The global recession is over and Ireland’s main trading partners appear to have returned to growth in the third quarter, amid more upbeat forecasts for the world economy in the coming year.
- The global recovery should boost Irish exports
- Domestic demand likely to remain weak
The global recession is over and Ireland’s main trading partners appear to have returned to growth in the third quarter, amid more upbeat forecasts for the world economy in the coming year. The Irish data has also tended to surprise on the upside of late, notably the labour market, in welcome contrast to the dismal readings common from last autumn, according to Bank of Ireland’s Quarterly Economic Outlook published today, Friday 16 October 2009.
Commenting at the launch of the publication, Dr Dan McLaughlin, Group Chief Economist, Bank of Ireland said: “We expect Irish exports to benefit, picking up in the coming months and expanding more strongly in 2010. This export-led growth remains the most likely driver of an Irish recovery as some key components of domestic demand remain weak. Consumer spending, for example, has been constrained by falling employment, flat to negative wage growth, a rise in the tax rate and a rise in the savings ratio.
“We noted in our previous ‘Outlook’ that the worst may be over for the Irish economy and this may indeed prove to be the case: GDP stopped contracting in the second quarter, with consumer and business spending rising, although the plunge in activity over the previous nine months still meant that GDP contracted by 7.4% on an annual basis.
“The recession in Ireland has seen a substantial rebalancing in the economy, away from domestic demand and towards exports. House building is falling by 50% a year and now accounts for only 3.3% of real GDP from 11.5% in 2005, with construction as a whole under 12.5%, virtually half its share of GDP at the peak of the boom. Households have cut discretionary spending in order to rebuild savings, which may exceed 12% of disposable income this year, from 2.3% in 2007. Exports, which have held up remarkably well amid an unprecedented plunge in global trade, amounted to 88% of GDP in the second quarter, from 79% in 2006.
“Despite the second quarter data, it is too early to say that the recession in Ireland is over, although a positive quarterly growth reading is certainly possible in Q4 or the first quarter of 2010. This is likely to be driven by exports and business spending, rather than the consumer, and these are volatile in the short-term, although one would expect exports to pick up on a more consistent basis next year assuming that the global recovery maintains momentum. On that expectation, we are revising up our forecasts, with GDP growth now seen at 1% next year, from our previous flat reading. For 2009, GDP is expected to contract by 6.5% on average, from our previous 7% forecast, with the annual pace of decline slowing sharply in the fourth quarter, to -2.5%, from -8.4% in the first half of the year.
“The deterioration in the Irish labour market has been more pronounced than experienced by most other developed economies: the unemployment rate in the second quarter of this year was a seasonally adjusted 11.6% from 5.5% a year earlier and 4.7% in the second quarter of 2007. Employment began to fall in the spring of 2008 and declined by 174,000 in the year to Q2 2009. This represents an 8.2% plunge and as such a steeper decline than the 7.4% contraction in GDP recorded over the same period. Employment is likely to continue to fall in the near term, although the exodus of immigrant labour means that the unemployment rate is likely to average 13.3% next year and peak around 13.5%.
“The more widely quoted measure of Irish prices, the CPI, has recorded a much sharper fall in inflation, largely due to the influence of mortgage interest. This accounts for 7% of the index and has fallen by some 50% over the past year, thereby reducing the CPI by 3.5 percentage points. However, the deflation cycle also appears to be at a turning point, and we expect the annual inflation rate to return to positive territory in the second half of 2010”, concluded Dr Dan McLaughlin.
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