Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Download The Irish Economy in Perspective
Document related concepts
Transcript
The Irish Economy in Perspective June 2011 Department of Finance 1 This document was produced by the Department of Finance. Updates are produced periodically. Comments are welcome and should be addressed to: Rónán Hickey, Economist e-mail: [email protected] ph: +353 1 604 5823 Note that the figures and text are up-to-date as of end-May but will change as further data become available. Forecasts in this document are those of the Department of Finance contained in the Stability Programme Update, published at end-April. As is the norm, revised short-term and medium-term forecasts (covering the period 2011-2015) will be published by the Department in conjunction with Budget 2012. Initials are used to indicate sources in many of the charts. They are: CSO (Central Statistics Office); DoF (Department of Finance); EC (European Commission Spring 2011 forecast); WB (World Bank). A more detailed presentation on banking developments can be found on the Department’s website at: http://www.finance.gov.ie/documents/pressreleases/2011/mn001presrev.pdf The Irish Economy in Perspective Successful transition over 20 years Imbalances and property bubble Policy responses Emergence from recession Underlying strengths remain 2 Overview The Irish economy was transformed over the past two decades. Per capita income rose strongly, converging towards and subsequently overtaking European average levels. However, from the early part of the last decade, imbalances began to emerge which made the economy increasingly vulnerable. A major property bubble began to unwind from 2007, and the fall-out from this was exacerbated by the major deterioration in the external environment. As a result, GDP has fallen by around 15% from its peak in Q4 2007. Significant policy responses have been undertaken to stabilise the public finances, ensure banking stability, improve our competitiveness position and support job creation. Following eight consecutive quarters of decline, Ireland technically emerged from recession in the first quarter of 2010 when real GDP expanded on a quarterly basis. While GDP for 2010 as a whole contracted, the expectation is that economic activity will expand this year against the backdrop of strong export growth, and the recovery will strengthen and broaden out in subsequent years. The Irish economy retains many of its strengths, particularly flexibility, an educated workforce, favourable demographics and a pro-enterprise environment. As a result, our medium-term prospects remain favourable. Section 1 Successful transition 3 Strong growth in second half of 1990s… 14.0 CELTIC TIGER PERIOD DOMESTIC DRIVEN GROWTH GDP growth 12.0 average 1981-85 average 1986-90 10.0 average 1991-95 average 1996-00 per cent change 8.0 average 2001-2007 6.0 4.0 2.0 0.0 Chart shows: annual GDP growth over 1981-2007 period (source – CSO) 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984 1983 1982 1981 -2.0 4 During the 1980s, GDP growth averaged around 2½% per annum, and living standards remained well below those in other advanced economies. Following a modest acceleration in the growth rate in the first half of the 1990s, GDP growth accelerated sharply in the second half of the decade, averaging 9¾% per annum over this period. This was mostly export-led growth, which is how growth in a small open economy such as Ireland’s should be driven. By 2000 overall economic output was almost double that in 1990. This very sharp economic growth resulted in a rise in Irish income per capita, from around two-thirds of the EU average in the 1980s to above average levels. The pace of growth slowed somewhat post-2000, averaging 5½% per annum over the 2001-2007 period. While still a strong rate of expansion, growth in this period became increasingly unbalanced, driven by domestic sources consumption and construction (see later) – and by the mid-part of the decade growth was heavily skewed towards residential construction. Explaining Ireland’s rapid growth… Improving competitiveness; Attracting foreign direct investment; Investing in education and skills; Infrastructure investment, with EU assistance; Reforming the tax system to promote growth and employment; Improving flexibility; Social partnership; Putting our public finances in order; Pro-enterprise culture; Participation in EU / EMU. 5 There is no single factor which explains Ireland’s economic transformation. Instead, the period of rapid economic growth is often seen as one of delayed convergence – up to the mid-1990s, per capita incomes failed to keep pace with those elsewhere in Europe because of policy mistakes in the first few decades of independence. Over time, the policies necessary for economic progress were gradually put in place (see the bullet points above). Thus, by having the correct economic conditions in place, Ireland was able to take advantage of a period of sustained global economic expansion. As a result, per capita incomes rose rapidly to levels in other advanced countries. Section 2 Imbalances and property bubble 6 Loss in competitiveness… (rise in line = loss in competitiveness) 130.00 HCI Real HCI (deflated by consumer prices) 125.00 120.00 115.00 1991 Q1 = 100 110.00 105.00 100.00 95.00 90.00 85.00 80.00 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Chart shows: effective exchange rate movements (source – CBI) 2009 2010 7 From 2000 onwards, the economy began to lose competitiveness. This reflected a combination of factors: a higher nominal exchange rate, a loss of price competitiveness and a loss of cost competitiveness. With regard to the former, Ireland’s Harmonised Competitiveness Indicator (HCI) - a trade-weighted exchange rate – increased by around 10% between the introduction of the euro in 1999 and the end of 2008. A rise in the index implies an appreciation of the euro, making Irish goods and services more expensive outside the euro area. Exchange rate developments were exacerbated by a loss of price competitiveness. The real HCI – which takes account of relative price movements as well as exchange rate developments – increased by more than 20% over the same period, as inflation in Ireland exceeded that in our major export markets (although price developments in subsequent years have seen the gap close). There was also a decline in cost competitiveness for much of the last decade as pay increases in the economy exceeded productivity, thus adding to the problem. Reflecting these factors, the rate of export growth slowed from the early part of the last decade. Post-2000 developments… Lost competitiveness slower export growth Shift in drivers of growth: o away from exports o towards domestic demand Domestic demand driven by a housing boom o house building reached unsustainable levels o employment in construction unsustainably high o living standards were artificially inflated Unbalanced growth 8 This deterioration in competitiveness resulted in a sharp moderation in export growth from 2000 onwards. The export growth rate slowed from an average of 17.8% in the five years to 2000 to just 5.3% in the five years to 2005. Nevertheless, GDP growth remained relatively strong as robust domestic demand - and new house building in particular took over in driving the expansion. Construction-led growth of this sort was unsustainable, however. House building, house prices, employment in the construction sector and credit growth all reached unsustainable levels as a bubble developed in the market, while living standards in the economy were artificially inflated. The construction bubble would also have significant consequences for the public finances, with government revenues becoming increasingly reliant on transitory sources of revenue. Economy too dependent on house building… 100,000 90,000 Departm ent of Finance forecas ts 2011 - 2015 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Chart shows: annual house completions (sources – CSO and DoF) 2014 2015 9 The growing dependence of the economy on house building is evident from the chart above, which shows that by 2006 house completions had surpassed 90,000 units per annum. As a result, the ratio of residential investment to GDP reached nearly 13% that year, compared with a long run average of 6% in Ireland. The subsequent sharp decline in house completions has had a major direct effect on the country’s growth rate. Completions declined by around 80% between 2007 and 2010, subtracting a cumulative 7½ percentage points from the level of real GDP. New house completions are forecast to record another small decline this year before picking up over the forecast horizon. Given that there is currently a significant overhang of unsold properties, however, this increase will occur at a very gradual pace. Rapid increase in house prices… 160.0 140.0 120.0 100.0 80.0 60.0 40.0 20.0 Q1 1996 Q4 1996 Q3 1997 Q2 1998 Q1 1999 Q4 1999 Q3 2000 Q2 2001 Q1 2002 Q4 2002 Q3 2003 Q2 2004 Q1 2005 Q4 2005 Q3 2006 Q2 2007 Q1 2008 Q4 2008 Chart shows: Permanent TSB / ESRI House Price Index Q3 2009 Q2 2010 10 Focusing on house price dynamics, the Permanent TSB/ESRI Index reveals that national prices increased at an average pace of almost 15% per annum between the years 1997 and 2006, resulting in a cumulative increase of 240% over the period. The data indicate that prices peaked in the final months of 2006, and have been falling ever since. By the fourth quarter of 2010 prices had fallen by 40% from their peak and were back at a level last seen in 2002. New data from the CSO also point to a decline of 40% from the peak (although it sets the peak slightly later in mid-2007). Very strong credit growth… 40 30 20 10 0 -10 -20 -30 2004 2005 2006 2007 2008 2009 2010 2011 Chart shows: annual change in stock of credit held by households and NFCs (source – CSO) 11 The housing boom was supported by a rapid growth in bank lending. Data from the Central Bank reveal that the stock of credit held by households and non-financial corporations increased at an average annual rate of around 30% between the years 2004 and 2006. The rate of increase in the euro area, by comparison, averaged just under 8% over this period. Credit growth was supported by a number of factors, notably very low real interest rates, more integrated financial markets and innovation in these markets which led to a range of new products. With regard to the former, participation in EMU meant that monetary policy was set with regard to economic conditions in the euro area as a whole, with the result that nominal interest rates were too low in Ireland. Combined with high inflation, real interest rates were negative for much of the period 1999 to 2006. With credit growth exceeding the growth rate of deposits in the banking sector, Irish banks increasingly resorted to borrowing from abroad in order to fund the property boom. One implication of this was that Irish banks were increasingly dependent upon wholesale money markets, making them more exposed to the credit crunch which emerged from 2008. Another was that the country began to run a large balance of payments deficit - the nation as a whole was borrowing an annual average of 4¼% of national income from abroad over the 2005-2009 period, increasing our indebtedness to foreigners. The current deleveraging process is evident from the Chart above, which shows that households and non-financial corporations are now reducing outstanding credit at an annual rate of around 20%. Sharp decline in economic activity… 50,000 15% decline in level of GDP Q4'07 to Q4'10 45,000 40,000 35,000 17% peak-to-trough decline in level of GNP 30,000 25,000 2000Q1 2000Q4 2001Q3 2002Q2 2003Q1 2003Q4 2004Q3 2005Q2 GDP 2006Q1 2006Q4 2007Q3 2008Q2 2009Q1 2009Q4 2010Q3 GNP Chart shows: level of real GDP and GNP (source – CSO) 12 As a result of these accumulated imbalances, the Irish economy was especially exposed to the ‘Great Recession’, the rapid global downturn of 2008-2009. The collapse in world demand, together with the loss in domestic competitiveness (exacerbated by euro appreciation during the turbulence) had a detrimental impact on most of the exporting sectors. Housing output – which had already begun to decline – fell sharply as the demand for housing effectively collapsed. A dramatic fall in confidence resulted in an unprecedented fall in personal consumption – new car sales fell by two-thirds in 2009. Against this backdrop real GDP declined sharply in annual terms, falling by 3.5% in 2008 and 7.6% in 2009. While the economy technically moved out of recession in the first quarter of 2010, economic activity remained volatile last year and declined by 1% for the year as a whole, marking the third successive annual contraction. As the graph above shows, GDP has fallen by nearly 15% since peaking in the final quarter of 2007, while the peak to trough decline in GNP was even larger at 17%. The trough in GNP was reached in the first quarter of 2010; the indicator has increased in the past three quarters reflecting a moderation in net factor income outflows. Unemployment has increased sharply… 16 14 12 10 8 6 4 2 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Chart shows: standardised unemployment rate (source – CSO) 2010 2011 13 The labour market has been hard-hit by the recession. Over 320,000 jobs have been lost since employment peaked in the final quarter of 2007, with the construction, retail and manufacturing sectors particularly hard hit. The construction sector has accounted for around half of the total job losses over this period. Recent years have also seen a decline in the labour force, reflecting both a fall in the participation rate (from 64% in 2007 to 60.7% in Q4 2010) and the emergence of net outward migration. The fall in the labour force has not been large enough to compensate for the decline in employment, and, as a result, unemployment has risen sharply. The standardised unemployment rate increased to 14.7% in the final quarter of 2010, but has stabilised in subsequent months. The unemployment rate is forecast to peak at an average of 14½% this year, its highest since the mid-1990s, but to ease thereafter as economic growth resumes. Section 3 External assistance 14 Joint EU / IMF assistance programme… €85 billion of financial support over 3 year period: Based on strong conditionality drawn from Ireland’s own Programme Key objectives: Return our economy to sustainable growth Fiscal consolidation Ensure that we have a properly functioning healthy banking system Main elements of strategy: structural reforms to raise growth potential ensure fiscal sustainability through fiscal consolidation and reform restore financial stability Programme is on track: Government has concluded first and second quarterly reviews External funding partners: ‘Policy implementation has been strong’ 15 Despite a robust policy response (see next section), funding of the Irish banks and the sovereign became increasingly difficult in the second half of 2010. Against the backdrop of a strong increase in Irish bond yields, the Government agreed to the provision of €85 billion in financial support by Member States of the European Union and the International Monetary Fund on the basis of specified conditions. Notably these conditions are drawn from Ireland’s own Programme. The purpose of the external financial support is to return our economy to sustainable growth, achieve fiscal consolidation and ensure that we have a properly functioning healthy banking system. This will boost market confidence in the banking sector and sovereign, so as to restore market access at reasonable interest rates. It provides time to restructure the banking sector, consolidate fiscally and implement growth enhancing structural reform measures. Without this external support, the State would not be able to raise the funds required to pay for key public services for our citizens and to provide a functioning banking system to support economic activity. Following the first and second quarterly review of the Programme in April, our external partners noted that the Programme had met its targets and was off to a strong start. Ireland’s Funding Programme… EFSF, 17.7 EFSM, 22.5 Sweden, 0.6 Denmark, 0.4 Other, 4.8 UK, 3.8 Own Reserves, 17.5 IMF, 22.5 Chart shows: Ireland’s funding programme (source – DoF) 16 The €85 billion of financial support will come from both external and domestic sources. The external element amounts to €67.5bn shared amongst (i) the European Financial Stabilisation Mechanism (€22.5bn), (ii) the European Financial Stability Facility (€17.7bn), (iii) bilateral loans from the UK, Sweden and Denmark (€4.8bn), and (iv) the International Monetary Fund (€22.5bn). The Irish State will contribute €17.5 billion of the total, which will come from the National Pension Reserve Fund (NPRF) and other domestic cash resources. Structural reforms… Improved fiscal architecture: fiscal council to be established - provide greater oversight fiscal rules to be introduced - medium term spending framework - deficit / debt correction rule (along SGP lines) provided for in law (Fiscal Responsibility Bill) Micro-economic reforms: labour market reforms product market reforms - boost competition in sheltered sectors 17 Structural reforms are a key element of the EU/IMF programme. On the fiscal side these reforms will support and sustain fiscal consolidation. A Fiscal Advisory Council, mandated to provide an independent assessment of public finances, will be established, while fiscal rules will be introduced, credibly anchoring budgetary discipline over the cycle. Bringing forward these reforms will enhance the credibility of our budgetary process and lend greater confidence to our efforts. Reforms to boost the economy’s medium term growth potential are also being pursued. These will focus on measures to raise competitiveness and enhance job creation: • service sector growth will be promoted through vigorous action to remove remaining restrictions on trade and competition; • the government will undertake an independent assessment of the electricity and gas sectors with a view to enhancing their efficiency; • changes will be introduced to facilitate re-adjustment in the labour market and create greater incentives to take up employment. Section 4 Policy Responses 18 Guiding principles… Restoring sustainability to public finances; Repairing the banking system; Improving competitiveness; Jobs initiative. 19 Restoring sustainability to public finances… (i) correcting the large deficit % of GDP 12 0 -12 2005 2006 2007 2008 2009 2010 Chart shows: underlying fiscal deficit as a % of GDP (source – DoF) 2011 20 The rapid economic deterioration exposed underlying problems in the structure of the public finances, problems that have been exacerbated by the necessary banking support measures. Revenues had become too dependent on transitory taxes such as those associated with the property market; spending had been increased significantly on foot of these while at the same time income taxes had been lowered. Between 2007 and 2009, tax revenue fell by around 30%. As a result, a very large, unsustainable, gap opened up between government spending and revenue, a gap that is currently being filled by borrowing. As the Chart shows, the underlying General Government deficit – excluding the impact of banking support measures – stabilised in 2010 at 12% of GDP, and is forecast to decline to 10% of GDP this year. On a headline basis the deficit is estimated at 32.4% of GDP in 2010 (up from 14.3% in 2009). This higher figure is due to the inclusion of the full €31 billion in Promissory Notes committed to Anglo Irish Bank, INBS and EBS in 2010 in the deficit measure. Crucially, however, the financing of this €31 billion will be spread over a lengthy period of time, making it more manageable for the Exchequer. There was no borrowing associated with the Promissory Notes in 2010. It is crucial that the gap between government spending and revenue is reduced in the coming years. Restoring sustainability to public finances… (ii) significant corrective measures have been taken Adjustment package Main consolidation form Saving, €m * Expenditure 1,000 2. October 2008 (2009 Budget) Revenue 2,000 3. February 2009 Expenditure 2,100 4. April 2009 (supplementary Budget) Revenue Expenditure 3,600 1,800 5. December 2009 (2010 Budget) Expenditure 4,100 Expenditure Revenue Other** 3,900 1,400 700 1. July 2008 6. December 2010 (2011 Budget) * Figures in all cases are broad order of magnitude ** Asset disposals, increased dividends etc. 21 The Irish authorities were quick to react to the widening gap in the public finances. Beginning in July 2008, significant budgetary consolidation measures have been implemented over the course of six separate policy announcements, with the most recent – Budget 2011 – implementing a package of €6 billion. In total, budgetary adjustments designed to yield some €21 billion or over 13% of GDP have been implemented. These adjustments have been wide ranging and have included reductions in public service pay, social welfare rates and capital expenditure and a significant widening of the tax base. Crucially, only one third of these adjustments have occurred on the revenue side, which should limit their overall impact on growth. Restoring sustainability to public finances… (iii) medium term consolidation framework Irish Government fully committed to: reducing deficit below 3% of GDP by end-2015 aggregate fiscal adjustment for 2011 & 2012 set out in Joint EU/IMF Programme Progress on deficit reduction will be reviewed in context of Budget 2013 Comprehensive reviews of current and capital spending underway: will assist in determining precise nature of consolidation to be implemented in Budget 2012 22 Further measures will be required in the coming years to bring the deficit to more sustainable levels. The Irish Government is fully committed to reducing the deficit below 3% of GDP by the end of 2015. The consolidation strategy is spread out over a number of years in recognition of the need to balance the needs of the economy on the one hand and the need to eliminate the structural deficit (i.e. that part of the public deficit which will not be eliminated by economic recovery and therefore requires discretionary measures) on the other hand. This multi-annual approach has been endorsed by the EU Commission and by other respected international institutions such as the IMF and OECD. The Irish Government is also committed to the aggregate fiscal adjustment which underpins the Joint EU/IMF Programme of Financial Support for Ireland for the period 2011-2012. In preparation for Budget 2013, the Government will review progress on deficit reduction to ensure that the 3% of GDP deficit target is reached by 2015. This is a sensible course of action given the high degree of uncertainty surrounding the economic outlook for Ireland at this time. The overall fiscal adjustment for 2012 underpinning the Joint Programme is €3.6 billion. The precise nature of that adjustment will be informed by comprehensive reviews of current and capital expenditure which are underway and which will be completed in the autumn and will inform the Budget 2012 process. Restoring sustainability to public finances… (iv) debt has increased significantly but is sustainable 140 120 100 %of GDP 80 60 40 20 0 2006 2007 2008 2009 2010 2011 (f) 2012 (f) 2013 (f) 2014 (f) Chart shows: general government debt as a percentage of GDP (source – DoF) 2015 (f) 23 The stock of public debt has increased dramatically in recent years, albeit from a low starting point. This is a result of the large gap that has emerged between the revenues and expenditures of the State, caused by the economic downturn and the requirement for significant levels of State support to the banking sector. The debt position is sustainable, however. Fiscal consolidation measures (those already implemented together with future adjustments) together with the implementation of growth-friendly economic policies will help reduce the build-up of public debt. The General Government debt-to-GDP ratio is expected to peak at 118% of GDP in 2013 before declining to 111% by 2015. Restoring sustainability to public finances… (v) stabilising debt interest costs 35.0% 30.0% % of GDP 25.0% 20.0% 15.0% 10.0% 5.0% 19 85 19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14 20 15 0.0% Years Debt Interest - % of Tax Revenue Chart shows: debt interest payments as per cent of tax revenue (source – DoF) 24 Debt interest costs as a percentage of taxation revenue – a commonly used measure of sustainability – have also increased dramatically in recent years. These are projected to stabilise in the coming years at levels some way below those which prevailed in the mid-1980s. Debt interest costs are expected to absorb around one-fifth of tax revenue by 2015. In the 1980’s, by comparison, these costs were absorbing around one-third of the State’s tax revenue. Repairing the banking system… (i) Key objectives for the banking system 1. To provide a secure financial system for deposits and ensure the flow of credit to Irish consumers and businesses; 2. To ensure the Irish banks are viable financial institutions which can fund themselves without continued support from the State or the ECB/Central Bank; and 3. Return the banks to profitability and to broad based market funding with a view to eventually disposing of the State’s shareholding in these institutions. 25 The banking system must be the enabler of economic recovery by restoring public and market confidence in its financial health, management competence and ethical integrity. The capital and liquidity assessments carried out by the Central Bank together with the deleverage plans being developed by the banks themselves are critical steps in restoring market confidence in the Irish banking sector. This is expected in due course to facilitate the return of the banks to broad based market funding. The banking system itself first needs to be restructured to build a new core banking system that is fit for purpose for the economy, businesses and households by providing substantial new lending into the economy. Repairing the banking system… (ii) Banks will be adequately capitalised (“PCAR”) • The Central Bank PCAR has established a capital base for our banks that will be one of the most stringent in the world. • Capital targets are set to ensure that banks maintain a minimum capital ratio of 10.5% at all times in the base case scenario and do not fall below a minimum capital ratio of 6% even in an extreme stress scenario. • Capital targets are founded on independent and robust models, highly conservative assumptions and also include additional conservative buffer layers for any additional unknown factors. 26 Over just two years, the Irish State has contributed €46.3bn of capital to the domestic banks. Despite this, they continue to rely on government and central bank support. Based on the Central Bank’s work, a further €24 billion of capital is required. The Government will act to reduce this cost to the taxpayer. These actions will include further significant contributions to the costs of recapitalisation from subordinated debt holders, by the sale of assets to generate capital and where possible by seeking private sector investors. It is expected that the effect of these actions will be to reduce the amount of capital required significantly. In addition, an element of the capital will be provided on a contingent basis which if it is not required, must be returned to the State. To this end, some €3 billion of any recapitalisation will be in the form of contingent capital instruments. Repairing the banking system… (iii) Deleveraging in the sector (“PLAR” and “NAMA”) The Central Bank PLAR has set domestic banks the target of achieving a loan-to-deposit ratio of 122.5% by end 2013; Non-core assets totalling €73bn have been identified for deleveraging by end2013, through a combination of run-offs and a carefully phased programme of disposals. Approximately 90% of these assets are outside Ireland ensuring no negative feedback loop into the economy; NAMA is assisting in the deleveraging of the most risky land and development loans; Radical restructuring of banking sector. Anglo and INBS are being wound down over a reasonable period of time. 27 The Central Bank has set domestic banks the target of achieving a loan-to-deposit ratio of 122.5% by the end of 2013 (from 180% in 2010). The purpose of this target is to begin to return the Irish banks to a more appropriately leveraged and more stable funding position, and to reduce their reliance on ECB/Central Bank funding. In order to meet this target, the covered banks will follow a structured program of deleveraging and a re-focusing of their operations. The underlying core operations will transition towards stable and profitable businesses - which will be sufficiently deleveraged to reduce reliance on Central Bank funding - while non-core operations will be sold or run down over the next 3 years. Non-core assets totalling €73 billion have been identified for deleveraging by end-2013. NAMA has assisted in the deleveraging process by purchasing portfolios of risky loans (land and development loans, as well as certain associated loans) from participating institutions. To end March 2011 NAMA has completed the acquisition of 11,000 loans from 850 debtors with a nominal value of €71.2 billion. In return for these assets the NAMA participating institutions have received €30.2 billion in government guaranteed securities (58% discount), significantly improving the institutions liquidity positions. The NAMA portfolio of €30.2 billion consists of 40% land and development and 60% investment property. The most difficult part of the portfolio to realise is Irish land and development which represents 27% or €8.2 billion of the total portfolio. Recent sales announcements have been a positive indicator for the success of NAMA. Furthermore, a radical restructuring of the Irish banking sector will take place to serve the needs of the Irish economy as agreed in the Programme of Support with the EU/IMF. The future profile of the Irish banking sector will feature two domestic universal full-service banks, which will re-focus their operations to areas which will support our economic recovery. Restoring competitiveness… (i) Labour costs adjusting 15.0 10.0 Over the period 2008 to 2012 there is expected to be a 14% improvement in ULC vis-à-vis the Euro area %change 5.0 0.0 Chart shows: change in unit labour costs 2009 to 2012 (source – EC) Cyprus Luxembourg Slovenia Austria Finland Belgium Slovakia Netherlands Germany Italy Malta France Portugal Greece Spain Estonia Ireland -10.0 EuroArea -5.0 28 The necessary competitiveness adjustments are underway. Unit labour costs are a key component of competitiveness in an economy. The figures show how wages are moving after adjusting for productivity. European Commission forecasts anticipate that Irish unit labour costs will fall by a cumulative 8½% over the period 2009 to 2012. This decline reflects a recovery in productivity coupled with a decline in compensation per head. Unit labour costs in the euro area as a whole, by comparison, are forecast to increase by 5½% over the same period (as the Chart above shows, Ireland is one of only three euro area countries that will experience a decline between 2009 and 2012). In other words, economic projections show that Ireland’s relative position will have improved by around 14% vis-àvis the Euro area since 2009. This also illustrates the flexibility of the labour market – Irish labour costs are adjusting rapidly to the new environment. Restoring competitiveness… (ii) Consumer prices adjusting 6.00 5.00 4.00 Percentagechangeyear-on-year 3.00 2.00 1.00 0.00 -1.00 Source: European Commission Spring 2011 forecast -2.00 -3.00 1999 2000 2001 2002 2003 2004 2005 Ireland 2006 2007 2008 2009 2010 2011 2012 Euro Area Chart shows: harmonised consumer price inflation (source – EC) 29 The Harmonised Index of Consumer Prices is the appropriate measure for comparing inflation across the euro area. This differs from the national measure – the Consumer Price Index – through the exclusion of mortgage interest payments in the harmonised measure. Irish inflation was considerably higher than that in the euro area in the early years of monetary union, resulting in a deterioration of our price competitiveness. In 2009 and 2010, however, Irish price levels declined while those in the euro area continued to increase, helping to recover some of these competitiveness losses. Many of the factors depressing consumer prices in Ireland were temporary and a protracted period of declining prices (i.e. deflation) is not expected. In fact, prices increased in year-on-year terms in the first four months of 2011. European Commission forecasts expect Irish inflation rates to remain below those in the euro area as a whole, however, further improving our relative competitiveness position. Jobs Initiative… Objective is to assist in employment generation, provide opportunities for unemployed and generate confidence; Measures announced in May 2011 include: Introduction of temporary second reduced rate of VAT of 9% for labour intensive tourism sector; Halving of the lower rate of PRSI until end-2013 on low paid jobs; Labour activation measures: An additional 20,900 places for training, education and upskilling will be made available; Capital expenditure measures: Reallocation to more labour intensive capital spending. Measures are budgetary neutral over the period to 2014: Measures will be funded by a temporary pension funds levy. 30 The Government introduced a Jobs Initiative in May 2011, outlining a number of measures to assist in employment generation, provide opportunities for those who have lost their jobs, and generate confidence in the economy. These include: • A range of measures will be brought in to support employment in the labour intensive tourism sector, including the introduction of a temporary second reduced rate of VAT at 9% and a suspension of the air travel tax. • • The lower rate of employers PRSI will be halved until end-2013 on jobs that pay up to €356 per week. An additional 20,900 places will be made available for training, education and upskilling, adding to significant activation measures announced last year. • Planned capital expenditure will be reallocated towards more labour intensive spending, while some additional capital expenditure will also be introduced. Given the current public finance difficulties, the cost of the package of measures being introduced is being financed through the introduction of a temporary levy on funded pension schemes and personal pension plans. This ensures budget neutrality over the period to 2014 and should not hinder the economic recovery that is taking hold. Section 5 Emergence from recession 31 Recovery in a small open economy… Step 2 Step 1 Step 4 investment picks up exports recover consumption improves Step 5 Step 3 employment increases, unemployment stabilises taxes increase, further employment gains & unemployment falls 32 As a small open economy (SOE), the sequencing of recovery in Ireland can usefully be categorised into five phases. In terms of the current juncture, the Irish economy currently appears to be between Step 1 and 2. Step 1 – export-led growth The first step in a SOE’s recovery is an increase in net exports. Against the backdrop of a global recovery and an improvement in our competitiveness position, Irish exports have grown significantly over the past year, increasing by 9.4% in 2010. Step 2 – pick-up in investment As the global economic recovery gains momentum, indigenous and multinational investment in Ireland will pick up to meet stronger global demand. Step 3 – expansion of employment There is typically a lag between the recovery in activity and recovery in the labour market. However, as a result of higher investment, firms (domestic and international) will start to hire once again, so that employment will begin to expand. Step 4 – consumer spending improves Increasing employment will improve household disposable incomes and underpin consumer confidence, so that households will increase their spending. Step 5 – strengthening of domestic demand As domestic demand strengthens (this is more employment-intensive) tax revenue will recover, while unemployment will fall. Crucially, this is not domestically-driven growth, but a more sustainable evolution of domestic demand. Given the impact of fiscal consolidation and the necessary unwinding of private sector imbalances, it will take somewhat longer than normal for export growth to filter through to the domestic side of the economy during the current recovery. Return to annual growth expected this year… 12.0 10.0 Departm ent of Finance forecas ts 2011 - 2015 8.0 6.0 per cent change 4.0 2.0 0.0 -2.0 -4.0 -6.0 -8.0 -10.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Chart shows: Annual real GDP growth (sources – CSO and DoF) 33 Following a contraction of 1% in 2010, there is now a broad consensus that the Irish economy will return to annual growth this year. While near-term prospects remain subdued on the whole – reflecting significant headwinds on the domestic front - a strong export performance is expected to translate into GDP growth of around ¾% in 2011 and 2½% in 2012 (see Chart above). Turning to the medium term, the Irish economy is forecast to grow on average by 3% per annum over the period 2013-15. These projections take account of the trend growth rate and the amount of slack in the economy, which gives rise to the possibility of growth above trend for a period, as underutilised resources are brought into productive use. Exports are expected to continue supporting economic activity over this period, with a gradual pick-up in domestic demand also foreseen as the recovery broadens out and spills over to the labour market. Accordingly, growth in the Irish economy will be on a more sustainable basis than was the case in the past decade. Very strong export growth… 25.0 20.0 %changeyear-on-year 15.0 10.0 5.0 0.0 -5.0 -10.0 2000Q1 2000Q4 2001Q3 2002Q2 2003Q1 2003Q4 2004Q3 2005Q2 2006Q1 2006Q4 2007Q3 2008Q2 2009Q1 2009Q4 Chart shows: Export growth rate in year-on-year terms (source – CSO) 2010Q3 34 Having declined sharply in the final months of 2008 and throughout 2009, Irish exports recovered strongly last year. Against the backdrop of a recovery in global growth and significant competitiveness improvements, exports increased by 9.4% in real terms in 2010, their strongest annual growth rate for a decade. The export performance has remained robust at the start of 2011; in value terms exports recorded year-on-year growth of 6.9% in the first quarter of the year, while survey data of order books point to this positive trend continuing. The export performance is broadly based; the pharmaceuticals, software, financial services, business services and food sectors are all performing well. Exporters are also changing their main focus away from traditional markets towards new export opportunities in North and South America and Asia. Current account moving back into surplus… 6 Departm ent of Finance forecas ts 2010 - 2015 4 2 0 -2 -4 -6 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Chart shows: current account of BOP as a % of GDP (sources – CSO and DoF) 2015 35 One consequence of the recent strength of exports is that the current account of the balance of payments has turned positive once again, having been in deficit for most of the last decade and substantially in deficit as recently as 2008 (when it was -5.6% of GDP). While the current account was negative for 2010 as a whole, it moved into positive territory in the second half of last year, and is forecast to record a surplus of 1.2% of GDP this year. Furthermore, with the recovery set to be driven by net exports, the current account position is expected to strengthen over the coming years, reaching a surplus of around 4% of GDP in 2015. The return of the current account position to surplus is an important development. It means that the Irish economy will no longer be accumulating external liabilities, but will once again be paying its way in the world. Employment growth will resume over time… 6.00 Departm ent of Finance forecas ts 2010 - 2015 4.00 percentage change year-on-year 2.00 0.00 -2.00 -4.00 -6.00 -8.00 -10.00 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Chart shows: annual growth in employment (sources – CSO and DoF) 2015 36 While the Irish labour market remained very weak at the end of 2010, the outlook is for a gradual improvement over the forecast horizon, supported by recently-announced Government measures. Given that recovery in the labour market typically lags that in overall economic activity, employment is forecast to record a further decline this year. However, the pace of this decline, 1.6%, will be significantly weaker than in previous years. Employment is then expected to rise moderately in 2012, with the pace of hiring accelerating over the forecast horizon as economic activity strengthens and broadens out. Net employment creation of around 100,000 is foreseen over the period 2012-15, following a decline of around 300,000 between 2008 and 2011. In keeping with this, the numbers out of work should start to decline next year and gradually come down over the medium term. Nonetheless, the unemployment rate is expected to remain high over the forecast horizon, averaging 10% in 2015. Section 6 Ireland’s underlying strengths remain 37 Ireland’s underlying medium term strengths remain in place… Well-educated workforce; Favourable demographics; High level of employment; Very open economy…. …with high-tech export base; Pro-enterprise environment. 38 Well-educated workforce… 90 85 80 75 70 65 60 Chart shows: % of population 20-24 with at least upper second level education (source – Eurostat) Ireland Sweden Austria Finland France Belgium Greece United Kingdom EU 27 Luxembourg Netherlands Italy Euro area (16 countries) Germany Spain Portugal 50 Denmark 55 39 The Irish economy benefits from a highly educated and well qualified workforce, demonstrating the benefits of the substantial investment in education made over many years. • Data for 2009 show that the number of people aged between 20-24 in Ireland who are educated to at least an upper secondary level is the highest in the EU15 and is well above the euro area average (source: Eurostat); • Almost 45% of those in the 25-34 age cohort have at least third level education, above the OECD (38%) and euro area (30%) averages (source: National Competitiveness Council); • Ireland produces the third highest number of maths, science and computer graduates per 1,000 of population (aged 20-29) in the euro area (source: National Competitiveness Council); • The number of PhD students per 1,000 of population is above the OECD-24 average (source: National Competitiveness Council). Favourable demographics… 2008 2010 2020 2030 2040 Austria 25.4 26.0 29.2 38.1 46.0 Belgium 25.8 26.1 30.6 37.6 42.3 Denmark 23.6 25.0 31.8 37.8 42.7 Finland 24.8 25.7 36.8 43.9 45.1 France 25.3 25.8 32.8 39.0 44.0 Germany 30.3 31.2 35.3 46.2 54.7 Greece 27.8 28.2 32.8 38.5 48.2 Ireland 16.3 16.7 20.2 24.6 30.6 Italy 30.5 31.0 35.5 42.4 54.1 Luxembourg 20.9 21.1 24.2 30.8 36.3 Netherlands 21.8 22.8 30.7 40 46.8 Portugal 25.9 26.6 30.7 36.6 44.6 Spain 24.1 24.4 27.4 34.3 46.4 Sweden 26.7 27.8 33.7 37.4 40.8 UK 24.3 24.7 28.6 33.2 36.9 Chart shows: Old-age dependency ratio (source – EC 2009 Ageing Report) 40 Following a baby boom in the 1970’s and early 1980’s, the Irish population is relatively young by international standards, especially by European standards. Data from Eurostat estimate that the Irish old-age dependency ratio (population aged over 65 as a proportion of the working age population) was just 16.7 percent last year, the lowest in the EU15. This compared to ratios of around 30 per cent in Germany and Italy, and 25 per cent in France and Spain. Looking ahead, the old-age dependency ratio is expected to remain relatively low in the coming decades, increasing to 30 per cent by 2040. High level of employment… 2,200 2,000 thousand 1,800 1,600 1,400 1,200 Chart shows: Irish employment in level terms (sources – CSO and DoF) 20 15 20 13 20 14 20 12 20 11 20 10 20 08 20 09 20 07 20 05 20 06 20 03 20 04 20 01 20 02 20 00 19 99 19 98 19 96 19 97 19 95 19 93 19 94 19 92 19 90 19 91 1,000 41 While the numbers in employment have fallen against the backdrop of a sharp decline in activity, the level of employment remains relatively high from a historical perspective. At the end of 2010 there were 1.8 million people at work in Ireland compared to around 1.2 million in the early to mid-1990s. As noted earlier, employment is anticipated to increase once economic growth resumes. The pace of annual employment growth is expected to strengthen in the coming years, from 0.5% in 2012 to around 2% a year by the end of the forecast horizon. By 2015 the proportion of the population in employment is forecast to be around 45%, below the peak of 50% reached in 2007, but will above the level of around one-third recorded in the late 1980’s. Very open economy… 120.0 100.0 percent 80.0 60.0 40.0 20.0 0.0 2000 2001 2002 2003 EU27 2004 Ireland 2005 2006 Greece 2007 Spain 2008 Italy 2009 2010 2011 2012 Portugal Chart shows: Exports as a percentage of GDP (sources – Eurostat, EC) 42 Ireland remains one of the most open economies in the EU and indeed in the world. Irish exports increased to over 100 per cent of GDP in 2010, above their level at the start of the decade. The Commission has forecast a further strengthening to around 114% of GDP by 2012. In the EU 27 as a whole, by comparison, exports were just 40% of GDP in 2010 and are forecast to increase modestly to around 45 per cent of GDP by 2012. This openness will allow the country to trade its way to recovery, even while the domestic components of growth remain weak. High-tech export base… 60 50 per cent of total 40 30 20 Chart shows: high-tech exports as per cent of total exports (source – Eurostat) Malta Luxembourg UK Ireland Cyprus Hungary Finland Netherlands EU27 France Sweden Germany Denmark Austria Czech Republic Estonia Portugal Italy Belgium Greece Spain Slovakia Slovenia Latvia Romania Poland Bulgaria 0 Lithuania 10 43 Ireland has achieved critical mass in a number of high-technology sectors. Data from Eurostat, illustrated above, reveal that nearly one-third of Irish exports is classified as high tech (such as IT and chemicals) as business functions shift to higher value activities. This compares with an average of 17% in the EU-27. The high concentration of our exports in high technology sectors is a key factor behind our relatively resilient export performance despite the very sharp global economic downturn. While Irish exports contracted by 4.1% in 2009, exports in the euro area as a whole declined at a much more rapid pace, falling by 13.1%. Pro-enterprise environment… Country Ranking Country Ranking United Kingdom 4 Netherlands 30 Denmark 6 Portugal 31 Ireland 9 Austria 32 Finland 13 Luxembourg 45 Sweden 14 Spain 49 Germany 22 Italy 80 Belgium 25 Greece 109 France 26 Chart shows: Rankings in World Bank Ease of Doing Business Index (source – WB) 44 The Irish economy continues to be recognised as one of the most pro-enterprise environments in the world. Ireland was ranked ninth in the World Bank’s recent Ease of Doing Business Index, making it the highest ranked euro area country, and the third highest-ranked country in the European Union. Ireland continues to attract considerable inward FDI. Almost 1,000 companies, including Google, eBay and Facebook, have chosen Ireland as the hub of their European networks. Eight of the top ten global medical technology companies have a manufacturing base in Ireland, while eight of the top ten pharmaceutical companies have operations here. So Ireland remains open for business and is still the destination of choice for many of the world’s leading firms. The Government have been extremely clear in stressing that the 12½% corporation tax rate is here to stay. In conclusion… Ireland is recovering from a very deep downturn: The economy is expected to return to growth this year. Relatively strong growth is expected over the medium-term. The economy’s underlying strengths remain in tact. There has been a significant policy response: On track to correct the excessive deficit by 2015. Determined approach to banking issues. Large improvement in competitiveness. Jobs initiative will assist in employment creation. EU/IMF programme is on track: First and second quarterly review completed. Policy implementation strong. No complacency over challenges ahead. 45 The economy is currently emerging from one of the deepest recessions ever recorded in the developed world. Following three successive annual contractions, real GDP is expected to grow once again this year. Crucially, our society is cohesive, we enjoy political stability and a shared understanding of our economic problems. Furthermore, the economy’s underlying strengths remain in tact. Significant policy responses have been taken: • Tough decisions have been made to bring about stability to the public finances, and the deficit will be reduced below 3% of GDP by 2015; • • The banking system is being repaired; Our asset prices, wage levels and price levels are all adjusting rapidly to the new circumstances, thereby improving our competitiveness; • The recent Jobs Initiative will assist in employment creation. The financial assistance programme is on track. The Government has concluded the first and second quarterly reviews, and our external funding partners have concluded that our policy implementation has been strong. There is no complacency over the challenges that lie ahead, however.
