It is not only the UK today that will be facing the consequences of the cold wind of austerity as Ireland also has a budget statement for 2013. For those looking for my views on the UK Autumn Statement I gave them on Monday and today I will peer under the bonnet of the Irish economy and her public-sector finances. Like the other Euro area countries which have been hit hard by the crisis Ireland will announced further austerity for 2013 and we know that an extra 3.5 billion Euros has been inked in for today under her bailout plan.
How are Ireland’s finances doing?
Yesterday we received the latest numbers from Ireland’s Exchequer and they told us this. Up until the end of November 2012 she had spent 59.89 billion Euros and received 46.9 billion Euros of revenue leaving a deficit of 12.97 billion Euros. There is a grim reminder of the costs of her increased national debt from bailing out her banks in that nearly half of this is for debt interest ( 5.66 billion Euros). So a fiscal deficit which is still large relative to her economy and high debt costs are a dead weight for her going forwards.
On the positive side revenues were 6.2% higher than the same period in 2011 but this statement did also tell us this.
Income tax is now €231 million (1.6%) behind profile cumulatively at end-November, following a €300 million shortfall in the month.
So a good performance if we compare to my subject of yesterday,Portugal, has in the last month seen a downturn and in the detail we see that it is mostly a reduction in payments by the self-employed. It also provokes the question of whether there has been recent economic weakness in Ireland to explain this change.
Industrial production in Ireland has plummeted
From the Irish Central Statistics Office
On an annual basis production for October 2012 decreased by 17.9% when compared with October 2011. The seasonally adjusted volume of industrial production for Manufacturing Industries for the quarter period August 2012 to October 2012 was 9.1% lower than in the preceding quarter
As you digest these heavy falls let me give you the explanation for this which is that it is Ireland’s pharmaceutical industry which is responsible with (lack of) production of the drug Lipitor getting the blame. And it looks as thought it will not be alone as according to Chemistry World.
Seven of the top 10 drugs going off patent between 2011 and 2014 are produced in Ireland
And in particular they highlight these.
Also due to come off patent and manufactured in Ireland are Singulair (montelukast) from Merck & Co and Zyprexa (olanzapine) from Eli Lilly, each with estimated annual sales of $5 billion.
And in an example of Shakespeare’s sorrows come in battalions we are told this.
The effect for the Irish plants which are producing mainly for European markets is still to come
If we look at the underlying level of manufacturing production we see that it fell back to the levels of 2005 in October as it registered 100.1. Unfortunately industrial production was worse as it fell below the levels of 2005 to register 99.1.
So we see that not only has Ireland taken a lurch downwards in this sector but that other lurch downwards are not only possible but likely in the months and years ahead.
Purchasing Managers Indices for manufacturing
If we look at the recent numbers for this series they have been misleading as it has been positive for quite a few months now whereas production has plumetted! A clear fail. I have investigated this and the answer is that each company is asked its questions and replies but a down for example for Lipitor production is only one down in a series whereas in the real world it is a much higher percentage.
So thier relatively good credit crunch has seen some of the shine taken off them and they have slipped down the Premiership table somnewhat.
What about her services sector?
With the cautionary note above let us consider her latest purchasing managers index.
The seasonally adjusted Business Activity Index remained at 56.1 in November, equal with the five-year high seen in October. Respondents indicated that rising new orders had led to the latest sharp expansion in activity.
So as you can see there remains a high degree of optimism in Ireland’s services sector which is reinforced by this.
Forecasts of improvements in economic conditions led companies to expect activity to rise over the coming year.
So I think that we will have to take this sector under advisement so to speak. It is good that it is optimistic but if we look at the industrial numbers it looks rather Dr. Panglossian to me.
Ireland’s house prices
Here we see another deteriorating trend as after three months of rises they turned downwards again in October according to the Central Statistical Office. On a national basis house prices fell by 0.6% in October and compared to a year ago this has happened.
In the year to October, residential property prices at a national level, fell by 8.1%.
And this means that on an overall basis they have fallen in total by this.
Overall, the national index is 50% lower than its highest level in 2007.
If anything these numbers are likely to understate the falls as they do not include cash purchases which are likely to be on average at lower prices.
Household net wealth
I spotted a consequence of the house price falls in the numbers calculated by the Irish National Treasury Management Agency for household net wealth. It has fallen according to these figures from 725 billion Euros in 2007 to under 450 billion Euros now.
Those 2007 numbers were pure illusion were they not? Or to put it another way it shows the fallacy of using a marginal price for an average calculation.
Also if we do get a property tax today is that not ten years too late?
In my past analysis of the Irish economy I have regularly mused on the fact that she has had good news from sectors such as exports as well as an increasing debt burden from her collapsed banks. So unlike the other two countries that have received Euro area bailouts there were signs of hope in Ireland’s economy. Unfortunately the lurch downwards in her industrial production has turned out one or two of the lights in the distance. Whilst the exact impact may ebb and flow we can see that other patents will expire for pharmaceutical products and so further problems are likely. Even her proud balance of payments record looks likely to weaken and in time we may even see a deficit.
Against this backdrop it seems incredibly unlikely that the Irish economy can expand by 2.5% in 2014 and 2.9% in 2015. If we now add in her austerity plans which after today’s 3.5 billion Euros is supposed to have an extra 3.1 billion in 2014 and 2 billion in 2015 we see that she is in danger of foundering under the sea of debt that her banks have left her with.
There are always two sides to every story and on the upside she has seen interest rates on her debt fall and not every economic number is grim as for example retail sales rose by 1.7% in October on September and by 3.1% on the year before. Also her unemployment rate has just edged lower from 14.7% to 14.6% in November.But we also have signs that what her low corporate taxes brought her such as booming pharmaceutical production are fading just as other countries are also questioning the impact of such taxation regimes. So to get out of this morass Ireland will need to find new things to produce especially drugs. Can anybody think of likely ones?
2013 looks like being the most crucial year for a country which has been lauded as the poster boy of austerity.
Also I see calls in the UK for a type of sovereign wealth fund based on pension fund assets. It sounds great but if we look across the Irish Sea we see that such a great idea (NRPF) has been tried and that has been ruined by her politicians using it to back up their rhetoric and promises.