Irish GDP has fallen by 10.5% in real terms since the fourth quarter of 2007. Indeed, Ireland has fallen from the top of the Euro Zone growth table to the bottom. Given the state of the housing market and the country’s public-sector indebtedness, the economy’s performance comes as no surprise, but it does raise the question as to why Ireland is being significantly outperformed by countries experiencing similar deficits.
One might conclude that it signals an over-reliance on external trade; however, export volumes were only down 2.8% in the first half of this year. So we must therefore look to the domestic economy for an answer. Figures show that this is where the problem lies with domestic demand having spiralled downwards by 15.5% since the fourth quarter of 2007.
Why has Ireland experienced such a high drop in domestic demand? The main cause is the extreme weakness of the labour market. The fall in demand reflects the lower incomes of the unemployed as well as the straightened circumstances of those in employment. Personal disposable income was heavily affected in the early months of this year due to the combination of wage and salary reductions, and increases in taxes and levies. Concerns about job security and the risk of falling into negative equity have encouraged consumers to increase their precautionary savings.
Schemes like SSIAs kept the savings ratio hovering around the 7.5-9% mark between 2001 and 2006, however, early 2009 has seen a rise to about 10%; a sign that the deleveraging process continues. It is clear that consumers are continuing to save and pay their debt rather than take out new loans; some of this is due to the fact that credit from banks is no longer freely available. It is this credit shortage which the Government is seeking to address in setting up the National Asset Management Agency (NAMA), albeit focusing on increased lending to companies rather than individuals. Still, the Irish economy has a long way to go before it can start to benefit from NAMA’s creation. In the meantime demand for credit remains weak as consumers continue to fret about the underlying health of the economy and job prospects in particular.
The Quarterly National Household Survey (issued at the end of September), which measures unemployment, stated that the number of people in the labour force in the second quarter of 2009 was 2,203,100; representing a decrease of 36,500 in the year. This is a stark reminder of the hardship that many private-sector workers have endured over the past twelve months and is also a sign that things will get worse before they get better. The job-loss originated in the construction sector, with the problem later spreading into other parts of the economy. A recent poll of Irish economists saw an average projection for the unemployment rate at year-end being 13.9%, as opposed to 6.3% in 2008. However, based on improving trends and a recovery in the global economy, some forecasters predict the unemployment rate peaking at just below 15% in 2010.
Household debt has risen dramatically over the past decade and a half. In 1995 it stood at 48% of disposable income, but by the end of 2009 it is predicted to be in the region of 176%. Irish people owe €170bn to banks and other financial institutions, mortgage lending accounting for €150bn of this. The proportion of personal debt secured on property exceeds all Euro Zone countries except the Netherlands. House prices are currently down 24% from their peak in 2007 and some analysts believe a decline of 50% is possible. Potential buyers are being kept out of the market because of their expectations that prices will be lower in the future and because confidence in future financial security is at an all time low.
Long gone are the fruitful days of the Celtic Tiger. The economic downturn has seen consumers becoming more frugal with their income and this cautious behaviour is being seen throughout many sectors of our economy; reduced spending in the retail market, dramatic price falls in the housing market and indebt tax receipts being heavy indicators of this change. An average fall in expenditure of 7.5% is predicted for this year. However, this is expected to level out in 2010, with the weakness in spending being concentrated in the first half of the year.
Although analysts are beginning to hope that the figures won’t be nearly as bad as expected, there are some who fear that perhaps this fall in demand could be set to continue into the foreseeable future. If the deleveraging process has only just begun, economic recovery is sure to be sluggish for the foreseeable future.