15/6/2012: IMF Review of Irish Economy: Q2 2012

IMF latest outlook for Ireland. Not so cheerful reading after all. Quoting from the report:

• Growth prospects for 2012 remain modest at about ½ percent, unchanged from the fifth review. 
• Consumption is projected to decline by 1.7 percent as real household disposable income further weakens while the savings rate will likely remain elevated as households continue to reduce high debt burdens, although retail sales data for April suggest downside risks. 
• The decline in fixed investment is expected to continue, in part owing to fiscal consolidation, though at a slower pace than in 2011.  

Summary table:

Further quoting from the report [emphasis and comments mine]:

• An external recovery underpins the projected strengthening in growth in coming years, with support from a gradual revival of domestic demand, but there are significant risks. 
• Net exports are expected to continue to be the main contributor to growth in 2013–14, with support from further gains in competitiveness over time. [Albeit exports contribution to growth will effectively drop like a brick - from 4.5% in 2011 to 1.2% in 2017]
• Consistent with Ireland’s major banking crisis and ongoing fiscal consolidation, the revival in domestic demand is projected to be a protracted process, with a stabilization of demand in 2013, followed by a gradual pick up to about 2 percent growth by 2015–17. 
• Overall, growth is projected to average 2½ percent in 2013–17, which is low in relation to the scale of underutilized resources. [Re: unemployment staying very high and underinvestment continues rampant through the period].

There are, however, a range of interconnected risks to this outlook: 

• An intensification of euro area stress would heavily impact Ireland’s growth and the debt outlook through exports, and also through household and business confidence and spending, with adverse effects on financial sector health. [Not exactly 'just feta', then?]
• The gradual resumption in private consumption and investment growth starting in 2013 hinges on a combination of a bottoming out of housing prices, some pick up in lending to SMEs and the younger cohort of households with less debt [note stress on cohorts effects - supporting my continued insistence that, in effect, the current crisis and lack of Government support for deleveraging of households mean lost generation of highly indebted households], well targeted private debt restructuring over coming years, and public confidence that the crisis is being overcome, which will allow some easing in precautionary savings. [That is a motherload of 'ifs' there - all showing no sign of materializing any time soon.]
• Banks’ capitalization has been greatly strengthened, but their underlying profitability remained weak in 2011, reflecting the low quality of loan portfolios which include significant legacy assets. These factors could hinder a renewal of lending to households and SMEs including by limiting access to funding.
• Gradual recovery and slow reductions in unemployment could imply higher structural unemployment, limiting potential growth in the medium-term, and ongoing high youth unemployment could risk sustained high emigration. [Clear warning on human capital side].

In short, I can't read much of any conviction in the IMF view that the above risks will not overwhelm the economy in its current weak state.

Worse: "The structure of government debt, in particular the promissory notes, is a further challenge. ... [the] lack of burden-sharing on senior bank debt as part of the resolution process added to government debt, exacerbating the political difficulties with the annual payments of €3.1 billion due on the notes until 2023. In these circumstances, the authorities settled the payment due at end March 2012 by placing a long-term government bond with a face value of €3.5 billion with IBRC. The underlying set of transactions was complex and it is not expected that future promissory note payments can be financed in this manner. A more durable extension of the debt service schedule on promissory notes, matched by corresponding stability in the Eurosystem funding of IBRC, is needed to ensure the political sustainability of the substantial medium-term fiscal consolidation planned, and to significantly reduce market financing requirements in the medium term and thereby facilitate regaining market access."

So the 'Bad Cop' IMF is, as I always said before, still playing our side in the game against our wonderful 'European partners' who are screwing Ireland. Hmmm...

On debt: "Debt sustainability remains fragile, especially with respect to medium-term growth prospects. The debt path is projected to peak at 121 percent of GDP in 2013 and to decline to 111 percent of GDP by 2017. The upward shift in the gross debt path compared with the previous review reflects higher cash balances, which are expected to reinforce prospects for regaining access to market funding. The debt outlook remains sensitive to weaker growth, with debt rising to about 133 percent of GDP by 2017 if growth were to stagnate at 1⁄2 percent. Although the disposal of state assets and the planned sale of Irish Life could modestly lower the debt path, this may be offset to some extent in the next few years by potential outlays for restructuring the credit union sector."

Chart: 

Now, Green Jerseys love the number of 117% don't they... oops... IMF is sticking to 121%. Recall, Green Jerseys said in the past that debt < 120% is sustainable. Goodie, then...

IMF's overall review conclusions are:

• Ireland’s policy implementation has been consistently strong during the first half of the EU-IMF supported program, yet considerable challenges remain.
• The Irish economy remains weak, with real GDP broadly flat in the last three years.
• Labor market conditions may be beginning to stabilize, yet they remain adverse.
• The lack of employment opportunities is seen in the rising share of involuntary part-time employment, vacancy rates among the lowest in Europe, and the long- term unemployment share rising to 60 percent [note that this fully corresponds to my estimates and analysis of the 'broader' unemployment figures for Ireland - something that the Government comprehensively ignores.]
• Inflation continues to rise and is now closer to the euro area average [with energy accounting for three quarters of the increase and core inflation (mostly transport and insurance) contributing the remainder - in other words, IMF is noticing our Government's valiant efforts to gouge consumers by hiking state-controlled prices.]
• The current account was broadly balanced at 0.1 percent of GDP in 2011, and the unwinding of competitiveness losses continues. [Good news, but although a continued gradual decline in Ireland’s market share in goods exports suggests further improvements may be needed]
• Bank funding pressures appear to be easing as the overall level of deposits in the banking system has stabilized
• Mortgages - see follow up post, but core conclusion is that household deleveraging is simply not happening fast enough (see my forthcoming Sunday Times article on this)
• The PCAR banks are highly capitalized but report low profitability mostly due to weak loan quality [As warned in my Sunday Times columns]
• Exchequer situation - see follow up post but headline conclusion is: 
  Final data confirm the 2011 general government deficit was well within the program ceiling and Fiscal developments in the first four months of 2012 were in line with expectations.