The Celtic Tiger
19 August 2002
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Growth and key balances
Once the poor man of Europe, the 1990s saw Ireland dubbed the 'Celtic Tiger'. A combination of sound macroeconomic policy and favourable economic circumstances saw average gross domestic product (GDP) growth levels in Ireland rise to around 10 per cent from the mid-1990s.
GDP growth peaked at a whopping 11.5 per cent in 2000. Growth was fuelled by buoyant external demand, a growing labour force and membership of the EU. Unlike the UK, Ireland is now a fully-fledged member of the Eurozone, switching to the euro at its birth on 1 January this year.
Attracting foreign direct investment (FDI) has also been a major part of Ireland's recent success story. However, last year GDP growth fell by almost half to a little under 6 per cent as the global slowdown took its toll and FDI bombed. The outlook for 2002 suggests that GDP will halve again this year.
But not all the news is bad. A comparison of the full-year figures disguises an underlying pattern of recovery. GDP grew by 2.9 per cent year on year in the first quarter, which compares well with the previous quarter, when GDP growth measured just 0.1 per cent.
Exports and GDP growth are expected to pick up in the second half of 2002, assuming that the global economic recovery continues. However, uncertainty and volatility in key global markets (notably the US), the appreciation of the euro and high, although falling, domestic wage and price inflation pose considerable risks in this respect.
After a poor year by Irish standards, these factors should provide the basis for stronger GDP growth of around 6 per cent in 2003. This should set the pattern for the medium term as the growth of the labour force slows, real income convergence causes productivity levels to decline and FDI returns to more normal levels following the bursting of the technology bubble. The Celtic Tiger is likely to roar again, but the roar will be more muted than in the heady 1990s.
A stock market tiger?
The growth of the Irish economy helped to underpin a stock market rally that outperformed leading global stock markets, as the comparison between Ireland's top ISEQ index and the Dow Jones/FTSE 100 demonstrates.
However, like stock markets in other parts of the globe, Ireland's leading ISEQ index is firmly in retreat in 2002. Still further fallout is expected as a result of the bursting of Ireland's high-tech bubble; and the index has yet to bottom out.
On the back of foreign investment
Much of the recent success of the Irish economy has come from strong inflows of foreign investment. Investment boomed from negligible levels in the mid-1990s to huge heights by the end of the decade. Much of that investment was in the high-tech and telecoms sectors.
The comparably strong e2bn (£1.3bn) investment in the first quarter of this year has encouraged optimists to believe that inflows will remain strong amid higher global economic uncertainty. n
Brian Clark and Simon Woodward are economists at the World Markets Research Centre