| | | | | | | | | | | | | | | 2009 was a very difficult year for the Irish economy. For the full year GDP contracted by 7.1 per cent and GNP contracted by 11.3 per cent. This was the sharpest correction in Irish economic activity since records began in 1950. Consumer spending declined by 7.2 per cent, investment declined by 29.7 per cent, exports of goods & services declined by 2.3 per cent and imports of goods & services declined by 9.3 per cent. Not surprisingly against this economic background, unemployment increased very sharply, the public finances plunged into deep deficit and business and consumer confidence weakened significantly. The two key issues that need to be sorted immediately are credit availability and the burgeoning public deficit.
Credit conditions were very weak in 2009 due to a combination of weak demand and constraints on supply as a result of the banking crisis. In the year to December 2009, total private sector credit outstanding declined by 6 per cent and mortgage credit outstanding declined by 0.3 per cent. The weakness in credit conditions has carried over into 2010. In the year to February total private sector credit outstanding fell by 7.3 per cent and mortgage credit outstanding declined by 0.9 per cent. Credit conditions look set to remain weak over the remainder of 2010. Demand for credit will remain weak. On the credit supply side, the NAMA process is now underway. The initial loans are being transferred at the moment. Given the realistic discounts of 47 per cent on the first tranche of loans, it is clear that bank balance sheets will remain poor despite NAMA and it will take some time for more normal credit flow to resume in the economy. This is not going to happen in 2010.
Ireland had to borrow €24.6 billion in 2009, equivalent to around 11.5 per cent of GDP. Although the borrowing requirement for the full year was slightly better than expected due to a stronger than expected tax take towards the end of the year, a borrowing requirement of almost €25 billion is inordinately large in an Irish context and is not sustainable. The tax take fell by 19 per cent in 2009 and came in €1.4 billion behind target. The weakness in the public finances has continued in the early months of 2010. A deficit of €3.9 billion was recorded in the first quarter of the year, compared to €3.7 billion in the same period in 2009. Tax revenues were running 15 per cent behind last year. Future budgetary policy has got to work aggressively towards reducing this borrowing total as quickly and as aggressively as possible. Postponing the fiscal adjustment process is not an option because interest payments on Ireland’s national debt is rising steadily and will increasingly soak up a significant part of the annual tax take. Interest on the national debt is estimated at €4.4 billion in 2010.
While the Irish economy is still going through a very difficult adjustment process, it is clear that most economic indicators are now suggesting that the dramatic decline in economic activity is starting to level out. However, looking ahead over the remainder of 2010 it is difficult to be terribly confident that the economic environment might get markedly better. The housing side of the economy is still falling in terms of both prices and building levels, consumer confidence and spending will continue to be undermined by wage cuts in the public and private sector, further job losses, further cuts in government expenditure, and the inevitability of further increases in the personal tax burden. On the positive side, the external economic environment is getting steadily better and this will undoubtedly boost the export performance.
It is likely that the technical recession will end around the middle of 2010 and that growth will gradually pick up in the second half of the year and into 2011. The recovery is likely to be driven by exports and the fact that domestic demand is likely to level out after a very sharp fall. However, it will take some time for growth to return to levels that will result in positive growth in employment. The Irish economic future looks very challenging and will require sensible policy decisions revolving around the restoration of order to the public finances, continuing to sort out the banking crisis, and ongoing improvements in the competitiveness of the economy.
IRISH ECONOMIC FORECAST | | | Average
| 2008 | 2009
| 2010f | 2011f | GDP
| -3.0%
| -7.1%
| -1.5%
| 3.1%
| GNP
| -2.8%
| -11.3%
| -3.0%
| 2.0%
| Consumption
| -1.0%
| -7.2%
| -3.0%
| 2.0%
| Investment
| -15.5%
| -29.7%
| -20.0%
| 3.0%
| Government
| 2.6%
| -1.2%
| -1.5%
| -1.0%
| Exports
| -1.0%
| -2.3%
| 2.5%
| 5.0%
| Imports
| -2.1%
| -9.3%
| -4.0%
| 2.0%
| Consumer Price Inflation
| 4.5%
| -4.5%
| 0.5%
| 2.0%
| Unemployment (average)
| 6.3%
| 11.8%
| 13.5%
| 13.0%
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| | | | INTEREST RATES
Interest rate conditions remain very accommodative across the global economy. Official interest rates in the Euro Zone stand at 1 per cent, rates in the UK stand at 0.5 per cent and US rates stand in a range of 0 to 0.25 per cent. These historically low levels of interest rates were engineered to deal with an emergency economic situation, but the key central bankers are not yet convinced enough that the emergency has passed to contemplate tightening rates.
Over the coming months we are likely to see a gradual reversal of the quantitative easing, but there would appear no immediate pressure to start tightening official rates. Economic growth prospects are reasonable but not draminflationary pressures remain muted. Furthermore, there will have to be a strong emphasis on fiscal correction over the next couple of years, so official rate rises are not likely in 2010, but there would appear to be some limited upside potential in 2011. In the case of the European Central Bank (ECB), it is inconceivable that rate tightening could be contemplated in an environment of such uncertainty in the Euro Area as a result of the Greek crisis.
Once global central bankers become convinced that the recoveries in their respective economies are real and sustainable, they will move to gradually take rates back to more normal levels. We are not in that position yet but could be in 2011.
Domestically, the likelihood is that we will continue to see a gradual tightening of bank interest rates as the sector seeks to re-build margins. For those on tracker or fixed rate products this will not be relevant.atic; there is still considerable excess capacity across the global economy, and | | | | | APRIL 2010
| End-2010f
| End 2011f
| Euro Zone
| 1.0%
| 1.0%
| 1.75%
| United States
| 0-0.25%
| 0.25%
| 2.0%
| United Kingdom
| 0.5%
| 0.5%
| 1.5%
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| | | | Outlook for Housing & Mortgage Market
2009 turned out to be another very difficult year for the Irish housing and mortgage market and 2010 is not looking any easier. There is still a fundamental imbalance in the supply/demand dynamic in the market. On the supply side there is still considerable excess supply.
As well as excess supply, demand is also still constrained by a number of factors. | | |  | Consumer confidence is still weak against a background of declining economic activity, rising unemployment, downward pressure on wages, public expenditure cutbacks, and a personal tax burden that is increasing steadily;
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| | Despite the correction that has already occurred, potential house buyers believe that house prices are likely to fall further, so the decision to purchase is still being postponed. The only houses that are selling are those in very good locations or those that are being discounted very heavily;
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| | Credit availability is still an issue, although there is some evidence to suggest that there is some limited credit availability for first-time buyers. However, foreign-owned institutions are not actively involved in the market;
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| | Competition in the mortgage market is diminishing, with the exit of Bank of Scotland Ireland the latest withdrawal from the market;
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| | The fiscal background is still difficult. The personal tax burden has increased sharply and there is likely to be more tax increases and expenditure cutbacks in store in the December 2010 budget. The Commission on Taxation has proposed a property tax, but Government does not appear committed to introducing one at this juncture, but it looks inevitable at some stage in the not too distant future; |
| | The most positive factor in the market is the very low interest rate environment, and the sharp decline in house prices that have been seen since the peak of the market in February 2007. Affordability has improved significantly, but mortgage rates are now starting to rise for existing borrowers on variable rate mortgages and for any new borrowers. This trend is likely to continue over the coming months as banks seek to widen the margin and offset the losses on existing tracker mortgage products, which are no longer available. |
| | | Against this background of excess housing supply and constrained demand, it appears likely that house prices will fall further over the coming year. It is difficult to measure price changes in an illiquid market, where transactions are very limited. Based on house valuations, it is likely that prices have fallen by at least 50 per cent since the peak of the market early in 2007. A further decline of up to 10 per cent appears likely in 2010, before the market possibly bottoms out in 2011.
On the house building side, the figures on house commencements and new home registrations suggest that house completions in 2010 could be as low as 12,000. Any marked recovery in house building in 2011 looks unlikely as developers will have little incentive to start building again, given the very poor market conditions and limited credit supply. | | |
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