Nearly There

Despite the relapse of the past quarters, the Irish economy is on track to a lasting recovery. The real estate bubble has been completely absorbed, the unemployment rate has begun to decline and PMI indexes are looking upbeat. Fiscal consolidation is advancing smoothly, even though a high and largely structural public deficit will require extensive clean-up efforts. The country should be able to return to the financial markets by the end of the year. Yet given the massive stock of debt that has accumulated and the challenges that remain to handle the vestiges of the real estate bubble, Ireland will return to the markets accompanied by a European safety net: a precautionary programme with the ESM.

The best of the lot
Of the three countries undergoing bailout programmes (Greece, Ireland and Portugal), Ireland is unquestionably the one that has pulled through best. GDP rose 0.2% in 2012 after 2.2% in 2011 (compared to -3.2% and -1.3%, respectively, in Portugal, and -6.6% and -7.1% in Greece). The adjustment programme imposed by the Troika (European Commission, ECB and IMF) is on track and the country is ready to return to the financial markets by the end of the year. Its stronger performance is partly a matter of timing: Ireland entered recession well before the other eurozone countries. In late 2010, Irish GDP was 9.4% below its 2007 peak and real estate prices had lost 37% (for a total adjustment of 50%). Over the same period, real estate prices in Spain were down only 12.5% from the peak, while GDP in Portugal and Greece was down 1% and 8%, respectively, compared to 2007. Lastly, by 2010, Ireland had already swung back into a current account surplus, unlike the other peripheral countries. The recovery, albeit timid since 2011, partly reflects earlier efforts to clean up private sector balance sheets. Yet other, more structural reasons must also be taken into account. Ireland’s fiscal attractiveness; its openness to trade; and the flexibility of its markets for labour, goods and services have made the macroeconomic adjustment process less costly in terms of jobs and purchasing power1, thereby promising a more robust recovery.

A brighter H2
Despite these strengths, the Irish economy has stalled over the past three quarters. Q1 GDP contracted 0.6% q/q. Household consumption declined 3% q/q, investment plunged 7.4% q/q and exports 3.2% q/q. Yet temporary factors are mainly to blame for these disappointing figures. A change in the car registration system strained Q1 registered purchases but should boost H2. The expiration of numerous patents in the pharmaceutical sector, one of the pillars of Irish industry, is the main reason for the drop-off in exports. Q2 GDP figures showed an improvement in the situation (+0.4% q/q), in line with the rest of the eurozone. Growth is expected to pick up again at a robust pace in H2. PMI indexes suggest a widespread economic recovery. The services sector is looking particularly upbeat. At 61.6 in August, the services PMI returned to early 2007 levels. On the jobs front, there are also encouraging signs of recovery.

Employment increased 1.9% y/y in Q2 after 1.1% in Q1. The participation rate held steady at about 60%, and the unemployment rate has declined for five consecutive quarters to 13.7% in Q2. Coupled with weak inflation, this could trigger an upturn in household consumption. Moreover, the recovery taking shape in the eurozone following the one in the United States (which accounts for 20-25% of exports) should stimulate Irish exports, notably in the services sector. Lastly, real estate prices began rising again in June and July, up 1.2% y/y and 2.3%, respectively. The real estate bubble now seems to have been fully corrected. House prices fell by 50.9% between the peak and the trough. The construction PMI index is now near 50, and residential investment should start to pick up again soon.

BY Thibault MERCIER

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