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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?
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