Notes on the Front

Today is the start of the traditional builders’ August holidays. Today is ‘Black Friday’. It has been designated thus by commentators and industry spokespersons (mostly off the record) who have been predicting that today will be the last day of work for a number of building workers as a considerable number of them won’t have a job to come back to. It is part of the expected job losses in the construction sector resulting from the decline in housing starts. This would have an effect on any economy but especially here, as the Irish economy has been so dependent on construction growth. While one should guard against the ‘Cassandras’ predicting woeful tidings, if they are even half right, we could be at the beginning of a rough ride (and don’t forget, Cassandra proved correct).

To get a flavour of how dependent we have become on construction one only has to know that construction makes up approximately 20% of our GNP output. In other words, for every €5 of wealth created, €1 is generated from construction. This is twice the EU average. And this output is dominated by the residential sector: nearly 2/3 of all output comes from building homes. Its not just economic growth that is so dependent on construction.

Currently, there are approximately 280,000 people engaged in construction – or a little over 13%. But this doesn’t tell the full story. The CSO assumes there are an extra 40% are engaged in construction-related jobs – suppliers, auctioneers and brokers, finance, gardeners, etc. Put this together and there are 19% whose livelihoods depend on construction. So the next time you walk down the street, just remember: on average, one out of every five people you pass depends on a healthy construction sector for their livelihoods. In fact, between 2000 and 2006, construction and related activities accounted for nearly 40% of net job creation. The Irish economy is not just dependent on construction, it is uber-dependent.

So what will ‘Black Friday’ mean? Davy Stockbrokers is predicting a loss of 35,000 jobs in the housing sector alone. That is an incredible turnaround: a sector that was a major contributor to job creation will be the largest shedder of jobs. However, it’s not quite so bleak. They are predicting this loss will be off-set by other construction sectors (e.g. commercial, infrastructure, etc.) so that the net loss will be in order of 17,000 jobs.

However, the issue is not so much the absolute losses but the end of construction as a contributor to job growth. Ireland has had a remarkable record of job creation in the last six years – even with the post-9/11 downturn (though much of that has been in poorly paid service sectors). Davy, however, is predicting a sharp fall in employment creation – owing not only to the job-shedding in the construction sector but also to declining economic growth. If Davy’s projections hold up we will see within two years annual employment creation plummeting by 76%.

This leads us to the dreaded spectre of increased unemployment. Davy projects an increase in unemployment to 6% by the end of 2008 – up from 4.1% at the end of 2006. It may not seem much but it does constitute an increase of nearly 50%. From this little ‘seed’ could we experience the ‘great oak’ of high unemployment? Probably not (or should that read ‘hopefully not’?). It’s hard to imagine that society would countenance the high levels of unemployment experienced in the 1980s – when it topped out at 17.3% in 1986. But rising unemployment is not a cataclysmic once-off event. Rather, it’s more like the frog in ever-warming water.

Between 1971 and 1981 unemployment rose from 5.5% to 9.9% – an increase of 4.4%. That was pretty bad. But it only amounted to an average of 0.4% increase each year. Unemployment rose – surely, but ever slowly. Even when unemployment ‘took off’ in the 1980s, it still averaged an annual increase of 1.4%. Compare both these figures with Davy’s projection for the next two years: 0.9%. Right smack in the middle.

Of course, you can’t take two years out of a forecast and compare it with longer periods in the past. And Davy tends towards the ‘half-empty glass’ predictions.  The Central Bank is not so pessimistic – though it, too, predicts a fall in employment creations.  However, we should treat it as cautionary. More people pulling down unemployment benefit, less people paying tax, greater demands on public spending arising from an older population: combine these with a downturn in the biggest job creation sector in the last six years and you can see the bumps in the road ahead.

There is time to act, but it will have to be done in a way that past Fianna Fail governments have never done. For they let rip the housing market, ignoring the effects over-reliance on construction might have on job creation and Exchequer revenue. Do they have a ‘Plan B’? Doubtful. But it’s doubtful the opposition parties have either simply because it hasn’t become an issue.

So until some Cassandra starts to point our attention to the emerging dangers we will continue to happily croak away in our pool of water, without realising that ‘Black Friday’ may soon start to, however slowly, turn up the heat.