Economy of the Republic of Ireland

Economy of Ireland

Irish One Euro coin
Currency	1 Euro = 100 cent(s)
Fiscal year	Calendar year
Trade organisations	EU, WTO and OECD
Statistics
GDP	€161.6 bn (2005)
GDP growth	4.7% (2005 est.)
GDP per capita	$41,000 (2005 est.)
GDP by sector	agriculture (5%), manufacturing (46%), services (49%) (2002)
Inflation (CPI)	3.9% (2006)
Population below poverty line	10% (1997 est.)
Labour force	2.154 million (2006
Labour force by occupation	services (64%), manufacturing (29%), agriculture (8%) (2005)
Unemployment	6.6% (October 2008) [8]
Main industries	steel, lead, zinc, silver, aluminium, barite, and gypsum mining processing; food, brewing, textiles, clothing; chemicals, pharmacology; machinery, rail transportation equipment, passenger and commercial vehicles, ship construction and refurbishment; glass and crystal; computer software, tourism
External
Exports	$102 billion f.o.b. (2005 est.)
Export goods	machinery and equipment, computers, chemicals, pharmaceuticals; live animals, animal products
Main export partners	United States 18.7%, United Kingdom 17.3%, Belgium 15.1%, Germany 7.3%, Netherlands 4.8% (2005)
Imports	$65.47 billion f.o.b. (2005 est.)
Import goods	data processing equipment, other machinery and equipment, chemicals, petroleum and petroleum products, textiles, clothing
Main import partners	UK 36.8%, United States 13.8%, Germany 9.1%, Netherlands 4.5% (2005)
Public finances
Government debt	€37.2 bn (27% of GDP) (June 2006)
Revenues	€44.3 bn (2006)
Expenses	€45.4 billion (2006)
Economic aid	donor: ODA, €735 mn (2005)
All values, unless otherwise stated, are in US dollars.

The economy of Ireland has transformed in recent years from an agricultural focus to a modern knowledge economy, focusing on services and high-tech industries and dependent on trade, industry and investment. In terms of GDP per capita, Ireland is ranked as one of the wealtiest countries in the OECD and the EU-27 at 4th in the OECD-28 rankings. In terms of GNP per capita, a better measure of national income, Ireland ranks below the OECD average, despite significant growth in recent years, at 10th in the OECD-28 rankings. GDP (national output) is significantly greater than GNP (national income) due to the repatriation of profits and royalty payments by multinational firms based in Ireland. A study by The Economist found Ireland to have the best quality of life in the world. The 1995 to 2000 period of high economic growth led many to call the country the Celtic Tiger.

With high growth came high levels of inflation, particularly in the capital city. Prices in Dublin, where nearly 30% of Ireland's population lives, are considerably higher than elsewhere in the country, especially in the property market (but property prices are falling rapidly following the recent downturn in the World economy and its knock-on effects on Ireland). At the end of July 2008, the annual rate of inflation was running at 4.4% (as measured by the CPI) or 3.6% (as measured by the HICP) and inflation actually dropped slightly from the previous month.

The Financial Crisis of 2008 is currently affecting the Irish economy severely, compounding domestic economic problems related the collapse of the Irish property bubble. Ireland was the first country in the EU to officially enter a recession as declared by the Central Statistics Office. Ireland was stripped of it`s AAA credit ranking and downgraded to AA+ by Standard & Poor's ratings agency, due to Ireland`s bleak financial outlook and heavy government debt burden. The ESRI has recently predicted that the Irish economy will not recover until 2011 were growth could return to 5% per year until 2015. Ireland now has the second-highest level of household debt in the world, at 190% of household income.

History

Main articles: Economic history of Ireland and Social Partnership

The state was periodically troubled by emigration until the early 1990s. These problems virtually disappeared over the course of that decade, which saw the beginning of unprecedented economic growth, in a phenomenon known as the "Celtic Tiger." Over the past two decades, the Irish government has implemented a series of national economic programmes designed to curb inflation, ease tax burdens, reduce government spending as a percentage of GDP, increase labour force skills, and promote foreign investment. Ireland joined in launching the euro currency system in January 1999 along with ten other European Union countries. The economy felt the impact of the global economic slowdown in 2001, particularly in the high-tech export sector – the growth rate in that area was cut by nearly half. GDP growth continued to be exceptionally high in international terms, with a rate of about 6% in 2001 and 2002 – and it is expected to continue at more than 4 per cent (2006 onwards). Since 2001, GNI (which measures income to Irish residents rather than output) growth has been much slower.

Recent developments

Main article: 2008–2009 Irish financial crisis

Ireland has been in recession since second quarter of 2008 and some commentators have claimed it is in a depression, The ESRI (Economic and Social Research Institute) predict an economic contraction of 14% by 2010 , however this number may have already been exceeded with GDP dropping 7.1% quarter on quarter during the fourth quarter of 2008, and a possible greater contraction in the first quarter of 2009 with the fall in all OECD countries with the exception of France exceeding the drop of the previous quarter. Unemployment is up 8.75% to 11.4%. Ireland has the world's highest gross external debt at 811% of GDP due to the operation of Monetary Financial Institutions , Government borrowing and the financial bailout and Nationalisation of one of Ireland's banks which were loaded with debt due to the Irish property bubble.

Bank solvency

The second problem, unacknowledged by management of Irish banks, the financial regulator and the Irish government, is solvency. The question concerning solvency has arisen due to domestic problems in the crashing Irish property market. Irish financial institutions have substantial exposure to property developers in their loan portfolio. These property developers are currently suffering from substantial over-supply of property, much still unsold, while demand has evaporated. The employment growth of the past that attracted many immigrants from Eastern Europe and propped up demand for property has been replaced by rapidly rising unemployment. Irish property developers speculated billions of Euros in overvalued land parcels such as urban brownfield and greenfield sites. They also speculated in agricultural land which, in 2007, had an average value of €23,600 per acre ($32,000 per acre or €60,000 per hectare) which is several multiples above the value of equivalent land in other European countries. Lending to builders and developers has grown to such an extent that it equals 28% of all bank lending, or "the approximate value of all public deposits with retail banks. Effectively, the Irish banking system has taken all its shareholders' equity, with a substantial chunk of its depositors' cash on top, and handed it over to builders and property speculators.....By comparison, just before the Japanese bubble burst in late 1989, construction and property development had grown to a little over 25 per cent of bank lending."

Irish banks correctly identify a systematic risk of triggering an even more severe financial crisis in Ireland if they were to call in the loans as they fall due. The loans are subject to terms and conditions, referred to as "covenants". These covenants are being waived in fear of provoking the (inevitable) bankruptcy of many property developers and banks are thought to be "lending some developers further cash to pay their interest bills, which means that they are not classified as 'bad debts' by the banks". Furthermore, the banks' "impairment" (bad debt) provisions are still at very low levels. This does not appear to be consistent with the real negative changes taking place in property market fundamentals.

In contrast, on the 7th of October 2008, Danske Bank wrote off a substantial sum largely due to property-related losses incurred by its Irish subsidiary - National Irish Bank. The 3.18% charge against the loan book of its Irish operations is the first significant write off to take place and is a modest indication of the extent of the more substantial future charges to be incurred by the over-exposed domestic banks. Asset write downs by the domestically-owned Irish banks are only now slowly beginning to take place

Rumours circulated that Spain's Grupo Santander had expressed an interest in acquiring Bank of Ireland but the acquisition was not undertaken when due diligence had been undertaken. This was subsequently denied by Bank of Ireland.

Guarantee of banking system

On 30 September 2008, the Irish Government declared a guarantee that intends to safeguard the Irish banking system. The Irish State guarantee, backed by taxpayer funds, covers "all deposits (retail, commercial, institutional and interbank), covered bonds, senior debt and dated subordinated debt".

In exchange for the bailout, the government did not take preferred equity stakes in the banks (which dilute shareholder value) nor did they demand that top banking executives' salaries and bonuses be capped, or that the banks' board members be replaced.

Despite the Government guarantees to the banks, their shareholder value continued to decline and on 2009-01-15, the Governmentnationalised Anglo Irish Bank, which had a market capitalisation of less than 2% of its peak in 2007. Subsequent to this, further pressure came on the other two large Irish banks, who on 2009-01-19, had share values fall by between 47 and 50% in one day.

As of 11 October 2008, leaked reports of possible actions by the government to artificially prop up the property developers have been revealed.

2009 Budget

On Tuesday, 14 October, 2008, the Government presented its 2009 Budget. Current developments point to a deficit of almost €15 billion which amounts to over 10% of GDP despite European Union rules which oblige member states to keep budget deficits below 3% of GDP

In March 2009, Ireland was stripped of its AAA credit ranking and downgraded to AA+ by Standard & Poor's ratings agency, due to Ireland's bleak financial outlook and heavy government debt burden. Standard & Poor again cut the credit rating in June 2009 from AA+ to AA, the move was seen as the Irish economy's worsening situation. In light of the worsening condition of public finances, an emergency supplementary budget was announced for 7 April.

Infrastructure

Main article: Transport in Ireland

Ireland's transport infrastructure came under strain due to the economic expansion of the past decade. Since 1993, road transport has been coordinated by the National Roads Authority in the case of the National Primary Routes, which are the most heavily used roads, The National Secondary Routes act as regional roads and linkages between the primary routes. The Dublin area is served by a light rail network (the Luas), the Dublin Port Tunnel the M50, M1, Dublin Airport, Dublin Suburban Rail and the DART.

The DART is a key piece of infrastructure in Dublin for commuters

Ireland's rail network is run by the semi-state body Iarnród Éireann, a subsidiary of CIÉ and is made up of 9 national lines and several regional commuter lines such as the DART. CIÉ retain some freight customers, though few new freight services have started in recent years. Only some major ports remain technically freight-connected, the connection at Sligo for example was removed in 2003, while the link to Foynes has remained unused since 1999. The efficiency of the train network is poor, with regular delays and overcrowding on major routes. Some regional routes have few services, and as a result, struggle to achieve passengers. Much new rolling stock has been acquired since 1994, and as of 2004, this is finally beginning to expand capacity rather than just replacing old stock. Most major routes have been relaid with continuous welded rail, and signalling has in most cases been upgraded from the more than century-old mechanical semaphores.

The country has a total of 15 airports and airfields, of which 3 - Dublin Airport, Shannon Airport and Cork Airport are of a substantial size. The country is served by several airlines, most notably Aer Lingus, Ryanair, Aer Arann, and CityJet. Air transport is relatively cheap. The main ports are Rosslare Europort, Limerick, Dublin, Cork and Waterford. There are daily ferry services to Britain.

Energy

Peat once provided much of Ireland's energy needs

The vast majority of Irish energy needs are met by fossil fuels. About 98% of Ireland's final energy demand is produced by burning coal, petroleum, peat, or natural gas. This over reliance on fossil fuels - particularly oil - has left Ireland vulnerable to international price fluctuations as it imports all of its oil needs. As part of its National Development Plan the Government adopted the Sustainable Energy Act (2002) and created Sustainable Energy Ireland as the nation's energy regulator. As part of their objectives to promote environmentally and economically sustainable energy production, electrical generation from peat consumption, as a percent of total electrical generation, was reduced from 18.8% to 6.1%, between 1990 and 2004. Likewise, coal consumption was reduced from 41.7% to 27.6%. Making up for this, the share of natural gas in electrical generation increased from 26.7% to 44.8%. Renewable energy, from biomass, wind and hydro, also increased from 1.9% to 2.6% in the same time period. A forecast by Sustainable Energy Ireland predicts that oil will no longer be used for electrical generation but natural gas will be dominant at 71.3% of the total share, coal at 9.2%, and renewable energy at 8.2% of the market. Wind power is quickly developing in the country by Airtricity and Hibernia Wind Energy (a subsidiary of the Electricity Supply Board) and many other companies. As of December 2005, there were fifty wind farms operational in Ireland with a combined capacity of 500 MW - generating enough energy for 300,000 homes, depending on wind conditions. In addition, a further 600 MW of wind farms (40 more) have signed connection agreements to link to the power system at high voltage or low voltage, and up to 200 MW of wind farms have received connection offers. Should these reach capacity, Ireland may exceed its EU target of 13.2 per cent of electricity generated from renewable sources by 2010. In addition to wind farms, electricity is also generated at large scale hydro schemes on the Shannon, Erne, Liffey and Lee rivers, and at mini-hydro stations, as well as landfill gas generating plants in Cork and Dublin cities.

Bord Gáis was established under the Gas Act, and charged with the responsibility for the supply, transmission and distribution of natural gas which was first brought ashore in 1976 from the Kinsale Head Gas Field. New sources of supply are expected to come on stream after 2009/10, including the Corrib gas field and potentially the Shannon Liquefied Natural Gas (LNG) terminal. Added to gas supplies, energy exports have the potential to transform Ireland's economy.

Statistics

• Electricity production: 23.41 billion kWh (As of 2003)
• Energy production by source: oil: 55.8%, natural gas: 24.3%, coal: 12.9%; peat: 3.8%; renewables: 2.2%; nuclear: 0% (As of 2004)
• Electricity consumption: 22.97 billion kWh (As of 2003)
• Electricity exports: 0 (As of 2003)
• Electricity imports: 1.2 billion kWh (As of 2003)
• Oil consumption: 175,600 bbl/day (27,918 m³) per day (As of 2003 est.)
• Natural gas production: 673 million m³ (As of 2003 est.)
• Natural gas consumption: 4.298 billion m³ (As of 2003 est.)
• Natural gas proved reserves: 19.82 billion m³ (As of 1 January 2002)

Monetary system

See also: Irish euro coins

As the country is a member of the Economic and Monetary Union of the European Union, the euro is the currency. The Central Bank and Financial Services Authority of Ireland is the country's central bank and financial services regulator, and an agent for the European Central Bank which sets the interest rates.

While there are over 60 credit institutions incorporated in Ireland, the banking system is dominated by the Big Four - AIB Bank, Bank of Ireland, Ulster Bank and National Irish Bank. There is a large Credit Union movement within the country which offers an alternative to the banks. The Irish Stock Exchange is in Dublin, however, due to its small size, many firms also maintain listings on either the London Stock Exchange or the NASDAQ. The insurance industry in Ireland is a leader in both retail markets and corporate customers in the EU, in large part due to the International Financial Services Centre.

Economic sectors

The Irish economy's secondary and tertiary sectors are of a similar size in fiscal terms however in terms of labour, the tertiary sector is far larger. Similarly in fiscal terms the primary sector appears small, however it still employs about 8% of the workforce.

Primary sector

The primary sector constitutes about 5% of Irish GDP, and 8% of Irish employment. Ireland's main economic resource is its large fertile pastures, particularly the midland and southern regions. In 2004, Ireland exported approximately €7.15 billion worth of agri-food and drink (about 8.4% of Ireland's exports), mainly as cattle, beef, and dairy products, and mainly to the United Kingdom. As the European Union's Common Agricultural Policy takes force Ireland's agriculture industry is expected to decline in importance. In the late nineteenth century, the island was mostly deforested. In 2005, after years of national afforestation programs, about 9% of Ireland has become forested. It is still the least forested country in the EU and heavily relies on imported wood. Its coastline - once abundant in fish, particularly cod - has suffered overfishing and since 1995 the fisheries industry has focused more on aquaculture. Freshwater salmon and trout stocks in Ireland's waterways have also been depleted but are being better managed. Ireland is a major exporter of zinc to the EU and mining also produces significant quantities of lead and alumina. Beyond this, the country has significant deposits of gypsum, limestone, and smaller quantities of copper, silver, gold, barite, and dolomite. Peat extraction has historically been important, especially from midland bogs, however more efficient fuels and environmental protection of bogs has reduced peat's importance to the economy. Natural gas extraction occurs in the Kinsale Gas Field and the Corrib Gas Field in the southern and western counties, where there is 19.82 bn cubic metres of proven reserves.

Secondary sector

The secondary sector constitutes 46% of Irish GDP — but only 29% of the labour force. Dominated for many years by textile companies like Fruit of the Loom, the sector is now largely made up of high-tech/high value multi-nationals such as Intel, Pfizer and IBM. The secondary sector in Ireland manufactures products such as computers (25% of Europe's computers are made in Ireland, the European Headquarters of Apple Computer are in Cork City), computer parts (Intel processors are made in Ireland), drugs (much of Europe's supply of Viagra is made in Cork), confectionery (HB, Jacob's and Cadbury-Schweppes all have significant Irish operations - although Cadbury-Schweppes does not manufacture Schweppes products in Ireland or the UK), beer (the Guinness and Smithwicks, and Harp Lager breweries are located in Ireland), high quality glass and crystal (Waterford Crystal is made in County Waterford), software (Ireland is the world's largest exporter of software - Oracle and Microsoft both have large operations in Dublin) and machinery. The sector faces increasing competition from cheaper Eastern European countries such as Poland and many Asian countries such as the People's Republic of China, particularly in the lower skill areas such as confectionery manufacturing. The industrial production growth rate in As of 2003 was 6.7%. Over the last decade, construction has become a major component of the economy, currently constituting 9% of economic activity. A recent downturn in residential property market sentiment, combined with the cyclical nature of construction has highlighted the over-exposure of the Irish economy to construction, which now presents a threat to economic growth.

The construction sector, which is inherently cyclical in nature, now accounts for a significant component of Ireland's GDP. A recent downturn in residential property market sentiment has highlighted the over-exposure of the Irish economy to construction, which now presents a threat to economic growth.

Tertiary sector

The tertiary sector constitutes 49% of Irish GDP and 64% of Irish employment. The tertiary sector is by far the largest driver of modern Irish economic growth — the Celtic Tiger. It is made up of several industries such as accountancy, legal services, call centres and customer service operations, finance and stock broking, catering, and tourism. Many US firms (such as IBM, Apple Inc., Google and eBay) located their European customer service operations in Ireland due to the availability of a young, highly educated, English speaking workforce. Recruitment agencies also play a major role in this sector, connecting qualified work candidates to business clients looking to hire in these areas. The Irish tourism industry attracts over five million visitors annually and employs over 100,000. The IFSC in Dublin created some 14,000 jobs in the 1990s, all in the high-value finance and legal sectors. The hospitality and retail sectors are quite large — there are hundreds of domestic and foreign retail firms in Ireland (such as Next and Argos), and most cafe and restaurant firms operate in Ireland such as McDonalds, Starbucks, Burger King and Subway.

State role in the economy

Through RTÉ the government control much of the radio and television broadcast sector, although commercial enterprises are gaining market share .

Taxation

Main article: Taxation in the Republic of Ireland

Recent economic policy has favoured a low corporation tax to encourage foreign direct investment in Ireland. Consequently, the government opposes moves by the European Commission to restrict tax competition. Between 1998 and 2003 the corporate tax rate was reduced in stages from 32% to the current rate of 12.5%, versus between 15% and 60% in the rest of Europe. The income tax system is designed to redistribute wealth from the richer to the poorer segments of society. There are 2 tax bands, based on income levels. These range from a maximum top rate of 41%, to a maximum bottom rate of 20%. In reality, however, a generous tax credits system ensures that the lower rates of taxation are normally 4% to 12%. The top rate of tax never exceeds 35% in practice.

The government receives much of its revenues from taxes on goods — these include a 21.5% VAT rate on most consumer goods, high levels of excise duty on tobacco, petrol, and alcohol, a Vehicle Registration Tax of between 14% and 36% on new passenger vehicles and high annual Motor Tax rates, as well as several smaller taxes on items such as plastic bags, cheques, ATM cards, credit cards and debit cards. The taxes in the personal financial sector, as well as the television licence, are often seen as regressive.

Welfare benefits

As of December 2007, Ireland's net unemployment benefits for long-term unemployed people across four family types (single people, lone parents, single-income couples with and without children) was the third highest of the OECD countries (jointly with Iceland) after Denmark and Switzerland.

Jobseeker's Allowance or Jobseeker's Benefit for a single person in Ireland is €197.80 per week, as of January 2008. This compares to £60.50 (~ €77.20) per week for a single person aged 25 or over in the UK.

State provided old age pensions are also relatively generous in Ireland. The maximum weekly rate for the State Pension (Contributory) is €223.30 for a single pensioner aged between 66 and 80 (€423.30 for a pensioner couple in the same age range). The maximum weekly rate for the State Pension (Non-Contributory) is €212.00 for a single pensioner aged between 66 and 80 (€352.10 for a pensioner couple in the same age range).

Wealth distribution

Like many Western democracies wealth is partially redistributed among the poorer segments of society through the progressive tax system. Large disparities in wealth exist between those employed and those dependent on welfare payments. The percentage of the population at risk of relative poverty was 21% in 2004 - one of the highest rates in the European Union. Levels of wealth higher than the national average are concentrated among people living in the central eastern region and in Dublin. Despite this, there are many areas in Dublin marked by relative poverty, particularly in the inner city. The poorest members of society are those entirely dependent on welfare payments. Ireland's inequality of income distribution score on the Gini coefficient scale was 30.4 in 2000, slightly below the OECD average of 31. Ireland's 2000 score was less than 9 of the OECD member states but higher than 13 members.

In contrast to most other countries in the European Union (with the exception of the UK, Greece and Hungary) Ireland has high rates of home ownership. In particular, house ownership (at approximately 80%) is the norm. In Continental Europe renting is the norm. Social housing schemes do exist and the government has invested €8.5 billion in the provision of over 34,000 social housing units between 2000 and 2005.

Sustained increases in the value of residential property during the 1990s and up to late 2006 was a key factor in the increase in personal wealth in Ireland, with Ireland ranking second only to Japan in personal wealth in 2006. However, residential property values and equities have fallen substantially since the beginning of 2007 and major declines in personal wealth are expected.

Minimum wage

The national minimum wage is €8.65 per hour for full time staff over the age of 18 — this is one of the highest in the world. From 2007, someone working 39 hours per week at this rate is exempt from income tax, as earned income below €17,600.00 per year is not taxed. Nonetheless, all income above a level of €15,800 is subject to a levy of 2% as a response to the economic crisis and budgetary difficulties.

Economic ties

Exports play a fundamental role in Ireland's growth and over the last 40 years a string of significant base metal discoveries have been made, including the giant ore deposit at Tara Mine. Zinc-lead ores are also currently exploited from two other underground operations in Lisheen and Galmoy. Ireland now ranks as the seventh largest producer of zinc concentrates in the world, and the twelfth largest producer of lead concentrates. The combined output from these mines, three of Europe’s most modern and developed mines, make Ireland the largest zinc producer in Europe and the second largest producer of lead.

The country is one of the largest exporters of software-related goods and services in the world.

European Union

Ireland has grown much closer to the rest of Europe from the late 20th century — particularly since it joined the European Union (EU) in 1973. It is also part of the EMU and thus has the euro as its currency. Many US companies have located their European headquarters in Ireland and this has led to increased Irish-European ties. Ireland regularly comes near the top in polls of the most enthusiastic Europeans and spent some €60m during its presidency of the EU. The EU now accounts for the bulk of Irish trade, with the United Kingdom being the largest trading partner. Ireland's main exports to the rest of Europe are beef, computers (Dell, Intel, HP, EMC, Analog Devices and Apple Computer all have manufacturing facilities in Ireland) and software (Oracle and Microsoft have their European Headquarters in Ireland). Ireland's major imports from Europe include cars, machinery, trucks, steel, oil and consumer goods. A major economic bonus Ireland has received from EU membership has been agricultural subsidies from the CAP and large amounts of EU investment in Irish road infrastructure. Since the acceptance of the 10 new Eastern European nations in 2004, Ireland's ties with Europe further increased. Since the accession event in 2004, several hundred thousand workers from countries such as Poland (mostly), Latvia, and Estonia, no longer requiring work permits, came to live and work in Ireland.