Thursday, February 28, 2008

Irish Chain Reaction

From the FT today:

Back in Vilnius, Arunas Adomaitis trained as a ­classical music conductor. Today the Lithuanian, after stints on building sites, runs Lituanica, a specialist food shop in Dublin’s Ballymun district.

Lituanica is a symbol of the changes engulfing an area that was once a byword for bad town planning. The original residents of Ballymun – established as part of an inner-city slum clearance in the 1960s – have largely moved to better housing elsewhere. Geraldine Brady, at Martin Shortt, the local letting agency, estimates 90 per cent of the occupants of the flats are now non-Irish.

While businesses such as Lituanica have contributed to the revival of areas like Ballymun, the big question now is what would happen to such communities if, as many analysts now forecast, the Irish economy falters in the face of a possible US recession and a domestic property slowdown.

Official forecasts put growth this year at little more than 2 per cent – respectable by European standards but the lowest for Ireland since the early 1990s.

Will the immigrants who lose their jobs pack up and go home – easing Ireland’s unemployment problems, just as their arrival relieved the labour market tightness? Or will they, like Mr Adomaitis, find new work and put down roots in Ireland?

The non-Irish now account for 10 per cent of Ireland’s 4.3m population and they have buoyed the labour supply and bolstered consumer demand.

Their presence has particular relevance for the housing market where, in some areas of Dublin, estate agents report the majority of new mortgage applications have been by non-nationals.

After a 10 year property boom, a cooling of the housing and construction sectors has been long predicted and, according to most economists, badly needed. The economy had become dangerously dependent on the sector, with house building alone responsible for close to a third of the growth in economic output in the past four years, reaching a peak of 13 per cent of gross domestic product in 2006. This compares with a figure of 5 per cent in the US and 4 per cent in the UK.

In the year to November house prices fell by 5.9 per cent, though rents rose 11 per cent suggesting strong underlying demand.

“People sometimes forget the economy didn’t take off because we started building houses. What happened in Ireland was not a construction-led boom in that sense,” says Eunan King, chief economist at NCB stockbrokers.

Mr King has long argued that the story of the Irish economy can be largely explained in terms of its ­positive demography.

In the 1990s – the early phase of the “Celtic Tiger” boom – it was the delayed effect of improvements in birth and mortality rates that saw the population of working age surge. This in turn attracted increased numbers of foreign multinationals, exploiting the low corporate tax regime and business friendly regulation. Large numbers of expatriate Irish were also lured back home by robust growth.

After a breather in 2001, following the collapse of the dotcom boom, the economy took off again. This time the drivers were low eurozone interest rates and the strong labour supply after Ireland, like the UK and Sweden, opened its jobs market to the new European Union accession states in May 2004.

Mr Adomaitis’s experience follows the classic pattern of what sociologists refer to as “chain migration”. He came on his own initially. His wife then joined him. The second of his two sons was born here. His sister and his wife’s sister have also become part of the extended Ireland-based family. All the signs are that he is committed to staying. The shop he set up, borrowing the money to do so, sells packaged Lithuanian soups and other food imports to the immigrant community.

But Mr King says: “We should perhaps regard this phenomenon as a pool of labour that is available to Ireland, rather than a permanent migrant population in the historic mode of inter-country migration. Thus the issue is not so much will those who are here now stay, but is the incentive sufficient to persuade a continuous inflow to be established?” The key determinant, he believes, is the continuing gap in incomes between Ireland and the accession states.

A study by the Central Statistics Office shows that of those immigrants who registered for work between 2002 and 2005, two thirds were still in employment in 2006. Comparable figures for immigrants from the US, UK and the original EU 15 showed that 70 per cent had since moved on.

There is no evidence as yet that the pace of arrivals has slackened, although there is an expectation that it will slow as fewer construction jobs become available. Mr King, like other economists, predicts a fall in house ­completions as builders wind-down their operations in the face of slower demand and at a time when there is a large stock of unsold homes.

However, he is optimistic about a likely upturn in the property market. “Anecdotal evidence suggests a sharp cut in supply is in prospect. If that is the case then rents are likely to continue to accelerate, driven by the need for accommodation for the growing population of working age.”

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