Personal Financial Planning, Cork, Jan 30th 2014

Ireland’s Economic Prospects

Colm McCarthy

Irish economic policy very pro-cyclical

This is the second macroeconomic crisis in a generation and more difficult than the 1980s crisis

There has been a record of boom and bust, and of pro-cyclical policies

This time it was external borrowing by the banks rather than the government, with a double bubble in bank credit and public spending

Signs of Recovery?

The employment data is improving

External environment, especially outside

the Eurozone, is better

But there is still limited hard evidence of a

broad-based recovery.

The L-Shaped ‘Recovery’

This crisis worse than 1980s

Banking system rescue has imposed enormous Exchequer costs, possibly 50% of GDP

Competitiveness must be restored without devaluation…

Five years into fiscal consolidation, deficit still €8 billion in 2014

Sovereign credit markets must believe the future programme…

Macro Prospects……..

Sharp decline in activity seems to be over

Fiscal stance remains deflationary, credit availability weak. Big debt overhang in both public and private sectors.

Over 2013 to 2015, nominal GDP unlikely to grow more than 4% per annum

An output recovery for 2014 is plausible, but

there is a clear debt sustainability problem

Domestic Demand Prospects

Since Ireland must run a BOP surplus for

many years to come, domestic demand

must be restrained.

This means consumption and fixed capital

formation cannot grow too quickly.

Growth needs to be mainly export-driven.

What Infrastructure Deficit?

Unsustainable External Debt?

The essential problem is external debt, in

a foreign currency (the Euro).

The country needs to deleverage, which

means many more years of a balance of

payments surplus

Which in turn means low consumption, low

investment and low government spending,

with high export growth.

Will fiscal adjustment be

enough? Without fiscal measures taken to date,

budget deficit would be 20% of GDP.

There has been a very large fiscal effort.

The sustainable interest rate can hardly be

much above 4%

Wisdom of exiting the troika programme

with no safety net will be tested.

Beyond the Programme

Further fiscal consolidation is needed: the

domestic banks remain fragile and may

need more capital

The withdrawal of foreign banks reduces

competition and credit availability

The plans for avoiding the next European

banking crisis need to be supported with

decisive actions to resolve the current one.

Personal Investment Post-Crisis

Budget gap still to be closed.

Temptations of ‘financial repression’.

Includes taxing funded pension schemes,

higher DIRT and CGT.

Risk of capital controls a la Cyprus, threats

to unguaranteed bank deposits.

Holding assets overseas, and outside

pension funds?