The IMF (International Monetary
Fund) said today that after a steep slump, Ireland is experiencing a nascent
recovery. It said return to the high growth rates that earned Ireland the nick
name of “Celtic Tiger” is unlikely.
a severe decline in late 2008 and 2009 - - amounting to more than
15% contraction of the nominal GDP - - the Irish economy has now
stabilised, and growth resumed in the first quarter this year.
The Fund said the Irish
authorities were among the first in Europe to undertake serious
fiscal consolidation, with the introduction of an income levy and
sizeable cuts to public sector pay and social welfare benefits. This
early action helped restore confidence, and a strong export
performance has lifted growth prospects. But unemployment remains
high at more than 13% of the labour force, and the country’s openness
makes it vulnerable to the instability that has gripped financial
markets in recent months.
Although the economy
could grow again this year, a return to the high growth rates that
earned Ireland the nick name of “Celtic Tiger” is unlikely,
with the IMF expecting GDP growth to increase gradually to about
3.5% in 2015.
The IMF said exports offer the most promising source
of sustained recovery provided the gains in competitiveness
continue. But the relatively low domestic value-added of the most
dynamic exports and their high capital intensity imply that the
spillovers to domestic growth and employment will be limited. The
decline in domestic price levels is needed to restore
competitiveness but, in the interim, creates deflationary demand
risks. Current policy efforts to boost banks’ capital ratios will
help, but deleveraging and banks’ risk aversion will constrain
lending, at least in 2010–11. Along this narrow path to stability
and recovery, unforeseen fiscal needs and at times heavily bunched
banks’ funding needs could generate unwelcome pressures.
The IMF said orderly disposal of NAMA’s assets will
help restore the commercial property market, distress of
economically-vulnerable homeowners requires attention, and the
banking sector itself needs reshaping to a new strategic vision and
business model. Reflecting the lessons of the crisis, the ambitious
ongoing redesign of the regulatory and supervisory system will be
hobbled without a special bank resolution framework.
Together, these efforts will facilitate a gradual
exit from the government’s guarantee of bank liabilities. The
authorities’ planned fiscal consolidation will require sustained
implementation and, if insufficient to reach their goals, should be
supplemented by additional measures. A stronger fiscal framework
would guide consolidation as the crisis-induced urgency abates.
Every year, the IMF
conducts reviews of its member countries’ economies. The analysis is
subsequently discussed by the IMF’s 24-member Executive Board.
Read the report
In this interview,
Ashoka Mody, IMF mission chief for Ireland, speaks about the nascent
recovery and the many challenges that still lie ahead.
Survey online: Ireland took swift action
to return the budget to solvency. But has it been worth it, given
the severe downturn of the economy?
If the government had failed to take action, the budget deficit
would have been much larger and the borrowing requirements would
have started going up even faster. That would have put the country
in a difficult position over the medium term.
consolidation had to occur during a recession, it has inevitably
dampened short-term growth prospects. But that needs to be traded
off with the longer term confidence-building that is very much a
goal of this consolidation process. To the extent that the Irish
authorities can now legitimately claim broader policy credibility,
some of that confidence-building is already occurring, offsetting,
in part, the short-term contractionary effects on the economy.
Survey online: How vulnerable is the
economy to contagion from the European sovereign debt concerns?
Ireland is in the group of so-called “peripheral” economies that
have been the focus of sovereign debt concerns in recent months.
Irish sovereign spreads have risen along with spreads in these other
economies. However, within this group, the Irish economy has been
relatively insulated and there has been no sense of a disorderly
rise. Of course, on some days, when the markets have been very
tense, those tensions have been felt in Irish sovereign debt markets
also. The evidence so far, therefore, suggests the likelihood of
severe contagion to Ireland is limited.
Survey online: What are the prospects for
a return to growth?
The growth numbers for the first quarter of 2010 look very good. On
that basis, a number of commentators have revised their short-term
growth outlook upwards. However, we are somewhat more cautious. All
the growth in the first quarter has come from the spectacular growth
of exports produced and sold by multinationals.
Domestic demand actually
contracted in the first quarter of 2010. And employment has
continued to remain weak. So the strong performance of the export
sector is a little isolated, an outcome that is consistent with the
analysis in our staff report.
So we are now awaiting
the results for the second quarter. In the past, a very substantial
growth in exports has sometimes been followed by a contraction in
the immediately following quarter. So it’s not yet clear that these
short-term developments are on a sustainable footing.
More generally, we
believe there are still forces at play that will cause a drag in the
Irish economy. These reflect the legacy of overvalued property,
overextended credit, and an unsustainable increase in wages and
prices. Therefore, our view of the medium term is also more cautious
than that of the authorities.
Survey online: Will the export sector
produce enough new jobs to reduce unemployment?
If recent evidence is any guide, then Ireland’s export sector is
unlikely to be an engine of job growth unless the exporting activity
broadens to include domestic exporters and they show a much more
lively participation in exports than they have in the past.
Most likely, most new
jobs will be generated when consumption starts growing again.
Consumption growth will improve prospects for businesses, who will
then start investing and hiring.
Survey online: How real is the risk of
Ireland had one of the highest price levels in Europe during the
boom years, so some adjustment had to occur. This adjustment is
currently taking place. Along with weakness in domestic demand, this
process will keep prices soft.
But we do not expect
negative inflation or declining prices over a prolonged period.
Based on current evidence, we believe that prices in Ireland will
decline this year, an assumption that is widely shared. Prices
probably also will decline somewhat next year, though less so than
Survey online: What is the state of play
regarding Ireland’s banks?
Substantial rebuilding of the Irish banking sector is still needed.
There are two immediate issues: recapitalization and liquidity.
If everything goes
according to schedule, Ireland’s banks will have been recapitalized
to a reasonable extent by early next year. The plan is to “over”
capitalize the banks to enable them to deal with the continued
losses they are expected to face in 2011. Hopefully, at the end of
this process, the banks will still have adequate capital—core Tier 1
capital of 8% of risk-weighted assets. If the losses turn out to be
larger than expected today, the issue will have to be revisited.
The second issue is one
of liquidity. In the boom years, Irish banks came to rely
considerably on market funding, a tendency that many banks worldwide
shared. The recent market tensions have been felt particularly
acutely by banks seeking funding for their operations. Later this
year, Irish banks will need to roll over some of their funding, as
some of their past obligations come due.
The Irish authorities
can provide guarantees to banks seeking new funds from the market,
which should help the rollover process. With that rollover
completed, the planned capitalization by early next year should give
the banks greater ability to obtain market funding on their own and
be gradually weaned off public support. This process will unfold
over the coming months and will be monitored carefully by the