Uncertainty lies ahead, but it's not all bad news
Although unemployment and debt are huge issues, there are glimmers of hope for our economy in 2013, writes Louise McBride
'The simple fact is that Ireland's sovereign debt burden and interest rate burden is unsustainably high. . . a deal could be a game changer'
IT'S now four years and four months since Ireland officially sunk into recession – and last year was the toughest. With unemployment hovering around the 15 per cent mark for most of the year, one in seven people were out of work.
Economic growth was sluggish at best, with Davy Stockbrokers recently predicting that GDP growth (a key measure of a country's economic growth) for 2012 would be a dismal 0.2 per cent.
Research from Myhome.ie and Daft.ie last week shows that property prices in Dublin are beginning to stabilise, but it remains unclear whether this will last and when house prices in the rest of the country will pick up.
Despite all this, the two men in charge of turning Ireland's economy around appear to think the country is getting back on its feet.
In his Christmas message to the nation, Taoiseach Enda Kenny said he believed the Irish economy was recovering. "They are small signs but they are vital signs," said Kenny. "And they show that, at last, Ireland is heading in the right direction."
Kenny's remarks mirrored those made by Finance Minister Michael Noonan ahead of last December's Budget.
"The economy grew last year and will grow again this year and next year," said Noonan. "There are manifest signs that the country is emerging from the worst of the crisis."
But are Kenny and Noonan right? The Sunday Independent lined up some of Ireland's leading economists to get their thoughts on what the New Year will hold for the beleaguered Irish economy.
Managing partner, Indecon
Alan Gray, managing partner of Indecon, is not optimistic about the country's employment prospects this year.
Gray feels the country's unemployment rate will continue around the levels seen in 2012 – peaking at around 14.8 to 14.9 per cent and falling to 14.6 per cent by the end of the year.
"There remains great uncertainty around unemployment," says Gray.
"There will at best be weak growth in employment and there will not be a significant reduction in the levels of unemployment in the coming year.
"It's likely that we will see an increase in emigration and increased numbers not in the labour force. Most worryingly is that long-term unemployment – which represents about 60 per cent of the total amount of people out of work – will remain at this very high level."
Gray believes the property market will remain fairly flat in 2013, largely due to economic uncertainty and concerns about property taxes.
However, he thinks house prices in Dublin could increase by as much as 10 per cent this year.
"There is likely to be significant pent-up demand [for property] due to the very high levels of the labour force in rented properties," says Gray. "Perhaps Dublin house prices will increase by between 5 and 10 per cent in 2013. However, Dublin apartment prices will remain constant."
Gray predicts that Ireland could see a small increase in GDP of between 0.5 and 1 per cent in 2013 – as long as the country's export markets don't take a turn for the worse.
Irish inflation slowed towards the end of last year and Gray expects inflation will remain low in 2013, at between 1 and 1.25 per cent – with higher energy prices being the key driver of inflation.
If his predictions on interest rate movements are correct, homeowners shouldn't see their mortgage bills go up too much in 2013.
"The ECB rates are likely to remain very low, reflecting the ongoing low levels of demand in many EU countries," says Gray. And it's this sluggish demand which he cites as the biggest risk to the Irish economy in 2013.
"The largest risk for the Irish economy is a slower than anticipated demand in European markets," says Gray.
"There is also a small risk of an escalation of the ongoing uncertainty in the euro. A failure by Europe to provide some debt relief would also mean future additional cuts in public expenditure."
The biggest opportunities for the Irish economy in 2013, meanwhile, lie in tourism, agri-food and foreign direct investment, according to Gray.
"There may also be some opportunities in niche areas such as the film sector. Significant adjustments and reforms have been made [to the Irish economy] over the last year by the Government and there are now signs of hope.
"However, unemployment and debt remain two key issues for policy makers."
Economist, Merrion Capital
Merrion Capital's economist, Alan McQuaid, also believes it will be some time before Ireland sees the back of its massive unemployment problem.
"Tackling the huge unemployment problem is going to be a very slow process and it will be a number of years before the jobless rate falls back into single digits," says McQuaid. "The average unemployment rate in 2011 was 14.6 per cent and is expected to be higher for 2012 at 14.8 per cent – though this is forecast to be the worst of it."
McQuaid expects there to be some improvement in employment in 2013, with the average unemployment rate falling back to 14.3 per cent.
"The unemployment rate should start the year at 14.6 per cent and gradually make its way down to 14 per cent by the close of 2013," he says.
McQuaid expects the housing market to "gradually continue to recover through 2013, with Dublin driving the pick-up". On economic growth, he believes the Department of Finance's 1.5 per cent forecast for GDP growth in 2013 is too high "given the introduction of a property tax and a weaker external environment".
"Still, there is a reasonable chance the increase in national output will exceed 1 per cent for the third year in a row – by far the best performance of the debt-laden eurozone countries," he adds.
He believes weak consumer demand will continue to push inflation down further this year, and predicts the average inflation rate for 2013 will be 1.4 per cent – down from 1.7 per cent in 2012.
"Domestic inflationary pressures in Ireland are likely to remain subdued for some time to come. Continued weak consumer demand will put downward pressure on prices in the months ahead.
"The changes announced in the Budget will hit disposable incomes hard, which in turn will weigh negatively on spending power."
The main risk on the inflation front he feels will come from the external side, and the price of energy on the global market. "A sluggish world economy should contain oil prices, but as ever there will be geopolitical risks keeping prices higher than they would otherwise be."
Another interest rate cut could be on the cards for homeowners in 2013 "given the weak eurozone economy and the lack of inflationary pressures", says McQuaid.
"There is the possibility of one last quarter-point percentage cut from the ECB this year, to 0.50 per cent," he says. "I don't see rates going any lower than this."
McQuaid cites political in-fighting within the Coalition – and a weak global economy – as the biggest risks to the country's growth prospects in 2013.
"A government that's not united will send the wrong signal to financial markets and push up bond yields just at a time when Ireland is trying to exit its EU/IMF bailout.
"The biggest risk to economic growth will be the possibility of a weaker external environment than is currently factored in, which would damage exports – the country's main growth driver at this juncture.
"The big opportunity for Ireland would be to exploit export markets in the Asia-Pacific region – the part of the world that is driving global economic growth at the moment, and away from the traditional European and US areas.
"Obviously, getting a better deal on the country's bank debt would be hugely beneficial, easing the burden on Ireland 's budgetary position. A temporary move by the eurozone in general away from the 'austerity model' at least until economic growth in the region starts to pick up again, would be a great help, too."
Jim Power believes the unemployment rate will peak at 14.8 per cent this year – falling to 14.5 per cent by the end of the year.
He expects a recovery in the property market this year, predicting that national average property prices will rise by 2 per cent.
Power is the most optimistic of the economists when it comes to economic growth, forecasting GDP growth of 1.75 per cent in 2013. He forecasts an inflation rate of 1.8 per cent this year, and though he thinks ECB rates will remain unchanged at 0.75 per cent this year, he feels there is a small chance that rates will be cut by 0.25 per cent to 0.50 per cent.
Power cites a failure to get a debt deal for Ireland as the biggest risk to the Irish economy this year.
"The simple fact is that Ireland's sovereign debt burden and interest rate burden is unsustainably high," he says.
"A deal could be a game changer, but if a deal of sufficient magnitude is not delivered, we will face at least five years of further increases in the tax burden and a further diminution of public services – not to mention the deep damage it would do to business and consumer confidence."
He thinks the biggest opportunities for the economy are the agri-food sectors and tourism.
"A debt deal would open up the possibility of strong capital inflows into the Irish commercial property market and help the bank capital situation – once outside value-hunters become convinced that Ireland's debt situation has become sustainable."
Economics lecturer, UL
University of Limerick economics lecturer Stephen Kinsella believes unemployment will remain above 14 per cent this year. He feels property prices could go either way – and increase or decrease by 2 per cent in 2013.
Kinsella forecasts that GDP growth will be between 0.5 and 1 per cent in 2013.
At between 3 and 4 per cent, his forecast for inflation in 2013 is the highest of the economists we contacted. However, he also expects that the ECB rate will remain "very, very low".
"The biggest risks to the Irish economy this year will be a collapse in export volumes – and any change in international taxation rules to stop our usage as a corporate tax haven," says Kinsella.
"The biggest opportunity for the economy is getting a deal on our bank debt – anything else is small potatoes."
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