The Irish economy contracted by 7.1% in 2009, which was well below the euro zone average of 4.1%, but not the worst performance in the euro area or indeed the EU. Within the former, Finland recorded a 7.8% fall in GDP while across Europe as a whole the Baltic States contracted at more than double the Irish pace – Latvian output fell by 18%, Lithuania by 15% and Estonia recorded a 14% decline according to Bank of Ireland’s latest Bulletin which was published today, 7 April 2010.
Author of the Bulletin, Dr. Dan McLaughlin, Group Chief Economist, Bank of Ireland said: “Last year’s contraction in Ireland was steeper than the euro area for two main reasons. First, capital spending generally fell heavily across most developed economies and by 11% in the single currency area, but in Ireland the fall was some 30%, including a 34% fall in building and construction. This sector was also of more significance in the Irish economy than the norm elsewhere, but by the fourth quarter of 2009 had fallen to under 12% of GDP, or half its share of GDP at the peak of the construction boom. House-building alone now accounts for only 2.5% of real GDP, again dramatically lower than the 12% share in 2005.
“Consumer spending also fell across the EU area, by 1.1% on average, reflecting falling employment and slower wage growth. In Ireland employment fell precipitously, by over 8%, and wages also fell on average, which partly explains why the fall in Irish real consumer spending, at 7.2% is unusually large, but Irish households also appear to have cut discretionary spending by more than the fall in disposable income. In other words the savings ratio went up, and may now be 11% – 12%, from under 3% in 2007.
“The one area in which Ireland outperformed its European neighbours was in the external sector: Irish exports fell by 2.3% in volume terms in 2009, while exports in the euro area declined by over 13%. This implies Ireland gained market share which sits uneasily with the widely held perception that the economy has lost competitiveness in recent years. It is true that Irish hourly earnings in manufacturing have risen by 69% over the past decade, against a 39% rise in our main trading partners, but Irish productivity has also outpaced the competition, with the result that Irish unit labour costs in manufacturing have fallen 14% relative to our trading partners over the past decade, according to Central Bank data. This productivity growth has been largely driven by the multinational sector, however, so it would be more precise to say that the indigenous economy has lost competitiveness, but that the multinational sector has certainly not; the output of the multinational sector went up last year while indigenous production fell by over 14%. Multinational profits also rose last year; which also helps to explain why the income of Irish residents (GNP) fell by over 11% in 2009 and hence more precipitously than the output of the economy as a whole “, concluded Dr.Dan McLaughlin.
7 April 2010
Dr. Dan McLaughlin
Group Chief Economist
Bank of Ireland Global Markets
Tel: 01 609 3221
Media Relations Manager
Bank of Ireland
Tel: 01 604 3836