Transcript Ireland in Emu: More Shocks, Less Insulation?

Another Lap for the Irish Hare?
Patrick Honohan, Trinity College Dublin, June 2008
Overview
• The dangers of misunderstanding the process
that has occurred
• The delayed convergence hypothesis (HonohanWalsh, 2002) suggests the rapid expansion is
unlikely to be repeated, but that scale growth
could continue…
• …after an inevitable adjustment.
(This adjustment is potentially rather severe,
given the excesses of the housing market.)
NB: Cover painting: http://www.wendyfwalsh.com/pages/shop2.htm
The delayed convergence hypothesis
• asserts that Ireland’s convergence to the leading-edge of
EU economic performance was delayed
– by a 25-year long cycle caused largely by inappropriate fiscal
policy beginning just after EU membership in 1973.
• emphasizes traditional virtues at three frequencies:
– long term (institutions, structural policies, human and fixed
capital formation);
– medium-term (fiscal sustainability; helped );
– short term: (wage competitiveness and asset market stability).
The delayed convergence hypothesis (2)
The fundamentals were in place…
…when the recovery phase arrived, it was facilitated by:
– the timeliness of the flow of structural funds,
– competitiveness gains from exchange rate movements and (of
course)
– the famous wage restraint of the social partnership
Celtic Tiger period was not just an artefact of inward FDI
boom and the low company tax rate (or even the
structural funds)
– these helped smooth the way, and have shaped important
features of the economy today, but convergence to frontier living
standards is more like the norm for an EU country given the
traditional virtues.
Stylized fact 1
The hare* has run its course (?)
*Cf. Aesop’s Fables
The hare has run its course
• While many discussions focus on growth rates, the
dynamics of unemployment are key to understanding
what the Irish economy has done and can do.
• We note the long business cycle 1973-2000 using the
internal and external balance map. The Celtic Tiger
period coincides with a recovery phase: exaggerates the
long-term sustainable trend growth. Since 2000 the
economy has remained close to the balance zone (also
experienced in the 1960s)—though emerging BOP
deficit is noted.
• Now pessimism has set in (as evidenced from survey
data). Is this warranted?
18
16
Unemployment rate
14
12
10
8
6
4
2
0
60
65
70
75
80
85
90
95
00
05
The 25-year business cycle delays the catch-up
18
1987
Unemployment rate % (ILO basis)
16
1993
14
12
1990
10
1997
1981
8
1975
6
1979
4
2006
2000
1974
1961
2
0
-6
-3
0
3
6
9
BOP Current a/c deficit as % GNP
12
15
18
ESRI Consumer Sentiment Index
Feb 96-May 08
135
125
115
105
95
85
75
65
55
45
end-97
end-99
end-01
end-03
end-05
end-07
Stylized fact 2
No productivity miracles
There is no productivity miracle to explain
• There is no productivity miracle to explain
• Forget about double-digit growth. Unadjusted data
flatters what was a very good performance. MNC profits
are one element calling for adjustment, Terms of Trade
changes another. Netting these shows a good but not
miraculous productivity growth.
• (Nevertheless, income growth per head of population in
the peak Celtic Tiger period years was excellent)
Aggregate productivity growth
5
4
3
2
1
0
75/70
80/75
GDP/Empl
85/80
90/85
95/90
GDP less MNC profits/Empl
00/95
06/00
Growth in living standards
8
7
% per annum
6
5
GNP/Pop
GNDI Adj ToT/Pop
Personal Cons/Pop
4
3
2
1
0
-1
75/70 80/75
85/80
90/85 95/90
00/95 06/00
Stylized fact 3
Employment growth is still
astonishing
The miracle (if there is one) is in
employment growth
Not only sweeping in the unemployed…
…but catering to increasing participation…
…and attracting large-scale immigration.
Distribution of population change by economic status
100
non-ag
employment
ag. employment
thousands per annum
80
60
40
unemployed
20
0
non-active
-20
Over 64
-40
Under 15
-60
61-71
71-86
86-91
91-01
01-06
Distribution of population change by economic status
100
thousands per annum
80
non-ag
employment
ag. employment
60
40
unemployed
20
0
non-active
-20
Over 64
-40
Under 15
-60
61-71
71-86
86-91
91-01
01-06
Participation rates
56
75
54
74
52
73
50
72
48
71
46
<-- Female
44
70
Male -->
20
07
20
06
20
05
20
04
20
03
20
02
20
01
68
20
00
40
19
99
69
19
98
42
Employment in nonAg as % Population
50
45
40
35
30
25
20
15
10
5
0
1961
1971
1986
1991
2001
2007
Components of population change
Net migration
thousands (annuak average)
80
Natural increase
60
40
20
0
-20
-40
61-71
71-86
86-91
91-01
Components of population change
Net migration
thousands (annuak average)
80
Natural increase
60
40
20
0
-20
-40
61-71
71-86
86-91
91-01
01-06
Net migration 1930-2007 (000s)
80
60
40
20
0
-20
-40
-60
-80
30
40
50
60
70
80
90
00
Stylized fact 4
Distribution is stable
Income distribution/poverty
The benefits extend through most of the income
distribution…
…But, especially recently, incidence of acute poverty
(“basic deprivation”) has not fallen
Poverty in Ireland
(Absolute/Consistent and Relative Concepts)
25
15
Below 60% of
median income
10
Experiencing basic
deprivation
5
2001
2000
1997
0
1994
% of population
20
Poverty in Ireland
(Absolute/Consistent and Relative Concepts)
25
15
Below 60% of
median income
10
Experiencing basic
deprivation
5
2006
2005
2004
2001
2000
1997
0
1994
% of population
20
Nolan (2004), CSO (2007)
Stylized fact 5
Some financial vulnerability is
evident
Financial vulnerability?
Export-led growth was replaced after about the rune of the
millennium by a housing boom with several causes
(important at different times): EMU interest rates,
increasing savings/wealth and confidence, housing
demand boosted by migration, increased bank
competition.
Created a dangerous over-dependence on housing
construction—and on foreign financing of this boom.
But this period is now over: house prices are falling,
demand and supply of credit have shrunk, construction is
sharply down, employment in construction is down.
Irish Real New House Prices 1970-2008
4
Index, 1970=1
3.5
3
2.5
2
1.5
1
0.5
1970 1975 1980 1985 1990 1995 2000 2005
Real interest rates 1983-2007
deflated by 4-quarter future inflation
20
15
10
5
0
-5
83
85
87
89
91
93
95
97
99
01
03
05
07
Real domestic credit & house prices
rolling 3-month growth rate 1997-2008
14
12
10
8
credit
house prices
6
4
2
0
-2
-4
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
-6
Real domestic credit & house prices
rolling three-month growth rate 1997-2008
mortgage credit
12
house prices
10
8
6
4
2
0
-2
-4
08
20
07
20
06
20
05
20
04
20
03
20
02
20
01
20
00
20
99
19
98
19
19
97
-6
Net position of credit institutions in Ireland
vis-a-vis Irish residents
60
Apr
% of GDP
50
40
30
20
10
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Ireland: Credit Supply and Demand -- Enterprises
Ireland: Credit demand & Supply -- House purchase
(Change from previous quarter)
(change from previous quarter)
4
4
3.5
3.5
3
3
2.5
2.5
Standards
Standards
Demand
Demand
2
1.5
2003Jan
2
2004Jan
2005Jan
2006Jan
2007Jan
2008Jan
1.5
2003Jan
2004Jan
2005Jan
2006Jan
2007Jan
2008Jan
Employment in construction
as % of total employment, 1990-2007 (April)
14
13
12
11
10
9
8
7
6
5
90
95
00
05
Ireland: Employment in construction
as % of total employment 1997-2008
14
13
12
11
10
9
8
97
98
99
00
01
02
03
04
05
06
07
Housing Completions, 1970-2007
no. of dwelling
units completed
100,000
90,000
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
1970
CSO
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
Discussion 1
Competitiveness worries:
Is the mechanism broken?
Competitiveness worries
• But this depends on old-fashioned wage competitiveness
being maintained
• And there are indications that the social partner
mechanism that delivered wage restraint since 1986 is
no longer ensuring international competitiveness.
Ireland: real bilateral exchange rates 1979-2008
155
145
135
125
115
GBP
105
USD
DEM/EUR
95
85
75
65
80
To March 2008
82
84
86
88
90
92
94
96
98
00
02
04
06
08
cpi-weighted
125
Wage competitiveness
2000
Total employment (rhs)
120
115
1800
110
1600
105
100
1400
95
1200
90
85
1000
75
80
85
90
95
00
05
125
Wage competitiveness
2000
Total employment (rhs)
120
115
1800
110
1600
105
100
1400
95
1200
90
85
1000
75
80
85
90
95
00
05
Discussion 2
Scale growth could resume
Scale growth could resume
• Tiger period will not return (growth in employment rate
reached plateau)
• After a housing correction…
…and with restored wage competitiveness…
• scale growth could continue
The steady state
Convergence of employment ratio is at an end
Wage competitiveness has to improve
Housing prices: ST falls back to shoulder
Employment in nonAg as % Population
50
45
40
35
30
25
20
15
10
5
0
1961
1971
1986
1991
2001
2007
125
Wage competitiveness
2000
Total employment (rhs)
120
115
1800
110
1600
105
100
1400
95
1200
90
85
1000
75
80
85
90
95
00
05
Irish Real New House Prices 1970-2008
4
Index, 1970=1
3.5
3
2.5
2
1.5
1
0.5
1970 1975 1980 1985 1990 1995 2000 2005
The steady state
Convergence of employment ratio is at an end
Wage competitiveness has to improve (10–15%?)
Housing prices: ST falls back to shoulder (25% real)
But scale growth could continue – depending on wider
“competitiveness” aspects…
…partly a political issue
Scale growth could resume (2)
Depending on wider competitiveness issues: including
– Population/land density still low
– Dependency ratios favourable for many years
– Investment still insufficient
Age-dependency rate
44
42
40
38
36
34
32
30
60
65
70
75
80
85
90
95
00
05
Age dependency (with projections)
44
42
40
38
36
34
32
30
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025
Gross domestic fixed capital formation
35
30
as % GDP
25
Agriculture
20
Industry
15
Residential
Other
10
5
0
75
80
85
90
95
00
05
Gross domestic fixed capital formation
35
30
Non-market services
Other market services
as % GDP
25
Manufacturing
20
Agriculture
15
Energy
Roads
10
Building
5
Residential
0
75
80
85
90
95
00
05