- Ireland grew in 2011 after three years of recession. Looking forward, we project that the Irish economy will grow a modest 0.7% in 2012 and around 1.6% in 2013. We expect inflation to remain subdued as high unemployment keeps wage pressure at bay.
- Ireland’s large export sector continues to pull the economy forward, although export growth weakened in H2 11 as the global economy slowed. We expect exports to pick up momentum again in 2012 driven by global demand.
- Austerity measures and the sliding property market are weighing heavily on domestic demand. All domestic demand components continue to contract and imports continue to decline. As a result, Ireland has a growing current account surplus.
- House prices are down 46% since they peaked in 2007. There are no signs of
- stabilisation yet and mortgage arrears continue to deteriorate. In our projections, we assumed that house prices stabilise in 2013.
- Irish sovereign bond spreads have tightened quickly as market confidence in Ireland is returning. In January Ireland successfully swapped bonds due in 2014 for new bonds with a 2015 maturity in a first sign that Ireland may soon be able to return to the market. Irish economy
Irish GDP contracted sharply in Q3 posting a quarterly decrease of 1.9%, following a very strong performance in the first half of the year. However, caution should be used in interpreting Irish statistics on a quarterly basis. In a small open economy dominated by very large export and import flows, quarterly GDP figures tend to be volatile and subject to large revisions. We expect to see almost zero growth in Q4 11. Export growth declined at the end of the year caused by the slowdown in the global economy in general and the European economy in particular. Ireland is an unusually open economy, with exports equivalent to 103% of GDP. Nevertheless, exports outperformed imports at the end of 2011, causing an improvement in the current account surplus but this is countered by domestic contraction. We do not believe the 20% fall in fixed investments in Q3 11 continued in Q4. Irish manufacturing and service PMI indicate a modest contraction at the end of the year. Consumers’ assessment of current conditions have improved slightly, while their expectations remain subdued.
We project that the Irish economy will grow 0.7% in 2012 and 1.6% in 2013 led by a pickup in export growth as the global recovery gains momentum. Domestic demand continues to decline, albeit at a slowing pace, as the headwind from austerity declines. We expect private consumption and investments to stabilise in 2013 and grow modestly at the end of the forecast period. Government consumption continues to contract throughout the forecast period, albeit at a slowing rate, reflecting the need for further austerity. The Irish central bank is projecting GDP to grow 0.5% this year, while the Ministry of Finance expects as much as 1.3% growth.
Housing market declines further
House prices in Ireland have now declined 46% since they peaked in 2007. In Dublin, house prices are down more than 50%. There are no signs that the pace of house price decline is slowing. However, prices are now much closer to fair value and some renewed interest is seen when houses are offered at auctions at prices below the current market level. In our projections we assume that house prices stabilise during 2013, reflecting an improved economic environment, continued low interest rates and the absence of new supply. It is, however, very difficult to project when the market will stabilise, as there is a real risk that the overshooting caused by irrational exuberance will be followe by undershooting caused by irrational pessimism.
Residential mortgage arrears continue to deteriorate. As much as 9.2% of all mortgage loans were over 90 days in arrears at the end of 2011, up from 8.1% at the end of Q3 11. In addition, 4.8% of mortgage loans had been restructured (typically to interest only and/or longer tenor). New personal insolvency legislation opens up for some form of mortgage debt forgiveness for heavily distressed homeowners. Moody’s has suggested that the new insolvency laws will leave as much as 25% of all mortgage debt open to write-off.
New initiatives aimed at stabilising the property market include a reduction in Ireland’s tax on property transactions from 6% to 2%, new tax incentives for property investors who hold property for at least seven years and a scrapping of proposed retailer-friendly reforms, which had threatened rent levels for investors.
House construction has literally come to a standstill. New house guarantee registrations, which peaked at 7,800 in June 2006, stood at just 76 in December 2011. Housing completions have fallen from a peak level of almost 9,000 to an apparent stabilisation just below 1,000.
Labour market stabilisation
Unemployment in Ireland is currently stabilising at a high level, while employment continues to contract. In January the unemployment rate declined for the second consecutive month, from 14.3% to 14.2%. Employment continues to fall, though the average quarterly fall of 11,000 persons in 2011 was somewhat less than the 16,000 person average in 2010. Employment falls in public services dominated industries such as education and health are starting to quicken as the moratorium on recruitment takes effect. The rise in unemployment has been stemmed by outward migration of foreign nationals, though the number of Irish nationals continues to grow because of Ireland’s
demographic profile.
Budgetary austerity continues
Ireland entered its fourth year of austerity with the announcement of Budget 2012. The budget shows a determination to meet the EU/IMF targets with an additional EUR3.8bn in cuts (2.4% of GDP), though this represents a smaller fiscal impact than the three previous years, which each saw approximately EUR6bn of spending cuts and tax rises. The government deficit for 2011 is expected to be around 9.8% of GDP, well within the 10.6% target set in Ireland’s bailout terms. However, the deficit remains at exceptionally high levels, necessitating a number of years of additional austerity. The government is targeting a budget deficit of 8.6% of GDP in 2012.
The main savings came from a continued fall in the number of public servants, an increase in VAT of 2% and a sharp reduction in the capital spending programme. The main surprise was some measures to revive the commercial property market, though the market still has large challenges to overcome. Corporation tax is expected to remain at 12.5% and the Irish government’s determination to maintain this might cause another battle at a European level in the coming months.
Return to the market
In January, Ireland successfully swapped EUR3.53bn of bonds due in 2014 for new bonds with a 2015 maturity in a first sign that Ireland may soon be able to return to the market. Irish government bond spreads to Germany have continued to narrow across the curve. Ten-year rates are back at levels not seen since September 2010.
Irish CDS spreads have also narrowed substantially since mid-2012. The widening last week probably reflects the increased likelihood that Greek Collective Action Clauses (CAC) will be applied and trigger CDS payment rather than increased uncertainty about the Irish sovereign’s ability to repay its debt.