This is an abbreviated post from our subscription series at Credit Writedowns Pro.
I am very interested in the intersection of private debt, financial fragility and economic growth because I believe this intersection is pivotal in understanding whether the secular forces which led to the Great Financial Crisis have been arrested. I want to use Ireland as a jumping off point here for a wider questioning.
Here’s what we know.
- Ireland has been one of the best performing countries in the eurozone periphery as the European sovereign debt crisis has faded from the headlines. We have seen 14 straight months of growth in the manufacturing sector where the latest PMI was 55.4, among the highest in the eurozone.
- Moody’s believes the economy will expand twice as fast as the overall eurozone.
- As business activity has picked up, so have office rents. They are up
- Property prices are up 12.5% year-on-year after a steep decline post-crisis. Prices are now still 43% off their peak.
- Housebuilding demand has really pickup as a result with housing starts up 132% in January – April versus the year ago period.
- But, problems remain and they are enormous aside from the unsecured debt problem. Unemployment is still 11.5%
- At the end of 2013, government debt to GDP was 123.3%, up from 24.8% pre-crisis. Debt to GDP declined to 122.2% after Q1 2014. But the deficit was still 5.6% of GDP, meaning that government debt can still rise across the business cycle as a percentage of GDP despite growth.
- As a result, the EU still prescribing more austerity. Jean-Claude Juncker is on record saying so.
- And that means infrastructure cutbacks. Before the crisis, Ireland planned to boost investment in education to over a billion euros annually. But by 2011, a deep recession meant the government had to cut its capital spending plans education to about half that level.
The bottom line is that, despite the cyclical bounce, Ireland has deep structural problems and a large debt overhang that will make it difficult for consumer spending and economic growth to be robust in the absence of asset price appreciation.
I think this goes to the general problem across economies in North America and Europe that suffered in the crisis. The debt overhang is diminished, but still large. In Ireland, where expunging debt is more difficult, we are seeing a huge surge in unsecured household credit even while the mortgage debt overhang still exists. All of this is manageable in a cyclical upswing in the midst of rising asset prices. But once the economy turns down, how resilient is the economy to deal with these problems? I don’t think we know the answer to this.
Full commentary at Credit Writedowns Pro