh credit to help them work through the difficult times and to benefit from the upturn. We need strong SMEs to keep any recovery on track.”