Is Ireland's Economy Really on the Road to Recovery?

The Grant Thornton International Business Report 2013 has named Ireland as the 5th most optimistic economy in Europe, with 36 per cent of senior executives hopeful that the country's prospects will improve by 2014.

The Grant Thornton International Business Report 2013 has named Ireland as the 5th most optimistic economy in Europe, with 36 per cent of senior executives hopeful that the country's prospects will improve by 2014. While this marks a rise of six percentage points on 2012 levels, this optimism may be called premature.

Figures from Central Statistics Office revealed that gross domestic product (GDP) increased by 0.2 per cent on a seasonally adjusted basis in the penultimate quarter of 2012, while gross national product fell by 0.4 per cent over the same period. On a year-on-year basis, this is a GDP increase of 0.8 per cent and a GNP rise of 3.7 per cent.

However, analysis shows that not all areas of the economy is performing as well as previously hoped. There were 4.1 per cent declines in the valued added of public administration and defence, not to mention 17.9 per cent falls in agriculture, forestry and fisheries on a year-on-year basis. Personal expenditure also increased by 0.2 per cent in volume in Q3 2012 compared with the same period in 2011.

The performance of the property market also throws into question how far down the road to recovery Ireland actually is. While it is hard to argue the economy is in better shape than a year ago, it is important not to be too bullish: If real estate performance is anything to go by, Ireland is still frail. Residential property prices at a national level fell by 5.7 per cent in the year to November, which, while slower than the 8.1 per cent decline noted in October, is still considerable. House prices in Dublin remain 54 per cent lower than at their highest level in early 2007, while apartment prices are 64 per cent lower.

Fitch Ratings doesn't expect the situation to improve, with Irish house prices potentially plummeting by a further 20 per cent during the year. This means that there will potentially be stiff losses for holders of mortgage bonds and a growing risk of property defaults. The agency claims in the Global Market Outlook for Housing and Mortgages that the country is now at the mercy of politics, not just in Ireland but in Greece and Spain. The eurozone periphery is struggling and countries are each taking steps to stop property repossession.

A surge in 90-day arrears to 11.3 per cent has resulted from the uncertainty and distressed borrowers are posing a "moral hazard", as the promise of new insolvency laws removes the incentive to pay mortgages. "The consequences of the [Irish] property boom may not have fully played out yet. Overall vacancy rates remain high," Fitch said.

The outlook for Ireland is proving to be worse than any of the other 12 countries included in the Fitch report. However, the nation's approach to the problem has been praised for its conservatism.
"It is also conceivable that Irish prices stabilise sooner and at a higher level than Fitch's base case assumption suggests," the report states. The affordability of property in the country is helping to stabilise the sector, ensuring first-time buyers can remain active. However, the difficulty is securing finance is still posing a problem.

Commercial property appears to be faring slightly better. According to the CBRE, despite polarisation between primary and secondary real estate and limited rental growth potential, there is room for cautious optimism. In its predictions for 2013, the company expects property to enter the market on "relatively controlled basis", while loan sales activity will increase as banks deleverage property holdings.

International investors will also play a key role in recovery, particularly in the prime office, retail and residential sectors. However, it will be core locations such as Dublin that witness an influx of buyer interest, with economic uncertainty acting as a barrier to widespread investment.

It seems that Ireland still has a long way to go to witness the return of activity in both residential and commercial markets. With much of the country's economic fate out of its own hands, it hard to predict when stability will occur. While the country is undoubtedly on the road to recovery, there have been several false starts that cannot be glossed over.

- Monday 14 January 2013

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