The economic outlook is even more downbeat in Europe than it is in New Zealand. Share markets are tumbling and the media are dominated by reports of depressed housing markets, banking problems and job losses.

Economic pessimism is particularly pronounced in Ireland, which is experiencing a major economic downturn after a long period of impressive economic growth.

The Irish media are full of sensational business stories, with one radio station reporting that a number of expensive, debt-funded BMWs have been found abandoned at Dublin Airport after the owners left permanently for Australia.

What went wrong? Why has the Celtic Tiger died such a painful death and are there any lessons here for New Zealand?

The Irish economy experienced spectacular growth between 1995 and 2006 as real gross domestic product grew by more than 5 per cent in 10 of these 12 years. By contrast, New Zealand’s highest GDP growth rate during this period was 4.8 per cent and we slipped to 19th among the 30 OECD countries on a per capita GDP basis while Ireland leaped to third.

Ireland’s success was built on its ability to take advantage of EU membership, a low corporate tax rate and proactive policies to attract overseas investors that built new export-oriented operations.

These policies were a spectacular success, with Irish exports surging 152 per cent between 1995 and 2006 while New Zealand’s grew by a more modest 56 per cent over the same period.

But Irish consumers became overconfident and went on a huge borrowing, spending and residential property binge. The property bubble has burst and this is having a major impact on the banking system and consumer spending. One major economic forecasting group predicts GDP will fall by 4 per cent next year.

Ireland and New Zealand have similar populations, yet 93,419 new houses were built in Ireland in 2006 and 78,027 last year compared with 25,952 and 25,644 respectively in New Zealand.
Housing construction boomed in Ireland because of cheap finance, rising house prices, tax incentives and high immigration, particularly from Eastern Europe.

The rental market was buoyant because of the inflow of migrant workers and there seemed to be more Polish immigrants than Irish at the Ireland versus Poland soccer international in Dublin on Wednesday.

But with job losses increasing, these migrant workers are returning home and the Irish countryside is dotted with housing estates – containing between 10 and 40 identical houses – with only 20 per cent to 30 per cent of the dwellings sold.

This oversupply is having a dramatic impact on prices – the average sale price fell by 14.8 per cent from its December 2006 peak to ¬266,400 ($632,000).

In contrast, the median New Zealand sale price has fallen only 6.3 per cent from its all-time high to $330,000 in September. Irish house prices are expected to fall by 30 per cent from top to bottom and land prices by even more.

The two major listed banks, Allied Irish Bank and Bank of Ireland, have a huge exposure to the property market and the total level of household mortgage debt is $338 billion (¬147.5 billion) compared with $161 billion in New Zealand.

But a major difference between Ireland and New Zealand is that the Irish banks have financed property developments, whereas in New Zealand developers were mainly funded by finance companies.

This has had negative implications for the Irish banks, with Allied Irish Bank’s share price falling from a peak of ¬24.39 in February last year to ¬2.18 this week, and Bank of Ireland shares dropping below ¬1 compared with its all-time high of ¬18.82 just 21 months ago.

Falling bank share prices has been the main item on most television and radio news bulletins this week and the Irish Government has indicated it will recapitalise, and partially nationalise, the Bank of Ireland. This would be a major decision as the bank, which was founded in 1782 and should not be confused with the Central Bank of Ireland, has remained privately owned throughout Ireland’s traumatic history.

Falling house prices and the huge amount of personal debt is adversely affecting the retail sector, with September sales down 3.8 per cent compared with September last year. This was the sixth consecutive month that retail sales were lower than the same month in the previous year.

The country’s unemployment rate has risen from 5.3 per cent in April to 6.6 per cent in September, well above New Zealand’s 4.2 per cent.

The Irish sharemarket has taken a pounding, with the benchmark index down more than 72 per cent since its February 2007 high. This reflects the large number of banks and construction companies listed on the Irish Stock Exchange.

Thus the combination of falling house and share prices, the huge level of personal debt and the international recession is having a major impact on the Irish economy, with the result that consumer confidence is ebbing quickly. The GDP forecasts in the accompanying table have been compiled by the Central Bank of Ireland and the Reserve Bank of New Zealand.

These are one month and two months old respectively and many economists, particularly Irish economists, believe the decline in next year’s GDP will be far worse.

The lesson to be learned from Ireland is no matter how well an economy is performing, it is extremely important to ensure that asset bubbles, particularly debt-fuelled ones, are nipped in the bud and the banking system is carefully, but not overly, regulated.

The Irish Government gave attractive tax breaks for property investment in rural and holiday areas and there has been major overbuilding in these parts of the country that will take a long time to absorb.
New Zealand’s residential property boom was also boosted by tax breaks and politicians were unprepared to dampen the party while it was in full swing.

Debt-fuelled property binges don’t have soft landings and this downturn will be fairly severe across most of Europe. A number of leading economists predict this will be the worst recession since World War II.

Governments and central banks have adopted three broad policy measures to try to soften the blow. These are:
* Slashing interest rates.
* Introducing measures to encourage banks to start lending again. This includes the recapitalisation of major financial institutions.
* Boosting spending through fiscal measures, including accelerated infrastructure spending and tax cuts.

Banks are making on-balance sheet loans but their off-balance sheet activities, mainly securitised products, are contracting sharply and this is resulting in an overall reduction in lending.

There is considerable disagreement about the wisdom of fiscal stimulation, particularly tax cuts and other Government spending projects, because they will lead to an increase in Budget deficits and public debt.

These concerns should be ignored in the short term because the impact of a severe recession – big contractions in economic activity, rising unemployment and a sharp jump in social welfare payments – is far worse. The onus is on Governments to do everything they can to avoid these outcomes, regardless of the short-term Budget and public debt consequences.

Ireland versus New Zealand – Irish housing bubble was much bigger




New Zealand 





Per Capita GDP 




GDP Growth 




– Last year (actual) 




– This year (estimate) 




– Next year (forecast) 




New houses built 




Personal mortgage debt 

September 30

$338 billion

$161 billion

Average house price




Retail sales

Sept08 v Sept07







Sharemarket capitalisation

October 31


$43.5 billion


 All figures are in NZ dollars.