MacSharry's view of boom, bust and the future
In the five years to the end of 2007 the Irish economy experienced a period of unprecedented economic growth and expansion:
- GDP increased by 30 per cent in real terms and circa 45 per cent in nominal terms over the five years.
- Numbers employed increased by 20 per cent to more than 2.1 million with wage growth of 29 per cent.
- Consumer spending increased by 28 per cent in real terms with consumer price inflation recording a further 18 per cent increase.
- Household mortgage borrowing increased from €4.7bn in 2002 to €102bn in 2007.
- Household debt increased from 84 per cent to more than 154 per cent of disposable income. However, household savings ratio is estimated to have fallen by four percentage points.
- Some 400,000 new housing units were built representing more than 20 per cent of the housing stock in 2007. House prices increased by 45 per cent.
- External liabilities of the Irish banking sector increased from 10 per cent to almost 60 per cent of GDP.
The phenomenally positive background -- which of course in hindsight we now recognise as in large measure a bubble -- was essentially the catalyst for what followed.
In 2008 and 2009 the combined impact of the credit crisis, the global recession and the collapse of the Irish property market resulted in the economy going into reverse.
GDP fell by more than 10 per cent in real terms and by 15 per cent in nominal terms. Employment fell by 10 per cent and unemployment increased from a low of 4.5 per cent to 12.5 per cent.
Property prices fell substantially and have further to fall.
This sharp and severe adjustment has positioned the economy to begin to recover in 2010.
However, given the specific challenges facing Ireland, namely
- The recapitalisation and restructuring of the Irish banking sector
- And the correction of the deficit in the public finances and the requirement to restore competitiveness
-- the emergence of the economy out of recession and a return to capacity growth will be slow and will take longer than it otherwise should with Ireland's performance lagging behind most European economies for a period.
Consensus forecasts for 2010 are for GDP to fall by circa 1 per cent in real terms but for the country to come out of recession in the second half of the year.
Thereafter an annual average growth rate of 4 per cent over the period of 2011 to 2014 is achievable given the growth in labour supply and productivity and the slack in the economy. This assumes that the major challenges are successfully managed and the global economic recovery -- on which Ireland is hugely reliant -- is sustained.