Back on October 6th I discussed whether austerity was working in Ireland or not and it is time I feel to review again where she stands. In the meantime I have seen yet again commentators and the media veer between calling her (yet again) a poster boy for austerity and saying that she will founder under all her debts! I think that the conclusions are usually more influenced by the author’s bias than the evidence. One thing we can be sure of is that so far Ireland has put up a better economic performance than Greece and Portugal. This leads to the question will she be able to escape the economic black hole which is sucking them downwards?
What caused the Irish decline?
In essence a housing boom which turned to dust hit an economy which had come to rely on the tax revenues and employment that all the construction and associated economic activity provided. In addition the banks which lent the money to finance all this found themselves with a tsunami like wave of bad debts. If this was not bad enough the Irish government made a fatal error as I described on October 6th last year.
However when trouble hit the housing and banking sectors her political leaders panicked and in September 2008 they offered an absolute guarantee from Irish taxpayers to the debts of the Irish banking sector for two years. Either they did not realise that this was a move which was virtually impossible to reverse or even more seriously they were in effect in the pocket of the bankers. So Ireland ended up guaranteeing bank assets that were nearly three times her Gross National Product and became a banking sector with a population rather than an economy with a banking sector.
This meant that private-sector banking debts were now a public-sector issue and the effect on the Irish national debt was extraordinary. Ireland had (partly due to construction driven tax revenues) had a net national debt to Gross Domestic Product of 24.7% in 2006 but since then it has ballooned from the 44 billion Euros it was then to 119 billion Euros now according to the National Treasury Management Agency. Care is needed with the NTMA’s numbers as they are much lower than the latest Eurostat ones which are for gross debt but I use them for comparison over time.
If there is a clearer case of private-sector debt being transferred to the public-sector I do not know it!
A feature of the Irish economy: non-domiciled companies
A feature of Ireland’s economy is that she has a low corporation tax rate (12.5%) and by measures such as the tax-free financial business district in Dublin has encouraged overseas businesses to base themselves there. If you like the businesses are the corporate equivalent of what is called non-domiciled or non-dom for an individual.
So if they have come to Ireland for cheap and in some cases virtually no corporate taxes (Google) then if you try to tax them they will start to leave. Accordingly I feel that GDP is a poor measure for Ireland and prefer Gross National Product which is a measure that excludes the effect of such foreign businesses. To give you an idea of the scale real GDP in 2007 was 178 billion Euros and real GNP was 151 billion Euros so the difference is substantial and economic output is suddenly potentially some 15% lower.
Another feature of Irish economic life: A Balance of Payments surplus
Here we have a clear difference between Greece,Portugal and Ireland and as Brian Clough so memorably put it she is in a “class of one”. Why? She has run a persistent surplus. If you look at the latest quarterly national income accounts then she ran a surplus of 9.59 billion Euros with exports growing by 1.9% on a year earlier and imports declining by 0.3%. We may doubt in the current environment how much export growth can continue but Ireland starts from a strong position. However a possible fly in the ointment occurs if you wonder how much of that is driven by the non-domiciled companies.
The International Monetary Fund should not be there
Under its old and to my mind proper role the IMF should not be involved in Ireland as it has a balance of payments surplus. We are seeing a bail out of political promises here which is not its role in my view and so far it has loaned some 13.1 billion Euros to Ireland.Please see my update on the IMF for a fuller explanation of this.
Where does Ireland stand now?
So far we have seen a public-sector debt explosion in response to a private-sector debt explosion and bust but we also unusually have a balance of payments surplus.
A GNP recession over the past year
The latest national accounts for Ireland are only for the third quarter but they told us this.
Initial estimates for the third quarter of 2011 show seasonally adjusted decreases of 1.9 per cent in GDP and 2.2 per cent in GNP compared with Q2 2011.
If we stick we the GNP measure we see that as it only rose by 1.1% in the second quarter that it has fallen if we look back over the half-year. If we look back over the past year we get an altogether grimmer picture.
Comparing Q3 2011 with the same quarter one year earlier, GDP at constant prices registered a decrease of 0.1 per cent while GNP was 4.2 per cent lower.
This poses a problem for the definition of a recession (two continuous falling quarters of economic growth) does it not?
The Irish housing market
As this was a root cause of the problems we can look to see if there have been signs of improvement. First we see that house price declines have continued through 2011 and that they follow-on from falls in both 2010 and 2009 (h/t Nama Wine Lake).
The Survey of Chartered Surveyors Ireland report suggests that transaction values for a second-hand 3-bedroom semi-detached house declined by 12.6 per cent in Dublin in 2011. This compares to a decline of 14.3 per cent and 18.8 per cent in 2010 and 2009 respectively.
Actually looking at the report Dublin’s figures are better than others shown! I notice also that the spokesman for this body added a grim postscript for 2012 and also for the banking industry.
Until we see the financial institutions lending to qualified buyers, we will not see a recovery in activity levels in the property market.
So the banking sector remains constrained and if we recall that surveyors have an interest in a healthy market we can conclude that the outlook may be very poor still even after sustained house price declines. This is reinforced by the view on the commercial property market.
the commercial market was severely impacted in 2011 by difficulties in accessing finance.
There is a historical irony in the fact that the one sector which had a decent year was agricultural land! Actually agricultural output is rising too being up 18.8% over the 12 months to November 2011 and so there is room for some optimism there.
Since my article on October 6th this has risen from 107.2 to 107.8 on the underlying index based on 2005 being 100. However the latest numbers for November showed a 9.5% month on month fall and gave an annual growth rate of 3.9% so the picture looks as though it may be about to worsen. If we look at the latest manufacturing purchasing managers report for manufacturing we see signs that it may have done.
Manufacturing production decreased for the third month running in January.
Operating conditions in the Irish manufacturing sector continued to deteriorate at the start of 2012 as output and new orders both fell at solid rates in January.
We see some signs of hope here as they rose by 2.1% in December 2011 compared with the previous month and were up by 3% on a year earlier. However there is some recovery yet to come as we see that the index is at 95.8 where 2005 =100. Also the growth seems to have come from the motor trade (+26.3%) and I wonder if some initiative might have expired.
The latest measure of consumer sentiment is hopeful although consumer sentiment often picks up with the January sales.
The overall KBC Bank Ireland/ESRI Consumer Sentiment Index increased to 56.6 in January from 49.2 in December.
Austerity is continuing
As Ireland faces 2012 she faces a further contraction of her public sector as part of a programme to cut 7.5 billion Euros over the period 2011-14. According to the IMF she can expect.
Budget 2012 targets further consolidation of 2¾ percent of GDP to lower the deficit to 8.6 percent of GDP, and sets out a clear path to reach the 3 percent of GDP deficit target by 2015.
So a hard road remains ahead and it will be harder if the current economic weakness continues around the European Union.
The IMF in its rather coded report uses the words “challenging” and “challenges” which give food for thought if we remember that it is prone to using rose-tinted glasses in reports where it is involved.
As we stand Ireland has avoided the black hole which has sucked Greece down and is currently drawing Portugal in, but the fundamental problems created by her construction and banking boom remain an issue. In many ways the answer for 2012 remains abroad as she needs to export but faces economic slowdowns across much of Europe.
There is an irony here with the UK being her main trading partner. Back in the 1920s the slogan for Irish independence was the “Kaiser or the King?” But having taken the Euro route and moved towards the Kaiser economic growth may well depend on 2012 on what happens in the land of the King or rather Queen.
So far Ireland has avoided being “sucked into the Super massive Black Hole” as Muse put it but a lot of work and maybe some luck will be required to keep out of it for good.