Recovering from the Crisis: Whither the Irish Economy?

1. Recovering from the Crisis: Whither the Irish Economy? John McHale National University of Ireland, Galway Irish Fiscal Advisory Council European Commission Conference: Challenges Facing the Irish Economy Galway, March 24, 2012

2. Overview • The shock • Adverse feedbacks and the stabilisation challenge • Failure to “manage” without outside assistance • The recovery strategy: (Phased) adjustment with assistance • The banking challenge • The fiscal challenge • The growth challenge

3. The bubbles bursts

4. Adverse feedback loops

5. In the end, we failed to manage the crisis without outside assistance

6. Loss of bank fundingSource: NTMA

7. Heavy dependence on ECB/CBI

8. Loss of Government creditworthinessApprox. 10-year yields (monthly averages) Source: ECB; http://www.ecb.int/stats/money/long/html/index.en.html

9. Recovery strategy • (Phased) adjustment with financing • Banking adjustment • Recapitalise/deleverage • Credit supply/debt resolution • Fiscal adjustment • Bring deficit & debt to safer levels • Limit fall in domestic demand • Real economy • Restore competitiveness • Restore growth in domestic demand • Fiscal adjustment harms disposable income • Need for confidence in future path of disposable income

10. As seen by Government . . . Stabilisation, reputation, confidence

11. The Banking Challenge

12. Objectives Policies Guarantees Original “blanket” guarantee ELG guarantee (new borrowing) Remove “toxic” assets National Asset Management Agency (NAMA) Recapitalisation Deleveraging New regulatory / supervisory regime Debt forgiveness • Functioning credit system • Rational credit decisions • Access to funding • Limit liability to the State • Secure future financial stability • Reduce burden of private-sector debt

13. Cost of the Banking RescueBillions of Euro

14. Securing bank funding Guarantees Capital Deleverage/de-risk Reliable lender of last resort

15. Big challenges • Recapitalise/deleverage without a severe credit contraction • Debt forgiveness without further undermining bank balance sheets

16. The Fiscal Challenge

17. Actual and planned austerity measures

18. Simulation of zero-adjustment scenario

19. General Government Deficit Source: IMF

20. Primary (non-interest) surplus

21. Determining the fiscal stance • Difficult balancing act: • Supporting domestic demand vs. ensuring sustainability/creditworthiness • Fiscal Council recommended a more ambitious fiscal adjustment in October 2011 • Funding vulnerabilities • Risks to debt sustainability • Slow pace of debt reduction post-2015 • Negative growth surprise → Worsens the dilemma

22. The Growth Challenge

23. Real economySeasonally Adjusted Quarterly Aggregates, 1997Q2 – 2011Q3

24. Massive rise in unemployment . . .

25. . . . Large fall in employment

26. Consistent downward revisions to 2012 forecasts

27. Unusual uncertainty: Whither the Irish Economy? • Uncertainty about the starting output gap • Uncertainty about the speed at which the gap will close • Uncertainty about the underlying potential growth rate

28. Output gap

29. Actual and Potential GDP (IMF)

30. Actual and Potential GDP (IMF & Budget 2012)

31. Growth strategy Domestic Demand Demand Net Exports Focus by necessity Competitiveness Supply Smart Economy

32. Nominal GDP growth, 2007 - 2011 Source: CSO

33. A dual economy: Contributions to nominal GDP growth, 2007 - 2011 Source: CSO Note: Statistical discrepancy included under domestic demand

34. Q4 National Accounts • 2011 • Real GDP: +0.7 percent • Real GNP: -2.5 percent • Back in recession: Two successive quarters of contraction • Tentative signs of stabilisation in domestic economy • Final domestic demand up 1.3 percent in final quarter • Consistent with surprise 10,000 job gain in quarter

35. Other heavily debated topics • Restructuring the IBRC promissory notes • Referendum on the fiscal compact • Building the euro zone firewalls