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Ireland’s Economic Crisis Deepens - Goodbye AAA
2nd April 2009
Ireland is in deep economic crisis. Real GDP is shrinking at an annual rate of over 8% and the unemployment rate climbed to 11% in March taking the jobless rate to a level last seen in the mid 1990s. Consumer price inflation is now negative - the prices of goods and services are falling as are asset prices, especially property where the housing market is mired in deep slump. It will come as no surprise that consumer confidence has collapsed and that the Irish government’s own finances are in a real mess - income taxes may have to rise to plug some of the widening gap - the fiscal deficit now means that Ireland will suffer a further credit downgrading in the near future. Retail sales are falling at an annual rate of 20%. The Standard and Poor’s ratings agency downgraded Ireland’s debt from its prime AAA rating to a AA+, with a “negative” outlook a couple of days ago and bond yields on 10 year treasury debt have more than doubled in the last two years and now stand at over 6%. This raises the cost of servicing a ballooning level of public sector debt.
A quick summary of where Ireland is:
CPI (Consumer Price Index) -1.7%
Interest Rate 2% Apr, 2009 (set by the ECB)
Unemployment 11% Mar, 2009
Consumer Confidence -24 Apr, 2008
Budget deficit - forecast to be 11% of GDP in 2009 - almost four times the approved limit for countries inside the Euro Area
Retail Sales -19.9% Jan, 2009
GDP (Gross Domestic Product) -7.5% Oct, 2008
Ireland is a salutary tale of a country that did not adjust to the challenges and demands of joining a single currency - they went on a borrowing and spending binge fuelled by rapid asset price inflation and the consequences are awful. The Celtic Tiger economy is now looking distinctly ill. What price that by the end of 2009 or in the spring of 2010 countries such as Spain Ireland, Portugal and Greece decide to leave the single currency and revert back to their own currencies - flexibly pegged to the Euro in a loose version of the ERM but will scope for depreciation as a way out of damaging recession?
Geoff Riley
Geoff Riley FRSA has been teaching Economics for over thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.