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News : Irish Economy Last Updated: Feb 20, 2015 - 9:31 AM

Irish Economy: Davy looks at political risks to economic recovery
By Michael Hennigan, Finfacts founder and editor
Feb 19, 2015 - 8:54 AM

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Davy today looks at the political risk to the Irish economic recovery following the success of a radical left party in last month's Greek general elections and Irish polls that show strong support for anti-austerity parties, in particular Sinn Féin, and also non-party politicians.

The next Irish general election is due to be held  in the next 12 months and Conall Mac Coille, chief economist, says that "it is far from clear whether Sinn Féin and independent candidates can translate this support into actual electoral success. We have commissioned independent political scientist David Farrell (see separate report, also issued this morning) to assess the current state of Ireland’s political landscape. While an extreme left-leaning government seems unlikely – a broader coalition government may be likely after the next election."

The Davy report says: "Our current Irish GDP growth forecast is 4.8% in 2014, 3.7% in 2015 and 3.4% in 2016. This means that Ireland will be the fastest-growing economy in Europe. Why?

First, the Irish economy is naturally experiencing a catch-up process, having seen one of the deepest and protracted recessions through the financial crisis. The EU/IMF programme of support has helped to stabilise Ireland’s public finances and banking sector – providing a platform for growth. However, perhaps missing from similar programmes in Greece and Portugal was an effective growth strategy. Ireland has focussed on the export sector, successfully attracting FDI – evident in the strong expansion of the ICT services sector."

Finfacts recently highlighted the poor FDI (foreign direct investment) performance of Greece compared with its near neighbours and the fact that Portugal was the fourth biggest recipient of Chinese outward FDI in the past five years, while Ireland has yet to appear on the radar for China's investors.

Europe's Worst Exporter: Poor export and FDI performance of Greece

Chinese investment into Europe at record high; UK on top, Ireland hopes

Our own view on Irish FDI performance is that from the dip in 2009 there hasn't been a spectacular FDI recovery but rising exports in particular services exports hugely boosted by Double Dutch Irish tax avoidance schemes, were positive for the international reputation of Ireland (most external commentary on the Irish economy wrong the as distortions caused by the foreign-owned sector are not understood.

Despite the efforts of IDA Ireland, the inward investment agency, jobs in foreign-owned exporting firms in 2014 were below the level in 2000 despite a surge in headline exports.

The CSO shows that from the end of 2009 to Q3 2014, there were 5,000 jobs added in 'Information and communication' as a whole while total jobs in services grew by 17,000 from 2009 to 2013 and likely at 21,000 by 2014 with about 8,000 of them part-time or temporary.

Ireland: Jobs in foreign-owned exporting sector in 2014 below 2000 level

Irish Economy: Ireland's ephemeral services export boom

Forty American firms account for two-thirds of Irish exports

The report says that Davy's forecasts for GDP growth imply that the deficit will narrow to 2% of GDP by 2017 with no further fiscal adjustments. So the next government may not have to implement fresh spending cuts or tax rises. However, Ireland has traditionally implemented pro-cyclical fiscal policy, with budget giveaways around election time. It says political pressures for inappropriate spending increases and tax cuts will surely build – whatever the hue of the next government. However, the bigger picture is that a sharp reversal in budgetary policy would be required to endanger debt sustainability – which we do not think is likely.

Conall Mac Coille says that the next government is unlikely to interfere with current plans to sell its stakes in the banking sector.

The political narrative is focused on how much of the €64bn cost of recapitalising Ireland’s banks can eventually be recouped. Stakes in Allied Irish Banks and Bank of Ireland are currently valued at close to 9% of nominal GDP. Realising this value will push the government debt/GDP ratio below 100% and will be recognised as a success story. More concerning may be efforts to extend or increase the banking levy. Pressures on NAMA to deliver a ‘social return’ could grow, perhaps inhibiting profitability.

Political pressures to prevent repossessions of delinquent mortgage loans could delay loan work-outs (albeit against conservative provisioning) or lead to a further breakdown in payment discipline. Focusing on property markets, residential house price inflation looks set to slow in any case given expiring capital gains tax exemptions, stretched valuations and new rules to curb leveraged mortgage lending. But we do not believe slowing house price inflation will threaten Ireland’s export-led recovery. The commercial property market could be more exposed to political developments, which could impact on liquidity and valuations"

Davy report

Prof David Farrell looks at four scenarios: (1) steady state, where some combination of established parties form a coalition; (2) the Greek outcome, where the newer forces of the left form a coalition; (3) middle of the road, where a coalition is formed between established parties and some elements from the left; and (4) electoral uncertainty, where a minority and unstable government is formed. Of these, the least likely scenario is the Greek outcome; the most likely outcomes will either be steady state or middle of the road.

Farrell report

Irish Boom & Bust: Could conventional wisdom be fooled again?

Ireland 2016: "Best small country in the world" for business? - a FAIL

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