The dramatic decline in the Irish economy continued into the second quarter of this year, the fifth consecutive quarter of decline. The damage wreaked by this recession has been immense, whether seen through the collapse in house building, the surge in unemployment, the decimation of Government tax revenue, or the sharp decline in consumer demand.
The more positive news is that the pace of decline has eased in the second quarter. A number of indicators of activity, whether soft (consumer confidence, PMI surveys, global economic prospects) or hard (unemployment, tax revenue, retail sales), show continued weakness, although the pace of decline has eased considerably.
The cause of Ireland’s economic decline is evidenced by the sheer scale of the collapse of private sector demand. In 2006, at the height of the boom, the Irish private sector was a net borrower to the tune of EUR10bn. In 2009 the private sector will be a net saver of EUR20bn a year. This represents a withdrawal of EUR30bn from the economy annually because of less spending on housing and consumer goods, and less capital investment by businesses. High Government borrowing is a direct mirror of this saving. While the spreads on Irish Government debt have risen sharply over the past year, the massive level of domestic savings will make the funding of this deficit easier.
The economic recovery will come from two sources. First, foreign demand for Irish produce will pick up as the global economy recovers. The initial signs here are encouraging. While global exports have been in freefall since Christmas, Irish exports have defied gravity. Second, as domestic confidence returns, the enormous rate of private saving will begin to fall. Consumer spending will bottom out this year and begin to grow slowly around the turn of the year. A pick-up in housing activity will take longer, with the residential sector to remain subdued for an extended period.
However, as long as Irish consumers and businesses remain in retrenchment mode, then overly aggressive measures to reduce government borrowing could be counter-productive. The budgetary measures taken in October and April were necessary, as the deficit was heading for 15% and financial market turmoil meant that there was a genuine (if remote) fear that funding could dry up. However, the Government should refrain from further significant taxation increases, although continue to reform the public and local private service sectors.
