Ireland Economy in Crisis
Tutor2u Economics
February 2009
Irish economy under pressure
•
•
•
•
1st Euro Area country to enter recession
High share of exports to GDP – exposed to global downturn
Strong Euro damaging trade prospects e.g. with the UK
Twin crisis – banking and government finances
– Bank of Ireland and Allied Irish Bank have required bail outs + nationalisation
of Anglo Irish Bank
– Soaring budget deficit may cause Ireland’s credit rating to be downgraded
– Prospect of sharp rise in taxes to pay for the deficit
• Unemployment now 9.2% of labour force
• Industrial production declining by 12% pa
• House prices started falling in March 2007 and have fallen in every
month since
• Economy on the brink of consumer price deflation
• Will Ireland leave the Euro Area?
• Or will it be able to use its own sovereign wealth fund to advantage?
High growth lifted relative living standards
Per Capita GDP for selected EU Countries
GDP per head, purchasing power parity adjusted, EU27=100
160
160
150
150
140
140
EU27=100
Ireland
130
130
Germany
UK
120
120
110
100
110
Italy
Spain
100
90
90
99
00
01
02
03
04
05
06
07
08
Source: Reuters EcoWin
An economic boom that went sour
Ireland's growth comes to a halt
Percent
Real GDP, precentage change from previous period, Constant Prices
12.5
12.5
10.0
10.0
7.5
7.5
5.0
5.0
2.5
2.5
0.0
0.0
-2.5
-2.5
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
Source: Reuters EcoWin
“Ireland's decadelong economic boom
came to a crashing
halt last year after
the country's
housing bubble burst
in the midst of global
financial turmoil,
while the economy
took a further hit
from a string of bank
scandals in recent
months.”
Source: Reuters
Overheated demand fuelled a BoP deficit
Ireland's BoP Current Account
2
2
0
0
-2
-2
-4
-4
-6
-6
-8
-8
1.0
1.0
0.5
0.5
0.0
0.0
-0.5
-0.5
-1.0
-1.0
-1.5
-1.5
-2.0
-2.0
-2.5
-2.5
-3.0
-3.0
-3.5
-3.5
-4.0
-4.0
00
01
02
03
04
05
06
07
billions
EUR (billions)
PERCENT
Ireland, Current Account, Balance, Euro (bn) per quarter
08
Current account balance, as a percentage of GDP
Current Account, Balance, Total, EUR
Source: Reuters EcoWin
The property bubble has burst
Ireland House Prices
Index
Index of average national prices, 2003=100
140
140
130
130
120
120
110
110
100
100
90
90
80
80
70
70
60
60
50
50
40
40
30
30
97
98
99
00
01
02
03
04
05
06
07
08
Source: Reuters EcoWin
In 2006, Ireland
(population 4.2 million)
built 88,000 houses,
compared with 150,000 in
the UK (population 60
million). At one point, a
fifth of the workforce,
swelled by tens of
thousands of immigrants,
worked in construction.
Ireland now has up to
350,000 empty homes –
more than its entire
private rental market –
many of them simply
abandoned as builders
went bust. House prices
are expected to fall by 80
per cent. (Telegraph)
Housing building has collapsed
Ireland House Prices and New Housing Starts
10000
Dwellings Commenced, Total number of residential units
9000
8000
7000
6000
5000
4000
3000
2000
1000
0
10000
9000
8000
7000
6000
5000
4000
3000
2000
1000
0
140
140
Ireland, House Price Index, 2003=100
Index
Number of
Index of average national prices, 2003=100, new housing starts, per month
135
135
130
130
125
125
120
120
115
115
110
110
105
105
Jan May Sep Jan May Sep Jan May Sep Jan May Sep Jan May Sep
04
05
06
07
08
09
Source: Reuters EcoWin
And consumer sentiment has headed south
Ireland Consumers Expectations Index
(KBC Bank Ireland/ESRI), Index, 1995Q4=100
110
100
100
90
90
80
80
70
70
60
60
50
50
40
40
30
30
20
20
Index
110
02
03
04
05
06
07
08
09
Source: Reuters EcoWin
Unemployment has more than doubled
Unemployment in Ireland
Person
Total, seasonally adjusted
180000
180000
170000
170000
160000
160000
150000
150000
140000
140000
130000
130000
120000
120000
110000
110000
100000
100000
90000
90000
80000
80000
70000
70000
60000
60000
98
99
00
01
02
03
04
05
06
07
08
Source: Reuters EcoWin
And recession creates a negative output gap
Growth and the Output Gap
Real GDP, precentage change, output gap (% of GDP)
12.5
12.5
10.0
10.0
7.5
7.5
5.0
5.0
2.5
2.5
0.0
0.0
-2.5
-2.5
-5.0
-5.0
-7.5
-7.5
-10.0
-10.0
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
Real GDP, precentage change from previous period, Constant Prices
Output gap of the total economy
Source: Reuters EcoWin
A deflationary depression is possible
Unemployment and Inflation in Ireland
Percent
Percentage of the labour force out of work, and consumer price inflation
10
10
9
9
8
8
7
7
6
6
5
5
4
4
3
3
2
2
1
1
0
0
-1
-1
98
99
00
01
02
03
04
05
06
07
08
Unemployment rate (per cent of the labour force)
Consumer price inflation (annual percentage change) [ar 12 months]
Source: Reuters EcoWin
Bond yields are rising as doubts grow about the
solvency of the Irish economy
Rising Bond Yields as Investors Get Nervous
Percent
Ireland, Government Benchmarks, Bid, 10 Year, Yield, %
6.5
6.5
6.0
6.0
5.5
5.5
5.0
5.0
4.5
4.5
4.0
4.0
3.5
3.5
3.0
3.0
00
01
02
03
04
05
06
07
09
Source: Reuters EcoWin
Audio-Visual on the Irish Economy