– Surprising weak end to 2010
– GNP to outpace GDP this year
The past month has thrown up two surprising and unwelcome data releases in Ireland. The first was that the unemployment rate over the past six months has been much higher than previously published, on the basis that the labour force stopped falling in the final quarter of 2010. This in turn implies that the scale of net emigration of late is much lower than previously thought, contrary to popular belief. It is doubtful whether this marks a clear break in the previous trend but the near-term impact is that the unemployment rate in 2011 is now expected to average 14.4% from 13.6% last year, albeit having probably peaked in recent months. The second data release showed that nominal GDP was deemed to have fallen by a massive 6.6% in just three months. The decline in real GDP was also a substantial 1.6%, driven by falling exports, contrary to the trend over the rest of the year. As a result, the economy entered 2011 in a weaker state than most expected and as a consequence we are revising down our GDP growth forecast for the year to a modest 0.5%, in line with the latest consensus, according to Bank of Ireland’s Quarterly Economic Outlook published today, 11 April 2011.
According to Dr. Dan McLaughlin, Group Chief Economist, Bank of Ireland and author of the publication: “The Irish labour market has been characterised by falling employment and a contracting labour force for the past three years but that pattern was partially arrested in the final quarter of 2010, as revealed in the Quarterly National Household Survey. The data showed that the labour force was broadly unchanged in the quarter when seasonally adjusted, in turn implying that the pace of net emigration had slowed appreciably, which is at variance with the widely held popular view that there is a substantial outflow of Irish nationals. Employment continued to fall, however, by 16,000 or 0.9%, with the result that the total unemployed jumped to 315,000 from 290,000 in the previous quarter, pushing the unemployment rate up to 14.7% from 13.7%. This was substantially higher than the previously published monthly estimates, (averaging 13.6% in Q4), with significant knock-on effects on the subsequent monthly data and on forecasts for this year as a whole.
“Employment fell by an average 4.2% in 2010, following an 8.2% plunge in 2009 and although the pace of decline has slowed, there is no clear indication that employment has stabilised as yet. The pace of redundancies did slow sharply in the latter half of 2010 but has picked up marginally again this year, and the monthly decline in the Live Register has also decelerated. Consequently, we expect a further fall in employment in 2011, albeit at a slower pace of 1.5%, equivalent to an average job loss figure of 28,000. The surprise stabilisation in the labour force in Quarter 4 is unlikely to be repeated in the succeeding quarters in our view, given the outlook for labour demand, and we therefore expect a further decline in the labour force in 2011, but at a much slower pace (15,000 from 48,000 in 2010). As a result, the unemployment rate is set to average 14.4% which implies a steady but modest fall from the current 14.7% over the coming months. The trend in the labour force is very uncertain it has to be said, so a faster decline is possible if the level of immigration picks up again.
“The Irish CSO surprised the consensus (and ourselves) by announcing a 1.6% fall in seasonally adjusted real GDP for the fourth quarter of 2010, which alongside a downward revision to the previously published Q1 figures resulted in a 1% fall in GDP for 2010 as a whole. Consequently, the Irish economy is now seen to have contracted for a third consecutive year, with a total fall of 14.5% from the cycle peak in the final quarter of 2007. Moreover, the fall in nominal GDP in Q4 was put at an extraordinary 6.6% which meant that GDP in 2010 was much lower than the government had anticipated, at €153.9bn against a projection in excess of €157bn.
“Irish net exports has proved the only positive in the GDP data over the past few years, and that was the case again in 2010, with the volume of exports rising by 9.4% against a 6.4% increase in imports, thereby contributing 3.3 percentage points to GDP (exports now account for 96% of GDP). That pattern was expected to materialise in the fourth quarter data, but in the event exports were deemed to have fallen by 1.4% against a flat reading for imports, thereby producing a significant negative contribution to growth. We do not expect this to be repeated in 2011, and forecast export growth of a similar, albeit slightly slower, magnitude than last year, but with import growth picking up to 7.5%, partly due to base effects. The dichotomy between the export and domestic sectors has been a feature of the economy for some time now and looks set to continue on the assumption that global growth continues to expand at the brisk pace projected by the IMF.
“The recent increase in oil prices presents a clear downside risk to world economic activity, however, and alongside rising ECB rates will also result in higher Irish inflation than previously expected; we expect CPI inflation to average 3%, although the HICP measure, the standard across the EU, may rise by only 2% and as such below the expected euro average of 2.4%.
“The fourth quarter national accounts also revealed that the income of residents in Ireland, captured in GNP, actually ended the year on a strong note, despite the fall in GDP, due to weak multinational profit outflows and strong growth in Irish income earned abroad. As a result we expect GNP growth to outpace that of GDP in 2011, with the former rising by 1.2%. The aggregate imbalances evident in the economy in recent years are also no longer in evidence, and as a result we expect Ireland to run its first Balance of Payments surplus in over a decade“, concluded Dr. Dan McLaughlin.
11 April 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