Is the Celtic Tiger roaring again, or is this just a dead cat bounce?

 

Ireland's bust was spectacular.

When Dublin applied for an international bailout last November the nation's fiscal fundamentals were among the worst in the world. The government's deficit was 32 per cent of GDP, thanks mainly to the cost of bailing out Ireland's ruined banking sector. The country's stock of debt was closing in on 100 per cent of national output. The markets were charging the Irish government double-digit interest rates to borrow.

But, since then, the country has experienced two successive quarters of decent growth (unlike Greece and Portugal, which are still shrinking). Ireland's deficit has dropped to 10 per cent. The yields on Irish bonds have also fallen to 8 per cent, indicating that investors are more confident that the country will be able to pay off its debts.

It looks like a miracle. But is the Celtic Tiger really beginning to roar again? An OECD report on the country yesterday was generally optimistic. The Paris-based organisation raised its forecast for GDP growth to 1.2 per cent for this year, up from zero in its May projection. It even suggested that Dublin ought to reduce its deficit more quickly than agreed under the EU/IMF bailout.

Yet there are perils ahead. Ireland's growth this year has been export driven. That makes it vulnerable to a eurozone slowdown. There is another obstacle. The United Kingdom, Ireland's largest trading partner, is also trying to grow through increasing exports. Office for National Statistics trade figures this week showed that Britain increased exports to Ireland in August by £213m and cut imports by £153m. This illustrates the problems of many nations trying to increase their exports all at once. It also illustrates the disadvantage of Ireland, locked in the eurozone, in not being able to devalue its currency. Britain is exporting more to Ireland, in part, because of the 20 per cent depreciation of sterling.

Despite the OECD's confidence about Ireland's prospects, the organisation more than halved its 2012 growth forecast for the country to 1 per cent, down from 2.3 per cent in May. Ireland's deficit reduction plans are fragile too. The OECD says Ireland is on target, but not everyone agrees. Dublin's new official fiscal council said this week that Ireland will miss its 2012 budget deficit target of 8.6 per cent of GDP unless it imposes an extra €400m (£349m) of cutbacks in the December budget.

The overall debt dynamics are less than rosy too. The OECD puts Ireland's debt stock as a proportion of GDP on course to rise to 117 per cent in 2013. That is dangerously high. To bring this debt burden down, Ireland needs trend growth of 2.8 per cent a year from 2013. If growth falls short of that, the total debt pile would continue to rise and would soon become unsustainable. While Irish bonds are considered less risky than those of Greece and Portugal, credit default swap rates show that the markets still consider the country to have a default probability of around 9 per cent.

Ireland has advantages that Greece and Portugal lack, such as a flexible labour market, a more export-oriented economy and a population prepared to accept considerable public-sector austerity. And Ireland does seem to be battling its way back to competitiveness. Hans-Werner Sinn, professor of economics at Munich university, points out that Ireland has managed a 12 per cent real depreciation in labour costs since the crisis struck. By contrast Spain and Greece have achieved a zero per cent depreciation, while Portugal has eked out just 1 per cent.

But the OECD forecasts that unemployment will remain at 14 per cent well into 2013. Joblessness on that high level could begin to strain even Ireland's impressive discipline in the face of public austerity. Ireland's politicians have held the line so far. But that might not last forever. The Energy Minister, Pat Rabbitte, yesterday spoke out against the idea that the government should go faster on spending cuts .

Ireland's fate remains unclear. The country might be able to make it make it through this storm without needing to default. But that depends hugely on decisions made by the leaders of the eurozone. A false move could tip the Continent into another financial meltdown, or a new recession, destroying Ireland's export-driven recovery.

The consequences of an Irish default would be felt here in Britain. The Royal Bank of Scotland and Barclays have a combined exposure to the Irish economy of €68bn. If Ireland crashed out of the single currency, these two banks would suffer huge losses and taxpayers would have to bail them out. That is why it is not just the Irish who are praying that what we are seeing from the Celtic Tiger is not a dead cat bounce.

Suggested Topics
Start your day with The Independent, sign up for daily news emails
News
Professor David Nutt wants to change the way gravely ill patients are treated in Britain
people Why does a former Government tsar believe that mind-altering drugs have a place on prescription?
News
Norway’s ‘The Nordland Line – Minute by Minute, Season by Season’ continues the trend of slow TV
television The BBC have commissioned a series of programmes doing away with high-production values, commentary, script or drama
Arts and Entertainment
art
Sport
Jonny Evans has pleaded not guilty to an FA charge for spitting at Papiss Cisse
football
Life and Style
Kate Moss will make a cameo appearance in David Walliams' The Boy in the Dress
fashion
News
The image released by the Salvation Army, using 'The Dress'
news
Sport
Liverpool defender Kolo Toure
football Defender could make history in the FA Cup, but African Cup of Nations win means he's already content
ebooks
ebooksA special investigation by Andy McSmith
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Customer Relations Officer

£13000 per annum: Recruitment Genius: This is an exciting opportunity to join ...

Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Jemma Gent: Project Coordinator

£12 - £15 Hourly Rate: Jemma Gent: In this role you will report to the Head of...

Recruitment Genius: Evening Administrator

£8 per hour: Recruitment Genius: This Pension Specialist was established early...

Day In a Page

Homeless Veterans campaign: Donations hit record-breaking £1m target after £300,000 gift from Lloyds Bank

Homeless Veterans campaign

Donations hit record-breaking £1m target after huge gift from Lloyds Bank
Flight MH370 a year on: Lost without a trace – but the search goes on

Lost without a trace

But, a year on, the search continues for Flight MH370
Germany's spymasters left red-faced after thieves break into brand new secret service HQ and steal taps

Germany's spy HQ springs a leak

Thieves break into new €1.5bn complex... to steal taps
International Women's Day 2015: Celebrating the whirlwind wit of Simone de Beauvoir

Whirlwind wit of Simone de Beauvoir

Simone de Beauvoir's seminal feminist polemic, 'The Second Sex', has been published in short-form for International Women's Day
Mark Zuckerberg’s hiring policy might suit him – but it wouldn’t work for me

Mark Zuckerberg’s hiring policy might suit him – but it wouldn’t work for me

Why would I want to employ someone I’d be happy to have as my boss, asks Simon Kelner
Confessions of a planespotter: With three Britons under arrest in the UAE, the perils have never been more apparent

Confessions of a planespotter

With three Britons under arrest in the UAE, the perils have never been more apparent. Sam Masters explains the appeal
Russia's gulag museum 'makes no mention' of Stalin's atrocities

Russia's gulag museum

Ministry of Culture-run site 'makes no mention' of Stalin's atrocities
The big fresh food con: Alarming truth behind the chocolate muffin that won't decay

The big fresh food con

Joanna Blythman reveals the alarming truth behind the chocolate muffin that won't decay
Virginia Ironside was my landlady: What is it like to live with an agony aunt on call 24/7?

Virginia Ironside was my landlady

Tim Willis reveals what it's like to live with an agony aunt on call 24/7
Paris Fashion Week 2015: The wit and wisdom of Manish Arora's exercise in high camp

Paris Fashion Week 2015

The wit and wisdom of Manish Arora's exercise in high camp
8 best workout DVDs

8 best workout DVDs

If your 'New Year new you' regime hasn’t lasted beyond February, why not try working out from home?
Paul Scholes column: I don't believe Jonny Evans was spitting at Papiss Cissé. It was a reflex. But what the Newcastle striker did next was horrible

Paul Scholes column

I don't believe Evans was spitting at Cissé. It was a reflex. But what the Newcastle striker did next was horrible
Miguel Layun interview: From the Azteca to Vicarage Road with a million followers

From the Azteca to Vicarage Road with a million followers

Miguel Layun is a star in Mexico where he was criticised for leaving to join Watford. But he says he sees the bigger picture
Frank Warren column: Amir Khan ready to meet winner of Floyd Mayweather v Manny Pacquiao

Khan ready to meet winner of Mayweather v Pacquiao

The Bolton fighter is unlikely to take on Kell Brook with two superstar opponents on the horizon, says Frank Warren
War with Isis: Iraq's government fights to win back Tikrit from militants - but then what?

Baghdad fights to win back Tikrit from Isis – but then what?

Patrick Cockburn reports from Kirkuk on a conflict which sectarianism has made intractable