Fears for Ireland’s fragile recovery
By John Murray Brown in Dublin
Ireland’s school leavers’ parties are normally an occasion to buy a new outfit.
But where in the years of the Celtic Tiger economy, the so-called “deb’s dress” would have been an expensive off-the-peg item from a top store, this year, many mothers are taking to the sewing machine ahead of the coming round of parties.
“It’s the big trend,” says Caoimhe Derwin, a shop assistant in Murphy Sheehy, a designer fabric supplier in Dublin. “Of course you can buy something in one of the cheaper stores, but everyone will be wearing it. If you want something original, you make your own.”
In Ireland’s shrunken economy everyone is having to make do with less. Yet despite cutbacks and tax rises, the country still chalked up a 1.3 per cent expansion in gross domestic product in the first three months of this year. This fragile growth prompted Eamon Gilmore, the foreign minister, to call Ireland “the recovery story of the eurozone”.
But Ireland’s main business organisation last week warned that this comeback could be at risk if calls for more aggressive austerity measures were heeded. Danny McCoy, director-general of the Irish Business and Employers Confederation (Ibec), said that “austerity measures greater than those already planned would be at odds with the economic needs of the country at this time”.
Empty: a cow grazes in front of an unfinished housing estate in Donegal, left derelict after the property crash
His comments come amid concerns that a slowing US economy could hurt Irish exports, the engine of the recovery so far, and fears about the impact of the crisis in the eurozone.
Michael Noonan, the finance minister, said in July that the €3.6bn of cutbacks and revenue increases agreed under the European Union-International Monetary Fund plan may not be enough to hit the planned 2012 budget deficit target of 8. 6 per cent of gross domestic product. “There are a lot of variables between now and [the budget in] December so that could move slightly,“ he said. Colm McCarthy, economist at University College Dublin, this month added that in order to reassure debt markets the “most effective action the government can take over the next few months is an acceleration of the budgetary adjustment”.
However Mr McCoy of Ibec says: “There is a danger at this time in the year with the [spending] estimates coming up, and heading for the budget, that people are getting much more aggressive and talking our way into a much deeper range of austerity measures.”
The recovery is still weak, he stresses. Company liquidations reached record levels in July, said Cormac Mohan of FM Accountants. At the same time, consumers remain reluctant to spend, amid fears of job losses and continued falls in house prices.
Ireland is broadly hitting the tax and spending targets set by the EU and IMF under the terms of the €85bn bail-out agreed last November. Its budget deficit this year is projected to be 10 per cent of gross domestic product, after €6bn of tax increases and spending cuts. This brings the cumulative adjustment since the onset of the crisis to the equivalent of 13 per cent of national output.
The state has also pumped more than €45bn into its five domestic lenders, to rebuild balance sheets and pay off foreign creditors after crippling losses on loans to builders and developers after the property crash. Efforts to right the economy were rewarded with a reduction in the interest rate it pays on the loans from the EU, all of which will ease the fiscal position slightly.
The recovery has been largely driven by exports. Last year, Ireland had record levels of sales by the largely foreign-owned IT, pharmaceuticals,and financial services companies based there. Many of them have been encouraged to set up shop in Ireland by the country’s 12.5 per cent corporation tax rate. This could be at risk, following calls for a harmonised corporation tax at last week’s meeting between Angela Merkel, the German chancellor, and Nicolas Sarkozy, president of France.
If the US, Ireland’s main export market, slipped back into recession, then Ireland’s growth projections could prove overly optimistic. After three years of negative growth, GDP is officially forecast to increase by 0.7 per cent this year, and 2.5 per cent in 2012. Further austerity measures would then be needed if Ireland is to bring the deficit to below 3 per cent of gross domestic product by 2015 in line with the EU-IMF programme, economists warn.
Philip Lane, professor of economics at Trinity College Dublin, says the eurozone crisis and concerns about global growth mean the Irish government should “do more, go faster” on its fiscal adjustment. He warned last week that “implementing the terms of the agreed EU-IMF programme may no longer be sufficient for Ireland to contribute positively to the stabilisation of the euro crisis.”
