Ireland could stagnate if Europe stalls, ESRI economist warns

Faltering recovery could renew pressure on public finances, says John FitzGerald

Prof John FitzGerald of the ESRI: deleveraging by Irish households could continue for “some considerable time” if recovery stalls in the rest of the EU. Photograph: Brenda Fitzsimons

Prof John FitzGerald of the ESRI: deleveraging by Irish households could continue for “some considerable time” if recovery stalls in the rest of the EU. Photograph: Brenda Fitzsimons

Fri, Apr 18, 2014, 01:00

Ireland could face a debilitating period of stagnation – characterised by high unemployment, falling prices and low growth – if recovery in Europe falters, Prof John FitzGerald of the Economic and Social Research Institute has warned.

In a report entitled Ireland’s Recovery from Crisis , Prof Fitzgerald said deleveraging by households could continue for “some considerable time” if recovery stalled in the rest of the EU, resulting in a return to stagnation in Ireland.

Given the continuing high level of indebtedness, a faltering recovery could also result in renewed pressures on the public finances just as the Government gears up to end a long series of austerity budgets, he said.

Coming on the back of several positive forecasts for the Irish economy, Prof FitzGerald’s warning reflects the contingent nature of the State’s post-crash recovery.


Japanese case
After experiencing spectacular economic growth for much of the postwar era, Japan’s economy was plunged into a period of stagnation in the mid-1990s following a property crash. The period was marked by recession or weak economic activity, and by low inflation or deflation.

Another possible restraint on the State’s recovery, as Prof FitzGerald sees it, is the shortfall in housing, most notably in Dublin and Cork, which is creating unnecessary pressure on prices.

Population growth alone would require 25,000 dwellings a year, whereas currently under 10,000 houses are being built, he said.

“Even if the pressures for additional dwellings were to continue to grow, there might not be a supply response if the financial sector was unable to finance the new investment.”

Conversely, Prof FitzGerald believes if the euro zone recovery picks up pace this year and in 2015, and is accompanied by an increase in domestic demand, Ireland could see a more rapid reduction in the numbers unemployed and a return of the public finances to a small surplus over the period 2017-2019.