The Irish economy is stabilising as GDP fell by only 0.3% in the six months to September
- Exports growth to provide main economic stimulus
- Domestic demand expected to fall again
- Positive inflation expected before year end
The Irish economy is stabilising as GDP fell by only 0.3% in the six months to September in comparison to the unprecedented 7.5% plunge in the six months to March 2009, according to Bank of Ireland’s Quarterly Economic Outlook published today, Monday, 18 January 2010. “One could state that the recession ended in the second quarter of 2009 although this growth was due to a sharp fall in imports relative to exports, following a further decline in domestic spending. The real income of Irish residents, as measured by GNP, contracted by 1.4%”, according to Dr. Dan McLaughlin, Group Chief Economist, Bank of Ireland and author of the publication.
“Most forecasters, including the Government, envisage a return to positive growth in the second half of this year, although this still leaves the average growth rate in negative territory, at around -1%. We still expect a positive figure of 1%, however this is largely because we forecast a slightly stronger recovery in exports, given that Ireland’s main markets are now growing again. The volume of exports is anticipated to pick up as 2010 unfolds and we have pencilled in a 3.5% rise for the year as a whole. In contrast, imports are expected to fall again albeit by a less dramatic 2%, with the result that the external sector again provides the main support for the economy.
“There is general consensus that domestic demand is set to fall again this year, albeit at a slower pace than 2009. The recession has seen a collapse in total capital spending, which we expect to decline to only 14% of GDP in 2010, from an estimated 17% last year and a cyclical peak of 27.4% in 2005. We anticipate a 2% contraction in consumer spending (-7.2% in 2009) and a 17% fall in capital spending. A key component of this trend is the precipitous fall in residential construction, with a 50% decline likely in 2009, following a 34% fall in 2008. The building and construction sector as a whole is still forecast to decline by over 22%, following a 36% decline last year. House-building is now down 3% of GDP from a cyclical peak of over 12% and we expect a 42% fall in 2010.
“The record low interest rate environment and falling consumer prices has provided some support for personal incomes, but households appear to have reduced spending by more than the fall in disposable incomes; the savings ratio may have risen to over 11% in 2009, against a decade average of 5.4%. This highlights the fact Irish households reduced their discretionary spending to an unusual degree last year in the face of rising unemployment, while repaying credit card debt and reducing net mortgage debt outstanding.
“The rise in unemployment was less than expected. The third quarter saw a further deceleration in the Live Register trend, with a monthly average rise of 5,000, and the rise in Q4 was just 400 a month. The result was that the unemployment rate ended the year at 12.5%. Unfortunately this change in trend owes little to employment and largely reflects a sharper than expected decline in the supply of labour due to lower participation and an increase in outward migration, some 61,000 non-nationals lost their jobs in the year to the third quarter with some 45,000 then leaving the country. We expect job losses to remain a feature of the Irish economy in 2010, although employment may fall at a slower pace – we forecast a 65,000 decline on average over the year, or 3.5%, from an 8% average decline in 2009. This is likely to precipitate a further substantial fall in the labour supply, however, with the result that the unemployment rate is forecast to average 12.9%, implying only a modest rise from the final quarter of 2009.
Unlike its EU counterparts Ireland is still in the throes of deflation. The Irish average inflation rate (as per the HICP measure) for 2009 was substantially below that of the euro average, emerging at -1.7% against +0.3% in the euro area. The difference between the Irish price experience and her euro peers is evident in the food, clothing/footwear and housing sectors. This partially reflects a sterling effect, with Ireland being far more exposed to the euro/sterling exchange rate than its continental neighbours. The deflation cycle appears to have turned, albeit at a more sluggish pace than likely in the euro area, we expect inflation to turn positive again before year end.
Finally, the fiscal position also appears to be stabilising after two consecutive years in which the outcome was substantially worse than expected, although uncertainties still abound, including the pace and durability of the global recovery and the timing of the monetary tightening by the ECB”, concluded Dr Dan McLaughlin.
18 January 2010
Dr. Dan McLaughlin
Group Chief Economist
Bank of Ireland Global Markets
Tel: 01 609 3221
Media Relations Manager
Bank of Ireland
Tel: 01 604 3836 / 087 246 0358
VIew Bank of Ireland’s Quarterly Economic Outlook (PDF, 127kb)