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Recovering from the Crisis: Whither the Irish Economy?. John McHale National University of Ireland, Galway Irish Fiscal Advisory Council European Commission Conference: Challenges Facing the Irish Economy Galway, March 24, 2012. Overview. The shock - PowerPoint PPT Presentation
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Recovering from the Crisis: Whither the Irish Economy?
John McHaleNational University of Ireland, Galway
Irish Fiscal Advisory Council
European Commission Conference: Challenges Facing the Irish EconomyGalway, March 24, 2012
Overview
• The shock
• Adverse feedbacks and the stabilisation challenge
• Failure to “manage” without outside assistance
• The recovery strategy: (Phased) adjustment with assistance
• The banking challenge
• The fiscal challenge
• The growth challenge
The bubbles bursts
1975 1980 1985 1990 1995 2000 2005 20100
2,000
4,000
6,000
8,000
10,000
12,000
Monthly House Completions, January 1975 to January 2011
Based on ESB Electricity Connections
Source: Department of Housing, Hertiage and Local Government
Adverse feedback loops
In the end, we failed to manage the crisis without outside assistance
Loss of bank fundingSource: NTMA
Dec-08 Dec-09 Dec-10 Jun-11 Sep-110
20
40
60
80
100
120
140
160 152 146136
118 121
Retail DepositsBillions of Euro
Dec-08 Dec-09 Dec-10 Jun-11 Sep-110
20
40
60
80
100
120
140
160
103
80
3221 21
Billions of EuroCorpotate Deposits
Dec-08 Dec-09 Dec-10 Jun-11 Sep-110
20
40
60
80
100
120
140
160140
123
6958 55
Billions of EuroDebt Capital Markets
Dec-08 Dec-09 Dec-10 Jun-11 Sep-110
20
40
60
80
100
120
140
160
89
50
3019 21
Billions of EuroRepo/Interbank
Heavy dependence on ECB/CBI
Dec-08 Dec-09 Dec-10 Jun-11 Sep-110
20
40
60
80
100
120
140
160
37
62
142
123 122
Billions of EuroCentral Bank
Loss of Government creditworthinessApprox. 10-year yields (monthly averages)
Jan-01Jul-0
1
Jan-02Jul-0
2
Jan-03Jul-0
3
Jan-04Jul-0
4
Jan-05Jul-0
5
Jan-06Jul-0
6
Jan-07Jul-0
7
Jan-08Jul-0
8
Jan-09Jul-0
9
Jan-10Jul-1
0
Jan-11Jul-1
1
Jan-120
2
4
6
8
10
12
14
Ireland
Germany
Source: ECB; http://www.ecb.int/stats/money/long/html/index.en.html
Recovery strategy• (Phased) adjustment with financing
• Banking adjustment– Recapitalise/deleverage– Credit supply/debt resolution
• Fiscal adjustment– Bring deficit & debt to safer levels– Limit fall in domestic demand
• Real economy– Restore competitiveness– Restore growth in domestic demand
• Fiscal adjustment harms disposable income• Need for confidence in future path of disposable income
As seen by Government . . . Stabilisation, reputation, confidence
The Banking Challenge
Objectives
• Functioning credit system– Rational credit decisions– Access to funding
• Limit liability to the State• Secure future financial
stability • Reduce burden of private-
sector debt
Policies
• Guarantees– Original “blanket” guarantee– ELG guarantee (new borrowing)
• Remove “toxic” assets– National Asset Management
Agency (NAMA)
• Recapitalisation• Deleveraging• New regulatory / supervisory
regime• Debt forgiveness
Cost of the Banking RescueBillions of Euro
Cost Prior to March 31
March 31 Stress Tests Total
AIB/EBS 8.1 12.7 20.8
Bank of Ireland 3.5 1.2 4.7
IL&P 0 2.7 2.7
Anglo /INBS 34.7 0.0 34.7
Total 46.3 16.6 62.9
Securing bank funding
Capital
Deleverage/de-risk Reliable lender of last resort
Guarantees
Big challenges
• Recapitalise/deleverage without a severe credit contraction
• Debt forgiveness without further undermining bank balance sheets
The Fiscal Challenge
Actual and planned austerity measuresBillions of Euro
July 2008Expenditure adjustments
1.0
Budget 2009 (October 2008)Revenue raising measures
2.0
February 2009Expenditure adjustments
2.1
Supplementary budget (April 2009)Revenue-raising & expenditure-reducing measures
5.4
Budget 2010 (December 2009)Revenue-raising & expenditure-reducing measures
4.1
Budget 2011 (December 2010)Revenue-raising & expenditure-reducing measures
6.0
Budget 2012 (December 2011)Revenue-raising & expenditure-reducing measures
3.8
Planned Adjustments: 2013 – 2015Revenue-raising & expenditure-reducing measures
8.6
Total actual and planned adjustment 33.0 (≈ 21 % of GDP)
Simulation of zero-adjustment scenario
General Government Deficit
2011 2012 2013 2014 20150
1
2
3
4
5
6
7
8
9
10
11
IrelandGreecePortugalSpain
Overall Deficit % of GDP
Source: IMF
Primary (non-interest) surplus
2011 2012 2013 2014 2015
-8
-6
-4
-2
0
2
4
6
IrelandGreecePortugalSpain
Primary Balance % of GDP
Source: IMF
Determining the fiscal stance
• Difficult balancing act: – Supporting domestic demand vs.
ensuring sustainability/creditworthiness
• Fiscal Council recommended a more ambitious fiscal adjustment in October 2011– Funding vulnerabilities– Risks to debt sustainability– Slow pace of debt reduction post-2015
• Negative growth surprise → Worsens the dilemma
The Growth Challenge
Real economySeasonally Adjusted Quarterly Aggregates, 1997Q2 – 2011Q3
1997Q1
1997Q4
1998Q3
1999Q2
2000Q1
2000Q4
2001Q3
2002Q2
2003Q1
2003Q4
2004Q3
2005Q2
2006Q1
2006Q4
2007Q3
2008Q2
2009Q1
2009Q4
2010Q3
2011Q215,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
Real GDPReal GNPReal Domestic Demand
€m
Massive rise in unemployment . . .
0
2
4
6
8
10
12
14
16
Unemployment Rate
Long-term Unemployment Rate
. . . Large fall in employment
0.0
500.0
1,000.0
1,500.0
2,000.0
2,500.0Millions
Consistent downward revisions to 2012 forecasts
Autumn 2010 Winter 2010 Spring 2011 Autumn/Summer 2011
Autumn/Winter 2011
Winter/Spring 2012
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
DoF CBI ESRI EC IMF
%
Unusual uncertainty: Whither the Irish Economy?
• Uncertainty about the starting output gap
• Uncertainty about the speed at which the gap will close
• Uncertainty about the underlying potential growth rate
Output gap
2008 2009 2010 2011 2012 2013 2014 2015
-7
-6
-5
-4
-3
-2
-1
0
1
2
3
Output Gap (IMF) Output Gap (Budget 2012)
Percent of Potential Output
Actual and Potential GDP (IMF)
2008 2009 2010 2011 2012 2013 2014 20150.86
0.88
0.90
0.92
0.94
0.96
0.98
1.00
1.02
1.04
1.06
Real GDP (IMF) Potential Real GDP (IMF)
Actual and Potential GDP (IMF & Budget 2012)
2008 2009 2010 2011 2012 2013 2014 20150.86
0.88
0.90
0.92
0.94
0.96
0.98
1.00
1.02
1.04
1.06
Real GDP (IMF) Potential Real GDP (IMF)Real GDP (Budget 2012) Potential Real GDP (Budget 2012)
Growth strategy
Demand
Supply
Domestic Demand
Net Exports
Competitiveness
Smart Economy
Focus by necessity
Nominal GDP growth, 2007 - 2011
2007 2008 2009 2010 2011
-12.0%
-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%6.5%
-5.2%
-10.8%
-2.9%
0.3%
Source: CSO
A dual economy: Contributions to nominal GDP growth, 2007 - 2011
2007 2008 2009 2010 2011
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
6.6%
-4.8%
-15.5%
-5.9%
-2.2%
0.0% -0.4%
4.8%
3.1%2.4%
Domestic Demand
Net Exports
Source: CSONote: Statistical discrepancy included under domestic demand
Q4 National Accounts
• 2011– Real GDP: +0.7 percent– Real GNP: -2.5 percent
• Back in recession: Two successive quarters of contraction
• Tentative signs of stabilisation in domestic economy– Final domestic demand up 1.3 percent in final quarter– Consistent with surprise 10,000 job gain in quarter
Other heavily debated topics
• Restructuring the IBRC promissory notes
• Referendum on the fiscal compact
• Building the euro zone firewalls