RaboResearch - Economic Research

Country Report Ireland

Country Report


Ireland flag

Ireland exited the EU/IMF bailout package in December 2013, and has regained market confidence. Nonetheless, challenges remain as the country remains dependent on the external environment, and skeletons may yet come out of the closet.

Strengths (+) and weaknesses (-)

(+) Flexible economy

Ireland has proven to be able to decisively deal with economic crises, on the back of a well-established institutional framework.

(+) Labour force is highly competitive

Ireland has a highly educated workforce, that allows the country to be competitive in internationally high-tech sectors.

(-) Financial sector remains weak

The bailout of the financial sector has not yet resulted in a stable sector, as the fallout of the bursting of the housing market bubble has not fully been incorporated yet.

(-) Vulnerable to external events

Although domestic demand is becoming a force in driving growth again, the small economy remains dependent on the economic fortunes in the US, UK and EU.

Key developments

1. Bail-out exit finalised in December 2013

In a sign of Ireland moving in the right direction, the country was able to exit the EU/IMF bailout program on 15 December 2013. As such, the government has regained control over setting the Irish budget, without needing to comply with strict outside regulations. First and foremost, it is a political success for the government to be able to present tangible results from the severe austerity measures. Second, it is a testament to the Irish dedication to structurally improve the fiscal balance and sets up the country for a more stable future. As a consequence, the yield spread has come down to 140bps over German bonds.

Figure 1: Growth performance
Figure 1: Growth performanceSource: EIU
Figure 2: Fiscal indicators
Figure 2: Fiscal indicatorsSource: EIU

Ireland has taken up the opportunity to go back to the market to improve their debt structure. Some of the borrowings are intended for cash purposes, in order to facilitate debt payments throughout 2014, and early 2015. In that sense, the liquidity threats for Ireland are reduced to naught. It is expected that the Irish government will further tap into the market this year in order to further stabilise their debt load in terms of debt service payments in the coming years (i.e. longer tenors and fixed rates).

Nonetheless, significant challenges remain. Although according to some sources, the government will achieve a primary surplus in 2014, the overall budget deficit will still be large at an estimated 5.2% of GDP. The debt pressure is peaking at the moment at over 120% of GDP, too large by far for comfort. Furthermore, the government has gone back on an earlier indication of EUR 3.1bn in restrictive measures, instead opting for a lower figure (EUR 2.6bn). Nonetheless, the Irish performance remains impressive, as most deficit cuts are done in the form of spending cuts instead of raising income. Although the long-term outlook is thereby favourable, in the short-term, there remain several vulnerabilities to the economy that also might impact the budget (see below).

2. Financial sector remains vulnerable, especially to housing market

The non-performing loans books of Irish banks are high (25% of total loans) and rising. The government has proposed various legislation to allow for a quick resolution of bad debts, but the banks have not been willing or able to go down that path. As more and more homeowners are expected to face payment difficulties, not only will bank have to write off a significant amount of assets, the housing market recovery will be nipped in the bud. The housing market has just started to show signs of recovery, after years of declining house prices. After imploding by almost 50% from 2007 to 2012, the residential house prices are finally starting to increase. Nonetheless, there is a long road ahead for a full recovery, and it will likely take year to regain lost ground. Naturally, the drop in the housing market, in combination with fast rising unemployment in the crisis years, is causing payment problems on mortgages. Although the economy is recovering, it is expected that many households are only now coming to the end of their financial rope and require either a write-off, or foreclosure on the house. The economic ramifications for the banking sector are unclear, as are the social consequences for the country.

3. Growth is back, but remains vulnerable

General consensus is that the Irish growth outlook is favourable. Growth prospects in its primary export markets (US, UK and EU) are better, and the domestic market is also picking up on the back of that. Furthermore, some setbacks in recent years, such as pharmaceutical patents expiring in 2012, are now being compensated for. Furthermore, the attractiveness of Ireland as a destination for foreign direct investments has remained. The country has been working on providing a competitive environment for international businesses. While their tax structure has come under fire from Brussels, the highly educated (and English speaking) Irish workforce is, as a result of the economic crisis, now available at a lower price.

Nevertheless, the growth outlook – though indeed positive – remains rather fragile, as the main source of growth is still external demand. While the US seems to have turned the corner, the same cannot be said for the EU. The outlook has improved, but the economy has still not gathered a firm pace in the right direction. Also, as China’s outlook has worsened, and the political situation in Russia and Ukraine may lead to sanctions on the EU, much is still uncertain. As Ireland will have no domestic demand driven growth to speak of in the short-term, the country will hope that global growth will remain robust.

Factsheet of Ireland
Factsheet of IrelandSource: EIU, CIA World Factbook, UN, World Economic Forum, Transparency International, Reporters Without Borders, World Bank.

Background information

Ireland gained independence from the United Kingdom in 1921. The country has worked with the UK to stop the violence in Northern Ireland, and although the issues are far less urgent than decades ago, tensions linger. Ireland is one of the frontrunners within the European Union, having joined the European Community in 1973, and being one of the founding members of the European Economic and Monetary Union. The Irish economy is outward looking and trade dependent. This is coupled by a flexibility of the population and the institutions to deal with difficulties. One of the primary examples hereof is the emigration from Ireland as the crisis hit. In no other European country was the population as ready to move as the Irish. The economic crisis of 2007 hit Ireland very hard, with the economy shrinking by some 10% from 2008-2010. Credit collapsed, the housing market (down almost 50%) and construction collapsed, and external demand collapsed. The government went all-out to save the important banking sector by recapitalising the sector and guaranteeing all deposits. This led to a record budget deficit of over 30% of GDP in 2010 and an aid package being required by the EU and IMF. This EUR 85bn package came with strings attached and resulted in severe austerity measures, dampening (domestic) economic growth. As a result of the austerity measures, Ireland was the first country to exit the bailout program, and enter the international capital markets at decent rates. Furthermore, the current account deficit of the pre-crisis years has turned into a surplus. The health of the financial sector remains a concern, as Ireland’s households remain in the doldrums.

Economic indicators of Ireland
Economic indicators of IrelandSource: EIU
Jeroen van IJzerloo
Rabobank KEO

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