Ahearne (Indirectly) on the Irish Economy

In today’s Irish Times, Harry McGee reports the substance of Alan Ahearne’s recent presentation on the state of the Irish economy here.

17 replies on “Ahearne (Indirectly) on the Irish Economy”

Ahearne deserves credit, as an independent academic, for his timely warnings about the coming crisis.

But, now that he is a special advisor, he is condemned to the party line. Granted, he has the privilege of helping shape that line. But he cannot publicly take a stand against the government line. [I speak here as a special advisor in the last government.]

One key variable missing in Ahearne’s analysis is property prices. Maybe he dealt with the subject and it was omitted from Harry McGee’s reporting or maybe it was omitted from what McGee himself was told. But the future course of property prices is central to (a) bank solvency and (b) consumer solvency.

If, as I believe, commercial and residential property prices still have a long way to fall, then our national debt will rise higher and higher (as the state repairs ever more insolvent bank balance sheets) and the recovery will be delayed and slow (as consumers try to avoid insolvency and focus on repairing thier own balance sheets).

Yes, the private sector has adapted well. But that is not just a symptom of funtioning markets. It is a symptom of desperation and the scale of our depression.

But net current government spending (the element of the economy most under the control of Alan Ahearne et al) is planned to rise in every single year from 2006 to 2013 despite the economy being forecast to shrink by some 15-20% during that period.

Another key variable missing from Alan Ahearne’s analysis is interest rates. If cheap interest rates fuelled the bubble, why are so few looking at interest rates today?

Running 2009 government forecasts (from the Supplementary Budget) for inflation and the output gap through Rossa White’s January 2005 formulation of the Taylor Rule generates an appropriate interest rate for Ireland today of -5.5% (minus five point five per cent).

The government’s efforts are focussed on restoring the supply of credit by repairing our banking system. They risk expending huge political and financial captial doing so, only to find that demand for credit has dried up. Rapid falls in the issue of new credit card debt (an area without reported credit supply constraints) point clearly in that direction.

What is it about some economists in Ireland that they can’t get their basic statistics right? Do they not teach statistics as part of economics courses in Ireland?

This doesn’t happen in other fields that require a bit of numeracy. If there was a debate concerning, say, the relative performance over the years of various gaelic football teams, and one of the contributors got the result of the 1944 All-Ireland Final wrong by one point, he’d be labelled as a ‘know nothing’ and banned from partaking in any further discussion.

First, we had Morgan Kelly’s ludicrous claim on Friday that housebuilding’s share of Ireland’s national income (GDP) had fallen from 20% to zero. When I exposed this as ridiculous on another thread on Friday, his fan club eventually came up with the ‘explanation’ that he didn’t really mean
‘national income’ but ‘government tax receipts’. Although any economist would know the difference between the two.

Now, we have the ‘foremost’ economist in the country making a number of elementary howlers, which completely destroy his analysis of Ireland’s recent economic performance.

First, Professor Ahearne claims the following:

“The huge over-dependence on construction, he told the meeting, saw its share of GDP increase from 4 per cent in the 1990s to 13 per cent in 2006.”

No, it didn’t. It peaked at 9% in 2006. It has since fallen to about 6%. The actual figures for the share of building and construction in Ireland’s GDP during the boom years were as follows:

1995 4.8%
1996 4.9%
1997 4.9%
1998 5.4%
1999 5.9%
2000 6.7%
2001 7.0%
2002 6.9%
2003 7.2%
2004 7.9%
2005 8.8%
2006 9.0%
2007 8.5%

The figures are on the CSO website at the following link:

As to why construction’s share of GDP did rise (even if not by as much as Professor Ahearne claims), I’d have thought the reason was pretty obvious. Contrary to what the conspiracy theorists believe, it was not the result of a plot hatched in the Galway Tent between the Government, the Banks and the evil housebuilders. Rather, it was the correct market response to Ireland’s unprecededent population growth. Between the mid 90s and 2007, Ireland’s population increased by 35%, compared with around 5% in most EU countries. So, of course, we had to build far more houses than any other country. Do Ahearne and others think the extra million people (of whom half a million were immigrants and returning emigrants) should have been housed in tents in the Phoenix Park? The Irish housebuilding industry deserves great credit for being able to raise output to such an extent that all the extra million people were
accommodated in high-class modern housing. But, I digress.

Next, Professor Ahearne claims the following:

“At the same time, with inflation, rising prices, costs and wages, EXPORTS CONTINUED TO FALL. The figures in retrospect are incontrovertible and indefensible.”

No, they didn’t. They CONTINUED TO RISE. The actual figures for the annual growth in the volume of exports (goods + services) during the boom years were as follows:

1996 +12.5%
1997 +17.6%
1998 +23.1%
1999 +15.5%
2000 +20.2%
2001 +8.6%
2002 +5.2%
2003 +0.6%
2004 +7.5%
2005 +5.2%
2006 +5.1%
2007 +8.6%

The figures are on the CSO website at the following link:

As the figures show, the rate of increase slowed down during the global recession in 2003. But, once that relatively mild global recession ended, exports grew rapidly again and by 2007, the last year before the latest and much more serious global recession, they were growing very strongly(8.6% in volume in 2007).

Since 2007, Ireland’s export volume has indeed fallen. But, as Professor Ahearne himself admits, by only 5% or so, compared with 25% average for other EU countries.

Moving from the historical record to the current state of the Irish economy, there is an obvious contradiction in Professor Ahearne’s analysis. He claims that Ireland is 25% wage-uncompetitive compared to other EU countries. His ‘solution’ for this is massive cuts in wages in Ireland (not just in the public sector but in the private sector as well). He boasts that this is actually being achieved and contrasts how easy it is to cut wages in Ireland compared with other EU countries with much more rigid labour markets. Yet, he also boasts that so far in 2009 Ireland’s export volume is down only 5% in 2009 compared with 25% in other EU countries and 35% in Sweden.

So, how is this possible? If Ireland is 25% wage-uncompetitve compared with other EU countries, how come Ireland’s exports are doing so much better that other EU countries?

If exports are down 5% in Ireland in this global recession and down 35% in Sweden (Professor Ahearne’s own figures), how come Ireland rather than Sweden is the one being diagnosed as wage-uncompetitive, and why are wages required to be slashed in Ireland while allowed to rise in Sweden?

It’s strange that there is no reference to the pace of the US recovery given that US firms are responsible for most of Ireland’s exports.


Just on a little fact: Alan Ahearne is not a professor.

DKM Economic Consultants’ in a report for the Dept of the Environment in 2007, estimated that Irish construction output represented 22.6% of GNP and 19% of GDP, when measured in gross output terms. The construction to GDP ratio was the second highest proportion (after Spain) in the European Union and ranged from less than 8% in Sweden to over 21% in Spain and with an average ratio of around 12% in Western Europe and less than 11% in the UK.



On the share of building construction in GDP. Total value added in the building and construction industry in 2007 was €16.371bn which is indeed 8.59% of total GDP that year (€190.603).

However, it is also true that total investment in building and construction in 2007 was €39.079 bn (Line 151 of Table 11 of the NIEs) which is 20.5% of total GDP (the difference here being the large amounts of materials imported by the construction industry.)

So, perhaps Prof. Kelly’s figures are less ludicrous than you think. People can differ about what is meant by “the construction share of GDP” but decompositions based on the expenditure method are standard.

As for Alan Ahearne, remember that this is a second-hand (third-hand?) reporting of his comments. Alan is a very smart and well-qualified economist and there is no way, for instance, that he thinks that Irish exports were falling in the years up to 2006. He may well have said that they were falling as a share of something and this was then misinterpreted.

Perhaps you might consider dialing down the rhetoric a touch?

Or if you can’t tone it down, perhaps you might be brave enough to identify yourself fully?

“A large-scale leisure centre is also at the planning stage, including all-weather football pitches and a swimming pool. Permission for the development was granted last year but no soil has been disturbed. Large hoardings surround the barren sites, with one proclaiming ‘Football pitches – coming in 2008’. No one has replaced or updated the hoarding. Another hoarding heralds the arrival of the swimming pool with the slogan ‘Come on in, the water’s great’. But again the site is untouched. And as we leave Adamstown, yet another 151 bus speeds past us, bound for Ireland’s Milton Keynes. It is empty.”

Phew, I sure am glad it turns out that Adamstown is the “correct market response to Ireland’s unprecedented population growth.” For a minute there I was worried that the State might have to bail out the firms who backed such endeavours.

Found this report from the Irish Exporters Assoc on first quarter exports 2009 versus 2008 with a breakdown by sector, country and products.


The reason I took a look is to try and get a picture of whether our relatively decent export performance is down to one sector or across the board.
The IEA states overall exports were down 9.6% in the first quarter with manufacturing down just 3.4% and services down a much bigger 18%.

Exports to the US market was up 10.5% with the UK down 11.7%. Belgium is ranked 3rd in the table (what do we export to Belgium!!!!!) and was down 8.8%.

By product type agri/food was down 15.2% and beverage 8.9% but computer hardware was down a whopping 27% (presumably Dell related). The single biggest export area Pharmaceuticals was up 5.2% and is carrying the export market at the moment.

The answer is our decent export performance is mainly down to the Pharma sector and exports to the US. The indigenous side agri/food to the UK is struggling while services exports are also well down.

While we should be grateful for the Pharma sector and it seems to be pretty recession proof we do need to address the issues elsewhere.

Top line stats hide these variations particularly in a small open economy like ours.

I understand that quite a bit of pharma sector exports go first to Belgium before being dispersed to the four winds. I echo earlier calls for “John” to play his full hand, he seems determined to undermine this very useful resource.


The figures you quote in good faith are actually wrong. They were the IEA guesstimates in mid-May as to what the first quarter’s export figures would turn out to be. But, they were wildly over-pessimistic.

As you may know, in economics there is a time-lag before statistics are published for a given period. It takes months for the CSO to gather the relevant data as detailed questionaires have to be completed by thousands of companies. Until the CSO publish the official figures, figures published by other organisations are pure guesswork.

The official CSO figures for the first quarter were only published last Tuesday. They confirm the earlier IEA guesstimates as over-pessimistic. The actual CSO figures are in this link:


They show:

value of total exports:

2008 Q1 36,560
2009 Q1 36,586

y-o-y change: +0.1%

value of merchandise exports:

2008 Q1 20,150
2009 Q1 20,536

y-o-y change: +1.9%

value of services exports:

2008 Q1 16,410
2009 Q1 16,050

y-o-y change: -2.2%

These are the figures for export values rather than volumes. The CSO estimate the volume of total exports was down 3% y-o-y in 2009 Q1, but doesn’t give separate figures for merchandise and services.

Since 2009 Q1, the CSO has published merchandise exports figures for April 2009. These show a big rise of abouy 12% in value compared with April 2008.

Took a look at that, thanks. Would be interesting to see it in more detail by sector.

While IEA overegged the drop presumably the thrust that the pharma sector is outperforming the indigenous agri/food will still be valid. If pharma is relatively recession proof then when recovery comes we need the indigenous agri/food to drive us back into growth and we should be doing what we can to keep it ticking over.

One interesting figure is the performance of imports of merchandise. These dropped 21% yoy in the first qtr (€12,516 vs €15,864) and for 2008 were down 10% on 2007. In fact merchandise imports have dropped 5 qtrs in a row. Presumably car sales, lower consumer expenditure, lower capital imports is one explanation.

I cannot understand that he thinks that the Irish Economy should not have a Stimulus when the Private Sector is being doublewhammied by a severe recession and monstrous increases in taxes and levies. He obviously has never had to deal with trying to run a business in an evironment that is so hostile that good businesses are being made to fail with a consequent further loss of jobs and wealth. On the competitiveness issue taxes are a cost to business and we become more uncompetitive when Government increases them to pay for excessive Government Expenditure.

Re the question of whether Alan Ahearne was misquoted by the Irish Times and actually meant that Ireland’s exports were falling as a share of something. Obviously, he’ll have to speak for himself. But, for the record, I’ve computed Ireland’s total exports (goods + services) as a percentage of EU15 total exports (goods + services). I’ve taken the raw figures from Eurostat.

2000 Q1 – Ireland’s share of EU15 total exports: 3.129%
2008 Q1 – Ireland’s share of EU15 total exports: 3.242%
2009 Q1 – Ireland’s share of EU15 total exports: 3.950%

We’re repeatedly told that the Celtic Tiger ended in 2000 and that since then its been all construction and no exports. But, these figures don’t bear that out. Ireland’s share was slightly higher in 2008 Q1 than in 2000 Q1. There were ups and downs between 2000 and 2008, mostly related to the value of the Euro v the Dollar. A larger proportion of Ireland’s exports are priced in dollars than in other EU countries. So, when the dollar falls, Ireland’s apparent share of EU15 exports falls, and vice-versa.

But, while there was little change in Ireland’s share of EU15 exports between 2000 Q1 and 2008 Q1, Ireland’s share jumped by almost one quarter in 2009 Q1. In that quarter, it reached an all-time high, almost 4%.
Ireland’s population is just over 1% of the EU15 population. We are exporting way beyond our weight.

So, once again, the question needs to be asked.

As Ireland’s share of EU15 exports is now at an all-time high, why is it necessary for wages in Ireland to be slashed, at the same time as they are rising in every other EU country? Alan Ahearne freely admits that that is what is happening. In fact he seems to be rather proud of the fact that its happening. This, despite the fact that recent CSO figures show Ireland is suffering the biggest fall in consumer demand of any EU15 country. Clearly, the slashing of wages in Ireland relative to other EU15 countries is one of the reasons for this fall in consumer demand (although not the only one). At the time when this policy (of slashing wages) was being embarked on, we were being told (by, among others, Alan Ahearne) that, despite its adverse consequences for consumer demand, it was necessary because exports were doing so badly. But, now we know that they are actually at an all-time-high as a proportion of EU15 exports. Still, the policy continues. Why?

The problem is not that the economy is not fundamentally strong. The problem is that we invested heavily in infrastructure and houses using borrowed money.

It turns out now that we do not have the cashflow to pay our debts in our current structure.

The reason is that growth has slowed globally, so curtailing growth, and also that our costs had gotten out of line generally.

Now we have to pull back and restructure for the new circumstances.

We still have the fruits of our spending. The problem is that some of what we built is on too great a scale for our foreseeable needs and some of it was just not a worthwhile investment.

We have to pick ourselves up and dust ourselves off now, like the man said.

@ Antoin

I have been reading the many contriubutions to this site for some time now. I have found many of the contributions informative while others at least have given some entertainment in fairly miserable times. I am sure you are all eminently qualified to talk on your various areas of economic concern but Antoin’s contribution has probably been the most positive and encouraging post I have read. We are where we are, there remains some positives now our years of growth are over (for evidence, dust off The Commitments DVD, watch it and then drive down the quays), we just have to reassess where we go next with what we have.
“pick ourselves up and dust ourselves off”, your dead right Antoin…..


Surely you must compare like for like if you are talking about competitiveness. If I manufacture knickers then I can’t justify high wages for my workers on the basis that pharmaceutical exports are up!

Do you have statistics from which you can identify any one export product where Ireland is more competitive than most other EU countries?

Our increase share of EU exports is clearly because EU exports have dropped because world trade has dropped hugely. We have increased our share of EU15 exports by approx 22% because the other countrues have gone down so much. Common sense dictates that this is because the EU15 manufacture some goods (such as cars) which have been badly hit and we manufacture some goods (such as medicines) which have not been badly hit.

It does not mean that Irish business costs or wage costs are competitive across the board. It also doesn’t mean that our exporters in certain sectors are not under huge pressure. If your argument is about workers and wages then we must compare like for like. We don’t do workers any favours by telling them they are competitive because overall exports are steady if their sector is in trouble. We also don’t do them any favour by terrorising them with stories of them being undercut by serious competitors if that is not the case

As for pharma, the fate of those companies seems to hinge around patents and ther expiration. We need to keep a close eye on that.

Just look at Dell, Waterford, Team as prime examples where a reduction in Pay terms would likely have kept thousands people employed here in Ireland

It is better to retain jobs at a lesser rate of pay, than to lose them. Dell and the rest may have sounded out the workers, but the disparity in wages between their destinations and Ireland was far too large. These sectors are now mature and must compete with Chinese wages even in Poland. We were going to lose them anyway. There are other sectors like that too, but much smaller. For example, one export to Belgium is diamonds. The demand for the gem kind is falling and the finding of new sources apart from those in the Oppenheimer grasp, means they will continue to decline as competition increases.

Pharma is not a mature sector as each drug is a seperate line of income. We act as a platform for new drugs and cannot compete for out of patent drugs, so some drug lines are coming to an end as others are ramping up. As Chow and Lie said.

Our country will not prosper long term, if it tries to compete with Chinese wage rates! But a loss of wages in some sectors may enable jobs to stay for a few more precious months or even years. Partnership is key and though undemocratic, this is a genuine asset in our country!
But the malinvestment in banking and in property and foreign assets will exacerbate the effects in Ireland of the down turn in the world economy.

This is a Depression. Not a recession. We have to think long term as well.

Ireland can still perform well above its weight even in that environment, but it requires a very cool head and the idea that we will be able to borrow to pay off investors for their losses is more than a straw and will break the back of the economy. How the useless assets, backing the loans that broke the banks, can be used is an interesting question. Better for the executive to buy them at 20% nominal, off NaMa or the banks, than to borrow to repay investors who may all be wiped out taking into account their losses elsewhere.

Sue Denhams or Pseudonyms are used by folks in sensitive positions who may drop useful info into a debate, so they should be tolerated.

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