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Ireland - Economy

Property prices rose more rapidly in Ireland in the decade up to 2007 than in any other developed economy. Since their 2007 peak, average house prices have fallen 47%. In the wake of the collapse of the construction sector and the downturn in consumer spending and business investment, the export sector, dominated by foreign multinationals, has become a key component of Ireland's economy. Overall economic activity has dropped sharply since the onset of the world financial crisis, with GDP falling by over 3% in 2008, nearly 7% in 2009, and less than 1% in 2010.

Since entering office in March 2011, the Kenny government intensified austerity measures to try to meet the deficit targets under Ireland's EU-IMF program. Ireland achieved moderate growth of 1.4% in 2011 and cut the budget deficit to 9.1% of GDP. Although the recovery slowed in 2012 because of weaker EU demand for Irish exports, Dublin managed to trim the deficit to about 8.5% of GDP. Unemployment rate rose to 14.6% in 2012, up from 14.4% in 2011.

Until 2008, Ireland boasted one of the most vibrant, open economies in the world. The "Celtic Tiger" period of the mid- to late 1990s saw several years of double-digit GDP growth, driven by a progressive industrial policy that boosted large-scale foreign direct investment and exports. GDP growth dipped during the immediate post-September 11, 2001 global economic slowdown, but averaged roughly 5% yearly between 2004 and 2007, the best performance for this period among the original EU 15 member states. During that period, the Irish economy generated roughly 90,000 new jobs annually and attracted over 200,000 foreign workers, mostly from the new EU member states, in an unprecedented immigration influx. The construction sector accounted for approximately one-quarter of these jobs. However, the Irish economy began to experience a slowdown in 2008. The Irish property market collapsed, putting pressure on the Irish banks, which had a significant portion of their loan books in real estate. This, in turn, caused a collapse in the government’s finances because of a large dip in the amount of revenue raised from value-added tax and tax on property transactions.

In 2010, the Irish economy experienced double-digit unemployment, deflation, a virtual standstill in credit availability, and a widening government budget deficit. With the effective collapse of the construction industry, unemployment levels continued to rise. Fragile consumer confidence and weak domestic spending further contributed to bleak economic conditions. Exports grew, albeit slowly, but GDP growth remained negative. Despite lower tax receipts and rising welfare costs, the government remained committed to cutting both capital and day-to-day spending costs. Thus, the December 2010 budget for 2011 was again austere, building on 2010 spending cuts of U.S. $5.8 billion (4 billion euro) put in place in December 2009.

The Irish banking sector, like many worldwide, came under intense pressure in 2007 and 2008 following the collapse of the construction industry and an end to Ireland’s property boom. Subsequently, it was determined that a number of Ireland’s financial institutions were severely under-capitalized and required government intervention to survive. The government introduced temporary guarantees to personal depositors in 2008 to ensure that deposits remained in Ireland and has so far continued these guarantees. One of the main banks involved in property lending, Anglo Irish Bank, was nationalized and the government has taken majority stakes in several others, some of which have now become effectively nationalized as a result. The Irish Government also created the National Asset Management Agency (NAMA)--a government-run organization--into which the Irish banks have transferred most of their property-related loan books. Overall, NAMA is expected to acquire U.S. $117 billion (88 billion euro) in loans for some U.S. $49 billion (37 billion euro).

With increased exposure to bank debts, the government found it difficult to place sovereign debt on international bond markets and had to seek International Monetary Fund (IMF) and EU intervention in November 2010. Ireland accepted a 3-year, 85 billion euro (U.S. $113 billion) EU-IMF bailout package to cover future government funding shortfalls, as well as a short-term recapitalization of its failing banks. The funds were approved by EU finance ministers in Brussels on November 28 and carry an average interest rate of 5.8%. External assistance in the package totals 67.5 billion euro ($89.7 billion), coming from the IMF, the EU Stabilization Fund, and bilateral loans from the U.K., Sweden, and Denmark. Ireland itself will contribute 17.5 billion euro ($23.2 billion) from its own National Pension Reserve Fund and cash reserves. In return for the bailout, Ireland will be required to stick to an austere economic plan designed to reduce its deficit to 3% of GDP in 4 years. This entails cutting at least 15 billion euro ($20 billion) from its budget over the 4 years, of which 6 billion euro ($8 billion) was front-loaded in 2011. Following further government capitalization of Allied Irish Banks, the effective control of the bank transferred to the Irish Government by the end of 2010. Irish Nationwide Building Society and EBS had also been taken into state control.

Moody’s credit rating service has cut Ireland’s rating to junk status on July 12th, 2011, adding that the outlook for the Irish economy was negative. This meant that, according to Moody’s, Irish government bonds were a high-risk investment. Moody’s said Ireland likely would need another international bailout. The rating service said Ireland is meeting the conditions of the loan it received earlier in the year, including imposing tax hikes, making economic reforms, and cutting its huge budget deficit. But it said the Irish economy continued to be weak, and that there are significant doubts about whether Ireland can fully implement its loan conditions.

Economic and trade ties are an important facet of overall U.S.-Irish relations. In 2010, U.S. exports to Ireland were valued at U.S. $7.27 billion, while Irish exports to the U.S. totaled U.S. $33.9 billion, according to the U.S. Census Bureau Foreign Trade Statistics. The range of U.S. exports includes electrical components and equipment, computers and peripherals, drugs and pharmaceuticals, and livestock feed. Irish exports to the United States represent approximately 17% of all Irish exports and include alcoholic beverages, chemicals and related products, electronic data processing equipment, electrical machinery, textiles and clothing, and glassware. Irish investment in the United States steadily increased during the economic boom times. Ireland is one of the top 20 sources of foreign direct investment in the U.S., with Irish food processing firms, in particular, expanding their presence.

US investment into Ireland in 2011 amounted to $30.5 billion, up 9% on the previous year and was the second highest level of US investment in Ireland on record. U.S. investment has been particularly important to the growth and modernization of Irish industry over the past 25 years, providing new technology, export capabilities, and employment opportunities. As of year-end 2009, (according to official Irish data) the stock of U.S. foreign direct investment in Ireland stood at U.S. $235 billion, more than the U.S. total for China, India, Russia, and Brazil--the BRIC countries--combined. American firms invested nearly $18 billion in Ireland in the first 6 months of 2011, an increase of 49% compared to the same period in 2010. There are approximately 600 U.S. subsidiaries currently in Ireland that employ roughly 100,000 people and span activities from manufacturing of high-tech electronics, computer products, medical supplies, and pharmaceuticals to retailing, banking, finance, and other services. In more recent years, Ireland has also become an important research and development center for U.S. firms in Europe.

Many U.S. businesses find Ireland an attractive location to manufacture for the EU market, since it is inside the EU customs area and uses the euro. U.S. firms year after year account for over half of Ireland's total exports. Other reasons for Ireland's attractiveness include: a 12.5% corporate tax rate for domestic and foreign firms; the quality and flexibility of the English-speaking work force; cooperative labor relations; political stability; pro-business government policies; a transparent judicial system; strong intellectual property protection; and the pulling power of existing companies operating successfully (a "clustering" effect). Factors that negatively affect Ireland's ability to attract investment include: high labor and energy costs (especially when compared to low-cost countries in Eastern Europe and Asia), skilled labor shortages, inadequate infrastructure (such as in the transportation and Internet/broadband sectors), and price levels that are ranked among the highest in Europe.