Irish signs of revival offers lesson to Greece, Spain
Published 01/06/2010 | 09:53
Ireland, which endured one of the worst recessions of any developed economy since the Great Depression, is showing signs of reviving.
The economy may be expanding again after shrinking 7pc in 2009, economists say.
Growth will hit 3pc next year, almost twice the euro-area average, the Organization for Economic Cooperation and Development said May 27.
“We’re close to the bottom,” said Central Bank Governor Patrick Honohan in a May 28 interview in his Dublin office.
“Here at the Central Bank, we are projecting an upturn in the second half of 2010.”
Irish exports will rise this year for the first time since 2007, the OECD said. That’s helping Ireland pull out of the slump even as it continues the spending cuts started in 2008 to reduce Europe’s biggest deficit.
The ISEQ benchmark stock index has risen 3pc in the last six months, while Greece, Portugal and Spain, which have been slower to tackle deficits, have fallen by an average 23pc.
“It’s a rebound, a significant signal to Greece to swallow the pill and move on,” said Carsten Brzeski, an economist at ING Group in Brussels.
“Whether it means that the Celtic Tiger is back and the outlook rosy remains to be seen.”
The Irish economy shrank about 10pc in the last two years. The financial system came close to collapse, unemployment surged to a 15-year high, and the budget gap widened to 14.3pc of gross domestic product in 2009.
The Government raised a sales tax in 2008, introduced an income levy and cut public workers’ pay by an average of 13pc to tame the deficit.
Now, 18 months on from the first fiscal measures, consumer confidence is rising and retail sales are increasing.
Sales rose in March for a second month after declining for two years, bolstered in part by stores cutting prices.
At Arnotts, Ireland’s largest department store, workers have returned to a full 37.5 hour week after losing 2.5 hours in February.
It was “really terrible last year,” David Riddiford, chief executive officer of the downtown Dublin store, said in an interview.
“Now there seems to be some kind of stabilisation. We can’t keep the Irish depressed for very long.”
Manufacturing expanded in April at the fastest pace in a decade and the OECD forecasts exports will rise 3.7pc this year.
Kilkenny-based Glanbia last month raised its 2010 earnings forecast, citing a recovery in dairy markets.
The country still has to deal with the legacy of the recession. More than 180,000 jobs were lost in the last two years, pushing unemployment to 13.4pc.
Property prices halved since 2007 and the government has pumped billions of euros into the country’s banks to help protect them from souring loans.
About 30pc of homeowners with a mortgage will be in negative equity by the end of 2010, according to research by the Economic and Social Research Institute in Dublin.
“Certainly, the headline numbers, the big picture is looking better,” James Forbes, senior equity strategist at Irish Life Investment Managers in Dublin, said in a phone interview. “However, the housing market will remain under pressure.”
The government last year injected €7bn into Bank of Ireland and Allied Irish Banks. It also set up NAMA to buy, at a discount, toxic property loans with an original value of €80bn from lenders.
“Ireland is like a patient bleeding from two gunshot wounds,” said Morgan Kelly, a University College Dublin economics professor dubbed Ireland’s ‘Doctor Doom’” after forecasting the economy’s slump.
“The Irish government has moved quickly to stanch the smaller, fiscal hole, while insisting that the liters of blood pouring unchecked through the banking hole are manageable.”
After being burned by rampant lending before the slump, lenders are now hoarding cash, which may curb consumer spending and company investment.
“Two years ago we would have been selling 60 to 70 percent of cars on finance,” said Gerry Murphy, a salesman at Sarsfield Motor Company in Kilmainham. “That’s not happening at all.”
Nonetheless, car sales are up, spurred in part by a cash-for-clunkers program. Some 57,900 cars were sold in the five months through May, more than all of last year.
‘On the up’
“Things are on the up,” said Murphy. “I think the decisions the government have made are working.”
Other European governments are now following the Irish lead in cutting spending, on concern that the mounting debt crisis in Greece would spread to other nations.
European Union leaders set up a €750m financial lifeline last month to backstop the region and defend the euro, prompting Italy, Spain and Portugal to agree to additional deficit cuts.
“I give Ireland credit,” said Joseph Quinlan, chief market strategist for the investment management unit at Bank of America.
“What Ireland did six months ago is what the markets are demanding now of Greece, Italy and Portugal.”