| | | | | | | | | | | | | | | | Irish economic activity contracted steadily during 2008.The latest data from the CSO confirm that Gross Domestic Product (GDP) declined by 3% in 2008 and Gross National Product (GNP) contracted by 2.8%. The weakening of activity accelerated in 2009 and all data releases are suggesting very low levels of activity. | | |  | In the first quarter of 2009, GDP declined by 8.5% and GNP by 12%. This represented the sharpest decline in Irish economic activity since records began. In the first quarter, consumer spending declined by 9.1%, investment declined by 34.1%, exports declined by 3% and imports declined by 11.7%; |
| | The volume of retail sales in the first six months of 2009 was 18.1% lower than the first half of 2008. This slowdown in retail spending reflects the pressure on disposable incomes from falling employment; nominal wage cuts in many sectors of the economy, and the increased personal tax burden inherent in the Government’s fiscal consolidation strategy. In addition there has been considerable destruction of personal wealth over the past couple of years. The key weakness in retail sales is concentrated in the auto sector. Excluding the motor trade, retail sales were 7.6% lower in the first six months of 2009 compared to the same period in 2008. There is some evidence that the downward trend in retail spending is now starting to decelerate, but consumer spending still remains very weak; |
| | Figures released by the Central Statistics Office (CSO) show that the net financial assets of the household and non-profit institutions sector fell by €36 billion during 2008 to reach €81.2 billion. Over the two years 2007 and 2008 the decline has been €58.7 billion, representing a decline of 42% since the highest level of net assets worth €139.9 billion at the end of 2006. Net financial assets is the difference between deposits, shares, life insurance and pension fund assets on one side of the balance sheet, and mainly loans on the other side. The key contributory factor to this decline in wealth during 2008 was the sharp decline in share prices, pension funds and insurance. A point worth noting is that the value of housing wealth is not included in this calculation. Given that the value of the housing stock has probably fallen by close to 45% over the past couple of years, the real situation for the Irish personal sector is considerably worse than the statistics suggest. But at least assets are still exceeding liabilities; |
| | The number of people signing on the live register increased to 423,400 on a seasonally adjusted basis in July 2009. This represents an increase of 261,200 since July 2007. The unemployment rate has jumped from 4.5% in the middle of 2007 to 12.2% in July 2009; |
| | Latest CSO data for the first quarter of 2009 show that employment fell by 89,000 during the quarter, and fell by 158,500 compared to the same quarter in 2008. Over the 12-month period the private sector shed 173,800 jobs, while the public sector created 15,300 jobs; |
| | The Irish export performance is turning out to be relatively strong in 2009, with the Chemical & Pharmaceutical sector putting in a strong performance. The value of merchandise exports in the first five months of 2009 was 0.9% higher than the first five months of 2008, but the value of merchandise imports declined by 21.4%. The sharp fall in the demand for imports primarily reflects the weakness of consumer demand; |
| | Manufacturing output in the first six months of 2009 was 1.1% lower than the first six months of 2008. Output from the ‘modern sector’ was up by 7.3%, while output from the ‘traditional sector’ was down by 14.4%; |
| | The exchequer returns for the first seven months of 2009 show a deficit of €16.4 billion. This compares to a deficit of €6.7 billion for the same period in 2008. Tax revenues are running 17.6% behind the first seven months of 2008. Stamp duties are running 64.1% behind last year, which in itself was well behind the previous year. This reflects the collapse in housing transactions. VAT receipts were down by 22.1%, reflecting weak consumer spending and the collapse in new house building. Income tax receipts are running 7.6% behind last year. This is despite the various levies that have been introduced in the two budgets since last October. Corporation tax is 31.6% ahead of last year. This reflects changes to the timing of corporation tax payments. The underlying situation is weak, reflecting the ongoing pressure on corporate profitability. Finally capital gains tax receipts are running 69.3% behind last year, which is no surprise given that very few capital gains have been made over the past couple of years; |
| | On the back of weaker demand in the economy and the sharp fall in mortgage interest rates, consumer price inflation has declined rapidly since the beginning of the year. The headline rate of inflation in July showed an annual decline of 5.9%. Excluding mortgage rates, prices declined by 2% in the year to July; |
| | Credit growth has slowed dramatically over the past two years, reflecting a lack of credit availability and weak demand. Total private sector credit declined by 0.7% in the 12-months to June 2009. Growth in residential mortgage credit slowed to 1.9%; |
| | All indicators relating to the housing market continue to suggest marked weakness. In the first five months of 2009 new home completions were 47.8% lower than the first five months of 2008, while new home registrations were down by 77.4% and new house commencements were down by 69.2%. These numbers suggest that house completions in 2009 could be as low as 20,000 and could fall to less than 15,000 in 2010. Completions peaked at just over 93,000 in 2006. |
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| | | | Based on all available evidence so far in 2009, GDP is set to contract by around 8.5% and GNP by around 9% in 2009. Prospects for recovery in 2010 will be heavily contingent on an international economic recovery, a restoration of some level of competitiveness in the Irish economy and a solution to the banking crisis to get credit flowing again in the economy. The international evidence is suggesting that the downward momentum in the international economy has bottomed out. However, it is unlikely that there will be a sudden sharp recovery in international economic activity over the coming months given the economic and financial imbalances that still exist in the global economy. It will take time to sort these difficulties out and so the global recovery process is likely to be gradual over the next 18 months.
From Ireland’s perspective, any recovery in the external environment will represent good news, but it is clear that Ireland has its own unique difficulties, which suggest that the Irish economic recovery will lag the international cycle.
The key issues for Ireland include: | | | | The negative fallout from the housing adjustment is ongoing and is very painful. Jobs are still being lost in construction related activities, house building is still weakening, property related tax revenues are still under significant pressure and house prices are still falling. Quite simply, Ireland is experiencing the largest housing market adjustment in the developed world. It has further to run; |
| | The banking system is still in a very uncertain place despite efforts at re-capitalisation. The banking sector’s balance sheet is seriously damaged as a result of non-performing loans and hence credit availability in the economy is still seriously constrained. It will take some take some considerable period of time to sort out the very difficult banking situation and get credit flowing again. This will act as an ongoing constraint on growth. The imperative is to set NAMA up as quickly as possible, subject to recent amendments in relation to sharing the risk more evenly between the banks and the taxpayer. A U-turn on NAMA at this juncture would be a disaster, particularly as external agents such as the EU and IMF have given their approval to the concept. It is too late in the game to scarp it and start creating a new model; |
| | In an effort to address the massive deficit in the public finances, Government is engaging in limited cutbacks in spending and significant increases in the personal tax burden. Pursuing such a tight fiscal policy, with the emphasis on tax increases, in the midst of the deepest recession in Irish history is dangerous and could exacerbate the downturn; |
| | Over the past decade the Irish economy has lost considerable competitiveness. Wage costs, energy costs, professional fees, local authority charges, commercial rates, and IT costs have all increased at a faster pace than our main trading partners. Quite simply, the cost of doing business in Ireland was allowed spiral out of control and there is now a very strong imperative to bring the cost base of the economy down sharply in order to restore domestic and external competitiveness; |
| | Ireland as a location for Foreign Direct Investment (FDI) has become less attractive in recent years as a result of the escalation of costs. At the same time the forces of economic globalization are intensifying, with the emergence of many low cost economies offering skilled labour forces, attractive corporation tax rates and a competitive cost base. The 12.5% corporation tax rate is still an important factor for Ireland but it could be described as a necessary but not sufficient condition for Ireland’s future success in the FDI arena. FDI is unlikely to be as big a driver of the Irish economy over the coming years as it has been over the past couple of decades and indeed holding on to the current levels of FDI will be a significant challenge in itself. |
| | | Against this background, it does appear that following a contraction of 8.5% in the economy in 2009, at this early stage a further contraction of around 1% looks probable in 2010, before the economy returns to a positive growth path in 2011.
| | | | Average | 2008
| 2009f
| 2010f
| GDP
| -2.3%
| -8.5%
| -1.2%
| GNP
| -3.1%
| -.8.9%
| -2.0%
| Consumption
| -0.8%
| -8.0%
| -3.0%
| Investment
| -19.9%
| -30.0%
| -11.0%
| Government
| 2.1%
| 0.0%
| 0.0%
| Exports
| -0.4%
| 1.0%
| 1.5%
| Imports
| -4.4%
| -5.5%
| -2.5
| Consumer Price Inflation
| 4.5%
| -4.5%
| 1.0%
| Unemployment (average)
| 6.4%
| 14.0%
| 15.0%
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