IT IS no understatement to say that the economic and business climate is at its most challenging in decades. The extent to which the national and global economic landscape altered during 2008 is illustrated by the fact that this time last year the consensus forecast was that Ireland would record modest economic growth of 3 per cent in 2008. As things turned out, the economy has limped into 2009 some 2.5 per cent smaller than it was just 12 months ago.
The economy was hit by a double whammy as the end of the domestic housing and consumer booms combined with the global slowdown and credit crisis. Excessive and now manifestly unsustainable borrowings of Irish households and businesses have been cruelly exposed and if leverage was a byword for the boom, then its evil twin, deleveraging, will figure large this year.
The balance sheets of companies and households will have to be reconstructed. This will translate into less spending as families and individuals try to rebuild savings and avoid asset disposal. It is already apparent as demonstrated by record falls in retail sales, consumer credit and other indicators reported during the last quarter of 2008. The wider consequences such as job losses and company failures are escalating and 2009 will see the return of substantial emigration.
There is some ground for hope that the downturn could be relatively short-lived, with recovery coming towards the end of the year or early in 2010. The main reason for optimism is the scale of the financial stimulus that has been unleashed globally, most notably by the US authorities.
The extent to which the US and other leading nations - with the arguable exception of Germany - have faced up to the global slowdown is in marked contrast to the rabbit-in-the-headlights mode in which our Government seems trapped.
The speed and extent of the downturn clearly blindsided an administration and a generation of politicians more accustomed to prosperity. As a result, they have become intellectually lazy in a political culture that relies on buying its way out of trouble. Now that the money has run out, the Government has failed to show that it is up to the task.
This became apparent with the decision to bring forward the budget from December to October when it was neither fiscally prudent nor relevant. It was indicative of a foolish belief that political theatrics could do the job of sound, evidence-based policymaking; style over substance. The mistake was compounded by the intensification of the credit crunch which understandably distracted the Government.
The result was a budget littered with political mis-steps and which is now redundant, with pretty much every one of its underlying assumptions from tax revenues to inflation superseded.
Despite protestation to the contrary a second or mini-budget in the spring seems unavoidable and necessary. But this time the Government must get it right.
* * * * * * *
THE DOMESTIC banking crisis also found the Government wanting. Having moved decisively in September to underpin the banks with a comprehensive guarantee, the Minister for Finance was too content to rest on his laurels. The failure to quickly follow through with a recapitalisation programme for the banks has caused unnecessary damage to the economy and also ceded a good deal of the initiative back to the banks.
The Government has subsequently adopted a piecemeal approach to the recapitalisation that will minimise losses to the banks' shareholders and limit exchequer involvement. But, as a result, the recapitalisation plan could prove catastrophically inadequate if more pessimistic predictions about what will transpire this year turn out to be accurate.
It is obviously in the interests of the banks to take such a risk, but it is hard to understand why the Government should partake in such a wager given the wider task that it faces.
More pertinently, some three months into the current phase of the crisis, there is only agreement in principle to inject money into the three largest banks, but no sign of the reforms and restructuring that should have been the price of a taxpayer-funded bailout.
Instead we have had some strident calls for heads to roll by Green Party Cabinet Ministers and Senators who do not seem to see the need for a connection between their words and deeds by the Government of which they are part.
Sorting out the banking system is a major task, but it is only one of a number of problems that have to be addressed. It should have been resolved by now and will continue to distract the Government in the coming months.
* * * * * * *
THE OVERRIDING challenge now facing the Government is to get a grip of the national finances and lay the groundwork for a sustainable recovery. This will undoubtedly involve further cuts in expenditure and new revenue-raising measures.
The Government needs to address also the immediate problem caused by the weakness of sterling which is the latest and most vicious manifestation of our loss of competitiveness. In the short term, this can only be achieved by cutting costs for existing business. But in the longer term, it means putting money and resources into industry sectors in which costs alone are not the dominant driver of success.
It is time the Government got to work.