Irish Economy and Growth Legal Framework for Growth and Jobs High Level Workshop, Sofia Diarmaid Smyth, Central Bank of Ireland 18 June 2015
Irish Economy and GrowthLegal Framework for Growth and Jobs High Level Workshop, SofiaDiarmaid Smyth, Central Bank of Ireland
18 June 2015
Agenda
1 Background to Irish economic performance
2 Economic boom and imbalances
3 The path to recovery
4 Pro-growth policies
Delayed convergence of the Irish Economy
2
60
70
80
90
100
110
120
130
140
Ireland: Real GDP per capita (EU 15=100)
Source: AMECO
Labour Market
3
• Employment soared in the
1990s and 2000s
• Obvious benefits – incomes,
wellbeing, taxes
• Low unemployment rates
1,000
1,200
1,400
1,600
1,800
2,000
2,200
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
Total Employment in Ireland (Thousands), 1988 - 2014
Source: CSO.
Agenda
1 Background to Irish economic performance
2 Economic boom and imbalances
3 The path to recovery
4 Pro-growth policies
Contributions to GDP Growth Year-on-Year
5
• Strong growth transforms
economy in the 1990s
• Exports the main engine of
growth
• Collapse in domestic demand
from 2008
• Return to growth in 2014
-10
-5
0
5
10
15
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
Domestic demand Net exports GDP
2001-07: Growth continues but becomes unsustainable
• Domestic demand driven by a housing boom
Fuelled by low interest rates and strong credit growth
House prices diverged form sustainable levels
Evidence of overheating
• Public Finances boosted by property boom
Windfall gains from construction boom
Treated as permanent used to fund higher expenditure
Underlying position not sustainable
• Competitiveness declined from favourable levels
Export growth moderated
Shift from goods to services
6
-10
-5
0
5
10
15
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
Consumption Investment Government
Net Exports GDP
Deep Recession
Economic indicators – 2007-2010
GDP -16.2%
Personal Consumption
-11.5%
Investment -51.9%
Unemployment (ILO measure)
from 4.7% to 13.9%
• GDP falls 3.1 per cent in average annual terms between 2008-10
• Sharper fall in nominal GDP
• Domestic side of the economy hardest hit
• Exports not as adversely affected during downturn
Cumulative Decline fromPeak (Q3 2007-Q4 2011) Persons (000’s) %
Agriculture -34 -30
Industry -71 -5
Construction -158 -60
Total Services -71 -5
Total Employment -308 -14
-15
-10
-5
0
5
10
% y
/y
Volume of Economic GrowthGDP
GNP
Sharp reversal in fiscal balances from 2007,
recovery underway
8
-35
-30
-25
-20
-15
-10
-5
0
5
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
20
12
% o
f G
DP
General Government Balance
GGB* GGB
Note: GGB* = GGB excluding exceptional payments
0
20
40
60
80
100
120
140
% of GDP Government Debt
GGD
Source: Eurostat.
Agenda
1 Background to Irish economic performance
2 Economic boom and imbalances
3 The path to recovery
4 Pro-growth policies
EU/IMF Recovery Programme
• Ireland entered the programme in November 2010.
• €64 billion in funding as part of total programme of €85 billion)
• Focus of the programme:
– Restructure the banking sector
– Improve competitiveness
– Resolve the fiscal crisis
• Programme ended in December 2013, without the need for further official funding assistance.
10
Fiscal Consolidation & Reform
• €30bn (19% GDP) in consolidation made by end-2014 – approx. 2/3rd expenditure based.
• General Government Balance expected to be -2.3 per cent of GDP by 2015, and to turn to a
surplus by the end of the decade.
• General Government Debt expected to decline to105 per cent of GDP in 2015, and decline to
85 per cent by 2020.
€1bn(0.6%)
€9.4bn(5.9%)
€4.3bn(2.7%)
€5.3bn(3.4%)
€3.8bn(2.4%)
€3.5bn(2.1%)
€2.5bn(1.8%)
2008 2011 20142009 2010 2012 20132008 2011 20142009 2010 2012 2013
€29.8bn(18.9%)
• Fiscal framework strengthened – fiscal rules, independent fiscal council, greater transparency.
Financial Sector/Banking Reform
• Significant reforms undertaken & repair on-going
Rigorous stress tests in 2011 underpinning total bank recapitalisation of €64 billion (40% of GDP) by the Irish State
Major bank restructuring
NAMA – manages a €30 billion contingent liability
Deleveraging to restore stable funding profile
Addressing mortgage & SME loan arrears
Reform of the personal insolvency framework
Strengthening supervisory, governance & regulatory structures
Balance sheet assessment completed
12
Agenda
1 Background to Irish economic performance
2 Economic boom and imbalances
3 The path to recovery
4 Pro-growth policies
Pro-Growth Policies - Summary
• Highly open economy
– EU membership
– Diversified export markets (US, UK, EU)
• Infrastructural investment – sustained
– Roads ( €34.4 billion investment programme 2006-15)
• Pro-business environment
• Deregulation – transport/telecommunications/etc
• Low tax economy –
– 12.5% corporate tax rate
– 25% R&D tax credit
Pro-Growth Policies - Summary
• FDI– Industrial Development Authority
• Investment in education –2nd and 3rd level
• Flexible and skilled labour market
• Favourable demographics
• Dynamic sectors (pharmaceuticals, chemicals, business services, computer services, IT, medical devices, food & beverages)
Pro-Growth Policies: dynamic sectors
• Agglomeration economies – leading sectors
– 9/10 software companies
– 13/15 medical tech companies
– 15/25 financial services
– 9/15 internet firms (Source: IDA)
• Dynamic economy
– Economy grew by 4.8% in 2014 (strongest in EU)
– Similar rate of growth anticipated in 2015
– Low inflation
– Robust and broad-based employment growth
Pro-Growth Policies: FDI
0
5
10
15
20
25
30
35
40
2012 2013
€b
illio
ns
Flows of FDI into Ireland by source
EU USA Other
Pro-Growth Policies: cost of business
75
80
85
90
95
100
Sin
gap
ore
New
Zea
lan
d
Ho
ng
Ko
ng
De
nm
ark
Ko
rea,
Rep
.
No
rway U
S
UK
Fin
lan
d
Au
stra
lia
Swed
en
Ice
lan
d
Ire
lan
d
Ger
man
y
Geo
rgia
Can
ada
Esto
nia
Mal
aysi
a
Taiw
an, C
hin
a
Swit
zerl
and
Au
stri
a
Sin
gap
ore
= 1
00
Ease of Doing Business (World Bank Ranking)• Ireland ranks highly (12th
place) in the cost of doing business ranking
• Particularly strong in taxation, protecting investors, trade, ease of starting a business
Pro-Growth Policies: education
• Investment in Education –long term commitment
• Over 250,000 students enrolled in 3rd level courses in Ireland in 2013
• 28% into Science & Engineering
• 25% into Business, Law, Social Sciences
20
25
30
35
40
45
50
Cyp
rus
Irel
and
Lith
uan
iaB
elgi
um
Luxe
mb
ou
rgD
enm
ark
Fran
ceSw
eden U
KN
eth
erla
nd
sFi
nla
nd
Spai
nEs
ton
iaP
ola
nd
Latv
ia EUSl
ove
nia
Gre
ece
Bu
lgar
iaG
erm
any
Hu
nga
ryP
ort
uga
lSl
ova
kia
Cze
ch R
epM
alta
Au
stri
aIt
aly
Ro
man
ia
%
Proportion of Persons with 3rd Level (25-34 age group)
Pro-Growth Policies: openness and tax
12.50
17.00
19.00
20.00
21.00
22.00
23.50
25.00
25.00
25.00
25.50
28.00
29.22
30.00
33.00
33.33
35.00
0 10 20 30 40
Ireland
Singapore
Hungary
UK
Portugal
Swedem
Denmark
Austria
China
Netherlands
Japan
Spain
Luxembourg
Germany
Belgium
France
USA
Corporate Tax Rates
0
50
100
150
200
250
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
% o
f G
DP
Openness of Economy
EU Ireland Bulgaria
Comparative Strengths of the Irish Economy
• Flexible well educated labour market (English speaking)
• Relatively large export sector – very open economy
• Business friendly environment
• High concentration of high-tech MNCs/dynamic sectors
• Strong FDI inflows
• Good infrastructure
• Stable political system with significant reforms (fiscal and banking)
21
Lessons I
• Lesson from the past: hard decisions pay off in the end
• Ireland has a track record in recovery
– more flexible than large closed economies
• Counter cyclical fiscal policy and sustainable tax system (danger of being reliant on cyclically sensitive taxes)
• Market sentiment can change swiftly - creditworthiness
22
Lessons II
• Banking system correction important for wider recovery
• Domestic demand will not sustain growth in SOE
• Need to maintain conditions for export led growth –competitiveness, attracting FDI, flexible labour market
• Sustainable balanced growth the aim
23
Annex
Convergence of Economy: long-run policies
• Export-led growth
• Focus on competitiveness
• Strong labour supply and investment in education
• High levels of inward investment in high growth sectors - high value, high-technology goods
• Significant infrastructural investment partly funded by EU
25
Convergence of Economy: long-run policies
• Significant infrastructural investment partly funded by EU
• Micro-reforms, especially of the labour market, i.e. tax/social welfare system
• Macroeconomic Stability – underpinned by a broad policy consensus post 1987
• Benign international environment and convergence toward monetary union criteria
26
Rapid convergence thanks to long period of
uninterrupted growth
27
-4
-2
0
2
4
6
8
10
1981-85 1986-90 1991-94 1995-00 2001-07 2008-10 2011-14
GDP Annual Averages % Growth
Source: CSO
010,00020,00030,00040,00050,00060,00070,00080,00090,000
100,000House Completions (Number)
28
Residential Property Price Indices - Overall
0
20
40
60
80
100
120
140
199
8q
1
199
9q
1
200
0q
1
200
1q
1
200
2q
1
200
3q
1
200
4q
1
2005
q1
2006
q1
2007
q1
2008
q1
2009
q1
2010
q1
2011
q1
2012
q1
2013
q1
2005 Q1=100
CSO Index
Permanent TSB/ESRI Index
Housing Collapse
• Housing collapse at centre of
recession
• Housing output down almost 90
per cent from peak
• House prices collapse also
• Prices currently 45 per cent
below peak
Housing Market
• Housing investment takes off
from mid-1990s
• Share of construction output in
GDP doubles in a decade
• House prices increase by over
300 per cent between 1996 and
2006
• More than double the average
rate of increase in OECD area
Investment in dwellings (% of GDP)
29
House prices (index, 2000=100) and
housing completions (4Q moving average)
0
5
10
15
20
25
0
50
100
150
200
250
Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3
2000 2001 2002 2003 2004 2005 2006 2007
ThousandsIndex
2000=100
House Prices
Housing Completions
0
2
4
6
8
10
12
14
16
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
% o
f G
DP
Ireland
EU28
30* Excludes IFSC. Property-related lending refers to the construction, real estate activities, and residential mortgages sectors. Source: Central Bank of Ireland, Statistics
Property-related lending - domestic Irish banks property related
lending/total private loans *
626464
6767
6359
56
5248
45
0
10
20
30
40
50
60
70
2009200820072006200520042003200220012000 2010
%
Credit Expansion and Bank Exposures
• Increased demand for housing met through
rapid growth in mortgage credit
• Lending for property development also
soared
• Over-concentration of lending to the
property sector
• Increasingly funded through foreign
borrowing by banks
0
50
100
150
200
250
Index=2000
Total CurrentExpenditure
Nominal GDP
Property related tax revenues
31
Nominal GDP and nominal general
government expenditures (Index, 2000=100)
Windfall Revenues
• Government revenues benefit
from surge in housing activity
• These revenues are largely
cyclical
• Reliance on more stable
revenues reduced
• Government expenditure grows
faster than nominal GDP growth
each year after 2000
Relative Hourly Earnings (Manufacturing)
- Ireland versus main trading partners
32
Current Account Balance (% of GDP)
90
100
110
120
130
-6-5-4-3-2-1012345% of GDP
Maastricht Treaty, 1992
Competitiveness and Current Account
• Economy highly competitive in
1990s. Some loss inevitable later
• Sharp deterioration from 2000
onwards
• Export growth slows and balance
of payments moves rapidly into
deficit
33
Bursting of property bubble resulted in large bank losses
Note: Applies to domestic Irish banks only. Source: Central Bank of Ireland Prudential Statistics
33
1.6 2.0 2.2 2.1 2.6 3.24.6 4.8
-3.2
-19.3
-32.5 (35)
(30)
(25)
(20)
(15)
(10)
(5)
-
5
10
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
€ bnDomestic Irish banks' profit/losses after tax 2000 - 2010