The economic conundrum that is Ireland

Let us take a brief break from the affairs of the UK and tomorrow’s Brexit referendum to take a look at an economy which bears many similarities but one crucial difference. That is the green island of Ireland where the crucial difference is that via its membership of the Euro it has an official deposit rate of -0.4% and 80 billion Euros a month of QE or Quantitative Easing. So we see that the monetary policy taps are open wide but we also see that Ireland is in a boom at the moment. This brings back some old memories of how it all went wrong last time so let us investigate further.

The Irish boom

The Irish take the slow road to producing economic growth ( GDP) numbers but here is the latest release.

On a seasonally adjusted basis, constant price GDP for the fourth quarter of 2015 increased by 2.7 per cent compared with the previous quarter while GNP increased by 3.4 per cent over the same period.

As you can see these quarterly numbers are ones which many of its Euro area partners ( Italy and Portugal spring to mind) would love to have. If it was a game of economic football being played between Ireland and Italy tonight it would be a landslide. The annual data only reinforces this view.

Preliminary estimates indicate that GDP in volume terms increased by 7.8 per cent for the year 2015.  GNP showed an increase of 5.7 per cent in 2015 over 2014.

The good news story continues as the growth is both investment and export driven. Indeed Ireland is doing its bit for world trade.

Import growth during the year of 16.4 per cent outpaced that of exports at 13.8 per cent.

Care is needed as Ireland has quite a current account surplus according to the official data so that net exports grew.

Also there is the perennial GDP/GNP issue which I have explained before. In 2015 GDP was 203.5 billion Euros and GNP (Gross National Product) was 171.9 billion Euros. The difference is that a lot of businesses in Ireland are non-domiciled there and send the money home. They want to take advantage of the low corporation tax rate and other benefits but do not consider it to be home. As you can see it is a big deal.

The problem that is housing

This intervenes on several levels. Firstly there was the boom which rather like in Spain led to houses and towns being built but ended up being like the “Road to Nowhere” sung about by the band Talking Heads. According to Vincent Boland in the Financial Times this happened.

A decade ago, Ireland was building many more homes than its demographic trends warranted: 90,000 a year at the peak of its building boom in 2006.

There was a consequence to this and as boom turned to dust Shane and Maria Bradshaw have experienced this.

It showed a newly planned town — the first in Ireland for 50 years — with a projected population of about 25,000, within easy commuting distance of the city and a high street lined with shops, restaurants and a cinema.

Seven years later, that glossy brochure offers a picture not so much of a suburban dream as a national nightmare…..
Only 15 per cent of Adamstown’s planned 10,000 homes have been built. Its 3,000 or so residents are surrounded by fenced-off fields where houses were by now supposed to be. The train station linking the town to central Dublin is eerily underused. And the Bradshaws are still waiting for their high street.

Actually some commuters would love the idea of an “underused” railway and developers not fulfilling their promises is hardly new but there is an element here which sings along with The Specials.

Do you remember the good old days
Before the ghost town?
We danced and sang,
And the music played inna de boomtown

Yet let me move this to economic measurement and GDP/GNP. As you see back in the day the houses referred to below would have boosted those numbers. Is that right?

Moreover, it is happening in a country that has 230,000 vacant homes. Some are in “ghost estates” in far-flung towns where few Irish people now wish to live — if they ever did. Even some of the half-finished developments can feel ghostly.

So there is the question posed today. Should these fully count in GDP? Someone like Paul Krugman with his call for “Space Aliens” would say yes but I think we need some sort of measure of what happens afterwards. After all it is a waste of finite resources to build houses that nobody lives in. Also we learn that Kevin Costner was not always right in the film Field of Dreams.

If you build it, he will come

Also with so many empty house this seems rather shameful.

A report by a cross-party committee of MPs last week says there are over 1,000 homeless families in Ireland today, compared with 400 at the beginning of last year.

A Monetary Problem

We know that Mario Draghi and his colleagues have turned the monetary taps open to boost Euro area economies. We also know that the housing market in Ireland tends to respond strongly to such a stimulus. Otherwise there would have been no boom and then bust. How is that going?

Last year fewer than 13,000 new homes were built, while demand is running at 25,000 a year, the majority of it in the capital Dublin.

Indeed this bit will echo around ECB Towers.

a scarcity of development finance,

There may of course be a case of once bitten twice shy at play here but this does pose a real question for the ECB and its policies. Also there is something awkward for the theme that there is no inflation.

According to the Society of Chartered Surveyors
Ireland, it costs €330,000 to provide a standard family home, a figure that appears to have changed little despite the deep recession.

This is a familiar echo of the UK exceeds what can be afforded by the majority.

especially for first-time buyers, most of whom can borrow no more than €300,000 .

Now I realise that inflation is a flow and that the price level is a stock but there is a problem here in telling people there is no inflation and yet despite extraordinarily low official interest-rates they still cannot afford property. After all the economy and their position is supposed to be booming. Oh and fans of macroprudential policy might like to mull that particular side-effect of it.

Oh and there is another problem shared with the UK.

It is becoming clear that Ireland may need to build a different, more affordable and higher quality product than it has offered up to now.


There is much to consider here as the official view is of a Phoenix rising from the ashes of the bust. Last year’s surge means that both GDP ( 43,906 versus 42454 Euros) and GNP ( 37,077 versus 35,657 Euros) per head  have passed the peak seen in 2007. All good so far even if we are returned by default to the GDP/GNP gap. But like in the UK there is often expressed a view that reality is not quite represented by that. Well Phillip Kinsella makes an offer of why.

Ireland and Luxemburg showing a very large difference between these two measures of household welfare. Using the AIC measure, Irish households are closer to Italian than Danish levels of welfare.

Economics imitates football as we note the Italian link. But let me explain. If you use GDP per capita then Irish eyes are smiling as in 2015 it was 1.45 times the European Union average. However if you switch to actual individual consumption or AIC  it is only 0.95 times the EU average. Whereas Italy is at a more stable 0.95 times and 0.97 times respectively. For comparison purposes the UK is at 1.1 times and 1.16 times which is consistent with our consumption culture. So the question for Ireland is posed by the late great Marvyn Gaye.

Oh, what’s going on?
What’s going on?
Ya, what’s going on?
Ah, what’s going on?



13 thoughts on “The economic conundrum that is Ireland

  1. Hello Shaun,

    “…. despite extraordinarily low official interest-rates they still cannot afford property. ”

    I’d posit that its precisely because of low interest rates that they , and us , cannot afford to buy a home .

    The low rates perverse is to save the Banks and by doing so set the pace for debt slavery for the people . Mind you can you rent cheaply in Ireland? bet not.

    Also you didn’t mention tax receipts and expenditure , always a good or bad sign 🙂

    I always find it ironic (?) that Ireland and Spain have so much free housing stock that European immigrants can fill ….. but they always end up in the capital cities ! ( because like the locals , they know where the money is ) .

    Even then , as you pointed out yesterday , we and Ireland dont build enough flats in either London or Dublin . Such is life


    PS: theres gonna be a good show soon – sit back and enjoy the cheaper popcorn !

    • Hi Forbin

      Good point on the rents which you have just reminded me to check. As of May they were rising overall at 8.7% per annum and the index was at 133.9 where 2011=100. So much for there being no inflation! Although the ECB will be pleased to see mortgage interest was some 8.1% lower with the index at 63.6.

      It is an establishment/bureaucractic fantasy that they can get people en masse to live where they want them to isn’t it? So we get too much housing in one area and too little where people want it.

      Still good news for corn futures another 1% drop today as no doubt you head for a heavy consumption phase.

    • don’t fall that old codswallop

      we had “free” movement of labour before the schengen aggrement . Remember “auf wiedersehen pet ”

      Ah Jimmy Nail , where are you now ….


      • The point about opportunity for brickies was missed by Remain (ironically, the Tories did use a bit of AWP in the AV referendum campaign), but you have obviously forgotten at the end that the brickies went home, due to the imposition of German rules on the payment of welfare contributions.

        There was free movement here until the 1880s (My ancestor came over here in the early 1800s) when controls were introduced, because there was a fear of “them” (Jews escaping the pogroms). What it shows is that free movement actually works to deal with labour shortages and oversupply quickly and efficiently – no points system, no quotas, no visas.

        Free movement of labour was actually in the Treaty of Rome, which was 1958. Schengen is the removal of borders and the Single Market (a UK Tory idea) was the basis of free movement of people.

    • Australia and New Zealand don’t have free movement of labour from Europe – but they do grant visas to people with jobs in areas of skills shortages. A skills shortage is easy to fix and visas can be issued on conditions of no benefits.

  2. Mmm, then there is that bloke, who keeps wandering around in his hi-vis jacket on building sites

    Funny how they want to include housebuilding in output, but not the cost of it in inflation. Perhaps a few words from Siouxsie & the Banshees:

    “This is the happy house, we’re happy here in the happy house
    Oh, it’s such fun, fun, fun
    We’ve come to play in the happy house
    And waste a day in the happy house, it never rains, never rains

    We’ve come to scream in the happy house
    We’re in a dream in the happy house
    We’re all quite sane, sane, sane
    This is the happy house-we’re happy here

    There’s room for you if you say “I do”
    But don’t say no or you’ll have to go
    We’ve done no wrong with our blinkers on
    It’s safe and calm if you sing along, sing along, sing along

    This is the happy house, we’re happy here in the happy house
    To forget ourselves and pretend all’s well
    There is no hell”

    • Hi David

      Thanks for the link it reminds me of when Ed Balls said in June 2006

      “According to the City of London Corporation our regulatory system is ranked as the best in the world, ahead of both New York and Frankfurt.
      We have a single unified regulator. And it is clearly independent of day-to-day political control – as are the competition authorities who scrutinise it. It is important that the FSA continues to deliver a light-touch and risk-based regulatory approach
      I remember well the internal discussions at the Treasury – and the external pressure in Parliament and among commentators to respond with a regulatory crackdown.
      We decided that in the face of pressure and criticism, the best action was to pursue a measured, proportionate response, and we were initially criticised in some quarters.
      Of course, it would have been so much easier not to have done so – we could have sought easy headlines and used an aggressive and heavy-handed populist response.
      But at what cost? That approach, as the Americans have found with Sarbanes-Oxley, would have been wrong for Britain.
      I believe we are right to avoid prescriptive, heavy-handed regulation in Britain. Indeed, I believe that while it is Bank of England independence that is regularly cited as the Government’s most significant financial reform, the establishment of the FSA has been as important for Britain.”

      Lauding the FSA? From a bloke who these days probably only wanders around…

      • There is a strange belief in regulation – as I said about Barclays, they informed me that they wouldn’t take a hit from a housing crash as they were “better regulated these days”. Surely, Ireland and Spain plus the 92 crash show you cannot regulate house prices!

        On the music there, I feel sorry for the band Europe, as I haven’t heard ‘Final Countdown’ at all this week, whereas Alice Cooper always makes a mint with ‘Elected’ at every General Election. Seems to be mostly The Clash: ‘Should I stay?’ and Blondie: ‘One Way or Another’.

  3. AIC measure or purchasing power parity. PPP is badly hurt by overpriced housing, leaving consumers to spend on everything else.

    I find PPP a much better international wage comparison statistic

    • Hi ExpatInBG

      The data poses not a few questions. The widest swings are for Luxembourg which I guess surprises no-one. But the wide gap between the collective position and the individual consumption poses a problem for the Irish economy. Either there has been a fair bit of growth or none at all.

      Interestingly the data for the UK per head showed very little growth on either measure ( GDP or AIC) for the UK from 2012 to 2015.

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