Ireland’s Exceptional Recovery

Since the crisis in 2007 the Irish economy has made an exceptional recovery, and its main task is to keep its stance solid by completing the recovery and spreading its fruits among the population.

The already-astounding growth rate of 7.8 percent in 2015 has been recently sharply upgraded by the Irish Central Statistics Office to 26.3 percent. This headline number is heavily affected by the operations of a number of multinational companies which caused an upward level shift in output, but had a limited impact on the true underlying developments of the Irish economy. Yet, there are a number of other indicators that confirm Ireland’s robust rebound.  For example, private consumption grew strongly (4.5 percent in 2015) on the back of rising employment. At the same time, the unemployment rate fell to 7.8 percent in June, while inflation has remained very subdued. Public finances have continued to improve, reflecting buoyant tax revenue, and government’s debt-to-GDP ratio has declined rapidly.

Ireland’s positive economic performance is expected to continue, despite the fallout from BREXIT. Nevertheless, in light of its tight economic and financial linkages with the UK, Ireland is likely to face some difficulties, the severity of which, however, is hard to gauge at this stage. It will depend crucially on the future relationship between the UK and the EU, especially regarding trade, financial flows, and movement of labor.

On the financial sector, one obvious connection is through the banks and insurers doing business in the UK.  A recession in the UK affects them directly and through a knock-on effect from Irish exporters to the UK. In the wake of the referendum, market prices of banks and financial institutions of Ireland have taken a tumble. But in the longer run, BREXIT would not necessarily affect the Irish financial system a great deal, given that the economy as a whole is now quite diversified.

The Irish residential real estate sector has indeed been quite transformed since and through the crisis.  The 2007 crisis in Ireland started out from a price bubble in the residential housing market, and prompted by the resurgence in prices, the authorities have introduced macro prudential measures affecting mortgages, including a limit on loan-to-value ratios.

These measures seem to have had some effect in taking the edge off the residential real estate market, while price expectations have become more moderate. There is probably more sign of heating up in the commercial real estate market. But it is not clear what the authorities can and should do about it at this stage when most of the financing is not coming from Irish institutions but rather from abroad.

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