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Another Fine Mess?

Ireland's Economic &Property Market Prospects

Trinity Business AlumniBreakfast Roundtable

July, 2009

Ronan Lyons, Economistronanlyons@gmail.com

mailto:ronanlyons@gmail.commailto:ronanlyons@gmail.com

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Quick Overview

The Global Recession

The Irish Recession

The Property Markets

Budgets and Banks

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The world is facing the worst recessionsince World War 2

12

34

56

78

910

1112

1314

1516

1718

1920

2122

2324

2526

2728

2930

3132

3334

3536

3738

3940

4142

4344

4546

4748

4950

5152

5354

55

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

Private sector jobs lost from peak

"1950s" 1974/75 1981/82 2000-03

Source: US BLS

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The world is facing the worst recessionsince World War 2

12

34

56

78

910

1112

1314

1516

1718

1920

2122

2324

2526

2728

2930

3132

3334

3536

3738

3940

4142

4344

4546

4748

4950

5152

5354

55

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

Private sector jobs lost from peak

"1950s" 1974/75 1981/82 1990/91 2000-03

Source: US BLS

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The world is facing the worst recessionsince World War 2

12

34

56

78

910

1112

1314

1516

1718

1920

2122

2324

2526

2728

2930

3132

3334

3536

3738

3940

4142

4344

4546

4748

4950

5152

5354

55

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

Private sector jobs lost from peak

"1950s" 1974/75 1981/82 1990/91 2000-03

Source: US BLS

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ronanlyons.com

The world is facing the worst recessionsince World War 2

12

34

56

78

910

1112

1314

1516

1718

1920

2122

2324

2526

2728

2930

3132

3334

3536

3738

3940

4142

4344

4546

4748

4950

5152

5354

55

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

Private sector jobs lost from peak

"1950s" 1974/75 1981/82 1990/91 2000-03 2008/09

Source: US BLS

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Trade, output and stock markets are falling everybit as much as the Great Depression

Source: O'Rourke & Eichengreen

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Fortunately, Ireland has almost entirelyescaped the global recession

Finland

Lithuania

Romania

Estonia

Slovakia

Portugal

Italy

Austria

Spain

UK

France

Denmark

Greece

Ireland

-45.0% -40.0% -35.0% -30.0% -25.0% -20.0% -15.0% -10.0% -5.0% 0.0% 5.0%

Source: Eurostat

Change in exports, Jan-Apr 2009 over same period, 2008

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Unfortunately, we're in the middleof our own recession

Consumption Investment Government Exports Imports GDP GNP-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

-38%

Change in GDP/GNP component, Jan-Mar 2009 over same period, 2008

Source: CSO

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There are four interconnected problemsthat the Irish economy faces

Financial Market

NAMA? Nationalize? Or...?

Who pays?This generation? And if so, should it be

shareholders or savers?Or next generation? Taxpayers?

The Exchequer

The government will spend 64bn thisyear - 45bn alone will go on health,education and social welfare

Tax receipts this year are likely to beonly 34bn (not 57bn as projected)

Labour Market

Unemployment: 500,000 signing on by

mid-2010?

Competitiveness: are wages an issue?Are non-wage costs an issue?

Property Market

House prices falling rapidly...

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Rapidly rising employment started the housing firebut cheap and easy credit and tax breaks fueled it

1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010-40%

-30%

-20%

-10%

0%

10%

20%

30%

Change in unemployment(inverted)

Change in House Prices Real property interest rates(inverted)

Source: CSO, DOEHLG

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This was despite supply more than matchingmedium-term demand

2002 q1 2002 q4 2003 q3 2004 q2 2005 q1 2005 q4 2006 q3 2007 q2 2008 q1 2008 q40

5000

10000

15000

20000

25000

30000

0

20000

40000

60000

80000

100000

120000

140000

160000

180000

200000New homes (LHS)

Estimated oversupply(RHS)

Source: DOEHLG

Approximate level ofhousing output needed

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Falling rents imply a very significant potentialcorrection in house prices

Implications for Dublin house prices of rents returning to a 5.25% yield

1998Q1 1999Q1 2000Q1 2001Q1 2002Q1 2003Q1 2004Q1 2005Q1 2006Q1 2007Q1 2008Q1 2009Q1 2010Q120

30

40

50

60

70

80

90

100

Dublin rents Dublin house prices

Source: based on daft.ie, CSO

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The Exchequer hole is so big that the Governmentwill need to raise taxes and cut spending

2002 2003 2004 2005 2006 2007 2008 200925000

30000

35000

40000

45000

50000

55000

Revenues Expenditure

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Some thoughts

On the tax side, a recipe for 6bn

A universal property tax (like every other developedeconomy)... 3bn

Increase corporate tax to 14% (effective tax rate would stillbe 3rd cheapest in OECD)... 1.5bn

Income tax: formalize levy as tax rates and normalize tax-free allowances to OECD averages... 1.5bn

On the expenditure side, a starter for 6bn

Better target the vulnerable by cutting 3bn out of 21bn insocial assistance

Public sector pay needs to get back in line... a further 3bn