Ireland has announced that its economy expanded by 0.9% in 2012, a rate that matched Germany’s. That follows growth of 1.4% in 2011. The news follows Ireland’s successful return to the ten-year government bond market a fortnight ago – its first auction since 2010.
What the commentators said
Ireland’s success is in stark contrast to the rest of the periphery. So what’s gone right? For a start, Ireland has made the most progress in improving its competitiveness. Real unit labour costs declined by 9.2% between 2008 and 2012, said Finbarr Flynn on Businessweek.com, compared to a 1.6% increase in the EU average.
Following a series of pay cuts, average weekly earnings declined to €695 by late 2012. Five years ago they stood at €720. Ireland maintained its 12.5% corporation tax rate, which is far lower than its competitors. That has underpinned inward investment.
Lower prices and wages, along with a huge external sector, fuelled an export-led recovery. The dependence on exports also offset the impact of austerity on the domestic economy, said Howard Schneider in The Washington Post. The Institute for International Finance estimates that annual changes in government spending and taxation cut around 1.7% from overall economic output between 2010 and 2012.
In Greece, where exports comprise a relatively small segment of the economy, austerity wiped an annual 5% off GDP.
Still, Irish GDP isn’t likely to take off any time soon. Growth slowed to 0% in the fourth quarter as export momentum waned, and key export markets in the eurozone and the UK look “especially weak”, said Alan McQuaid at Merrion Capital. The domestic economy remains lacklustre, despite tentative signs of improvement, and banks are “weighed down by nonperforming loans”, said the IMF. Ireland’s recovery, says McQuaid, will be “subdued for some time yet”.