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| Figure 1: Bank lending to households and non-financial firms as a percentage of GDP for Eurozone economies and the UK, 1997 and 2008; On Monday, Prof. Morgan Kelly of UCD released a paper - -The Irish Credit Bubble- - which concludes: In the last decade, the Irish economy has experienced an unusually large credit bubble. Lending as a fraction of GNP increased from 60 per cent in 1997, to over 200 per cent in 2008, twice the level of other industrialized economies. By the bubble peak in late 2006, the average first time buyer mortgage had risen to 8 times average earnings, and the average new house now cost 10 times average earnings, while the average Dublin secondhand house cost 17 times average earnings. As Irish banks are forced to repay this wholesale borrowing and to shrink their balance sheets to normal international levels, the sharply diminished supply of credit will lead inevitably to continued sharp falls in property prices. These falls in property prices will result in severe losses for the Irish taxpayer on the ill-conceived bad bank NAMA project. |
Irish Economy 2009: The Economic and Social Research Institute (ESRI) says in its Winter Quarterly Economic Commentary, published today, that it is hard to overstate what a difficult year 2009, has been for the Irish economy. The ESRI says that while Budget 2010 was clearly regressive, the combination of Budgets 2009 and 2010 placed most of the burden of fiscal adjustment on higher earners.
The ESRI says the economy will contract by 10 per cent on a GNP (gross national product) basis this year, or 7¼ per cent in GDP (gross domestic product - - which is not adjusted for the big impact of multinational company earnings) terms. This follows a contraction of around 3 per cent in 2008, in both GNP and GDP terms. The institute says that while these are stark figures, the true impact of the recession is probably better illustrated through the figures on employment and unemployment.
The institute now expects that the average number employed will be 170,000 lower in 2009 relative to 2008. Comparing 2007 and 2009, that figure is likely to be 193,000. At the end of 2007, the rate of unemployment was just 4.6 per cent; at the end of 2009, it is 12.5 per cent. It expects to see a further contraction in the economy in 2010 but this contraction will be modest compared with 2009. GNP will fall by 1½ per cent in volume terms; for GDP, the corresponding decline is ¼ per cent. This annual figure is based on output continuing to fall at the start of the year followed by a resumption of growth in the second half.
In an analysis of recent budgets when welfare rates were increased and cut, and taxes raised, mainly in the October 2008 and April 2009 budgets and taking into account falling wages and prices, the institute says that while individuals on lowest incomes were hit hardest by the most recent budget, the cumulative effect of the three budgets in the past 14 months was progressive.
The highest fifth of households in income terms incurred income loss of about 6 per cent as a result of the budgets, while the income of the lowest fifth“hardly changed.”
The ESRI says that in the year ending Q3 2009, almost 32,000 housing units were completed, a reduction of close on 50 per cent relative to the year ended Q3 2008. It now expects to see 24,000 house completions for the calendar year 2009. Looking into 2010, the economists forecast the downward trend in completions to continue. The forecast is for 10,000 completions in 2010. These completion figures imply falls in housing output of 40 per cent in 2009 and of 29¾ per cent in 2010. With house prices continuing to fall, the reductions in value terms are steeper.
The economists forecast that Irish merchandise export volumes will increase 2 per cent in 2010. It says this can be regarded as a relatively sluggish performance in view of the prospects for world trade next year together with a forecast of a continued weakness in Sterling in 2010. In value terms, the ESRI projections are higher, in light of recent price developments. Following a fall of 2.3 per cent in merchandise export prices in 2008, the institute expects prices to increase by 3 per cent this year and by a further 1 per cent in 2010. These figures imply that the value of Irish merchandise exports will fall by 2 per cent in 2009 and increase by 3 per cent in 2010.
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| Lending to credit institutions by the Irish Central bank has in turn been funded by the ECB through longer-term refinancing operations (LTRO). It peaked at over €130 billion in June 2009, up from €88 billion in December 2008. This was equivalent to over 21 per cent of total Euro system lending to institutions in the Eurozone, up significantly from an average of 6 per cent in 2007.
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The ESRI says the performance of services exports in the first half of the year has been mixed. The latest Q3 data from the Balance of Payments show substantial year-on-year increases in receipts from royalties/licences, business services and other services. However, exports of financial services, insurance and in particular tourism continue to decline. In value terms, total exports of services declined by 0.7 per cent in the year ended September 2009.
The economists estimate that the volume of exports will fall by 2¾ per cent this year.
"We are predicting a return to growth in 2010, with an estimated increase of 1½ per cent in total export volumes. With regard to services exports, we are forecasting a very sharp decline in tourism exports this year. Following a volume fall of almost 6 per cent in 2008, we expect an additional fall of 16¼ per cent this year. Based on the latest Balance of Payments data, we estimate that there will be a modest 1 per cent increase in the volume of non-tourism services exports in 2009. We expect these to stabilise in 2010, with a 1 per cent increase in the volume of nontourism services exports and a further ½ per cent decline in tourism exports," the report says.
The ESRI says that in addition to Budget 2010, further corrective action will be needed in 2011 and beyond. It says the announcement in the Budget that property taxes and water charges will form part of this adjustment can again be welcomed, based on previous ESRI research and on the report of the Commission on Taxation.
"We have argued that further increases in taxation would have to form part of the overall strategy to correct the public finances, even if 2010 was not the appropriate year in which to introduce such tax changes. A property tax will represent a broadening of the tax base; charging for water will raise revenue and will also provide correct incentives for water usage. In this context, the announcement in this Budget of the introduction of a carbon tax is also a correct move, based on both environmental and tax broadening principles" the report says.
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| The ESRI says the latest official estimates suggest that the General Government Balance/deficit will be just above €19 billion in 2009, equivalent to 11 ¾ per cent of GDP. It forecasts that this will remain broadly unchanged in 2010, at €18.6 billion. On this basis, and excluding the funding costs associated with bad bank NAMA in 2010, this will imply that the gross debt as a percentage of GDP will be 78 per cent at the end of 2010, up from 25 per cent in 2006. However, a significant part of this debt is held in Government funds by the debt management agency, the NTMA, both in the National Pension Reserve Fund and in exchequer cash balances. This means that the net debt in 2010 will be significantly lower, at 53¼ per cent of GDP. Relative to 2007, this is an increase of almost €63 billion in net indebtedness, 40 percentage points of GDP, and reflects the speed with which the public finances have unravelled. In the Budget, the Government estimated that interest payments on the national debt will increase by €2bn to €4.6bn in 2010. |
The ESRI's Dr. Alan Barrett, Dr. Ide Kearney, Jean Goggin, Thomas Conefrey: their own summary of the analysis:
Some of the main findings of the analysis include the following:
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We now expect that the economy will contract by 10 per cent on a GNP basis this year, or 7¼ per cent in GDP terms.
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We expect to see a further contraction in the economy in 2010 but this contraction will be modest compared with 2009. We expect GNP to fall by 1½ per cent in volume terms; for GDP, the corresponding decline is ¼ per cent. This annual figure is based on output continuing to fall at the start of the year followed by a resumption of growth in the second half.
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Given positive developments in the international environment, exports are expected to grow next year at a rate of 1½ per cent. However, domestic factors will act as a drag on growth. Private consumption is expected to fall by 1 per cent, investment by 17½ per cent and public consumption by 3 per cent.
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It should be noted that although consumption is expected to fall, our forecasts include a modest reduction in the savings rate between 2009 and 2010, from 11½ per cent to 10¾ per cent. This fall is included in the expectation that Budget 2010 will have boosted confidence, as will a slower pace of employment loss in 2010 relative to 2009.
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On employment, we expect a fall of 170,000 in 2009 and of 76,000 in 2010. Unemployment is forecast to average 11¾ per cent this year and to peak at close to 14 per cent in the latter part of 2010. We expect net outward migration to be 40,000 in the year ending April 2010.
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In our General Assessment, we discuss how Budget 2010 can be judged positively in terms of macro-fiscal management, even if some micro-dimensions are open to question. One such example is the exclusion of all pensions from cuts regardless of the wealth and incomes of those concerned.
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In spite of popular perceptions, analysis contained in the Commentary shows that Budget 2010 was not the most contractionary of modern times, largely due to the deflationary context in which the meaures were enacted.
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A further piece of analysis shows that while Budget 2010 was clearly regressive, the combination of Budgets 2009 and 2010 placed most of the burden of fiscal adjustment on higher earners.
Executive Summary and individual articles:
