While all eyes have been on Greece and Italy, another troubled peripheral state has been showing signs of recovery. Irish bond yields have fallen sharply of late (reflecting rising prices), with the ten-year yield almost halving since July as confidence in Ireland’s performance and prospects has grown. In its latest report, the International Monetary Fund said it expected Ireland to meet its budget deficit target for next year, and reckoned that the economy would expand by 0.4% this year – the first positive number since 2007 – and 1.5% next.
What the commentators said
Many analysts have argued that Ireland’s flexible and open economy is “unfairly lumped together” with peripheral laggards Portugal and Greece, said Neil Unmack on Breakingviews. Its performance since last November’s bail-out “is starting to prove them right”. In the year to July its primary deficit (after interest payments) was almost 1% lower than forecast. Labour costs slid by 3.5% in the second quarter; in the eurozone as a whole, they increased by 3.6%.
While austerity is tackling state spending and the debt load, lower labour costs (through falling wages) have helped the private sector regain competitiveness. Along with a buoyant global economy, this has underpinned a recovery in the crucial export sector. June saw a record monthly trade surplus. It also helped that the government managed to maintain its low corporation tax rate during negotiations with the EU. Ireland has continued to attract foreign direct investment, noted Marc Chandler on Creditwritedowns.com. The economy “bit the bullet”, said billionaire investor Wilbur Ross, and it will therefore be “the first of the euro countries to recover”.
But it’s hardly in the clear yet. Domestic consumption “is an Achilles’ heel”, said Unmack, as pay has fallen and the housing market is still plummeting. So domestic demand can’t offset weakening exports as the global economy turns down. That could mean growth undershooting forecasts, necessitating further austerity measures that in turn further undermine domestic demand. A debt default elsewhere in Europe is another threat to Ireland’s fragile recovery. Ireland, said Capital Economics, may yet need a second bail-out.