Friday, 31 July 2009

Ireland - the scale of economic downturn in the 'Celtic Tiger'

Most attention in the international financial crisis has naturally been focussed first on the situation in the largest economies (US, China, Japan, Germany, India) and, after that, on the extremely severe problems in a number of developing countries and in parts of Eastern and South Eastern Europe – with, for example, a decline of GDP in the Slovak Republic of 11.4% up to the end of the first quarter of 2009 and a decline of GDP in Turkey of 13.7% to the same period. Insufficient international attention has therefore been given to the situation in Ireland – that is the southern 26-county state - for many years referred to as the ‘Celtic Tiger’ on the basis of its rapid growth.

The economic crisis in Ireland has been referred to as similar to that of Iceland with the difference of one letter and six months. This comparison, however, actually understates the scale of downturn in Ireland’s overall productive economy. The fall in Ireland’s GDP, 9.6% by the first quarter of 2009 compared to its peak level, is significantly worse than Iceland’s – where GDP has only dropped by 4.4% since its peak. Indeed, apart from the Slovak Republic and Turkey, the decline in Ireland’s economy is the worst for any OECD country.

There are also very specific features of the economic crisis in Ireland. First, the economic downturn in Ireland started much earlier than in other countries. The European Union’s GDP peaked in the first quarter of 2008 – that is before the international financial crisis commenced. But Ireland’s GDP peaked in the first quarter of 2007 and then started to decline. Ireland’s economy has therefore been shrinking for two years. The international financial crisis therefore clearly did not cause Ireland’s recession, although of course it greatly worsened it. In Ireland the international financial crisis affected an economy that was already moving downwards.

Second, unlike most other countries, the financial crisis has scarcely affected Ireland’s trade. The decline in Ireland’s exports of goods of services, up to the most recent figures for the first quarter of 2009, is 4.5% - evidently extremely mild compared to the comparable figures for the US of minus 14.7%, the UK of minus 17.3%, Germany minus 17.5% or Italy minus 22.1%.

Instead the downturn in Ireland has been concentrated in an extremely severe collapse in investment. Ireland’s gross domestic fixed capital formation, by the first quarter of 2009, had fallen by a 42.9% compared to its peak in the first quarter of 2007. To give a scale of comparison the equivalent fall in Germany from the peak level has been 11.4%, in the UK 14.7%, and in the US by 14.7%.

The decline in investment in Ireland has been by far the worst in any OECD country except for Iceland (where, due to the disintegration of the financial system, investment had fallen by over sixty per cent).

These trends in Ireland's economy are shown in Figure 1.

Figure 1

09 07 30 Components of GDP

In order to give an indication of the scope of the fall in Ireland's investment Figure 2 shows the percentage decline of investment in the G7 as a whole since its peak in the first quarter of 2007, the decline in investment in Ireland in the same period, and, for comparison, the decline in investment in the US at the beginning of the Great Depression in 1929 - as there are no quarterly GDP figures for the US in 1929 it has been assumed for illustration that the annual decline in that period was spread evenly throughout the year.

It may be seen that the scale of investment decline in Ireland is far closer to the US in 1929 than it is to the decline in the G7 in the current recession - the fall in fixed investment in the US in 1929-31 was -47.6% compared to the fall in a similar two year period in Ireland in this downturn of 42.9%. For comparison the fall in investment in the G7 in this recession in the same period was 13.4%.

The decline in investment in Ireland is, therefore, without exaggeration, of 1929 proportions.

Figure 2

09 07 30 Ireland cf US 1929

The result of this, as may be seen in Figure 3, is that the proportion of investment in Ireland's GDP has fallen precipitately from a peak of 28.5% of GDP in the fourth quarter of 2005 to only 15.3% of GDP in the first quarter of 2009.

Figure 3

09 07 30 GDFCF

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