I am very grateful for the opportunity to speak here today on the prospects for the Irish economy. The topic is one which draws considerable attention in the national press, financial markets, and no doubt on the streets and in the pubs of Donegal!
I welcome this wide public discourse. It provides me scope to hear analysis of policies pursued by Government. As I have stressed before, we in the Department have certainly no monopoly on wisdom in this sphere. As such, I further welcome your thoughts in the questions and answers session.
Developments in the Irish economy are, now more than ever, a key concern for everybody in our society. So in my remarks this morning I would like to give you a flavour of what I see as the latest trends and the main challenges facing our economy. In doing so, I would also like to highlight some of the policies the Government is putting in place and actions we are taking in order to support the emerging economic recovery and to put it on a more robust and sustainable footing.
Euro Zone Crisis
Of course, it must be acknowledged that the prospects for economic growth in Ireland are very much connected with developments at a European level and in particular the ongoing efforts to resolve the euro zone crisis. The spike in Spanish sovereign bond yields and the fact that both Spanish and Italian spreads are now wider than our own, graphically illustrates that markets remain very tense and there is still a lot of uncertainty about what is going to happen.
My personal opinion is that resolving the crisis means returning ourselves to a position where the debt of European nations is once again viewed by markets as essentially riskless. The best manifestation of this in the first instance must be euro zone Member States themselves unconditionally expressing their trust in each other’s paper. Until this happens, it is very difficult to see a situation where market confidence can return sufficiently to re-open markets at sustainable rates for all “virtuous nations”.
I often think of things with simpler business analogies. Let me try one on you. If my friend needs €100,000 to start a business, the bank may be prepared to offer him €70,000 on the basis that he can secure the rest of the funding himself elsewhere. So he comes looking for me to become a partner in the venture. However, if I then offer him the €30,000 only on the condition that I get my money back before the bank does or that he provide me with collateral, the bank is unlikely to be receptive. Worse still if I agree to only provide funds on a quarterly basis after checking that he has not been off at the European Championships but is working hard and meeting his targets. Is it reasonable to expect the bank to have full confidence to lend the €70,000 to my friend when I myself am suggesting my own lack of trust?
It is not difficult to see how some of the approaches being taken in Europe fall into the same difficulties when the markets look to provide funding for European partners.
What does this mean for Ireland? I believe there are two aspects.
-Firstly, we must continue to push at a European level for solutions that build and also display this trust to the markets. The recent Heads of State or Government agreement referring to Ireland was key in this respect. Coming as it did after discussions about the need to have measures for “virtuous countries”, it for the first time recognised the need to consider additional measures for countries taking the correct measures, in this case, to help reinforce the debt sustainability of Ireland. While clearly key for Ireland, this is even more welcome for what it means for resolving the euro crisis as a whole. It is clearly a step in the right direction. So also in the same vein was the removal of seniority from ESM borrowings.
-The second aspect is that we here in Ireland must continue relentlessly the process of confirming trust at a European level that Ireland will be unwavering in taking the necessary hard steps to restore our economic and fiscal sustainability.
Exiting EU-IMF Programme
As we continue to re-establish trust in Ireland within the EU, we will start in turn to win back market confidence. The return to borrowing markets must be the key objective of economic and fiscal policy in the short-term. Only once the sovereign has regained market access at long term sustainable rates will we see ancillary benefits for the banking and corporate sectors. When banks can access funding more cheaply, this will reduce borrowing costs for businesses and households.
There is no doubt that the process of regaining market confidence is well advanced, as is evident by the improvement in our sovereign yields, but we must maintain our focus in this respect. It may seem hard to imagine it now but only July, last year, a mere twelve months ago, 2 year Irish bond rates were in excess of 23 per cent. Yesterday, they closed at about 4 per cent.
This means we must continue to deliver on the terms of our EU-IMF Programme and, in particular, implementing the fiscal consolidation strategy which will return our deficit to a sustainable position. But it is not just about austerity.
The best way to ensure a solution is to put in place the correct policies to support economic growth in Ireland.
Growth, Competitiveness and Exports
A key ingredient in restoring our fiscal sustainability is the achievement of reasonable levels of growth. So how are we doing in terms of delivering a return to economic growth?
Earlier this month, the CSO published revised outturn figures for 2011 which confirm that growth resumed in the Irish economy last year – GDP increased by 1.4 per cent, which is stronger than previously thought. Looking in more detail at the quarterly figures, GDP growth on a seasonally adjusted basis fell by 1.1 per cent. However, encouragingly, the Q1 figures show that GDP in the first quarter of 2012 was 1.2 per cent higher compared to Q1 2011. As has been well documented, the recovery is being driven by exports, which rose at an annual rate of over 6 per cent. Indeed, exports of goods and services are now well in excess of pre-crisis levels. This shows that the improvement in competitiveness, which has been evident in recent years, is starting to show results. For example, comparisons with German competitiveness show clearly though that even in a European context we have not yet regained all of the lost ground during the boom years.
In the progress to date, though, the Irish economy has demonstrated its inherent flexibility – prices and costs in Ireland have fallen significantly, and further improvements are in the pipeline. Data from the European Commission show that Irish unit labour costs – basically the labour cost per unit of economic output – are falling, in contrast to the increases being recorded in the rest of the euro area. Unit labour costs are estimated to improve by some 22 percentage points compared with the euro area over the period 2009-2013. Furthermore, recent exchange rate developments have also been helpful with the euro depreciating against both the dollar and sterling to stand at $1.22 and 78 pence yesterday. Only three months ago, the US dollar rate was some 10 per cent higher. This benefits Ireland because of our greater exposure to trade outside the euro area.
The strong export performance also means that our balance of payments with the rest of the world moved into surplus in 2010 for the first time in a decade and is expected to remain in surplus over the coming years. This is encouraging and means that the nation as a whole is paying its way.
It is true that the multinational sector is playing a lead role in the recovery and probably getting more of the headlines. However, the performance of the indigenous exporting sector is also striking.
Enterprise Ireland recently announced that its client companies achieved record levels of exports of €15.2bn in 2011. This exceeds the pre-recession record levels of 2008 and represented the highest ever annual export gain achieved by its companies.
Reclaiming the lost ground of 2009 and 2010 must rank as one of Irish business’ greatest achievements - these companies are targeting markets thought barely accessible to Irish enterprise heretofore, such as Brazil, Russia, India, China, the Gulf and of course the enlarged European market, while continuing to build on their substantial success to date in the UK, euro zone and the US. The performance of Ireland's exporting sector in overseas markets in 2011 was remarkable in any context, but particularly against the backdrop of a global economic slowdown.
More than 140,000 people rely for their employment on these indigenous companies and when taking into account the multiplier effect, in the region of 300,000 jobs are supported throughout Ireland. Enterprise Ireland client exporters spent €18.3bn on goods, services and payroll in the Irish economy in 2011.
What might not be commonly appreciated is that the impact of this expenditure, in terms of jobs and the economy, is comparable in scale to that of the Foreign Direct Investment sector.
In this context, people may think that the focus of my working weeks is only euro crisis and banking. Not so. One of the main points I reiterated when announcing our revised strategy for my department is how we must move beyond crisis management and get back to basic forward looking planning to create growth in all sectors of the economy. My own view is that indigenous companies, especially manufacturing ones, form a key part of that job.
We need to make sure that our state agencies provide the right support to indigenous businesses to allow them develop both domestically and to expand into new markets. We must look to see what obstacles to growth exist and how we can clear them out of the way.
The flexibility of our economy should be matched by the agility of our firms so that we can capitalise on new opportunities as they emerge.
While the economy is growing again and this is to be welcomed, the export-led nature of the recovery means it is not yet being felt on the ground. Indeed, the emigration of many young Irish people is continuing. While employment growth is showing some signs of stabilisation, the unemployment rate remains unacceptably high at close to 15 per cent with structural unemployment, a legacy of the construction boom, a particular problem. This I feel is one of the most significant issues facing the country from both a social and economic perspective over the coming years. The Government has sought to address this problem through, amongst others, activation measures contained in the first wave of measures set out in the Action Plan on Jobs. However, it is crucial that we match the ambition and ingenuity of our efforts with the enormity of the problem.
More generally, we are re-positioning Ireland as a global innovation hub – the best place for both multinational and Irish companies to start, grow and transform. This, combined with the re-skilling and retraining of the long term unemployed, will lay the foundations for future employment growth and reduction in unemployment.
Medium term outlook
Looking beyond this year, there are genuine grounds for optimism regarding the medium term prospects for the Irish economy. Our underlying strengths have not disappeared with the crisis – we retain many of the core qualities that underpinned the sustainable, export-led growth that prevailed during the 1990s. For instance:
·we have a very well-educated labour force (highest third-level attainment amongst 30-34 year-olds in EU), which – as confirmed by recent trends – is highly adaptable and flexible;
·our tax and regulatory regime rewards work and enterprise and as such is growth-friendly (ranked 10th in the World Bank Ease-of-Doing-Business report);
·we have a vibrant high-technology export base with critical mass in key sectors (29 per cent of exports classified as high-tech compared to EU average of 17 per cent);
·we have made substantial improvements to our infrastructure, which in many respects is now on a par with the best that continental Europe has to offer.
In terms of outlook, the external environment is expected to strengthen from 2013 onwards, as is export growth but there are still many dark clouds on the horizon.
If this stronger export performance continues, it will start to feed through to further investment and employment, consumer confidence will return and the savings rate should start to unwind somewhat leading to greater spending in the domestic economy.
What we expect to see is economic activity beginning to gradually firm and broaden out - from being exclusively externally-driven to a position where domestic demand also makes a modest contribution.
While we have talked in length about the emerging recovery of the Irish economy and the inherent strengths which will support the growth path, it is clear that challenges remain. I shall not have the time now to go into these in detail but it will not surprise you to hear that we see a number of serious risks, including:
·a global slowdown,
·the euro area debt crisis,
·high levels of structural unemployment,
·the weakness of the domestic property market and construction industry,
·high levels of indebtedness, especially personal, in the economy,
·the very high savings rate and contracted spending, and
·the remaining challenges in the banking sector (which I will return to in a minute).
Furthermore, notwithstanding the improvements in competitiveness, prices and costs in many parts of our economy remain in excess of those elsewhere and so further improvements in competitiveness will be necessary. Part of this will require a renewed emphasis on boosting our productivity and many of the structural reforms being implemented under the joint EU-IMF programme are designed with this in mind.
Reform of the Department
I want to assure you that we in the Department are thinking hard about how to overcome these issues.
To that end, when we published our revised strategic plan, we also announced that the Department of Finance is itself undergoing significant reforms. The Department is being re-oriented to play a greater role in the management of our economy and for example to have a greater focus on strategic economic planning for the future, with the Economics division in particular being significantly expanded.
The way I see it, the Department needs to become a sort of idea sponge for all of the clever ideas other people have to facilitate growth in their own sectors. It is not just absorbing the ideas but taking them, selecting the good ones to champion, building them into the State’s economic planning and making them a reality by playing a more pro-active role in our interaction with other Departments and agencies.
An economy is essentially complex but in Ireland, as opposed to large economies like the UK or US, I believe it is easier to dissect the entirety and look at and set targets for each sector individually. That allows one to almost imagine running them as discrete business lines and identify and implement measures which can encourage growth in those sectors.
In 2011 we focussed upon the agri-food and tourism sector, with the April 2011 Jobs Initiative in particular targeted towards supporting growth in those areas. While it is still early days, I think we have been relatively successful.
Bord Bia reported that the value of Irish food and drink exports increased by 12 per cent last year, while the number of visitors to Ireland rose by almost 8 per cent. Available figures for overseas visits so far this year (till end-May) have been broadly flat overall but recently we have seen significant growth of over 8 per cent from some of our traditionally smaller markets such as Italy and the Benelux countries. In addition, the employment data show that the number of jobs in tourism related industries grew by 8,500 year-on-year in the first quarter of 2012. These are jobs-rich sectors with deep links to local economies, so the relatively good performance over the past year or so is particularly encouraging.
The clear advantage of both of these sectors is that they are not confined to Ireland’s large urban areas – rather to the contrary, they create wealth in areas like Donegal itself.
We need though to be more inventive too about how we approach things, it is not just about looking for tax breaks. I know you will understand the following example in a county still focussed on sport and heading for an All Ireland in September. I was in Germany of all places when presenting Ireland’s economy on St Patrick’s Day at the embassy. Someone suggested to me that Ireland should brand itself as a destination for sports lovers in September after the high season months of July and August. For example take this year. We start with Notre Dame v Navy. Two All Irelands, Listowel races, golfing in Bundoran, Munster rugby in Limerick and more. And why not in the off season for most hurling and football teams do we not put on display games and target a tourist market. But it needs to be planned on a coordinated basis. What was most interesting to me is that when I got back to Dublin I tried to find the sports events happening in that month. Nowhere did I find a convenient list of events. It is on things like this that we need to shoot smarter. We need to make it easy for people and think across the entire system as well as outside of the box.
Even in advance of the beefing up of our economics division, our focus has already moved this year to the indigenous SME sector and the property and construction industries, with a number of initiatives being taken through the banking sector, including NAMA.
Given the very significant employment losses suffered in the construction industry, we have worked with NAMA to facilitate them playing an active role in supporting recovery in the property and construction sectors. To this end, NAMA is providing €2 billion in development capital, introducing vendor financingand has launched an 80/20 deferred payment scheme to help restore confidence in the residential property market.
The Department is also working extremely hard to ensure that every sector has sufficient credit to support enterprise, but in particular the SME sector. A number of measures are being implemented in this regard:
We have commissioned a further independent survey of demand for SME credit.
I, along with the Minister for Small Business, visited seven locations nationwide to hear the views of relevant stakeholders in order to feed into Government policy.
A partial credit guarantee scheme is being rolled out which will facilitate up to €150 million of additional lending per annum to SMEs.
The Department of Jobs, Enterprise and Innovation are also finalising the delivery structures for a State-backed Microfinance Loan Fund to provide loans to the microenterprise sector.
For larger companies, the NPRF is currently working on a number of initiatives. Firstly, to augment the funding available by seeding an SME credit fund and an Irish based private equity fund. You’ll also have noticed the recent announcements about Silicon Valley Bank.
We now have an interdepartmental team working at the highest levels to secure greater EIB funding for innovation and development in indigenous companies.
An absolutely key element is ensuring the existence of a properly functioning banking system. Put simply, a healthy banking sector supports economic growth. While targets for bank lending can play an important role here, the real objective is to re-establish fully functioning and profitable banks.
What does this mean? It is not rocket science. It means banks must have revenues which exceed their costs. It will mean reducing the costs of funding, including on deposits. It will mean reducing fixed costs in line with more domestic business models. It will mean ensuring that loans are priced at fully commercial rates for the risks being taken.
In short, banks must continue to re-examine their business models to ensure that their pricing structures, infrastructure and capabilities are suitable for a modern economy and in particular generate operating cost savings by reflecting more how people have changed how they interact with their banking institutions in a modern computerised country.
As regards providing further support to the domestic economy, as you know, the Government has also recently announced details of a further infrastructure investment. This involves a €2¼ billion infrastructure package to complete further investment in a range of projects and sectors, including education, health and transport in particular. We are fortunate that the significant investment which took place in the past decade or so means that much of the necessary infrastructure to meet the demands of the economy is already in place.
Going forward, I believe that, as we plan for the longer term, in order to establish a re-enforcing cycle of sustainable recovery in the economy, and in particular establish a supportive environment for growth in the private sector, a more holistic approach is needed. This includes working in tandem with the EIB and European Commission in particular to find optimum ways to fund more ambitious plans for infrastructure around education, energy, transport and communications.
Holistic Approach to Supporting Domestic Economy
A holistic approach also means ensuring that our state agencies are active and working together in supporting business and enterprise. Initiatives such as Innovation Fund Ireland, the Enterprise Stabilisation Fund and the Halo Business Angel Network must continue and be coordinated with other initiatives.
We are also working to ensure that the regulatory and legislative environment is conducive to growth. This means that tax policy is supportive of investment and enterprise. The Action Plan for Jobs’ targets cuts in red tape which must be delivered.
All of these elements underpin the Government’s vision for growth which is a dual strategy combining a strong exporting sector with sustainable and broad-based domestic economic activity.
To sum up, Ireland has dealt decisively with the rapid change in our economic and budgetary fortunes over the last few years. This has been acknowledged by the international organisations that assess our prospects. While it is encouraging that the NTMA have recently tapped the short dated end of the market, the issuing of longer term bonds is the next step to securing a future for Ireland, independent of external partner funding. With normalisation of our state finances and funding will come strength in our banking sector and economy.
I would emphasise that there remain substantial challenges ahead, most particularly in bringing the budget deficit back down to a sustainable level and in tackling the still very high level of unemployment.
You may recall the words of Liam Reilly in “Flight of the Earls” which I heard often when living in New York. The song is set in 1980s Ireland, a country beset by emigration. Reilly opines that Ireland’s best asset, our youth, are also our best export.
Unfortunately, emigration is once again affecting all corners of the country. In my opinion, the litmus test for our recovery will be a reversal of this situation and one where our young and not so young people have a choice to remain, work and raise a family in Ireland or move abroad not by necessity but out of choice to seek further training or new adventures.
I cannot over emphasise the commitment of our teams to achieving this objective.
I believe that we have the people, know-how, education and determination to see this through.