Imports stronger than expected. First rise in domestic spending since late 2007
The Irish recovery is universally expected to be driven by external trade and that was certainly the case in the first quarter, when exports rose by 7.1%, twice the pace of imports. Export growth slowed in the second quarter however to 1.6% and import growth accelerated by 4.5%, so contributing to a fall in GDP of 1.2%, albeit still leaving output 1% above the low recorded in the final quarter of 2009. Domestic demand as whole rose in the second quarter, for the first time since late 2007, driven by an unexpected surge in business spending on machinery and equipment”, according to Bank of Ireland’s Quarterly Economic Outlook published today, 7 October 2010.
“The trade pattern evident earlier in the year may have resumed again in the third quarter – merchandise exports rose to a nine year high in the month of July – and we still expect the external sector to drive Irish GDP growth into positive territory in 2010. We have revised up our import projection, however, and as a consequence GDP growth is now expected to be 0.5% against our previous 1%”, according to Dr. Dan McLaughlin, Group Chief Economist, Bank of Ireland and author of the publication.
“The second quarter contraction in GDP was a surprise given the strength of retail sales and the other monthly indicators, but domestic spending did increase in the quarter, for the first time in over two years. This reflected a substantial increase in business spending on machinery and equipment and a modest rise in non-residential construction, although capital spending as a whole is still likely to fall sharply in 2010, to 13% of GDP or half its share at the cycle peak in 2005. This is extremely low by Irish historical standards and only a small further decline is expected in 2011, particularly as house completions have shown signs of bottoming in recent months.
“The pace of job losses has slowed of late and the unemployment rate may be at or near a cyclical peak, and if this proves the case may prompt some reduction in the household savings ratio in 2011, and therefore a modest rise in consumer spending. Consumption may fall this year, however, by around 1% following a 7% decline in 2009.
“Irish inflation has moved back into positive territory, as we expected, and the 2010 Budget has also remained on target – indeed it may emerge slightly below the official projection although slightly higher as a percentage of GDP as the latter may be lower in nominal terms than the Government anticipated. The General Government deficit, the EU standard fiscal measure, is likely to be around €49bn, or 32% of GDP, as it will probably include the capital sums injected into the State owned banks. Clarity on this figure has been welcomed by investors, but 10% of the total or around €3bn will probably be added to next year’s borrowing requirement, prompting a revision to the previous five year fiscal plan. The 2011 Budget is now likely to involve a larger fiscal adjustment and we have revised down our 2011 GDP forecast to 2.5%, which is marginally below the current consensus. A sharp fall in the headline deficit will achieve little however if it simultaneously reduces GDP and hence leaves the deficit ratio little changed”, concluded Dr. Dan McLaughlin.
Dr. Dan McLaughlin
Group Chief Economist
Bank of Ireland Global Markets
Tel: 01 609 3221
Media Relations Manager
Bank of Ireland
Tel: 076 623 4771 / 087 246 0358