Economic recovery keeps motoring without fuel from banks

Analysis: Return to growth usually triggered by lending, but not in Republic’s case

Ireland appears to be defying economic logic, if there is such a thing. The economy has somehow engineered a broadly based recovery – as evidenced by a range of indicators – in the absence of any meaningful flow of credit from the banks.

Conventional wisdom suggests banks must start lending to firms before an economy can move out of recession.

In simple terms, refinanced firms expand output and hire more staff, who in turn spend more money in the economy, boosting demand – all of which cements a virtuous circle, in theory anyway.

Economic orthodoxy insists you need the financial cycle to kick-start the economic cycle. However, almost the exact opposite is occurring in Ireland, in that the economy is motoring without fuel from the banks.


Ireland’s “credit-less recovery” is, of course, explained by the country’s relatively large multinational sector, which is not subject to domestic credit conditions. These firms can respond to a pick-up in global economic conditions without having to seek credit extensions here.

Meagre flow of credit

It’s unlikely that an economy such as Spain, for instance, which is the mirror image of Ireland in that 70 per cent of its activity is domestically based, could engineer a similar level of recovery on such a meagre flow of credit.

In its latest economic commentary, the Economic and Social Research Institute (ESRI) noted the unusual nature of Ireland’s recovery. However, it also warned that it may lead to some undesirable outcomes down the line, most notably in the property sector.

Specifically, it highlighted that the limited flow of credit to developers was contributing to chronic supply-side shortages, especially in Dublin.

The ESRI estimates that population growth alone will require about 25,000 houses to be built annually from now on, whereas only 15,000 are projected to be built next year. This means that even with a contraction in mortgage credit and a relatively small number of transactions, demand will keep outstripping supply, resulting in higher prices in the future.

Some have speculated that the Government’s apparent indifference to the problem may stem from the fact that most of the electorate are either homeowners or mortgage holders, and so benefit from rising house prices, in wealth terms at least. Hence the Government is happy to stoke the fire a little while longer before delivering a concrete housing policy.

Political short-termism However, keeping the country on this loathsome boom- and-bust merry-go-round is pure political short-termism.

Ireland needs to make itself inviting to workers and firms who want to come here, and prohibitive housing costs makes us distinctly less competitive.

Kieran McQuinn of the ESRI says: “As the economy continues to emerge from the recent recession, keeping key cost-of- living factors affordable, such as housing, is imperative as the economy seeks to maintain competitiveness advantage that has been gained in recent times.”

The ESRI’s commentary makes much of the fact that consumer spending appears to be picking up, noting that it is being driven by more people returning to work. It also notes that average weekly earnings are still on the slide, largely as a result of the new taxes and charges associated with the ongoing budgetary consolidation.

The big question for the Coalition is will an improvement in this metric arrive in time for the next general election.