Ireland and “the largest financial shock since the Great Depression”

While the UK wrestles with the problem of a plummeting sterling the Irish Republic faces an equally difficult challenge in the form of a soaring euro.

The International Monetary Fund says the Irish economy will grow by less than 2% this year, the slowest pace in almost 20 years and down from 5.3% in 2007. House prices have fallen 8.8 percent in the last 12 months, and the jobless rate rose to an eight-year high of 5.2 percent in February.
Tax revenues are down 600 million euros in the first quarter and unemployment is expected to hit between 5.5% and 6% this year as the construction industry continues to shed jobs due to the contraction in homebuilding.

Davy Stockbrokers estimate that housing starts fell a whopping 70% year-on-year in March — the biggest annual decline on record. Davy’s Rossa White told the Irish Examiner:

We estimate total housing starts (including one-off housing) were running at an annualised rate of 24,500, seasonally adjusted, in March. That compares with 27,000 in February, 32,000 in January and 40,000 in December.

House prices are 15% off their 2006 peak levels and housing completions are expected to drop to between 40,000 and 50,000 compared to 78,000 in 2007. Each fall of 10,000 completions cuts 1% off Ireland’s GDP.

The slowing economy means that the incoming Finance Minister will have his/her work cut out trying to meet budgetary targets.

Current Finance Minister and Taoiseach in waiting Brian Cowen says the slowing economy is a “response primarily to the global liquidity crisis” which will see the Irish economy go from a budget surplus in 2007 to a budget deficit of somewhere in the region of 5 billion in 2008.

As an export nation, Ireland’s economic performance is also adversely affected by the strong euro and weak sterling as 70pc of small companies export to the UK market. It is estimated that approximately 60,000 jobs in small companies are dependent on UK trade links.

The Small Firms Association (SFA) is already calling it a “crisis” situation while John Whelan, chief executive of the Irish Exporters Association (IEA) pointed out that it wasn’t just the slide of sterling that was causing the problems:

The deepening credit crises in the US is putting over €15bn of our exports at risk. At today’s euro exchange rate to the dollar, exporters have had to deal with an 8pc fall in the value of their exports since the start of January 2008.

The reality is that exporters large and small can handle a short- term swing in currency — however, we have had a two-year continuous slide in the dollar, with a 20pc fall in the period since January 07 alone.

There is a real concern amongst the large number of small exporters, whose main source of income is the UK market, as sterling is now falling in tandem with the dollar, both being locked together in the spiralling credit fallout. The UK accounts for 18pc of total Irish exports, and last year this totalled to €16.4bn. A continued fall in the value of sterling against the euro would have a severe impact on the indigenous exporters in Ireland, who are under cost pressures from continued high inflation, and record fuel price levels. These smaller exports do not have the resources to handle a continued overvalued euro and are much more likely to have to exit the export markets than the larger multinational corporations.

The UK accounts for 42pc of Irish food and drink exports and CSO trade data for December shows a 10pc drop in food exports to the UK compared with the same month last year.

The strong euro has also been blamed for decisions such as Motorola Inc. shutting its plant in Cork with a loss of 330 jobs and U.S. biotech giant Amgen putting on hold plans for a $1 billion plant.

The last time Ireland found itself in this kind of situation in 1993 when the huge devaluation of sterling by Britain led to a loss of competitiveness, it simply devalued the punt. This option isn’t available this time around now that Ireland is in the eurozone so it remains to be seen just how adverse an effect the continued weakness of sterling and the US dollar will have on the economy.