# What happens if there is an economic slowdown?



## Slim (28 Mar 2006)

I hope this is not a stupid economic question! What might happen if the following factors combine in sparking some kind of contraction or slowdown in the economy?
- Interest rates are starting to rise
- Oil prices continue to rise
- Businesses continue to relocate to the lower cost economies
- Irish overindulgence in debt for cars, homes and foreign property partly stoked by the crazy cost of starter homes here.

What effect will the €15bn of SSIAs have?

What might happen to the stock market, the tax revenues, the property market, bank repossessions etc etc.?
I am trying to get an overall view of what might happen.

Slim


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## walk2dewater (28 Mar 2006)

Why do I get the feeling that nobody remembers what a recession is like?


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## CCOVICH (28 Mar 2006)

walk2dewater said:
			
		

> Why do I get the feeling that nobody remembers what a recession is like?


 
Becauase not everyone may be as _old_ as you are.


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## jpd (28 Mar 2006)

The only thing experience teaches us is that experience teaches us nothing. _André Maurois (1885-1967) French biographer and writer._


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## redo (28 Mar 2006)

jpd said:
			
		

> The only thing experience teaches us is that experience teaches us nothing. _André Maurois (1885-1967) French biographer and writer._



Good one.


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## redo (28 Mar 2006)

Taxes will go up.

AND

Chorus of calls for more wages.
Stock response will be, "Don't ask for more wages, you'll wreck to recovery".  Incidentialy, during boom times the stock answer is "Don't ask for more wages, you'll wreck the boom".


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## bearishbull (28 Mar 2006)

two articles in newspapers today about irish economies vunerabilities.  one was about our reliance on foreign multinationals who spend 30billion in this economy and that they are likely to leave ireland for eastern europe.the other article by davy stockbrokers were pointing out that our exports arent rising but our imports are rising substantially which means in long term we arent creating real wealth,we're too dependant on domestic demand from house building and consumer spending,they say the piper will have to be paid eventually.
wheres the money gonna come from for expensive houses when theres feck all jobs when multinationals cut back operations here and construction slows down and consumer spending falls,it would only take one significant event to trigger all the above .


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## onekeano (28 Mar 2006)

bearishbull said:
			
		

> two articles in newspapers today about irish economies vunerabilities.  one was about our reliance on foreign multinationals who spend 30billion in this economy and that they are likely to leave ireland for eastern europe..




The alleged "economist" who was promoting his report from NCB last week told the interviewer that "it didn't matter if all the multinationals pulled out" - I be cautious using NCB for advice on any matter if that's the quality of their view of the future in Ireland.

Roy


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## Duplex (28 Mar 2006)

Ccovich

I would like to know how does your snide remark add to the debate?


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## Chamar (28 Mar 2006)

Duplex said:
			
		

> Ccovich
> 
> I would like to know how does your snide remark add to the debate?



Sometimes the mods need moderating......


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## CCOVICH (28 Mar 2006)

How does their comment add to the 'debate'.  Btw, what was being 'debated' in the first post-it was a question that hasn't really thrown up many answers (barring post 6) that may be debated at this stage.

My comment/question was in direct response to the second poster's comment.  I don't remember a recession because I'm too young to do so. I'm sure there are others like me, perhaps even the original poster, who asked a number of questions (presumably in good faith?).  Surely that is a valid answer to the question that was asked?  Or was it a rhetorical question?

Now, what exactly does your post add to this debate (I won't refer to other threads in this one)?  In case you are not familiar with it, the warning triangle in the top right hand corner is the 'report bad post' function.  It allows you to do exactly that.  All moderators get the e-mail.  (I note that we haven't received one from the poster I have allegedly offended). There is also private messaging for this sort of exchange.


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## CCOVICH (28 Mar 2006)

Chamar said:
			
		

> Sometimes the mods need moderating......





			
				CCOVICH said:
			
		

> In case you are not familiar with it, the warning triangle in the top right hand corner is the 'report bad post' function. It allows you to do exactly that. All moderators get the e-mail.  (I note that we haven't received one from the poster I have allegedly offended).


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## tyoung (28 Mar 2006)

Seriously though there is a body of opinion that believes that the absence of a recent recession has bred complancy. If central banks are going to actively cut rates to fight a slowdown but sit on the sidelines when asset markets are bubbling over this creates assymmetric risk. This encourages excessive risk taking in the belief that if something bad happens the central bank and the government will bail them out.
I abolutely believe that this attitude infuses the stock and property market.
 Regards


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## Chamar (28 Mar 2006)

Thanks for the info.

In keeping with site rules maybe best PM that stuff in future......


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## CCOVICH (28 Mar 2006)

Slim said:
			
		

> What might happen to the stock market,


Given that a fair whack of the overall market cap of the ISEQ 100 is comprised of banks (heavily dependent on Irish retail lending, and by association, the construction industry), construction/DIY (who depend on demand for new homes and infrastructure) and media (who depend on recruitment and property advertising for a large measure of their revenue), it will more than likely take a dive (depending on the severity of the/any slowdown). Not many are well deversified georgraphically (I won't discuss specific stocks), so not much solace there.



			
				Slim said:
			
		

> the tax revenues,


Assuming they are positively related to economic activity, they would fall. So much of the increase in revenue in recent years has been down to stamp duty on property and VAT receipts consumer spending, that even a modest slowdown could have interesting effects. One way to counteract any decline would be a fresh round of investigations-maybe targeted on property?




			
				Slim said:
			
		

> the property market,


 Pretty much done to death elsewhere on AAM.  We may yet here more on the subject on this thread......




			
				Slim said:
			
		

> bank repossessions


Depends on the attitude and credit control policies of lenders-but I'd imagine there will be some increase.



			
				Slim said:
			
		

> I am trying to get an overall view of what might happen.


You might be able to catch the live show in few years time.  Or we may 'pull a Homer'.


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## walk2dewater (28 Mar 2006)

Perhaps, "why do I get the feeling that nobody KNOWS what a recession is like", would have been clearer.  All the youngsters have to do is open up a few books, or do some searches on the web.  In fact, anyone Irish who isnt old enough to remember what recessions are like need go further than their parents.

Ah but sure you'd be a "doom-monger" if you did that...


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## CCOVICH (28 Mar 2006)

High interest rates
High taxes
High unemployment
High emigration
High volume of 'how do I save money' queries on AAM!


Low prices
Low morale
Low volume of 'I have a lump sum that I want to invest?' type queries on AAM!

I guess that pretty much sums it up? 'It' being how things were when Ireland last experienced a recession?  Will things be different this time?  Or are we better able to withstand a slowdown this time round?


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## walk2dewater (28 Mar 2006)

CCOVICH said:
			
		

> High interest rates
> High taxes
> High unemployment
> High emigration
> ...


 
Anger at ourselves and our government for allowing property speculation to ruin all our other successes with the economy?

Overhaul of planning laws and the inherent inducement to corruption in them?

Redirection of stamp duty, zoning change wind-falls and other monies to pay for local infrastructure?

A return to stricter lending criteria? 

Setting up of an independent agency to monitor and report actual transaction prices in a transparent manner?

Reorganisation of tax laws to promote owner-occupation of property?

I could go on...


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## CCOVICH (28 Mar 2006)

walk2dewater said:
			
		

> A return to stricter lending criteria?



Is there any evidence that lender criteria are less strict than they were? 



			
				walk2dewater said:
			
		

> Setting up of an independent agency to monitor and report actual transaction prices in a transparent manner?



To which sector are you referring?



			
				walk2dewater said:
			
		

> Reorganisation of tax laws to promote owner-occupation of property?



In fairness, I don't think promotion of owner occupation is necessary-there is mortgage interest tax relief, CGT, 'rent a room' and stamp duty relief for owner occupiers.  Maybe tax _incentives_ to investors to be stopped, but that's already the case (i.e. current schemes are due to end in the near future).


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## Duplex (28 Mar 2006)

Ccovich; I welcome your magnanimity. You are more than welcome to PM me if I get up your nose.  


The old analogy about the tightening action of central banks after a run up in debt;

“Banks always remove the punchbowl just when people are starting to enjoy the party”

I’m beginning to wonder if the Fed the ECB and The Bank of Japan may actually be serious this time about tightening the liquidity screws.  The Fed upped rates by .25% today and indicated that they may go again to reach an accommodative rate of 5%. German business confidence is at its highest in fifteen years, indicating that the most important economy in the Euro area might be able to cope with higher interest rates.  Signs that the Japanese property market has stopped falling after fifteen years and increased consumer confidence suggest that the BoJ will look at raising the cost of borrowing also.  

My personal view is that the central banks want to maintain their credibility in the face of growing evidence of easy money debt induced asset bubbles.   The banks could have refrained from tightening and allowed the markets to flush speculative excess, but this may have caused wider unforeseen cross defaults and collapses.  Remember that central banks have acted in this clinical fashion before, to reign in bubbling markets; they will want to retain their credibility as masters of the financial universe.


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## Glenbhoy (28 Mar 2006)

> Is there any evidence that lender criteria are less strict than they were?


In terms of income multiples they certainly have relaxed the rules to a startling degree in the past 8/9 years - particularly so in the past 3/4.  I worked in one of the major banks 3 years ago, part of my remit was to consider mortgages approved and ensure that they complied with 'supposed' central bank criteria, as it turned out, the central bank did not enforce any of their recommendations at that stage, before I left that job, the first 100% mortgages were on the market (only to a select group of professionals), this went against all recommendations at the time - central bank response - none that I ever heard of.
In terms of affordability, I don't know how that has changed over the years, I've heard rumours that this is better than in the past, but can't comment either way.


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## joe sod (29 Mar 2006)

I think alot of mistakes were made over 10 years ago. I think Ireland attracted way too many multinationals for the size of the country. To much money came into the country too quickly. My own opinion is that 12.5% corporation tax was way too low. I think 18 to 20% should have been the rate. This would still have attracted enough multinationals to boost the economy. Maybe the very low corporation tax should only have been given to small indiginous companies operating in high technology or out of universities. the great tragedy now is that when the multinationals do move on, they will have left behind little indiginous capacity.


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## CCOVICH (29 Mar 2006)

Glenbhoy said:
			
		

> In terms of income multiples they certainly have relaxed the rules to a startling degree in the past 8/9 years - particularly so in the past 3/4. I worked in one of the major banks 3 years ago, part of my remit was to consider mortgages approved and ensure that they complied with 'supposed' central bank criteria, as it turned out, the central bank did not enforce any of their recommendations at that stage, before I left that job, the first 100% mortgages were on the market (only to a select group of professionals), this went against all recommendations at the time - central bank response - none that I ever heard of.
> In terms of affordability, I don't know how that has changed over the years, I've heard rumours that this is better than in the past, but can't comment either way.


 
Yes, that was really what I was getting at I guess-income multiples may have been relaxed to a degree, but that doesn't necessarily mean that borrowers are finding mortgage repayments as burdensome as they did in the past (but does that make sense, i.e. if multiples are higher, surely the burden is higher?).  Although that could be due to longer terms and interest rates nowhere near the mid-teens....

So are we likely to see rates as high as they were in the early/mid eighties?  If they remain low by historic standards, then any slowdown will arguably look (slightly) different this time around?

And getting back to the Central Bank/Financial Regulator-it appears that they never actively ensured their lending criteria were enforced-fair enough, we are all adults and should be responsible for our own decisions, but that is to be balanced against the need for stability in the banking system.  But is such central bank 'interference' exhibited in other (free market) economies?  Have lenders been fined/disciplined for breaching centrally determined lending criteria?


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## TallSpoon (29 Mar 2006)

Ccovich, I remember a year or so ago there was a documentary on BBC about mortgage fraud in the UK. It showed that the practice of exaggetaring ones income was widespread and done with the full knowledge of estate agents. The programme told how mortgage fraud was fuelling the market and making life very difficult for workers such as teachers and nurses to get a property.
I think that if it happens there then it happens here.


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## CCOVICH (29 Mar 2006)

TallSpoon said:
			
		

> Ccovich, I remember a year or so ago there was a documentary on BBC about mortgage fraud in the UK. It showed that the practice of exaggetaring ones income was widespread and done with the full knowledge of estate agents. The programme told how mortgage fraud was fuelling the market and making life very difficult for workers such as teachers and nurses to get a property.
> I think that if it happens there then it happens here.


 
Maybe, but banks require payslips etc. when you apply for a mortgage, and so this would prove income.  Granted, it is possible to get a letter from your employer to say that you earn XXX, or will be earning XXX by the time you have to make mortgage repayments.

And what do estate agents have to do with it-they don't deal with banks?  Are you referring to brokers?  I'm sure estate agents don't give a damn how you get approval as long as you have it, and frankly I can't see why they should.


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## Glenbhoy (29 Mar 2006)

> Granted, it is possible to get a letter from your employer to say that you earn XXX, or will be earning XXX by the time you have to make mortgage repayments


I suspect it happens frequently, i have definitely heard plenty of anecdotal evidence of it - in addition, I imagine many people who say they'll rent a room out do no such thing, and that can get you quite a few thousand more.
In reply to your earlier post, yeah, the lengthening mortgage terms are a massive factor in affordability, these have practically doubled from 20yrs to 35 years.  I can't verify that 20yrs was the normal length of a mortgage, 15 years ago, but in my experience (admittedly a very small sample) mortgages have been for 20yrs.  35 years mortgages would however have been the majority of FTB mortgages released by that bank 3 years ago.


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