How high can interest rates and the price of oil go? How far can house prices fall? Will exports pick up again or keep falling? Will the government cut expenditure or raise taxes or both? When will stock markets stop falling?
So many questions and so few crystal balls.
Recessions have to run their course and given the size of the mismanagement of our collective finances, this recession may take longer than previous ones.
For what it’s worth, my own view is that interest rates are likely to go higher before they come down again.
The main reason for this is that despite the ECB’s 0.25 per cent rate hike last week, the money supply true inflation – is still running ahead of wages and productivity in Europe, and this is certainly the case in the USA, UK and most other countries.
And in poor Zimbabwe, the government can’t print banknotes fast enough to keep up with hourly price rises and price inflation there is running at over a million per cent per year!
This is also one of the reasons why oil prices are so high, but high demand by developing communities is also fuelling (pardon the pun) the price of oil.
As for house prices, there aren’t too many signs that the price bottom has been reached and that prices will rise anytime soon.
Higher interest rates and the tightening up of credit generally by the banks will put more pressure on affordability as first time buyers, and others who may have thought of trading up, find it difficult to meet all their other costs.
Many will keep renting rather than buy an obviously devaluing property. Property bubbles typically take about seven years to deflate and return to peak prices, according to Galway economics professor, Alan Ahearn: given how large ours was, that timeline may be a little optimistic.
Will exports pick up again? Of course they will, but not anytime soon, say pundits given the weak currencies and consumer spending in the US and UK which account for about 40 per cent of all our exports and the weakening European economy.
It takes time to develop new markets and while Irish companies are making significant inroads, this sector will also struggle.
Until business picks up exports, services, retailing and housing, the Irish government’s tax take is going to keep going down. Higher unemployment rolls won’t help either.
A few billion euro has be cut from existing expenditure already this year and the exchequer will need to borrow more than expected to meet essential expenditure, wages and pensions for the public and civil service and to meet vital development costs.
How should the ordinary person react to all of this? Well, a good way to start is to just accept that what goes around comes around.
Some people saw the writing on the wall a couple of years ago (readers of this column, I hope) and reigned in their spending, paid off their most expensive debts and started putting aside a contingency fund just for these rainy days.
Now they should also accept that higher indirect and direct taxes and a cutting down of government services might also be on the cards: higher car tax rates depending on your car’s carbon emission is a good example of this, but old reliables, like booze and cigarettes are likely targets for next December’s Budget.
No widening of tax bands is also likely, and I wouldn¹t be surprised to see top rate income tax edged up a little higher.
A realist probably shouldn’t expect too many parliamentary cutbacks (of salaries, pensions or perks) and it will be a huge surprise if public and civil service incomes or pensions are adjusted – the unions are simply too powerful – hence the inevitable tax hikes.
Be prepared to strip out the few hundred euro you might have received from the last Budget out of your own budget in 2009.
As for the stock markets, the only certainty is that they will continue to be volatile. The Irish stock market, dominated by bank and building-related shares, rose in tandem with rising house prices.
The fall in the ISEQ was inevitable once the housing market collapsed. The performance of a typical Irish, managed pension fund is down 15 per cent over the past year and even over 10 years is looking at a typical return of only about three per cent.
Internationally, it’s a similar picture: stock markets reflect consumer confidence and when house prices fall and oil prices soar, consumers stop spending.
Company profits are hit and stock prices fall. Calling the bottom in a falling market is very difficult because investors underestimate just how volatile they can be or how much lower share prices can go. The Japanese property and stock markets are a perfect example of this: 18 years later neither have recovered from the asset crash that began in 1990.
So what should you, the ordinary worker, pensioner or investor do to protect your existing wealth, your job, your home?
The most important thing is to recognise that the boom is over and that the credit-fuelled bust could be (again, I’ve no crystal ball) very painful. But there are loads of practical, manageable things we can all do to get through it in one piece.
Over the next few weeks I’m going to look at some practical, immediate and hopefully short-term actions you can take to cut down on your expenditure to compensate for higher food, energy and other everyday costs.
Next week’s column starts off the series with the importance of protecting your existing wealth and assets whatever your age – and the information you need to arm yourself with when you go looking for professional, fee-based investment advice.
