Ireland GDP Decline Adds More Tarnish to Austerity Myth

Econintersect:  Ireland GDP contracted by 1.9% in the third quarter, to become the second worse Eurozone economy after Greece, another poster child for austerity.  In spite of the sharp downturn, Reuters says analysts predict the country will still eke out a narrowly positive GDP change for the entire year, less than a 1% gain.  Even with the third quarter decline Reuters reports expectations for GDP to deteriorate in 2012 if Ireland’s main trading partners fall into recession.  The promise of austerity was that “internal devaluation,” with reduced wages and public services, would make Ireland more competitive in export markets and propel the country into recovery.  Instead it is now feared that the exports markets may be curtailed and Ireland will just be involved in a spiral to the bottom.

The Dublin government’s achievement in generating growth despite severe public spending cuts had been hailed by some economists as an example of a successful “expansionary fiscal contraction”.  But this idea that one can cut back to create growth is now looking more like a myth.  From Reuters:

“It (GDP) is probably below the 1 percent this year,” said Austin Hughes, chief economist at KBC Bank. “In terms of next year it just emphasises the difficulty we have.”

The contraction in Gross Domestic Product (GDP) on a seasonally adjusted basis was far worse than forecasts of a 0.5 percent fall by seven economists polled by Reuters.

Held up as a role model for other indebted euro zone nations, deteriorating prospects for Irish growth threaten to undermine its efforts to become the first country to emerge from an EU-IMF bailout in 2013.

The following graphic from Trading Economics shows the course of Ireland’s GDP over the past five years.

Ireland experienced a decline in real GDP of 7.3% in The Great Recession and has seen a further decline of 0.9% in the nine quarters since.  By comparison, the U.S. had a similar decline of 5.2% followed by an advance of 5.3%.  This data supports austerity for growth?

Further study of the benefit of internal contraction to create growth has been outlined in a report posted this week on GEI Analysis, looking at Latvia.  Widely heralded as a success story for austerity leading to growth, the data is quite to the contrary.  And today GEI News reports about the recurring bank runs and bank failures in that country.

Sources:  Reuters, Trading Economic, GEI Analysis and GEI News