Ireland bucks the trend in euro zone's stalled recovery

by Reuters
Monday, 1 September 2014 11:10 GMT

* Strong week of economic data points to growing momentum

* Economy to grow almost three times faster than euro zone average

* Risks remain with personal debts high, vulnerable exports

By Conor Humphries and Padraic Halpin

DUBLIN, Sept 1 (Reuters) - Ireland is significantly bucking the trend in the euro zone's stalled recovery with evidence building from companies to consumers that the economy is set to grow faster than most on the continent this year and beyond.

It's not back to Celtic Tiger days by any means.

The economy may match that of 2006 by the end of the year, but will still be off the 2007 pre-crisis high. House prices are still more than 40 percent off their peak and 2014 unemployment is likely to 11 percent.

But there are definite signs of a substantive turnaround from the crisis that forced Ireland into a European Union/International Monetary Fund bailout in late 2010.

Unemployment has fallen for eight straight quarters, upbeat consumers bought more cars in the first seven months of the year than the whole of 2013, and exports are rebounding.

Ireland's economy is now expected to grow by over 3 percent this year.

"Given the position we are coming from in Ireland, there has been quite a rebound. We would be confident that growth is going to continue, probably for a number of years," Gene Murtagh, chief executive of Irish building materials group Kingspan , told Reuters.

"But it all needs to be put in perspective. We are not talking about a bounce back to the crazy days. I'd say it's more a gradual move back to what you might call normality."

That normality was evident in data on Monday that showed manufacturing activity last month hit its highest level since 1999, the last period of sustainable growth in Ireland before a property bubble and subsequent banking and fiscal crises brought the country to the brink of bankruptcy.

While Ireland represents just four percent of Kingspan's global insulation and materials business, sales volumes and orders at home are growing substantially, the company said in its half-year results last week.

Fellow building group Grafton saw a 15 percent rise in its Irish merchanting business as it almost doubled its profits in the first six months of the year. Ireland's two main banks returned to profit for the first time in five years in the same period.

Such renewed optimism among Ireland's largest companies was reflected in a slew of positive data last week showing retail sales growing strongly, a housing recovery beginning to spread outside the main cities and tourism up 10 percent year-to-date.


Ireland's recovery contrasts with the contractions or stagnations seen in France, Germany and Italy, a distinction Dublin puts down to an early and unwavering austerity drive that has seen 30 billion euros, or close to 20 percent of annual output, taken out of the economy in a bid to rebalance it.

The export sector has kicked back into gear just as others' are beginning to struggle, to a certain extent reflecting Ireland's commercial links with non-euro zone countries where economies are doing better.

North America accounts for around 22 percent of Ireland's goods exports, with the United States taking almost 10 percent of the fast growing services exports. Britain accounts for about 20 percent of services and 14 percent of goods exports.

The country of 4.6 million has had its fair share of luck too.

"While the economic momentum has been undoubtedly positive, Ireland has had a few favourable statistical "bounces of the ball"," Goodbody Stockbrokers chief economist Dermot O'Leary said, referring to new EU calculation methods that judged the economy to be about 6 percent larger than previously estimated.

"(But) the bottom line is that the Irish economic recovery is gathering pace. We now believe Ireland will remain one of the fastest growing economies in the euro area over the next three years."

As a result O'Leary and 11 other economists surveyed by Reuters last week believe the government will only have to implement a fraction of the planned final round of spending cuts and tax hikes in next month's budget for 2015, another potential boost to the long-suffering consumer.

There are plenty of risks, of course.

While Ireland has so far ridden out the slowdown elsewhere in the euro zone, its export-focussed economy is susceptible to external shocks and has had its momentum clipped before. The government's fiscal rigour will also be tested by parliamentary elections in 2016.

Crucially with household debt still close to 200 percent of disposable income and debtors repaying their borrowings faster than banks can lend afresh, personal spending may only grow at a modest rate until personal debts reach a more comfortable level.

"We began to be a little more confident about the Irish economy this time last year. If anything we probably underestimated how positive the economy would be," FBD chief executive Andrew Langford told Reuters last week.

"The caveat to that is that the Irish economy is so open, a slowdown in the European economy could have an impact." (Editing by Jeremy Gaunt)

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