Ireland to Shrink Most of Any Economy Since 1930’s

Ireland’s economy may suffer the biggest decline of any industrialized country since the Great Depression of the 1930s, according to the Irish Economic & Social Research Institute.

Here are a few of the dreadful projections…

·          GDP is set to decline 8.3 percent this year they believe.

·          Ireland's economy is expected to shrink by 11.6 percent 2008-2009.

·          Ireland’s economy will contract by 14 percent 2008-2010.

·          Unemployment is set to increase to 13.2% this year-17% in 2010.

·          Our budget deficit will hit 12% of GDP.

Remember that Ireland was once the fastest growing economy in the euro region.  While Ireland is an open economy (3rd most open in the world behind Hong Kong and Singapore) and therefore exposed to the global situation the driver of the Irish problem is construction, the same sector that drove the boom.

Also a 10 percent contraction from its peak crosses the line that is often used to distinguish between a recession and a depression. 

Due to our particular predicament our Government needed to increase taxes recently, and will increase them further in the October budget, and at the same time reduce spending. However they got the balance wrong. Increasing taxes reduces the chances that employers can achieve the pay-cuts that are needed to make Ireland competitive again. We desperately need to increase our competitiveness if we are to avail of an export-led recovery if and when the rest of the world bounces back.

But as Paul Krugman recently noted the “troubles of the Irish banks are largely responsible for putting the Irish government in the policy straitjacket they are in”.

In September the government offered to guarantee deposits at Irish banks which equates to a notional liability equal to twice our G.D.P. The combination of deficits and exposure to bank losses raised doubts about Ireland’s long-run solvency, reflected in a rising risk premium on Irish debt and warnings about possible downgrades from ratings agencies.

Earlier this month the government simultaneously announced a plan to set up a bad-bank to buy the bad assets from our banks while raising taxes and cutting spending, to reassure our lenders.

So what can we do?

1.       Reduce our spending and increase our competitiveness. This requires severe government spending cuts alas.   

2.       Remember that like the boom, this bust will not last forever. It will be painful while it does. Our standard of living will reduce by 20% perhaps. 

3.    Don’t let the negative news get us down. Our morale and spirit is our most important resource now to get us out of the mess.