patrick honohan : speeding up the economic correction remarks by mr patrick honohan, governor of the central bank of ireland, at the annual meeting of the irish economic association, dublin, 26 april 2012. * * * after five straight years of decline in, for example, employment and in aggregate personal consumption expenditure, the irish economic correction is proving to be quite long - drawn out. even if, on these indicators the turnaround will come in 2013, as is forecast by most analysts, it is not unreasonable to wonder whether more could and should be done to accelerate the correction. members of the irish economic association are collectively well - placed to contribute to this debate and for this reason i would like to take the limited time at my disposal this evening to touch on three dimensions of the adjustment which might be thought to moving slowly : ( i ) the property market ; ( ii ) the banks and ( iii ) the fiscal position. given the limited time, i can only be very selective, with the intention to promote debate rather than to present settled findings. 1. property prices – taking their time to reach the bottom there are a good number of open questions about the residential property market. why is it that prices have been taking so long to reach their new equilibrium? one reason of course relates to the willingness of banks to allow arrears to accumulate without foreclosure. this reduces the supply of properties on the market. ( impatient buyers who want to occupy may be prepared to buy even though they know the price is above equilibrium. there may be more of these than of impatient sellers, given the patience of banks. patient buyers ( waiting for equilibrium prices ) and owner / occupiers availing of moratoria and who hope to stay in occupation will not transact. the end result : very few transactions and those that do occur are disproportionately at above equilibrium prices. ) until the march data published today, prices have nonetheless been falling – and in recent months faster than before ( according to the cso series on the prices of properties where the purchase is financed by banks, which refers to loan drawdown date and as such lags contracted prices ). when will the price equilibrium be reached, and when will transaction volumes reach steady state levels? given elevated levels of uncertainty, will the relative price of housing – as a risky asset – converge to a price that undershoots that which would prevail in less uncertain times? even if aggregate availability of credit

supply chains for production, distribution and retailing. models and forecasting tools can be used to estimate the impact of long - run changes to trade arrangements. however, they are less suited for predicting the short - run effects and potential disruption arising from a breakdown in those arrangements. the scale of disruption would also be influenced by the ability of firms and retailers to respond and adjust. policy responses or mitigating actions would also help to ameliorate the situation. nevertheless, it is clear that a no deal scenario would have very severe and immediate disruptive effects, which would permeate almost all areas of economic activity. certain sectors would be disproportionately affected, particularly agriculture and food. border regions for example, would also be heavily affected. we calculate that a disorderly brexit could reduce the growth rate of the irish economy by four percentage points in the first year, albeit this figure is subject to much uncertainty. however, as a result of domestic demand and the strong non - uk multinational sector, our assessment is that there would still be some positive growth in output over the coming years – even under a no - deal scenario. this would be materially lower than in the central forecast i outlined earlier – and would be closer to one per cent growth in both years. a fast - growing economy is desirable as long as growth is sustainable. however, sometimes the economy can grow too fast and overheat. this happens when an economy reaches the limits of its capacity to meet demand from individuals, firms and government. one element of this is the concept of “ full employment ”, which occurs when almost everyone who wants to work has a job. when this happens, there is very little available slack. in other words, the amount of unused resources, or spare capacity in the economy – is very limited or non - existent. the problem with overheating is that it tends to result in a harmful downturn. 8 temporary surges create dynamics that are difficult to reverse. for example, wages can rise quickly to unsustainable levels. overheating can make households and firms over - optimistic about their future income prospects, and lead them to take on too much debt. if this future income fails to materialise, readjusting to a sustainable growth path can be painful. the result can be bankruptcies, job losses, wage reductions and cuts to public services. i mentioned earlier that our central forecast suggests some moderation in growth over the coming years. however