Ryan McGrath Comments: Irish Economy Grew Strongly In Third Quarter

December 19, 2013, Wall Street Journal

Ireland’s economy grew strongly in the three months to September, official data showed Thursday, bolstering the coalition government’s claim that the country’s long-delayed recovery is at last under way as it exits a three-year bailout program.

But as that phase of ireland’s recovery from its crisis comes to an end, the International Monetary Fund Thursday criticized euro-zone institutions for forcing the government to take on too much debt in rescuing its failed banks, rather than allow the banks to default on some of their bonds.

The economy grew in both 2011 and 2012, but its performance had been weaker than expected this year because of subdued demand for Irish exports, while austerity had weighed on consumer spending at home.

But consumer spending and business investment picked up in the third quarter, compensating for weak exports and pushing the Irish economy to its fastest expansion since the second quarter of 2011.

The Central Statistics Office said Irish gross domestic wwwuct in the three months through September was up 1.5% from the previous three months, and 1.7% from the third quarter of 2012.

While a 0.9% rise in consumer spending was flattered by a change in the system for registering automobiles that boosted sales, a 10.9% increase in investment spending will be particularly welcome news for the government.

"A strong pipeline of foreign direct investment and improving construction activity augur well for continued growth of investment into 2014," said Ryan McGrath, a senior bond trader at Cantor Fitzgerald Ireland in Dublin.

The weakness of Irish exports during the quarter largely reflects a decline in the value of drugs manufactured in Ireland as patents expired, said Conall Mac Coille, chief economist at Davy Stockbrokers, but he expects the economy to grow by 2.5% next year.

The Irish economy’s expansion over the quarter was by some margin the fastest in the euro zone, which as a whole grew just 0.1% over the period. In the wider European Union, only the Romanian economy grew more rapidly, expanding 1.6%.

Locked out from the international bond markets as a result of the huge cost it incurred in rescuing the country’s failed banks, the Irish government secured €67.5 billion ($92.89 billion) of loans from the International Monetary Fund and the EU in late 2010. In return, it agreed to a program of spending cuts and tax increases, as well as further efforts to repair the banking system.

The government celebrated its exit from that program on Dec. 15. Citing an increase in employment in recent months, the government has projected that the economy will expand relatively strongly in 2014 and will continue to grow in the coming years.

A number of independent forecasting organizations also believe that the Irish economy is finally on the mend. The Economic and Social Research Institute, the country’s leading think tank, and the Irish Business Employers’ Confederation, the largest business group, both predict GDP will expand up to 3% next year, provided the rest of Europe grows as well.

However, much of the Irish economy remains fragile. Despite receiving huge sums from Irish taxpayers, the banking system remains damaged and lenders could still need more capital injections. Many households struggle to pay home-loan debts and their properties are worth a fraction of their mortgages.

Unemployment has fallen from a peak of 15.1% last year, but remains at an elevated level of 12.5%. The government in its own medium-term forecasts published Tuesday projects that its gross debts of more than 120% of GDP will stay high for many years to come.

In its final report on the bailout, the IMF said the euro zone’s insistence that the government repay holders of bonds issued by Irish banks had been "unfair," since its policy had changed in subsequent bailouts of other countries.

"Euro-zone partners precluded the Irish from imposing haircuts on senior creditors of insolvent banks," said Ajai Chopra, the IMF’s deputy European director. "But subsequent developments in the principles of orderly resolution of banks, after Ireland had paid off these creditors at great cost, have shown that imposing losses on senior bank bondholders is now becoming more accepted."

The EU and euro zone had already provided "generous" support, but "there remains an excellent case" for Ireland receiving additional help to return its lenders to profitability, Mr. Chopra said.

The IMF lowered its projection for economic growth this year to 0.3% from the 0.6% growth it forecast in October. It projects the economy will grow 1.7% next year, lower than the 2% growth forecast by the Irish government, because the IMF believes that consumer demand will continue to be weak.

Mr. Chopra said Ireland’s prospects are "inextricably intertwined with those of the euro zone" and expressed some frustration with the currency area’s approach to supporting growth and fixing its banks.

"Ireland’s prospects will depend very much on the progress made to address demand and supply deficiencies in the euro zone, to achieve the ECB’s inflation target rather than undershoot it, to reduce fragmentation, and to make more meaningful progress in improving the architecture of the monetary union," he said.

The Irish government has committed to further austerity to cut its budget deficit to below 3% of GDP in 2015. One of those measures includes charging householders for water. Opposition lawmakers staged a rare walkout from the Irish parliament Thursday, protesting the government’s decision to bring debate on that proposal to a quick conclusion.