Ireland Economy in CrisisTutor2u Economics

February 2009

Irish economy under pressure

• 1st Euro Area country to enter recession

• High share of exports to GDP – exposed to global downturn

• Strong Euro damaging trade prospects e.g. with the UK

• Twin crisis – banking and government finances– Bank of Ireland and Allied Irish Bank have required bail outs + nationalisation

of Anglo Irish Bank

– Soaring budget deficit may cause Ireland’s credit rating to be downgraded

– Prospect of sharp rise in taxes to pay for the deficit

• Unemployment now 9.2% of labour force

• Industrial production declining by 12% pa

• House prices started falling in March 2007 and have fallen in every month since

• Economy on the brink of consumer price deflation

• Will Ireland leave the Euro Area?

• Or will it be able to use its own sovereign wealth fund to advantage?

High growth lifted relative living standards

GDP per head, purchasing power parity adjusted, EU27=100

Per Capita GDP for selected EU Countries

Source: Reuters EcoWin

99 00 01 02 03 04 05 06 07 08

90

100

110

120

130

140

150

160

EU

27

=1

00

90

100

110

120

130

140

150

160

GermanyUK

Italy

Spain

Ireland

An economic boom that went sour

Real GDP, precentage change from previous period, Constant Prices

Ireland's growth comes to a halt

Source: Reuters EcoWin

88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

-2.5

0.0

2.5

5.0

7.5

10.0

12.5

Pe

rce

nt

-2.5

0.0

2.5

5.0

7.5

10.0

12.5 “Ireland's decade-long economic boom came to a crashing halt last year after the country's housing bubble burst in the midst of global financial turmoil, while the economy took a further hit from a string of bank scandals in recent months.”

Source: Reuters

Overheated demand fuelled a BoP deficit

Ireland, Current Account, Balance, Euro (bn) per quarter

Ireland's BoP Current Account

Current account balance, as a percentage of GDP Current Account, Balance, Total, EUR

Source: Reuters EcoWin

00 01 02 03 04 05 06 07 08

bill

ion

s

-4.0

-3.5

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

EU

R (

bill

ion

s)

-4.0

-3.5

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

-8

-6

-4

-2

0

2

PE

RC

EN

T

-8

-6

-4

-2

0

2

The property bubble has burst

Index of average national prices, 2003=100

Ireland House Prices

Source: Reuters EcoWin

97 98 99 00 01 02 03 04 05 06 07 08

30

40

50

60

70

80

90

100

110

120

130

140

Ind

ex

30

40

50

60

70

80

90

100

110

120

130

140

In 2006, Ireland (population 4.2 million) built 88,000 houses, compared with 150,000 in the UK (population 60 million). At one point, a fifth of the workforce, swelled by tens of thousands of immigrants, worked in construction.

Ireland now has up to 350,000 empty homes – more than its entire private rental market – many of them simply abandoned as builders went bust. House prices are expected to fall by 80 per cent. (Telegraph)

Housing building has collapsed

Index of average national prices, 2003=100, new housing starts, per month

Ireland House Prices and New Housing Starts

Source: Reuters EcoWin

Jan May Sep Jan May Sep Jan May Sep Jan May Sep Jan May Sep04 05 06 07 08 09

105

110

115

120

125

130

135

140

Ind

ex

105

110

115

120

125

130

135

140Ireland, House Price Index, 2003=100

0100020003000400050006000700080009000

10000

Nu

mb

er

of

0100020003000400050006000700080009000

10000Dwellings Commenced, Total number of residential units

And consumer sentiment has headed south

(KBC Bank Ireland/ESRI), Index, 1995Q4=100Ireland Consumers Expectations Index

Source: Reuters EcoWin

02 03 04 05 06 07 08 09

20

30

40

50

60

70

80

90

100

110

Ind

ex

20

30

40

50

60

70

80

90

100

110

Unemployment has more than doubled

Total, seasonally adjusted

Unemployment in Ireland

Source: Reuters EcoWin

98 99 00 01 02 03 04 05 06 07 08

60000

70000

80000

90000

100000

110000

120000

130000

140000

150000

160000

170000

180000

Pe

rso

n

60000

70000

80000

90000

100000

110000

120000

130000

140000

150000

160000

170000

180000

And recession creates a negative output gap

Real GDP, precentage change, output gap (% of GDP)

Growth and the Output Gap

Real GDP, precentage change from previous period, Constant Prices Output gap of the total economy

Source: Reuters EcoWin

88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

-10.0

-7.5

-5.0

-2.5

0.0

2.5

5.0

7.5

10.0

12.5

-10.0

-7.5

-5.0

-2.5

0.0

2.5

5.0

7.5

10.0

12.5

A deflationary depression is possible

Percentage of the labour force out of work, and consumer price inflation

Unemployment and Inflation in Ireland

Unemployment rate (per cent of the labour force) Consumer price inflation (annual percentage change) [ar 12 months]

Source: Reuters EcoWin

98 99 00 01 02 03 04 05 06 07 08

-1

0

1

2

3

4

5

6

7

8

9

10

Pe

rce

nt

-1

0

1

2

3

4

5

6

7

8

9

10

Bond yields are rising as doubts grow about the solvency of the Irish economy

Ireland, Government Benchmarks, Bid, 10 Year, Yield, %

Rising Bond Yields as Investors Get Nervous

Source: Reuters EcoWin

00 01 02 03 04 05 06 07 09

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

Pe

rce

nt

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

Audio-Visual on the Irish Economy