Michael Saunders: 'spectacular'

Ireland could be set for a surprise economic bounce alongside the United States despite suffering the worst recession in the eurozone, especially if the dollar strengthens, according to one of Citigroup's top economists.

Michael Saunders, Citigroup's global head of developed markets economics, told the Sunday Tribune last week that rapidly improving economic conditions in the US will have a disproportionately positive effect on Ireland relative to other European countries.

Although Europe as a whole will recover more slowly than the US because its banks are in worse shape and its corporations have cut costs less quickly than American companies, Ireland could outperform other European economies because its close economic ties
to the US put it in a position to benefit from America's aggressive response to the downturn of the last two years. "The US has had an unprecedented drop in unit labour costs and capital spending – they've cut everything to the bone," said Saunders, who was in Dublin for Citi's European research road show. "The cyclical rebound will be spectacular, which will be a plus for Irish exporters."

American companies are better placed for recovery because they are cash positive and have been repaying debt, while their European peers are still in deficit, have poor credit quality and still have to cut costs further.

But Saunders believes Ireland's high level of exports to the US and large exposure to US foreign direct investment from such companies as Intel, Microsoft and Pfizer means it will benefit from America's bounce – when it comes.

A weakening of the dollar against the euro will also help, as it will lower the price for American buyers of Irish goods and services.

Saunders also stressed the need for the government to "avoid errors" by maintaining its commitment to low corporate taxes, friendly regulation and openness to investment.

"It's important politically not to undo your advantages," he said.

The one area where Ireland stands to benefit especially, Saunders said, is as a host country for international financial services – although not as a base for the global expansion of Irish banks, as it was during the bubble.

"The IFSC imposed no fiscal costs to the sovereign [during the crisis], so don't draw the lesson that you don't want to be a financial centre," he said. "The UK is not drawing this distinction very well and it's hurting London, which can strengthen Ireland's position."