Press release 2009 - Ernst & Young Economic Eye - Ernst & Young - Ireland

Grim news now but a brighter future?

• First All-Island forecast predicts nearly 8% GDP contraction in 2009
• ROI economy to be in technical recession before strong recovery from 2011
• It will take 12 years before the employment numbers recover to 2007 peak
• Forecast highlights key differences and some similarities between economies North and South

Dublin/Belfast – Wed 20 May 2009 – The Republic of Ireland is in a technical depression according to a study published today by the first all-Island economic forecasting unit – the Ernst & Young Economic Eye.

The forecast highlights that the Republic of Ireland recession is due to be far worse than Northern Ireland and amongst the worst in Europe and with a peak decline of 10% GDP from its economic height, it will effectively be in depression. However, the forecast also points towards more positive news in terms of the key areas of growth which will aid recovery both North and South of the border.

Speaking at the launch of the forecast Mike McKerr, Senior Partner for Ernst & Young’s Irish firm commented, “The island of Ireland is going through unprecedented economic turmoil at the moment but we do need to focus on how we can get out of this slump and this forecast provides some clear signposts on where recovery can happen in a relatively quick and sustainable manner.

As Brendan Lynch Special Advisor to the Ernst & Young Economic Eye comments, “The Island economy is in the eye of an unprecedented economic storm and collateral damage is severe. Though early 2009 looks like being the worst period, recovery will be slow and the storm will leave scars on the economic landscape for years. Global competitiveness remains key as it is to businesses the island must look for recovery as neither consumers or government are in any position to spend aggressively”.

Job losses recovery in 2021
The forecast confirms that the all-Island economy is currently in the midst of the most severe recession since the Second World War. Employment figures in the Republic will not return to their peak period (2007) until the year 2021 compared to 2018 for similar recovery in Northern Ireland. This means for many people and locations the recession will have a generational impact and bring severe economic and social hardship to many.

The impact of the recession on business, society and government will also be more severe than predicted by with an 8.9% economic contraction forecast for the Republic in 2009, a 2.9% contraction in Northern Ireland and an overall all-Island contraction of 7.8%.

One Dimensional Economy(s)
The forecast adds to the ongoing debate over the role which over-reliance on a ‘one dimensional’ economy has had to economic downturn in both regions and in particular the massive reliance on public sector and construction industries in both Northern Ireland and the Republic of Ireland.

The scale of job losses in construction across the island by year-end 2009 is staggering with the forecast estimating 150,000 jobs to be lost in construction across both regions from their peal - Northern Ireland will account for close to one in 15 of these losses.

This represents a halving of the size of the construction sector in ROI in two years since its peak in 2007. The forecast confirms that at the height of the boom, over one in 7 people in the Republic were employed in construction in comparison to just one in 15 in the UK.

A third risk – Public finances
The eye watering levels of debt being incurred by both the UK and ROI economies has been the headline grabbing statistic of the early part of 2009. Both economies are expecting fiscal deficits to top 10% of GDP and this will cast a long shadow over recovery and future economic growth.

According to the forecast, overreliance in Northern Ireland on the public sector and a relatively closed economy (compared to ROI) will result in both a less pronounced downturn than the ROI, but a longer recovery time due to less capacity for growth in the public sectors. Estimates quoted within the forecast put ‘fiscal deficit’ by the Department for Finance & Personnel somewhere between £6-8 billion per annum – which the Ernst & Young Economic Eye forecasts as being “unsustainable given heightened scrutiny over UK public sector spending”.

Responding to the Crisis
The forecast also outlines how the different nature of the two economies have led to contrasting remedial approach taken by the ROI and UK governments.

As Neil Gibson, Senior Advisor to the Ernst & Young Economic Eye explains “The Republic of Ireland’s government was left with little option other than adopting a radical ‘tax and cut’ approach to correct its imbalanced economic makeup by means of implementing unpopular but necessary tax rises and public spending cuts to reduce the budget deficit and meet EU stability and Growth (SGP) criteria of 3% of GDP in five years times”.

In addition, the recent downgrading of ROI’s credit rating from AAA to AA+ in March has resulted in greater challenges for government to sell ROI’s long-term debt to financial markets and thus a more extreme rebalancing was necessary.

In contrast, the Ernst & Young Economic Eye raises doubts over the likely success of the approach taken by the UK government.

“The UK has adopted an equally radical by very different ‘spend and hope’ approach - partially motivated according to forecasters by the upcoming UK general election in 2010. We predict that as spending increases and with stamp duty holidays and temporary VAT cuts due to reach their end, tax rises will inevitably follow”.

Recovery
As Neil Gibson explains the ROI’s relatively small, very open economy has led to a more extreme recession than much of Europe; however for the same reasons it means that the recovery will also be more impressive than NI or in the UK.

The Republic’s export deterioration appears modest relative to domestic consumer and investment contraction and that firms located in the ROI still benefit from the same tax advantages now as they did during the Celtic Tiger boom years, alongside a strong education system and much improved infrastructure.

Further positive data in the forecast shows the ROI had far less severe drops in its exports in Q4 (-.6%) than all of the major global economies including US (-12.4%), Germany (-8.2%), China (-13.2%) and Japan (-21.8%).

The forecast confirmed that the ROI’s low corporation tax regime and strength of reputation in export services sector, which sees high-end services provided on an international basis, will be critical to its successful economic recovery. Tempering recent cost pressures and brockering more realistic wage agreements will be key to ROI restoring some of its lost competitiveness.

In addition, the strength of ROI’s services sector exports, many of which require specialist skill sets, are predicted to make ROI less ‘replaceable’ as a centre for producing these exports.

As Neil comments, “No other major economy has as large a proportion of exports built on the services sector than The Republic of Ireland (44%) – e.g. NI (6%), UK(40%), US (31%) , Germany (14%)”.

By contrast, Northern Ireland’s position would appear to be very different in terms of areas for potential economic recovery. At just 6%, the percentage of its export economic composition in the services sector (DETI survey data) is amongst the lowest of the developed economies. That point, in addition to likely constraints in public sector spending will ensure that the growth path in Northern Ireland sees less ‘bounce back’ in its recovery phase.

What is clear from this forecast is that both the UK and ROI recession are close to bottoming out. It is reported that Q1/Q2 2009 data may be the worst for GDP but the latter quarters of 2009 are predicted to see a moderation in decline.

The forecast predicts a modest contraction continuing into 2010 before a recovery in 2011 that accelerates into 2012 - though net job losses well into 2010 are likely as rationalisation in the service sectors (public and private) continue to come through. This is in contrast with manufacturing and construction losses are more heavily ‘front loaded’ the recession.

A similar return to positive growth by the US economy, on which ROI’s open economy is so heavily dependent, has also been estimated by 2010.

Key sectors which the forecast predicts to drive this all-island recovery include: Professional services, Developing Green industry and Tourism, which as a sector remains relatively underdeveloped in Northern Ireland.

Ends

For more information

John Ward
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Email: John Ward 

About Economic Eye
The Ernst & Young Economic Eye is an economic forecasting forum launched by Ernst & Young in conjunction with Oxford Economics – a world-leader in quantitative analysis and economic forecasting. It will provide unrivalled detailed economic analysis of the all-island economy throughout the year.

The forecasts include analysis and predictions of a range of key economic indicators on all-Island basis including GDP, inflation, employment, and interest rates. The forecasts will also include an element of sectoral and geographic detail.

The initiative is designed around the hugely successful Ernst & Young sponsorship of the Independent Treasury Economic Model (ITEM) Club which has been running in the UK since 1988. The ITEM Club is one of the UK’s best-known independent economic forecasting groups and is unique in its use of the same economic model for its UK forecasts, as the UK Government’s Treasury department uses for its policy analysis and Budget forecasting.