ANALYSIS:Our labour markets are as closely integrated as any in Europe

BRITISH COMPANIES export more to the Republic than to the four Bric economies (Brazil, Russia, India and China) combined. This factoid caused some searching of British souls when it did the rounds in London at the end of last year. How, exhorted many, could a small, floundering economy be a more important export market than the planet’s four most-hyped emerging giants put together?

If the importance of Ireland for the United Kingdom’s prosperity tends to be underestimated across the water; on this side of the Irish Sea the hulking presence of the behemoth next door prevents any blindness to the enormous importance of bilateral economic relations.

The UK is Ireland’s largest trading partner. The labour markets of the two economies are as closely integrated as any in Europe. There is a significant two-way investment relationship. In 2009, the stock of Irish direct investment in Britain was €26 billion, while British investment in Ireland touched €20 billion, according to the latest figures from the Central Statistics Office.

There is every reason for residents of this country to pay close attention to economic goings on in our nearest neighbour. Yesterday’s Conservative-Liberal budget provides a good as reason as any to peer under the bonnet of the British economy. The first question to ask when making an assessment of current and future performance is how much damage the Great Recession caused and how it is being repaired to allow for recovery.

Britain has suffered somewhat more than the average among rich economies over the past 2½ years. Its gross domestic product (GDP) underwent a peak-to-trough fall of just under 6 per cent (the bottom was hit 18 months ago) and since the mid-2009 low-point it has clawed back one-third of lost output.

Irish GDP shrank by 15 per cent after the bubble burst. New GDP numbers, to be released today, will tell whether the economy remains face down on the floor.

Things could have been much worse for Britons.

In late 2008, the risk of meltdown was so real that deep under Whitehall, then prime minister Gordon Brown, along with a small group of his most senior cabinet ministers and top security people, planned for social chaos as the entire banking system came close to shutting down.

Even after the nightmare scenario was avoided in October 2008, over the following few months many expected things to be worse than they have turned out to be.

An economy highly dependent on the financial services industry, the costs of bailing out the banks, and the prospect of unsustainably high private-debt levels crushing consumers and businesses all pointed to an even worse recession than has been endured.

One of the reasons Britain did not slide into the abyss in late 2008 was its capacity to hit the fiscal accelerator and power away from the brink.

With comparatively low levels of public debt at the time of the crisis, about 40 per cent of GDP, the then Labour administration had the headway to ramp up spending to offset the weakness in private demand. It also had political leeway; there was near consensus across the parliamentary spectrum that stimulus was needed and could be effective.

Now there is profound disagreement between the government and the Labour opposition on the timing and speed of stimulus withdrawal. Labour gradualists argue that depriving the economy of publicly-generated demand now could push it into a recessionary tailspin. They argue there is no point in taking such a risk when the bond market shows no signs of losing faith in Britain’s ability to repay borrowed money.

The ruling coalition sees the current budgetary trajectory as unsustainable – Britain is running some of the largest budget deficits in the world and public debt has more than doubled to more than 80 per cent of GDP.

They say if the brakes are not hit now, Britain risks invoking the wrath of the bond market, and suffering the same fate as Ireland and Greece.

It is impossible to say who is right. It is possible to say that the outcome will have a big impact of jobs. Since 2008, British employment has been less affected than many other countries and hit far less than the last two major recessions in the early 1980s and 1990s. One in 50 jobs has disappeared compared to one in 17 two and three decades ago.

This has limited the upward pressure on the rate of unemployment, keeping it below 8 per cent. Less positively, the most recent indicators show that joblessness among the young is at record levels, something opportunity-deprived Irish youth will be bearing in mind when eyeing up emigration options.

Last week’s report on the British economy by Organisation for Co-operation and Development (OECD) forecast a marginal acceleration in GDP growth this year compared to last, with a solid 1.5 per cent rate of expansion pencilled in for 2011. Next year, it believes the British economy will move up to its trend rate of expansion of 2 per cent.

Even if these forecasts turn out to be correct, however, the gains for Irish exporters will likely be less than suggested owing to the composition of growth. The OECD (along with other optimistic forecasters) expects exports to generate much of this growth, as the domestic economy reels from the effects of austerity.

And that is where there is bad news for Irish exporters.

A weaker domestic economy means weaker demand for imports. The OECD expects the rate of import growth to be cut 2011, from 8 per cent last year to 4 per cent and remain at that rate next year.