Has Ireland de-coupled from the periphery?
Ireland is on a wave. After a bad patch and a massive loss of confidence eventually it looks like it has turned a corner and we can start to believe that there may be brighter times ahead. Of course, I could be talking about the Irish rugby team who had a stunning win over Australia at the rugby World Cup in New Zealand. But the economy isn’t doing too badly either.
Data last week showed that the economy grew by a respectable 1.6 percent in the second quarter, after expanding by an even better 1.9 percent in the first three months of this year. This beats the dismal growth rates in the UK and the euro zone, which both came in at 0.2 percent in the three months to June.
More importantly to Dublin, however, has been the drop in Irish bond yields. In recent weeks it has bucked the trend of other euro zone countries with dodgy financials who have seen their bond yields rise, instead its 10-year yield has fallen from a high of 14 percent in July to 8.7 percent at the end of last week. In contrast, Greek yields have risen more than 10 percent over the same period.
So, as ironic as it may seem, during the current period of market turmoil when stocks and other risky assets experienced heavy losses, Irish bond yields were one of the few winners out there along with the dollar and the yen. This is an about turn, back in November when Ireland applied for bailout funds its position was considered so precarious that it caused a wobble in the euro more severe than the decline we have seen in September.
But while officials in Dublin might not be allowing themselves to have grand ideas that Ireland could turn into the next safe haven they will be delighted that their bond yields have fallen as this not only lowers their costs of funding, but also brings them one step closer to achieving their goal of re-entering the capital markets in 2013. The cost to insure Irish debt from default has also fallen by more than 100 basis points over the past few weeks, which suggests investors are more confident that Ireland has stepped back from the edge of the default.
So what has Ireland done right? Growth in the second quarter was driven primarily by exports, which expanded by a whopping 23.9 percent between the second quarter of 2010 and 2011. The industrial (excluding construction) forestry, fishing and agriculture were the only sectors to see positive annual growth rates, but that is still not bad for an economy that just seven months before had to go cap in hand to the IMF and EU for a bailout loan.
The recovery in the Irish economy can be traced back to, believe it or not, the Celtic Tiger. Although that period is renowned for Irish excess, gaudy McMansions and ultimately economic collapse, a low corporate tax rate helped to position the Irish economy towards exports, particularly in the IT sector, as major companies set up home on Irish shores. This is now paying dividends.
Service exports, for example, rose by 1.35 billion euros in the year to June, mainly driven by computer services. That is thanks to, among others, Cisco, which is based in Oranmore in Galway, Intel Ireland, Microsoft Ireland and Facebook, which has its European and Middle East headquarters in Barrow Street in Dublin. Google has done the same and its large office complex has helped to regenerate the Ringsend area of the capital at the same time.
And even more encouragingly, inward direct investment to Ireland amounted to nearly six billion euros in the second quarter, mainly due to reinvestment of earnings by non-financial companies. So, some of the world’s most recognised corporations have stayed in Ireland through the worst of its financial crisis, which has acted as a buffer while the public sector goes through a massive process of consolidation.
Germany and France should take note. The low corporate tax rate may be irking Europe’s high command who think that it gives Ireland an unfair competitive advantage, but since these countries are major contributors to the bailout pot that Ireland had to tap, surely they should be happy that it is growing again as it increases the chances they will get their money back?
But that doesn’t mean things are back to normal in Ireland, far from it. Consumer confidence remains shot to pieces and domestic demand fell by 2.2 percent between Q2 2010 and Q2 2011. House prices show no signs of rising any time soon, they fell by a further 12.5 percent across Ireland in the year to July. Although this is partly a much-needed readjustment of prices after the Celtic Tiger excess, it also means that a lot of people are sitting on negative equity, which should keep consumer confidence subdued for some time yet. It is thus no wonder the Irish press were cagy about being too optimistic, and even opportunistic politicians didn’t use the data to give themselves a pat on the back for their economic policies, instead taking a cautionary stance.
And for Irish rugby fans out there, they will hope that Brian O’Driscoll and the team will do something similar. Don’t let the Australia win get to your head lads, there’s still a long way to go to the final.
Image — Pedestrian’s stop to look at papers at a news stand on O’Connell Street in Dublin July 6, 2011. REUTERS/Cathal McNaughton