Irish Economy and Growth Legal Framework for Growth and Jobs High Level Workshop, Sofia

Transcription

1 Irish Economy and Growth Legal Framework for Growth and Jobs High Level Workshop, Sofia Diarmaid Smyth, Central Bank of Ireland 18 June 2015

2 Agenda 1 Background to Irish economic performance 2 Economic boom and imbalances 3 The path to recovery 4 Pro-growth policies

3 Delayed convergence of the Irish Economy 140 Ireland: Real GDP per capita (EU 15=100) Source: AMECO 2

4 Labour Market Employment soared in the 1990s and 2000s Obvious benefits incomes, wellbeing, taxes Low unemployment rates 2,200 2,000 1,800 1,600 1,400 Total Employment in Ireland (Thousands), ,200 1,000 Source: CSO. 3

5 Agenda 1 Background to Irish economic performance 2 Economic boom and imbalances 3 The path to recovery 4 Pro-growth policies

6 Contributions to GDP Growth Year-on-Year 15 Strong growth transforms economy in the 1990s Exports the main engine of growth Collapse in domestic demand from 2008 Return to growth in Domestic demand Net exports GDP 5

7 : 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 -10 Consumption Investment Government Net Exports GDP 6

8 % y/y Deep Recession GDP falls 3.1 per cent in average annual terms between Sharper fall in nominal GDP Domestic side of the economy hardest hit Exports not as adversely affected during downturn Cumulative Decline from Peak (Q Q4 2011) Persons (000 s) % Agriculture Industry Construction Total Services Total Employment Economic indicators GDP -16.2% Personal Consumption -11.5% Investment -51.9% Unemployment (ILO measure) Volume of Economic Growth GDP GNP from 4.7% to 13.9%

9 % of GDP 5 Sharp reversal in fiscal balances from 2007, recovery underway General Government Balance % of GDP Government Debt GGB* GGB Note: GGB* = GGB excluding exceptional payments Source: Eurostat. GGD 8

10 Agenda 1 Background to Irish economic performance 2 Economic boom and imbalances 3 The path to recovery 4 Pro-growth policies

11 EU/IMF Recovery Programme Ireland entered the programme in November 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

12 Fiscal Consolidation & Reform 30bn (19% GDP) in consolidation made by end-2014 approx. 2/3 rd 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 bn (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%) 29.8bn (18.9%) Fiscal framework strengthened fiscal rules, independent fiscal council, greater transparency.

13 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

14 Agenda 1 Background to Irish economic performance 2 Economic boom and imbalances 3 The path to recovery 4 Pro-growth policies

15 Pro-Growth Policies - Summary Highly open economy EU membership Diversified export markets (US, UK, EU) Infrastructural investment sustained Roads ( 34.4 billion investment programme ) Pro-business environment Deregulation transport/telecommunications/etc Low tax economy 12.5% corporate tax rate 25% R&D tax credit

16 Pro-Growth Policies - Summary FDI Industrial Development Authority Investment in education 2 nd and 3 rd level Flexible and skilled labour market Favourable demographics Dynamic sectors (pharmaceuticals, chemicals, business services, computer services, IT, medical devices, food & beverages)

17 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

18 billions Pro-Growth Policies: FDI 40 Flows of FDI into Ireland by source EU USA Other

19 Singapore New Zealand Hong Kong Denmark Korea, Rep. Norway US UK Finland Australia Sweden Iceland Ireland Germany Georgia Canada Estonia Malaysia Taiwan, China Switzerland Austria Singapore = 100 Pro-Growth Policies: cost of business Ireland ranks highly (12 th place) in the cost of doing business ranking Particularly strong in taxation, protecting investors, trade, ease of starting a business Ease of Doing Business (World Bank Ranking) 80 75

20 Cyprus Ireland Lithuania Belgium Luxembourg Denmark France Sweden UK Netherlands Finland Spain Estonia Poland Latvia EU Slovenia Greece Bulgaria Germany Hungary Portugal Slovakia Czech Rep Malta Austria Italy Romania % Pro-Growth Policies: education Investment in Education long term commitment 50 Proportion of Persons with 3rd Level (25-34 age group) Over 250,000 students enrolled in 3 rd level courses in Ireland in % into Science & Engineering % into Business, Law, Social Sciences 20

21 % of GDP Pro-Growth Policies: openness and tax Openness of Economy EU Ireland Bulgaria USA France Belgium Germany Luxembourg Spain Japan Netherlands China Austria Denmark Swedem Portugal UK Hungary Singapore Ireland Corporate Tax Rates

22 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

23 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

24 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

25 Annex

26 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

27 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

28 Rapid convergence thanks to long period of uninterrupted growth GDP Annual Averages % Growth Source: CSO 27

29 1998q1 1999q1 2000q1 2001q1 2002q1 2003q1 2004q1 2005q1 2006q1 2007q1 2008q1 2009q1 2010q1 2011q1 2012q1 2013q1 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 2005 Q1= ,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 Residential Property Price Indices - Overall CSO Index Permanent TSB/ESRI Index House Completions (Number) 28

30 % of GDP Housing Market Housing investment takes off from mid-1990s Share of construction output in GDP doubles in a decade Investment in dwellings (% of GDP) Ireland EU28 House prices increase by over 300 per cent between 1996 and 2006 More than double the average rate of increase in OECD area Index 2000= House prices (index, 2000=100) and housing completions (4Q moving average) House Prices Housing Completions Thousands Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q

31 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 Property-related lending - domestic Irish banks property related lending/total private loans * % * Excludes IFSC. Property-related lending refers to the construction, real estate activities, 30 and residential mortgages sectors. Source: Central Bank of Ireland, Statistics

32 Windfall Revenues Property related tax 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 Index= Nominal GDP and nominal general government expenditures (Index, 2000=100) Total Current Expenditure Nominal GDP 31

33 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 % of GDP Relative Hourly Earnings (Manufacturing) - Ireland versus main trading partners Current Account Balance (% of GDP) Maastricht Treaty,

34 Bursting of property bubble resulted in large bank losses bn Domestic Irish banks' profit/losses after tax (5) -3.2 (10) (15) (20) (25) (30) (35) Note: Applies to domestic Irish banks only. Source: Central Bank of Ireland Prudential Statistics 33