It's been close to 140 years since Weir & Sons began trading jewelry on Grafton Street, a hot spot for Dublin shoppers. The business has weathered the years well. "We've seen ups and downs, wars and rebellions," says Neville McDowell, jewelry buyer for the family-run company. The latest downturn will test it again. After a "phenomenal" decade, McDowell says, a squeeze on spending means sales this year are expected to dip by 10%. Even for a hardy company, says McDowell, "business is tough."
It's a familiar refrain across Ireland. After more than a decade of runaway growth, the good times have ended. In September the Celtic Tiger, the best performing economy in the euro zone by some stretch in recent years, became the bloc's first to officially slide into recession. After expanding at three times the E.U. average between 1996 and 2007, Ireland's economy is expected to shrink by 0.75% next year, according to government predictions.
In some ways, Ireland has been a victim of its own success. Rising incomes and government policy failures pumped up a housing bubble that is now deflating fast, hurting Ireland's outsized construction sector. Factor in soaring unemployment, weaker consumer spending and the gummed-up credit markets, and Ireland is facing "the most challenging fiscal and economic position in a generation," Finance Minister Brian Lenihan told parliament on Oct. 14. "We must all pull together if we are to return to more prosperous times."
Ireland's attempts to navigate its way out of trouble will be watched closely by its neighbors. The country's economic boom, which followed years of underperformance, drew both international plaudits and curious visitors. Delegations from Chile to China dropped in to learn first hand from its turnaround. But just as Ireland offered a blueprint during the good times, so its recent stumble and prospects for recovery may offer lessons to others in the grip of the global downturn.
Ireland's transformation in the 1990s was as sweeping as it was swift. Lured by low taxes and a young, well-educated workforce, multinational firms such as Intel, Dell and Hewlett-Packard set up shop, establishing Ireland as a bridge between the U.S. and Europe. Exports soared, helped by billions of dollars in E.U. development funds and the government's clever management of public finances. Growth took off too: the Irish economy expanded at an average of 6.5% a year during the '90s, more than double the rate of the previous decade.
Shortly after the turn of the century, though, the housing boom began to spin out of control. As incomes and employment in Ireland rose, cheap credit and tax incentives fueled a buying frenzy that pushed up both prices and housing stock: the cost of an average house rose almost three-fold in the decade through 2006, while some 40% of the country's housing was built in the last decade, according to Brian Devine, an economist at Dublin-based stockbrokers NCB. At the Grange, a swish 11-acre (4.5 ha) development in Dublin, realtors sold 15 luxury apartments a week even before work started on the complex in 2006.
The construction mania fast became "a growth that squeezed all the other organs of the economy," says John Fitz Gerald, an economist at Dublin's Economic and Social Research Institute (ESRI). That starved Ireland's exporters of valuable resources. The result: the country's share of euro-zone exports has slipped by a fifth since 2001, while housing investment grew to 14% of Ireland's economy by 2006, roughly three times the European average. When values and demand began to fall house prices fell 10% in the year to August, while apartments at the Grange are now selling at a rate of just one or two a week it left a gaping hole in Ireland's growth prospects.
Repairing that will require the nation to kick its housing addiction. In future, says Rossa White, chief economist at Davy, a Dublin-based brokerage, "Ireland, as a small economy, will rely on trade to generate increases in living standards. We need to get back to that. We lost sight of it." That won't be easy, as long as major trading partners are themselves caught up in the slowdown; the U.S., for instance, buys roughly a fifth of Ireland's exports. It'll take some time, too, for exporters to redeploy resources such as labor freed by the housing slowdown.
Still, Ireland remains an attractive place to do business. It's blessed with a growing labor force of young workers, and it measures up well, too, in terms of taxes: its corporate tax rate of 12.5% is one of the E.U.'s lowest, while levies on labor and capital stack up well against rivals. That's one reason the world's second biggest advertising firm, WPP, announced in September that it plans to shift its headquarters from the U.K. to Ireland; and why pharmaceutical company Shire and publishers United Business Media both announced similar plans earlier this year. The arrival of new companies, and a greater emphasis on trade, should help Ireland to average growth of around 3.5% over the next decade, according to ESRI's Fitz Gerald, outstripping most of Europe.
Such a rebound will be welcomed by the Irish government. Thanks to the fall in tax receipts caused by the housing-market collapse, Ireland's budget deficit is forecast to hit 5.5% of GDP this year well beyond the 3% limit imposed by Brussels. That has left Dublin little room to spend its way out of trouble, a fact made clear when Finance Minister Lenihan announced a slew of tax hikes and spending cuts on Oct. 14.
The government is also keeping a close eye on the country's banks. Though heavily exposed to the domestic property market, they haven't yet needed the kind of cash injections seen elsewhere in Europe and the U.S. But with credit markets freezing over, the government has guaranteed deposits and debts for a handful of big lenders, amounting to well over $500 billion in liabilities, more than twice the country's GDP. The next step will be to ensure credit gets to Ireland's good-quality businesses over the next year or two, says Davy's White. On Grafton Street, Weir & Sons is among the luckier ones. It owns its black-and-gold-fronted store, so at least it doesn't have to worry about rent. And its prime location makes the shop popular with tourists. McDowell, for all his worries, remains bullish about Ireland's long-term prospects. "We're a very small, very young country," he says. "It doesn't take much to get it going again."