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Recovering from the Crisis:
Whither the Irish Economy?
John McHale
National University of Ireland, Galway
Irish Fiscal Advisory Council
European Commission Conference: Challenges Facing the Irish Economy
Galway, March 24, 2012
Overview
• The shock
• Adverse feedbacks and the stabilisation challenge
• Failure to “manage” without outside assistance
• The recovery strategy: (Phased) adjustment with assistance
• The banking challenge
• The fiscal challenge
• The growth challenge
The bubbles bursts
Monthly House Completions,
January 1975 to January 2011
Based on ESB Electricity Connections
12,000
10,000
8,000
6,000
4,000
2,000
0
1975
1980
1985
1990
1995
2000
2005
2010
Source: Department of Housing, Hertiage and Local Government
Adverse feedback loops
In the end, we failed to manage the crisis
without outside assistance
Loss of bank funding
Source: NTMA
Retail Deposits
Billions of Euro
152
160
Billions of Euro
Corpotate Deposits
160
146
136
140
118
120
121
140
120
100
100
80
80
60
60
40
40
20
20
0
103
80
32
21
21
Jun-11
Sep-11
0
Dec-08
Billions of Euro
160
Dec-09
Dec-10
Jun-11
Sep-11
Debt Capital Markets
Billions of Euro
Dec-09
Dec-10
Repo/Interbank
160
140
140
Dec-08
140
123
120
120
100
100
69
80
60
58
89
80
55
40
40
20
20
0
50
60
30
19
21
Jun-11
Sep-11
0
Dec-08
Dec-09
Dec-10
Jun-11
Sep-11
Dec-08
Dec-09
Dec-10
Heavy dependence on ECB/CBI
Central Bank
Billions of Euro
160
142
140
123
122
Jun-11
Sep-11
120
100
80
62
60
40
37
20
0
Dec-08
Dec-09
Dec-10
Loss of Government creditworthiness
Approx. 10-year yields (monthly averages)
14
12
10
8
Ireland
6
4
Germany
2
Source: ECB; http://www.ecb.int/stats/money/long/html/index.en.html
Jan-12
Jul-11
Jan-11
Jul-10
Jan-10
Jul-09
Jan-09
Jul-08
Jan-08
Jul-07
Jan-07
Jul-06
Jan-06
Jul-05
Jan-05
Jul-04
Jan-04
Jul-03
Jan-03
Jul-02
Jan-02
Jul-01
Jan-01
0
Recovery strategy
• (Phased) adjustment with financing
• Banking adjustment
– Recapitalise/deleverage
– Credit supply/debt resolution
• Fiscal adjustment
– Bring deficit & debt to safer levels
– Limit fall in domestic demand
• Real economy
– Restore competitiveness
– Restore growth in domestic demand
• Fiscal adjustment harms disposable income
• Need for confidence in future path of disposable income
As seen by Government . . .
Stabilisation, reputation, confidence
The Banking Challenge
Objectives
• Functioning credit system
– Rational credit decisions
– Access to funding
• Limit liability to the State
• Secure future financial
stability
• Reduce burden of privatesector debt
Policies
• Guarantees
– Original “blanket” guarantee
– ELG guarantee (new borrowing)
• Remove “toxic” assets
– National Asset Management
Agency (NAMA)
• Recapitalisation
• Deleveraging
• New regulatory / supervisory
regime
• Debt forgiveness
Cost of the Banking Rescue
Billions of Euro
Cost Prior to March
31
March 31 Stress
Tests
Total
AIB/EBS
8.1
12.7
20.8
Bank of Ireland
3.5
1.2
4.7
IL&P
0
2.7
2.7
Anglo /INBS
34.7
0.0
34.7
Total
46.3
16.6
62.9
Securing bank funding
Guarantees
Capital
Deleverage/de-risk
Reliable lender
of last resort
Big challenges
• Recapitalise/deleverage without a severe
credit contraction
• Debt forgiveness without further undermining
bank balance sheets
The Fiscal Challenge
Actual and planned austerity measures
Billions of Euro
July 2008
1.0
Expenditure adjustments
Budget 2009 (October 2008)
2.0
Revenue raising measures
February 2009
2.1
Expenditure adjustments
Supplementary budget (April 2009)
5.4
Revenue-raising & expenditure-reducing measures
Budget 2010 (December 2009)
4.1
Revenue-raising & expenditure-reducing measures
Budget 2011 (December 2010)
6.0
Revenue-raising & expenditure-reducing measures
Budget 2012 (December 2011)
3.8
Revenue-raising & expenditure-reducing measures
Planned Adjustments: 2013 – 2015
8.6
Revenue-raising & expenditure-reducing measures
Total actual and planned adjustment
33.0
(≈ 21 % of GDP)
Simulation of zero-adjustment scenario
General Government Deficit
Overall Deficit
% of GDP
11
10
9
8
7
6
5
Ireland
4
Greece
3
Portugal
2
Spain
1
0
2011
2012
2013
2014
2015
Source: IMF
Primary (non-interest) surplus
Primary Balance
% of GDP
6
Ireland
4
Greece
2
Portugal
Spain
0
2011
2012
2013
2014
2015
-2
-4
-6
-8
Source: IMF
Determining the fiscal stance
• Difficult balancing act:
– Supporting domestic demand vs.
ensuring sustainability/creditworthiness
• Fiscal Council recommended a more ambitious fiscal
adjustment in October 2011
– Funding vulnerabilities
– Risks to debt sustainability
– Slow pace of debt reduction post-2015
• Negative growth surprise → Worsens the dilemma
The Growth Challenge
Real economy
Seasonally Adjusted Quarterly Aggregates, 1997Q2 – 2011Q3
50,000
45,000
40,000
35,000
€m
30,000
Real GDP
Real GNP
Real Domestic Demand
25,000
20,000
15,000
1997Q1
1999Q1
2001Q1
2003Q1
2005Q1
2007Q1
2009Q1
2011Q1
Massive rise in unemployment . . .
16
14
12
Unemployment Rate
10
8
6
4
Long-term Unemployment Rate
2
0
1999Q1
2001Q1
2003Q1
2005Q1
2007Q1
2009Q1
2011Q1
. . . Large fall in employment
Millions
2.5
2.0
1.5
1.0
0.5
0.0
1999Q1
2001Q1
2003Q1
2005Q1
2007Q1
2009Q1
2011Q1
Consistent downward revisions to 2012 forecasts
3.5
3.0
2.5
2.0
%
1.5
1.0
0.5
0.0
DoF
CBI
ESRI
EC
IMF
Unusual uncertainty:
Whither the Irish Economy?
• Uncertainty about the starting output gap
• Uncertainty about the speed at which the gap will
close
• Uncertainty about the underlying potential growth
rate
Output gap
Percent of Potential Output
3
2
1
0
2008
-1
2009
2010
2011
2012
2013
2014
-2
-3
-4
-5
-6
-7
Output Gap (IMF)
Output Gap (Budget 2012)
2015
Actual and Potential GDP (IMF)
1.06
1.04
1.02
1.00
0.98
0.96
0.94
0.92
0.90
0.88
0.86
2008
2009
2010
2011
Real GDP (IMF)
2012
2013
Potential Real GDP (IMF)
2014
2015
Actual and Potential GDP (IMF & Budget 2012)
1.06
1.04
1.02
1.00
0.98
0.96
0.94
0.92
0.90
0.88
0.86
2008
2009
2010
2011
2012
2013
2014
Real GDP (IMF)
Potential Real GDP (IMF)
Real GDP (Budget 2012)
Potential Real GDP (Budget 2012)
2015
Growth strategy
Domestic Demand
Demand
Net Exports
Competitiveness
Supply
Smart Economy
Focus by
necessity
Nominal GDP growth, 2007 - 2011
8.0%
6.5%
6.0%
4.0%
2.0%
0.3%
0.0%
2007
2008
2009
2010
2011
-2.0%
-2.9%
-4.0%
-6.0%
-5.2%
-8.0%
-10.0%
-12.0%
-10.8%
Source: CSO
A dual economy:
Contributions to nominal GDP growth, 2007 - 2011
10.0%
6.6%
4.8%
5.0%
3.1%
0.0%
0.0%
2007
-0.4%
2008
2009
2.4%
2010
2011
-2.2%
-5.0%
-4.8%
-5.9%
-10.0%
Domestic Demand
-15.0%
-15.5%
Net Exports
-20.0%
Note: Statistical discrepancy included under domestic demand
Source: CSO
Q4 National Accounts
• 2011
– Real GDP: +0.7 percent
– Real GNP: -2.5 percent
• Back in recession: Two successive quarters of
contraction
• Tentative signs of stabilisation in domestic economy
– Final domestic demand up 1.3 percent in final quarter
– Consistent with surprise 10,000 job gain in quarter
Other heavily debated topics
• Restructuring the IBRC promissory notes
• Referendum on the fiscal compact
• Building the euro zone firewalls