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