Ireland in danger of turning boom to bust again
The Crash – 10 years on: Housing market the main danger facing recovering economy
“The biggest risk is that the housing market once again spirals out of control.” Photograph: Bryan O’Brien
Ireland accounts for just 0.4 per cent of the global economy. But outside interest massively outweighs that tiny world GDP share – given the ubiquity of the Irish people and the country’s enormous cultural reach.
Ask most Brits or Americans how the Irish economy is faring and, while they may not know specifics, they’ll have a general sense. The roar of the Celtic Tiger was heard around the world, as was the sound of Ireland’s 2008 crash – being more severe than in any other English-speaking country.
Ten years on, though, few outsiders really understand the dislocation Ireland suffered during the long, spluttering recovery of 2008-2013. The intensity of the subsequent boom is also yet to truly register – except among the loyal ranks of foreign direct investors.
My fear, as an “insider-outsider” – born into a London-Irish family and a frequent visitor – is that history could repeat itself
The Irish economy expanded by about 5 per cent in 2017, outpacing all other euro-zone countries for the fourth successive year. The recovery has been impressive – sending per-capita GDP to an astonishing sixth in the world (well ahead of Germany and the UK, ranked 23rd and 30th respectively).
Yet wages are still subdued, indebtedness remains high and the housing market is harking back to the pre-2008 madness. My fear, as an “insider-outsider” – born into a London-Irish family and a frequent visitor – is that history could repeat itself, with Irish boom turning again to bust.
Ireland endured a punishing seven quarters of economic contraction during 2008 and 2009. The country also dipped back into recession in late 2012, as the euro zone flirted with systemic collapse. The steep fall meant the economy returned to its pre-crisis size only in 2015 – taking seven years to recover, compared with three years in the United States and five in the UK.
Ireland should have regained its economic mojo far quicker – not least as foreign direct investment held up, despite domestic difficulties. Though it dipped from $60 billion in 2007 to $23 billion in 2008, net investment inflows bounced back above $50 billion in 2009, before averaging about $40 billion over the subsequent four years. Investors, particularly from the US, kept pouring money into crisis-ridden Ireland, attracted by low corporation tax and the young, well-educated workforce.
Ireland took one for the team, as the then finance minister Michael Noonan so rightly admitted in 2013
What hindered recovery was an austerity programme imposed by the European Union and International Monetary Fund that was simply too harsh. The scale of the pre-2008 property bubble, fuelled by reckless bank lending, is well known. But once the crash came, rather than letting busted banks fold while protecting depositors, the Irish government was outrageously strong-armed by euro-zone policymakers into bailing out bank creditors too.
Taxpayers were lumbered with almost €67 billion of debt – some €14,000 per person – largely to save investors in French and German banks that had been stupid enough to finance Ireland’s bubble.
“Ireland took one for the team,” as the then finance minister Michael Noonan so rightly admitted in 2013. “While some of it was our own fault, a lot of the action was taken at the direction of the European Central Bank to prevent contagion spreading to the European banking system.”
This EU-driven bailout drove the huge budget and wage cuts that hammered public services and crushed consumption, pushing unemployment above 15 per cent. Funding for local authority housing was slashed from €1.3 billion in 2007 to just €83 million in 2013 – helping explain the ongoing homelessness crisis. Over the same period, health spending fell an eye-watering 27 per cent.
Ireland endured “austerity measures” over four years that were some three times greater in proportionate terms than the UK spread over eight years. Yes, the country regained its credit rating and ability to raise money on international markets. But the adjustment was far too aggressive, the related social fallout needlessly damaging – thanks to policymakers in Brussels and Washington.
The economy has now rebounded largely because the export sectors in which Ireland increasingly specialises – such as biotech, pharmaceuticals and business and computer services – are extremely buoyant. Ireland, like Germany, also benefits from a single currency that remains significantly undervalued compared with the country’s domestic competitiveness.
The recovery has also been driven by Ireland’s still very strong economic and investment links to the Anglo-Saxon world. The top two single-nation export destinations remain the US and UK – with the same countries, in reverse order, being the top import partners too.
Since 2008, these economies have performed well, fuelling overseas sales of Irish goods and services. Over the last decade, the US has grown by 1.5 per cent a year, the UK by 1.2 per cent, while the euro zone has managed just 0.35 per cent annual growth since 2008.
There has, of course, been some trade diversification towards the EU. In 2016, though, three-fifths of Irish exports were sold beyond the EU27 – reflecting deepening trade links not only with the US but also some large emerging markets. Ireland now boasts the world’s seventh-largest trade surplus in absolute terms – a remarkable achievement.
This recovery is partially an accounting trick, with foreign firms allocating paper profits to Ireland for tax purposes
Recent signs of euro zone recovery are welcome – even if the growth reflects catch-up and an ongoing programme of European Central Bank money-printing. But the fact remains that Ireland continues to conduct the majority of its trade beyond continental Europe.
This recovery is partially an accounting trick, with foreign firms allocating paper profits to Ireland for tax purposes. And while unemployment is down, it is still an uncomfortable 9 per cent – with many talented youngsters still leaving. Indebtedness has fallen, but remains dangerously high, as the Central Bank warned last month. And with a non-performing loan rate of about 20 per cent, the Irish banking sector still looks fragile.
The main danger facing the Irish economy isn’t Brexit – which I happen to think will end up benefiting Ireland. The biggest risk is that the housing market once again spirals out of control – not least because, with monetary policy set in Frankfurt, there’s little scope to douse the market with higher interest rates.
Ahead of 2008, house prices doubled in six years. While this latest expansion is slower, there was still a hefty 8.4 per cent rise in 2017.
Ireland has a well-deserved global reputation for economic energy and resilience. Irish people everywhere won’t want us adding to our reputation for economic bust.
- Liam Halligan is a Telegraph columnist and the author of Clean Brexit: How to make a Success of Leaving the EU