– Exports have been stronger than expected
– Domestic spending still falling
– First Balance of Payments surplus likely since 1999
The Irish recession ended nine months to a year ago, depending on which national income measure one uses. GDP rose by a cumulative 1.6% over the first nine months of 2010 and on a GNP basis, which better reflects the income of Irish residents, the economy grew by 1.1% in Q3 2010, following a 0.1% rise in Q2. However, the general public does not perceive that the recession has ended, partly due to the slow pace of recovery which has yet to lead to employment growth, and partly due to the nature of the upturn, which has been driven by exports as domestic demand is still falling according to Bank of Ireland’s Quarterly Economic Outlook published today, 14 January 2011.
“Domestic demand is again forecast to contract in 2011, albeit at a slower pace of 2% against a 6% fall in 2010. Capital spending remains the main culprit for the fall in domestic demand, plunging an annual 31% with building and construction down 32% and spending on machinery declining by 27%. Despite some signs of stabilisation in house building, we forecast a 10% contraction in construction and building this year. Consumption too may decline by 1% as household disposable income is likely to fall further, although the behaviour of the savings ratio represents a major uncertainty following a sharp rise since 2007. The recent falls in the unemployment rate may help to improve consumer sentiment, as will the stabilisation of the public finances”, according to Dr. Dan McLaughlin, Group Chief Economist, Bank of Ireland and author of the publication.
“Both exports and inventories look set to offset the decline in domestic spending with the result that we expect GDP to record positive growth in 2011. An export led recovery was widely predicted but the combination of strong growth in global demand, a weaker euro and substantial gains in Irish competitiveness have generated much stronger growth in exports than expected, and we forecast that trend to continue this year, with exports projected to grow by 9% in volume terms.
“The latest data suggests that unemployment peaked last July, at 13.7%. There is some evidence that the demand for labour is no longer falling at a precipitous pace but as yet no clear indication that employment has stabilised, so the decline in the unemployment rate owes more to changes in labour supply rather than any pickup in demand. We expect employment to stabilise by mid-2011 but this still implies a further fall in the annual average, and the labour force is also likely to contract further, with net emigration rising to around 60,000 a year, thus largely offsetting any natural increase in the population. The unemployment rate may continue to inch downward as a result, averaging 13% this year, highlighting that the flipside of export-led high productivity growth is limited job creation
“The rebalancing of the Irish economy, away from construction and consumption led demands and towards the external sector means that the economy is now in better balance than it has been for some time. It is also evident in the balance of payments (BoP) data, which in Q3 2010 recorded the first meaningful quarterly surplus since 2003. This implies that the surpluses now being run by the household and corporate sectors are offsetting the public sector deficit. We expect Ireland to record a BoP surplus in 2011, equivalent to 1% of GDP, the first since 1999”, concluded Dr. Dan McLaughlin.
14 January 2011
Dr. Dan McLaughlin Anne Mathews
Group Chief Economist Media Relations Manager
Bank of Ireland Global Markets Group Communications
Tel: 01 609 3221 Bank of Ireland
Tel: 076 623 4771 / 087 246 0358
Full report attached : January Outlook 2011