Irish Economy: Goodbody Stockbrokers says a recovery is underway and will be U-shaped rather than V-shaped, given the scale of the task ahead in terms of fiscal consolidation and deleveraging, although economic growth is expected to return in the second half of 2010. The broker says private sector debt levels will increase to 225% of GDP in 2009.
The latest quarterly economic update issued today from Goodbody Stockbrokers predicts a contraction in the economy of 1.1% (GDP) for 2010, rising to a growth figure of 2.4% in 2011. (This contrasts with the broker’s previous most recent prediction of a 3.7% contraction in 2010, followed by a 1.2% growth figure in 2011.) Overall, Goodbody Stockbrokers say they are more confident now that a recovery is on the way, led by an improvement in exports but it will be U-shaped rather than V-shaped.
Goodbody Chief Economist Dermot O’Leary says that although public sector debt levels are receiving most of the attention, high private sector debt levels are of greater concern in the medium term for the Irish economy. “We believe private sector debt levels will increase to 225% of GDP in 2009, and are unlikely to fall below 200% until 2012 (similar to current levels in the UK and US). Given that Ireland is one of the most indebted economies in the developed world, we have benefited most from the collapse in interest rates, which we have quantified at around 5% of GNP. However, this benefit will not be repeated and will instead act as a drag on businesses and consumers going into 2011 in particular as the impact of interest rate rises is felt.”
“We have repeated an analysis of household debt that we originally carried out in 2005,” continued Dermot O’Leary, “And although household debt levels increased further over the past few years, to peak at 175% of disposable income, our original findings remains the same: Irish households are better able to sustain higher debt levels due to the younger population and low interest rates. However, high debt levels increase the sensitivity of Irish households and the economy overall to interest rate changes, both on the way up and they way down.”
Goodbody says at the end of 2006, total household assets amounted to €824bn, representing a 97% increase over the previous 5 year period. However, since that time Ireland has experienced significant wealth destruction. By the end of next year, asset values are set to amount to €654bn, a drop of 20% from the peak and close to levels last seen in 2004. This can be very much attributed to property, giving Irish households’ dependence on this source of wealth. By the end of 2010, the broker estimates the value of the housing stock will stand at €342bn, a drop of a third from the peak.
“The budget deficit is likely to remain high in the coming years,” says Dermot O’Leary,
“and we do not believe that the Government will reach its target of hitting the 3% of GDP deficit by 2013. Despite this, we have become more confident about the outlook over recent months. Government bond yields are down, policies have been put in place for resolving the banking issue, a budget consolidation plan has been put in place, funding is complete for this year and has begun for 2010 and recent rhetoric suggest that more focus is going to be placed on spending in the coming Budget rather than further damaging tax increases. Risks remain but the outlook has brightened considerably.”
Goodbody says private sector debt levels in Ireland are now among the highest in the developed world. The economists estimate that the private sector debt/GDP ratio will rise to 225% this year, compared to 86% a decade ago. However, the process of deleveraging has now begun. Since its peak last November, outstanding credit has fallen by 3%. However, this is a very slow process, and is viewed as the most significant medium-term concern for the Irish economy, given that, by definition Irish households and business will have been the biggest beneficiaries of the dramatic fall in interest rates over the past twelve months, but this will reverse, albeit slowly over the coming years. The economists assume that private sector debt/GDP ratio will fall to only 211% by the end of 2011.