This article was first published in the January 2014 Ireland edition of Accounting and Business magazine.
For the first time since 2010, Ireland has entered the new year as an economically sovereign nation. The contrast between then and now could not be starker. Four years ago, Ireland was in economic turmoil. Growth had collapsed, unemployment was rapidly increasing and there was no end in sight to the losses piling up in the under capitalised banking sector.
This year, it appears as if conditions are finally improving. To start with, Ireland is comfortably back in the capital markets and has built up a cash reserve in excess of E20bn. Notwithstanding the government’s decision to do without a precautionary credit line from the bailout partners, the treasury’s liquidity position looks good.
Investors seem to agree: Ireland’s bond yields have remained well below 4% for three quarters, even during periods of heightened volatility, such as when US Federal Reserve chairman Ben Bernanke hinted he would start tapering quantitative easing policies.
Employment is beginning to bounce back, too, with the official rate hitting 12.5% to close out 2013. Corporate profits have been strong following years of tough balance sheet restructuring. Meanwhile, the country has absorbed massive budgetary adjustments. Even the banks appear to be stable (although not yet profitable).
Despite all these undoubtedly positive changes, though, massive challenges remain. The chief among them? Growth.
This may not be a novel insight, but it is worth emphasising: without growth, Ireland’s recovery is unsustainable.
The economy came out of recession for the third time last year, with GDP nudging just into positive territory. But growth of under 1% is hardly going to put a dent in the huge national debt. And households will continue to struggle without the kind of increases that lead to pay rises.
Unfortunately, there are still a lot of risks about, both at home and abroad.
Domestically, the banks have to pass the ECB’s stress tests this year. A positive result is not a foregone conclusion, as last month’s balance sheet assessments by our own Central Bank revealed. Irish lenders still have a massive stock of mortgage arrears and bad business debts to work through. Until that happens, credit will remain scarce and growth will be constrained.
Within the eurozone, Ireland was actually a standout performer in 2013, but that says more about the currency zone’s continuing problems. If conditions deteriorate again, Ireland could find itself in difficulty through no fault of its own.
The real bright spot for Ireland, though, is the improvement in both the country’s main trading partners: the US and the UK. Both economies exited 2013 on a strong improving trend. If history repeats itself, Britain and the US could once again be the engine of Irish outperformance.
Jon Ihle is a financial journalist based in Dublin