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
News
people'It can last and it's terrifying'
Sport
Danny Welbeck's Manchester United future is in doubt
footballGunners confirm signing from Manchester United
Sport
footballStriker has moved on loan for the remainder of the season
Sport
footballFeaturing Bart Simpson
PROMOTED VIDEO
New Articles
Olivia Colman topped the list of the 30 most influential females in broadcasting
tv
News
Kelly Brook
peopleA spokesperson said the support group was 'extremely disappointed'
News
The five geckos were launched into space to find out about the effects of weightlessness on the creatures’ sex lives
i100
Sport
Andy Murray celebrates a shot while playing Jo-Wilfried Tsonga
TennisWin sets up blockbuster US Open quarter-final against Djokovic
Life and Style
techIf those brochure kitchens look a little too perfect to be true, well, that’s probably because they are
Arts and Entertainment
Hare’s a riddle: Kit Williams with the treasure linked to Masquerade
booksRiddling trilogy could net you $3m
Arts and Entertainment
Alex Kapranos of Franz Ferdinand performs live
music Pro-independence show to take place four days before vote
News
ebooksAn unforgettable anthology of contemporary reportage
News
news Video - hailed as 'most original' since Benedict Cumberbatch's
News
i100
Life and Style
The longer David Sedaris had his Fitbit, the further afield his walks took him through the West Sussex countryside
lifeDavid Sedaris: What I learnt from my fitness tracker about the world
Arts and Entertainment
Word master: Self holds up a copy of his novel ‘Umbrella’
booksUnlike 'talented mediocrity' George Orwell, you must approach this writer dictionary in hand
News
i100
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

SQL Implementation Consultant (VB,C#, SQL, Java, Eclipse, integ

£40000 - £50000 per annum + benefits+bonus+package: Harrington Starr: SQL Impl...

Head of IT (Windows, Server, VMware, SAN, Fidessa, Equities)

£85000 per annum: Harrington Starr: Head of IT (Windows, Server, VMware, SAN, ...

Technical Software Consultant (Excel, VBA, SQL, JAVA, Oracle)

£40000 - £50000 per annum: Harrington Starr: You will not be expected to hav...

SQL DBA/Developer

£500 per day: Harrington Starr: SQL DBA/Developer SQL, C#, VBA, Data Warehousi...

Day In a Page

'I’ll tell you what I would not serve - lamb and potatoes': US ambassador hits out at stodgy British food served at diplomatic dinners

'I’ll tell you what I would not serve - lamb and potatoes'

US ambassador hits out at stodgy British food
Radio Times female powerlist: A 'revolution' in TV gender roles

A 'revolution' in TV gender roles

Inside the Radio Times female powerlist
Endgame: James Frey's literary treasure hunt

James Frey's literary treasure hunt

Riddling trilogy could net you $3m
Fitbit: Because the tingle feels so good

Fitbit: Because the tingle feels so good

What David Sedaris learnt about the world from his fitness tracker
Saudis risk new Muslim division with proposal to move Mohamed’s tomb

Saudis risk new Muslim division with proposal to move Mohamed’s tomb

Second-holiest site in Islam attracts millions of pilgrims each year
Alexander Fury: The designer names to look for at fashion week this season

The big names to look for this fashion week

This week, designers begin to show their spring 2015 collections in New York
Will Self: 'I like Orwell's writing as much as the next talented mediocrity'

'I like Orwell's writing as much as the next talented mediocrity'

Will Self takes aim at Orwell's rules for writing plain English
Meet Afghanistan's middle-class paint-ballers

Meet Afghanistan's middle-class paint-ballers

Toy guns proving a popular diversion in a country flooded with the real thing
Al Pacino wows Venice

Al Pacino wows Venice

Ham among the brilliance as actor premieres two films at festival
Neil Lawson Baker interview: ‘I’ve gained so much from art. It’s only right to give something back’.

Neil Lawson Baker interview

‘I’ve gained so much from art. It’s only right to give something back’.
The other Mugabe who is lining up for the Zimbabwean presidency

The other Mugabe who is lining up for the Zimbabwean presidency

Wife of President Robert Mugabe appears to have her sights set on succeeding her husband
The model of a gadget launch: Cultivate an atmosphere of mystery and excitement to sell stuff people didn't realise they needed

The model for a gadget launch

Cultivate an atmosphere of mystery and excitement to sell stuff people didn't realise they needed
Alice Roberts: She's done pretty well, for a boffin without a beard

She's done pretty well, for a boffin without a beard

Alice Roberts talks about her new book on evolution - and why her early TV work drew flak from (mostly male) colleagues
Get well soon, Joan Rivers - an inspiration, whether she likes it or not

Get well soon, Joan Rivers

She is awful. But she's also wonderful, not in spite of but because of the fact she's forever saying appalling things, argues Ellen E Jones
Doctor Who Into the Dalek review: A classic sci-fi adventure with all the spectacle of a blockbuster

A fresh take on an old foe

Doctor Who Into the Dalek more than compensated for last week's nonsensical offering