Thursday, March 30, 2006

Irish Economy Booms-For Now

GDP growth in Ireland was a full 5.7% in the fourth quarter compared to the same period last year. Adjusted for terms of trade, growth was in fact even higher than the 5.7% volume number. Even taking into account that Ireland have much higher population growth than the rest of Europe due both to a much higher birth rate and a large inflow of Eastern European workers, this is far higher than any other Western European country.

Even taking into account the fact that some of Ireland's GDP is an accounting fiction created by the internal pricing of multinational corporations wiching to benefit from Ireland's low corporate taxes, Ireland now have a higher per capita income than its increasingly socialist neighbor Britain. In sharp contrast to the U.K., government consumption declined somewhat relative to GNP and GDP evem though it increased fast in absolute terms.

This does not mean that all is well for Ireland. While some of the factors now driving growth, like its relatively low tax and spending levels and its favourable demographics will remain, others are not as likely to be permanent. The strong housing boom in Ireland have been driven by in part the low interest rate policies of the ECB and in part by the inflow of Eastern Europeans who have boosted both demand and labor supply for the residential construction industry. The increasing inflationary pressures and cyclical upswing in the Euro-zone makes several interest rate hikes likely, something which will hit Ireland harder than other parts of the Euro-zone due to the large build up in debt in Ireland in recent years.

Moreover, due to shrinking populations and higher rates of economic growth (at least in per capita terms) Eastern Europeans will be more reluctant to emigrate. And as more and more EU countries do away with their immigration restrictions for Eastern Europeans, they will increasingly go other countries than Ireland.

Over a longer period of time, Ireland's outlook is certainly far better than the rest of Western Europe due to its lower taxes and higher birth rates. However, there is a risk for a temporary cyclical downturn.


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