ECONOMICS:IS IRELAND a rich country? It's a more complicated question than it might sound at first hearing. To frame the following analysis, consider two people. The first is a whiz-kid student lured to a high-flying company with the promise of a starting salary of €65,000. The kid is looking forward to a high-income future. But he is not wealthy. The borrowings he ran up in his college days stand at €15,000 and his worldly possessions, which would fit in a suitcase, wouldn't raise enough for a good night out if sold at a garage sale. His net worth is minus €15,000.
Now consider a 65-year-old widow. She has stopped working and lives on a pension which provides an income of €30,000 a year. Her pension pot is worth €500,000. Although she is furious with herself for not selling her four-bedroom house in a leafy Dublin suburb during the property frenzy, it’s still worth €800,000. The mortgage was paid off years ago. She has a few rainy-day bank accounts totalling €25,000. She doesn’t owe anyone a cent. The net worth of this pensioner is €1,325,000.
The above examples highlight the difference between income (a flow concept) and wealth (a stock concept). The youth is income- rich but wealth-poor. The pensioner is a millionairess but has less than half the income of the twentysomething.
The same basic framework works when assessing the incomes and wealth of nations. The former is measured by summing all incomes each year – wages, profits, salaries and earned interest.
The most comprehensive comparative data set is produced by the World Bank. It provides per capita gross national income figures for more than 200 states and territories. The figures are adjusted for price levels to give a more meaningful comparison of purchasing power.
Irish gross national income per head peaked in 2007. At that time, it was the 12th highest in the world, at almost $39,000, when the global average was just over $10,000.
The most recent figures are for 2009. Because Ireland suffered the third largest decline in per capita income of any economy in the world over the 2007/09 period, it slipped sharply down the rankings, to 20th place (among our EU peers, we are 11th out of 27).
Given the contraction in the Irish economy last year, a year in which almost every other economy in the world grew, 2010 will have seen further slippage.
If consensus forecasts for economic growth prove correct, Ireland’s ranking should stabilise at about 25th place out of 200-plus economies worldwide. This would leave it very firmly in the high-income grouping but much closer to its longer run, pre-Celtic Tiger position – in 1995 Ireland ranked 29th.
What about the wealth position? This is more complicated. Summing all assets and liabilities in an economy is a massive task. It is only in recent years that the authorities in Ireland have made any attempt to do it. This column will attempt to deal only with household wealth on this occasion. In so doing, the wealth of companies, the State and financial institutions is necessarily excluded.
The accompanying chart is a rough estimate of household wealth published by the Central Bank (it is so rough that the bank will not publish the figures used and will not provide them upon request). It shows households hold most of their wealth in their homes.
As of late last year, the Central Bank estimates that the value of all residential property in the State stood at approximately €350 billion. As is clear from the chart, the very sharp decline in property prices has resulted in a huge shrinking of this form of wealth (the orange bit).
Total household wealth – assets less liabilities – is depicted in the chart by the yellow line. It has fallen by approximately one-third since it peaked at the end of 2006. By comparison, the total income generated by the Irish economy has declined by around 15 per cent.
So the (bigger) stock of wealth has suffered much more than the (smaller) income flow. No wonder people feel glum.
How does Irish household wealth compare with other countries? The most comprehensive figures come from Eurostat, the EU’s statistical agency (my thanks to the Central Statistics Office for the characteristically helpful manner in which the following numbers were provided).
The figures cover only households’ financial assets – such as pension and insurance funds. They exclude housing assets.
By this measure Ireland was never wealthy. At no time have households approached the EU-27 average in net financial wealth (assets less liabilities). In 2009 (the most recent year for which a full set of EU figures is available), Irish households’ net financial wealth stood at 66 per cent of gross domestic product. This compares with an EU-27 average of 131 per cent of GDP, almost exactly double that of Ireland.
Irish households’ net financial wealth grew more slowly than the average even before the bust. Measured as a percentage of GDP, it actually fell.
Net financial wealth stood at just over 100 per cent of GDP in 2001. It declined gradually thereafter before going off a cliff in 2007/08. It bottomed at a mere 43 per cent of GDP in 2008. It rebounded very strongly in 2009 and 2010 but, to date, has not returned to pre-crisis levels.
The reason for all this is a familiar culprit: insane levels of borrowing. Irish households’ liabilities, which are overwhelmingly in the form of bank loans, were the fourth highest among the EU-27 as a percentage of GDP in 2009.
Netting this mountain of debt against (financial) assets, which are close to the EU average, Irish net household wealth is similar to Estonia, Hungary and Greece.
Given the unusually high level of home ownership in Ireland, these numbers are likely to understate the total asset position compared with other countries. So Irish households are almost certainly further up the pecking order in total wealth terms. But compared with our western European peers, Ireland is neither income- nor asset-rich.
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