Irish Economy 2011: The Economic and Social
Research Institute (ESRI) says the European Central Bank (ECB) should provide
Ireland with an interest-free loan of €40-50bn to “overcapitalise” the
The institute says in its Spring Quarterly Economic
Commentary that attempts at EU and ECB level to contain the banking crisis
within the countries most directly affected do not take account of the spillover
effects of the initial problem in the solution currently in place. What is
needed is an EU or Eurozone solution that does not place the whole of the burden
of recapitalising banks onto national budgets already stretched by recession.
The ESRI says the data show clearly the unbalanced nature
of the covered commercial banking institutions operations with a loan to deposit
ratio of 1.74, with loans additionally financed by interbank borrowing. The
figure for this at €167.8bn consists primarily of borrowing from both the ECB
and the Central Bank of Ireland. The total outstanding borrowings from the ECB
and the Irish Central Bank have remained at these levels, totalling some €170bn
at end February. As a consequence, the covered commercial banking institutions
operating in the Irish market face a funding crisis which makes it difficult for
them to engage in normal commercial lending.
The institute says there are several possible approaches
to EU centred restructuring. The simplest would be an interest free loan from
the ECB to the Irish Government, guaranteed by the latter, sufficient
to overcapitalise the banks. The two aspects, i.e. external funding and
overcapitalising, would give the exercise credibility and would allow the banks to
return to the interbank market, to reduce their indebtedness to the ECB and the
Irish Central Bank, to begin providing additional credit to the economy. An
alternative would be for the ECB to undertake the recapitalisation directly and
to convert the funds used for recapitalisation into equity with a view to future
sale of the assets.
Economy in Transition
The economists say the economy is in transition from where
growth was led by domestic demand to one where export growth by both
multinational and local firms will become the engine of growth. This transition
is underway as domestic firms in the tradable goods sector have sought to
replace falling domestic demand by sales in overseas markets. Output and exports
from traditional firms increased in 2010, with exports from the food and drink
sectors in particular rising by 11% in value terms. This is very similar to the
experience of the 1980s, when exports led growth, and the reverse of what
happened in the 2000s when the strong growth in domestic demand led firms to
shift their emphasis from exports to the domestic market.
However, the value of food exports is in a market where
some global food commodity prices have hit record levels.
While in 2010 the shift to exports was not sufficient to
counteract the decline in domestic demand following a rise in the personal
savings rate and the 2010 contractionary budget, the economists expect some very
modest growth this year with GNP (GDP) rising by about ½%, and strengthening in
2012 to 2%. This year the stimulus is coming entirely from the external sector
(both service and merchandise exports) as domestic demand will fall again, along
with investment and government current expenditure. The ESRI expects household
expenditure to rise very modestly during the year, following what looks like a
slight rise in household spending in the first quarter. Households have been
reducing their indebtedness very sharply since 2008 and some households may now
be satisfied with their net debt position. Consequently, the institute expects a
decline in the savings rate in 2012. Domestic demand will be very slightly
positive in 2012, while external demand will grow by 7½% in both 2001 and 2012.
The Consumer Price Index (CPI) is forecast to increase by
2½% this year and the EU Harmonised Index of Consumer Prices (HICP) to rise by
1½%. The pattern will be very uneven during the year as oil prices are rising in
the first half of the year but could fall back in the second half. Of greater
importance may be shifting by consumers to lower priced products and outlets as
price variations across goods and services remain very large. The deflator for
total household consumption is expected to remain at the 2010 average level in
2011, but to increase by about 1% in 2012.
Total employment will fall again in 2011, but at a much
slower pace than in recent years. Unemployment will be higher on average than in
2010, but the extent of it will be moderated by migration. The ESRI says the
extent of the latter will become clearer when the first 2011 census results
become available. Nevertheless, it is worth noting that there are emerging skill
shortages in some of the fast growing services exports sector.
Prof Joe Durkan said cutting the deficit more quickly would enable Ireland to re-enter the markets sooner, in turn restoring international confidence.
He suggested property and higher car taxes, and universal water
charges to increase revenues.
The economist also said it was time to consider abandoning the Croke
Park Agreement, as it had under-delivered. Instead, he favours
imposing an additional average 10% pay cut in the public sector.
Prof Durkan said he is 20% overpaid .
The ESRI economists said the capital spending budget
of €6bn should be cut, including the scrapping of the Dublin Metro North rail
The overall volume of exports of goods and services
increased by 9.4% in 2010, following declines in 2008 and 2009, and was 4.2%
above the previous peak level in 2007. Merchandise exports increased by 7.7% in
volume terms. Table 1 below shows the level of exports of goods in 2009 and 2010
and the percentage change by category. The data indicate an increase of 6.1% in
total merchandise exports in 2010, with considerable variation on growth rates
Modern sector exports (corresponding to Chemicals, some
part of Machinery and Transport equipment and Miscellaneous), which are
primarily produced by multinationals, account for the bulk of merchandise
exports. The ESRI estimates that the value of these exports increased by 4% from
2009 to 2010, while all other exports increased in value by 12.5%. In effect,
the growth rate of non-modern exports exceeded that of modern sector exports.
These other exports are produced in the main by indigenous and traditional
firms. Table 1 shows these growth rates; for example, food exports (the value of
live animal exports is very small) increased by 11.2%, while beverage exports
rose by 9.9% and similar increases were recorded by other traditional sectors.
This suggests that traditional sector firms have increased
output which has gone into export sales and was facilitated by the improvement
in competitiveness over the past three years and by an improvement in other
costs relative to competitor countries. The economists say this is the classic
‘expenditure shifting’ that governments hope for when reducing domestic demand
to correct a payments deficit or when correcting a budget deficit leads to a
reduction in domestic demand.
Overall, exports of goods and services are forecast to
rise by 7.5% in both 2011 and in 2012 in volume terms.
|The ESRI's David Duffy says statistics on mortgage arrears from the Central Bank shows a steady rise in the number and proportion of mortgages in arrears. Of the 786,164 private residential mortgage accounts in Ireland, 44,508 or 5.7% were in arrears for more than 90 days at the end of December 2010. This represents an increase of 15,905 from the end of 2009, and continues earlier trend increases in the number of mortgages in arrears. In December 2006 it was estimated that 11,252, mortgage accounts were in arrears for more than 90 days (1.2%).|
The latest release also includes data showing that 59,229 mortgages have been restructured by lenders as part of forbearance measures to assist borrowers facing difficulty. A move to an "interest only" mortgage accounts for the largest proportion of restructures (38.3%), while reduced payments (paying greater and less than interest only) account for 28.3% of restructures. Other types of restructuring include term extension (12.2%) and arrears capitalisation (11.9%). A payment moratorium accounts for just 4.3% of restructures to date, while other forms of restructuring account for another 4.9%. Taking account of an overlap between restructured mortgages and mortgages in arrears shows that 79,713 mortgage accounts are either in arrears greater than 90 days or have been restructured, amounting to 10.1% of mortgage accounts.
Analysis by the Irish Banking Federation shows that the repossession rate in Ireland is low when compared to the UK; for example, there were 13 repossessions per 100,000 mortgages here compared to 69 per 100,000 mortgages in the UK in Quarter 4, 2010.
Finfacts reports that according to Eurostat, the EU's statistics' office, over 40% of owner-occupied houses in Ireland have no mortgages compared with about 12% in Sweden and less than 10% in the Netherlands.
Summary Quarterly Economic
Commentary, Spring 2011
Joe Durkan, Cormac O'Sullivan (ESRI)
We see the economy as being in a
process of transition from one where domestic demand was the driver of
growth to one where exports will play an important part in economic
recovery. Firms in several traditional sectors are seeking markets abroad to
compensate for depressed domestic demand. Meanwhile exports of
multinationals continue to grow as competitiveness is regained.
The data for 2010 show this
transition is well underway, with exports from traditional firms increasing
by 12.5%. We expect this to continue with these exports rising by 7.5% both
this year and next, while modern sector exports rise by 5%. Exports of
services will continue to increase rapidly as new firms locate here and
existing firms expand.
We expect domestic demand to
remain very weak this year, with investment and government expenditure
declining and household expenditure static. Household expenditure fell over
the course of 2010 but we expect it to increase gradually during 2011 and to
rise by 2% in 2012. The current weakness in domestic demand is due primarily
to the negative effect of contractionary fiscal policy.
GNP (GDP) is forecast to
increase by ½ (2)% this year and by 2 (3)% in 2012. Our forecast for
unemployment is 14 ¼% this year and 14% in 2012, with the declines from
current levels reflecting migration. Consumer prices (CPI) are expected to
rise by 2½% this year, with the HICP increasing by 1½%. However, the
implicit consumption deflator, which takes account of changing consumer
expenditure patterns, may remain virtually unchanged this year. The balance
of payments is forecast to record a surplus this year and next.
The public finances are also in
a process of transition to a new lower level of expenditure and revenue. The
official budget targets, modified by the extra cost of bank restructuring
this year, are achievable. If the profile set out by government is
maintained, then public debt will be sustainable. However, given the need to
return to financial markets in the near future, we consider that attempts
should be made to eliminate the budget deficit faster than is currently
While the recent bank
restructuring should be more than adequate to restore the capital base of
the covered banks, we consider that the attempts at EU and ECB level to
contain the banking crisis within national borders ignore the spillover
effects of the initial problem. We suggest that an EU or Eurozone solution
is needed that does not place the whole of the burden of recapitalising
banks onto national budgets already stretched by the recession.
In our General Assessment we
reiterate the need for fiscal consolidation, but we also emphasise the
importance of strengthening the competitive position of firms so that export
growth can be maintained and increased. Water charges, property taxes, and a
reformed car tax regime can provide additional funding for government, and
also create the opportunity for reducing costs to business.
The existence of a balance of
payments surplus this year and next creates the opportunity for the
government to raise funds at a domestic level. Realising domestic funds may
require an imaginative approach focused on the type of instruments that
appeal to savers.
Summary and Research Articles