Support from readers like you keeps The Journal open.
You are visiting us because we have something you value. Independent, unbiased news that tells the truth. Advertising revenue goes some way to support our mission, but this year it has not been enough.
If you've seen value in our reporting, please contribute what you can, so we can continue to produce accurate and meaningful journalism. For everyone who needs it.
THE ‘R’ WORD has been back in the business headlines lately, with some economists forecasting another major economic downturn in Ireland.
Some of the impacts of Ireland’s last recession are still apparent now and although the economy was showing significant growth before the pandemic, the uncertainty of the last two-and-a-half years, as well as the outbreak of a war in mainland Europe, is causing concern.
But are we really heading into a recession – and what would that look like in 2022?
This week our The Explainer podcast asked that very question. We were joined by Stephen Kinsella, Head of the Economics Department at the University of Limerick and Chief Economics Writer with The Currency – here’s what he had to say.
What is a recession?
Kinsella said there are a number of meanings to the word ‘recession’:
The most technical definition is a two quarter decline in Gross Domestic Product (GDP). That’s a measure of the value of all goods and services sold in a given period. So, if the economy produces €100 worth of output in one quarter, then just €97 in the next and €96 in the one after that, the economy is technically in recession.
The slowing of economic activities such as sales, consumption, house purchases, investing, production.
A feeling that things are getting worse. An economy could be doing well, GDP may be growing, but prices are also rising so consumers are still worse-off. So, the rate of growth of the economy could be 2% but prices are rising by 5% and consumers are still 3% worse-off.
What caused the last recession?
The last banking crisis was caused by excessive amounts of bank credit, Kinsella explained.
“Banks were able to borrow at very low levels from abroad, that allowed them to sell loans to everyone in Ireland, we bought and sold bits of the country to and from each other. And that raised the amount of credit that everyone had and the amount of economic activity that everyone had.
“The government responded by lowering income taxes and lowering all other kinds of taxes, supporting the economy on the basis of stamp duty, which is basically transaction taxes from those sales.
“Eventually, the international banking system was so over leveraged – had lent out so much money – that there was simply no more left to give. And then the Irish banks, instantly starved of this foreign capital, were pretty much insolvent, meaning the value of their assets and the value of their liabilities was totally different.
“The State then had to step in to make things better for the for the banks, and to protect all the loans and deposits that have been given out. In so doing the state found itself insolvent.”
Kinsella said this pushed the economy into “really serious trouble” and the government had to to enter an IMF, European Commission, European Central Bank bailout.
Years of austerity followed, until 2014 when the economic started rapidly growing again.
Why are people taking about the ‘inverted yield curve’?
A yield is a percentage return on a bond, which is like an IOU. The ‘yield curve’ is a representation of the percentage return on bonds (the yield) and the time remaining until those bonds mature.
Every so often that curve on the chart inverts.
Shutterstock
Shutterstock
“What is happening there is the market is saying, okay, alright, it looks like the US economy is going to go into a recession in, say, two years’ time,” he explained.
“So if you thought that was going to be the case, what you would do is you would buy or sell US bonds, depending on what you thought was going to happen to the US economy.
This changes the percentage return on those bonds. When that curve moves quickly, Kinsella said that is a “pretty good predictor of the US economy and other economies going into recession”.
It has been a good predictor of recessions over the last 30 to 40 years, he said – and recently the yield curve has inverted.
The European Central Bank recently raised interest rates – how does that tie into all of this?
The Eurozone inflation rate is running above 8%. The ECD has a legal mandate under the Maastricht Treaty of keeping inflation at around 2%. The purpose of raising interest rates is to depress demand and prevent the rise of inflation.
However Kinsella said it is not clear that the interest rate hike will have the desired impact and it may actually induce a recession because people may decide not to borrow.
Advertisement
The President of the ECB has stated that if inflation does not calm down, interest rates will continue to rise.
How is Ireland’s economy doing?
Kinsella said Covid was a “serious shock” to the economy as it forced the government to “borrow hugely” to support the household and firm sectors.
He said it was an “incredible piece of policy success” that at one point during the pandemic the State was suporting more than one million people every week.
We are now saddled with a lot of Covid-related debt, but a lot of it is “quite cheap” debt.
The economy is moving into surplus, meaning we are spending less than we are taking in, which Kineslla said is “pretty awesome” because of the “enormous deficit” we had two years ago
All of that deficit has been closed by corporation taxes, however. The vast majority of that comes from around ten to 15 companies.
This means one of the main risks to our economy is a slowdown in the international economy.
The departure of one of the major multinationals would “devastate” the Irish economy, he said.
Another risk relates to the European energy system and the potential increase in the price of fuel.
The economy is in much better shape than it was in 2008, banks are well capitalised and the extent of credit in the economy isn’t as bad, Kinsella said.
How significant a role is China’s zero-Covid policy playing?
This policy is having a major impact on supply chains and it could cause problems for Christmas, Kinsella said.
“Right now it’s July, and a lot of the stuff that’s being produced for Christmas is actually being manufactured now,” he said.
“And so whatever the next Christmas toy, the Cabbage Patch, kid of 2022, is being manufactured in the factory in China right now. Whether there will be extreme shortages of children’s toys for Christmas is actually an open question right now.”
He said shortages caused by lockdowns in China mean products cannot be bought and sold and that means no taxes coming from those products. And, we don’t have “as much stuff to buy”, prices will increase, that is how supply and demand works.
What about the war in Ukraine?
This is having an impact in two ways:
Ukraine is a huge exporter of food – though we don’t import a lot of food from there and much of Europe’s food does not come from Ukraine. But the rest of the world relies on Ukraine more. If Egypt, for example, is trying to buy grain on the international market because it can no longer source it from Ukraine, that pushes up the price and means products like bread all across the world are more expensive, even in Ireland.
Restrictions on the price of gas and oil are expected to continue into winter and possibly into the new year. That would vastly ramp up the impact of a recession, because the price of the main input into many productive processes (oil and gas) will be rising. People will still need to put fuel in their cars and use it to heat their homes, but it will be more expensive. One positive, Kinsella said, is that because of the Covid pandemic many workplaces are set up for remote working and a reliance on that over the winter months may offset the impact of this.
What could be the longterm fallout if there is another recession?
Kinsella said he has spoken to most members of government and they understand the “deep and abiding need not to short-term cut capital expenditure” such as building roads, hospitals etc.
A large increase in the use of technology could be one longer-term impact.
“If Covid taught us anything it’s that we can transact much of the business of the State, and much of the business of our lives, electronically,” Kinsella said.
“I think if we have a situation where it costs a fortune to move around the place, we will simply move less.”
He said he does not believe we will see the return of austerity.
“I think we’ve realised that austerity does nothing except create anger and populist policies that give us things like Trump and Brexit – and nobody wants another Trump or another Brexit,” he said.
“So I think everyone’s realised you can influence policies to make government borrowing cheaper, that will mean that governments can continue to do what they need to do.”
Readers like you are keeping these stories free for everyone...
Our Explainer articles bring context and explanations in plain language to help make sense of complex issues.
We're asking readers like you to support us so we can continue to provide helpful context to everyone, regardless of their ability to pay.
To embed this post, copy the code below on your site
Close
33 Comments
This is YOUR comments community. Stay civil, stay constructive, stay on topic.
Please familiarise yourself with our comments policy
here
before taking part.
People living in illegal cabins - including family forced to dismantle home - tell their stories
9 hrs ago
25.1k
55
Catholic Church
Pope Francis had 'peaceful' night in hospital, Vatican says
2 hrs ago
5.7k
Mulhouse
One dead and several police officers wounded in 'Islamist' knife attack in France
Updated
15 hrs ago
36.3k
Your Cookies. Your Choice.
Cookies help provide our news service while also enabling the advertising needed to fund this work.
We categorise cookies as Necessary, Performance (used to analyse the site performance) and Targeting (used to target advertising which helps us keep this service free).
We and our 152 partners store and access personal data, like browsing data or unique identifiers, on your device. Selecting Accept All enables tracking technologies to support the purposes shown under we and our partners process data to provide. If trackers are disabled, some content and ads you see may not be as relevant to you. You can resurface this menu to change your choices or withdraw consent at any time by clicking the Cookie Preferences link on the bottom of the webpage .Your choices will have effect within our Website. For more details, refer to our Privacy Policy.
We and our vendors process data for the following purposes:
Use precise geolocation data. Actively scan device characteristics for identification. Store and/or access information on a device. Personalised advertising and content, advertising and content measurement, audience research and services development.
Cookies Preference Centre
We process your data to deliver content or advertisements and measure the delivery of such content or advertisements to extract insights about our website. We share this information with our partners on the basis of consent. You may exercise your right to consent, based on a specific purpose below or at a partner level in the link under each purpose. Some vendors may process your data based on their legitimate interests, which does not require your consent. You cannot object to tracking technologies placed to ensure security, prevent fraud, fix errors, or deliver and present advertising and content, and precise geolocation data and active scanning of device characteristics for identification may be used to support this purpose. This exception does not apply to targeted advertising. These choices will be signaled to our vendors participating in the Transparency and Consent Framework.
Manage Consent Preferences
Necessary Cookies
Always Active
These cookies are necessary for the website to function and cannot be switched off in our systems. They are usually only set in response to actions made by you which amount to a request for services, such as setting your privacy preferences, logging in or filling in forms. You can set your browser to block or alert you about these cookies, but some parts of the site will not then work.
Targeting Cookies
These cookies may be set through our site by our advertising partners. They may be used by those companies to build a profile of your interests and show you relevant adverts on other sites. They do not store directly personal information, but are based on uniquely identifying your browser and internet device. If you do not allow these cookies, you will experience less targeted advertising.
Functional Cookies
These cookies enable the website to provide enhanced functionality and personalisation. They may be set by us or by third party providers whose services we have added to our pages. If you do not allow these cookies then these services may not function properly.
Performance Cookies
These cookies allow us to count visits and traffic sources so we can measure and improve the performance of our site. They help us to know which pages are the most and least popular and see how visitors move around the site. All information these cookies collect is aggregated and therefore anonymous. If you do not allow these cookies we will not be able to monitor our performance.
Store and/or access information on a device 104 partners can use this purpose
Cookies, device or similar online identifiers (e.g. login-based identifiers, randomly assigned identifiers, network based identifiers) together with other information (e.g. browser type and information, language, screen size, supported technologies etc.) can be stored or read on your device to recognise it each time it connects to an app or to a website, for one or several of the purposes presented here.
Personalised advertising and content, advertising and content measurement, audience research and services development 136 partners can use this purpose
Use limited data to select advertising 106 partners can use this purpose
Advertising presented to you on this service can be based on limited data, such as the website or app you are using, your non-precise location, your device type or which content you are (or have been) interacting with (for example, to limit the number of times an ad is presented to you).
Create profiles for personalised advertising 78 partners can use this purpose
Information about your activity on this service (such as forms you submit, content you look at) can be stored and combined with other information about you (for example, information from your previous activity on this service and other websites or apps) or similar users. This is then used to build or improve a profile about you (that might include possible interests and personal aspects). Your profile can be used (also later) to present advertising that appears more relevant based on your possible interests by this and other entities.
Use profiles to select personalised advertising 77 partners can use this purpose
Advertising presented to you on this service can be based on your advertising profiles, which can reflect your activity on this service or other websites or apps (like the forms you submit, content you look at), possible interests and personal aspects.
Create profiles to personalise content 37 partners can use this purpose
Information about your activity on this service (for instance, forms you submit, non-advertising content you look at) can be stored and combined with other information about you (such as your previous activity on this service or other websites or apps) or similar users. This is then used to build or improve a profile about you (which might for example include possible interests and personal aspects). Your profile can be used (also later) to present content that appears more relevant based on your possible interests, such as by adapting the order in which content is shown to you, so that it is even easier for you to find content that matches your interests.
Use profiles to select personalised content 33 partners can use this purpose
Content presented to you on this service can be based on your content personalisation profiles, which can reflect your activity on this or other services (for instance, the forms you submit, content you look at), possible interests and personal aspects. This can for example be used to adapt the order in which content is shown to you, so that it is even easier for you to find (non-advertising) content that matches your interests.
Measure advertising performance 127 partners can use this purpose
Information regarding which advertising is presented to you and how you interact with it can be used to determine how well an advert has worked for you or other users and whether the goals of the advertising were reached. For instance, whether you saw an ad, whether you clicked on it, whether it led you to buy a product or visit a website, etc. This is very helpful to understand the relevance of advertising campaigns.
Measure content performance 60 partners can use this purpose
Information regarding which content is presented to you and how you interact with it can be used to determine whether the (non-advertising) content e.g. reached its intended audience and matched your interests. For instance, whether you read an article, watch a video, listen to a podcast or look at a product description, how long you spent on this service and the web pages you visit etc. This is very helpful to understand the relevance of (non-advertising) content that is shown to you.
Understand audiences through statistics or combinations of data from different sources 75 partners can use this purpose
Reports can be generated based on the combination of data sets (like user profiles, statistics, market research, analytics data) regarding your interactions and those of other users with advertising or (non-advertising) content to identify common characteristics (for instance, to determine which target audiences are more receptive to an ad campaign or to certain contents).
Develop and improve services 82 partners can use this purpose
Information about your activity on this service, such as your interaction with ads or content, can be very helpful to improve products and services and to build new products and services based on user interactions, the type of audience, etc. This specific purpose does not include the development or improvement of user profiles and identifiers.
Use limited data to select content 38 partners can use this purpose
Content presented to you on this service can be based on limited data, such as the website or app you are using, your non-precise location, your device type, or which content you are (or have been) interacting with (for example, to limit the number of times a video or an article is presented to you).
Use precise geolocation data 43 partners can use this special feature
With your acceptance, your precise location (within a radius of less than 500 metres) may be used in support of the purposes explained in this notice.
Actively scan device characteristics for identification 25 partners can use this special feature
With your acceptance, certain characteristics specific to your device might be requested and used to distinguish it from other devices (such as the installed fonts or plugins, the resolution of your screen) in support of the purposes explained in this notice.
Ensure security, prevent and detect fraud, and fix errors 86 partners can use this special purpose
Always Active
Your data can be used to monitor for and prevent unusual and possibly fraudulent activity (for example, regarding advertising, ad clicks by bots), and ensure systems and processes work properly and securely. It can also be used to correct any problems you, the publisher or the advertiser may encounter in the delivery of content and ads and in your interaction with them.
Deliver and present advertising and content 96 partners can use this special purpose
Always Active
Certain information (like an IP address or device capabilities) is used to ensure the technical compatibility of the content or advertising, and to facilitate the transmission of the content or ad to your device.
Match and combine data from other data sources 68 partners can use this feature
Always Active
Information about your activity on this service may be matched and combined with other information relating to you and originating from various sources (for instance your activity on a separate online service, your use of a loyalty card in-store, or your answers to a survey), in support of the purposes explained in this notice.
Link different devices 50 partners can use this feature
Always Active
In support of the purposes explained in this notice, your device might be considered as likely linked to other devices that belong to you or your household (for instance because you are logged in to the same service on both your phone and your computer, or because you may use the same Internet connection on both devices).
Identify devices based on information transmitted automatically 84 partners can use this feature
Always Active
Your device might be distinguished from other devices based on information it automatically sends when accessing the Internet (for instance, the IP address of your Internet connection or the type of browser you are using) in support of the purposes exposed in this notice.
Save and communicate privacy choices 64 partners can use this special purpose
Always Active
The choices you make regarding the purposes and entities listed in this notice are saved and made available to those entities in the form of digital signals (such as a string of characters). This is necessary in order to enable both this service and those entities to respect such choices.
have your say