Irish economy smiling as GDP growth beats eurozone rivals

Ireland (Other OTC: IRLD - news) has much to smile about currently.

The country's rugby team has just clinched its third Six Nations title in five years.

It has had nearly twice as many winners as Great Britain so far at the Cheltenham Festival.

And St Patrick's Day is just 48 hours away.

Thursday, though, brought something arguably more important than all of those causes for cheer.

Ireland has just been confirmed as the fastest-growing economy in the eurozone for the fourth consecutive year.

Irish GDP grew in 2017 by 7.8%, up from 5.2% in 2016, with almost all parts of the economy growing strongly.

That growth, spurred on partly by a solid performance from the country's important IT sector, was more than three times the eurozone average.

It adds up to a spectacular turnaround from the dark days of 2010 when, with the banking sector on its knees and property prices in freefall, the economy contracted by 14.8%.

Two years later, almost one Irish person of working age in every seven was unemployed.

So how did Ireland do it? Two things stand out.

The first is that Ireland endured genuine austerity as it sought to stabilise its public finances.

Unlike in Britain, where public spending grew every year in cash terms every year after the crisis and where entire sectors - notably the NHS and foreign aid - were ring-fenced from cuts, Ireland cut spending and raised taxes in a big way.

As a result, not only has the deficit been more or less wiped out, Ireland has actually brought its debt-to-GDP ratio down from 89.4% in 2013 to just 66% in 2016, quite a contrast with the UK, where the debt-to-GDP ratio still stands at north of 85% and is only set to start falling next year.

The second factor lies in all of the strengths outlined by Ireland's former finance minister, the late Brian Lenihan, days after his appointment at the height of the crisis in May 2008: flexible markets, a dynamic and well-educated labour force, a pro-business and outward-looking society and very low taxes on both labour and capital.

All of those assets helped Ireland continue to attract foreign investment, even while the crisis was still raging, with the likes of Airbnb and Facebook (NasdaqGS: FB - news) among those to have opened or expanded their activities in Ireland during recent years.

Whereas in the so-called 'Celtic Tiger' years, excessive lending by banks to the property sector created a bubble in asset prices, investment across Ireland these days is more broadly based.

Multinationals are still investing in Ireland and the country's exports are rising.

The recovery in the public finances also means Ireland is at last able to start investing in infrastructure again.

A new metro service is planned to relieve congestion in Dublin's choked streets while a new motorway connecting the country's second and third largest cities, Cork and Limerick, is also planned.

There is some caution required.

At present, the recovery is largely concentrated by Dublin, where house prices are climbing sharply again.

The annual worldwide cost of living survey by The Economist Intelligence Unit, published this week, revealed the Irish capital is now a more expensive place to live than London.

There are concerns that, as young people return to Ireland, further pressure on housing will be created.

And it is also fair to say that the GDP figures are not viewed by everyone as providing a reliable picture of growth.

Due to the large amount of foreign direct investment Ireland enjoys, proportionate to its economy, the statistics have suffered in the past from a fair degree of distortion due to a variety of factors including accounting for research and development, aircraft leasing activity and the relocation and restructuring activities of multinational companies.

A lot of economists prefer to look not at the Irish GDP data but at Gross National Income (GNI (KOSDAQ: 192410.KQ - news) ), an alternative measure, which seeks to strip out the impact of activity in the country due to globalisation.

However, even on this narrower measure, the Irish economy grew by 6.6% last year.

Nowhere can the growth be seen coming through more strongly than in the employment figures.

Data published earlier this week revealed the number of people in work, at 2.23 million, to be just short of the all-time pre-crisis high of 2007.

The unemployment rate is down to 6.1%, less than half the level during the crisis, which is a spectacular achievement given that the population as a whole has risen by 10% during the past decade.

One major cause for concern is the extent to which Brexit will impact the Irish economy.

However, on these numbers, it appears not to be dampening economic activity just yet.