– 1% growth now seen for 2011 following weak Q3 data
– Similar expansion expected in 2012
The scale of the reported fall in third quarter GDP implies that even with a modest rebound in the fourth quarter Irish growth in 2011 was 1% at best. This is stronger than the consensus view held in the early part of last year but forecasts had moved higher in the wake of upside growth surprises in the first two quarters, now revised down. The composition of that growth has been as expected however, with net exports providing the main stimulus and offsetting further falls in domestic spending, according to Bank of Ireland’s Quarterly Economic Outlook published today, 17 January 2012.
According to Dr. Dan McLaughlin, Group Chief Economist, Bank of Ireland and author of the publication: “The importance of exports in the Irish economy highlights that the risks to growth in 2012 may well be more to the external side, given the ongoing uncertainty in the euro sovereign debt market and the prospect of weak growth at best in the euro area and the UK. The current strength of the US economy (Ireland’s largest single export market), the gain in Irish competitiveness and the fall in the euro, particularly against sterling, may provide some offsetting support, although we now expect the external sector to provide a smaller stimulus to the economy than in the past few years. Against that, the fall in domestic demand may ease; the increase in Foreign Direct Investment in 2011 may translate into a rise in spending on machinery and equipment and the headwinds facing the consumer may become less intense – employment is expected to fall further but wages may stop falling in aggregate and inflation is also likely to slow, so reducing the expected fall in real household incomes.
“Irish inflation, as measured by the CPI, picked up through 2011, and probably ended the year around 3.0% from 1.3% twelve months earlier. The acceleration was largely due to two factors unrelated to Irish domestic spending – energy and mortgage interest. The recent ECB shift to easier monetary policy will also support most mortgage holders, and although there is some debate on whether rates will fall further, it is universally felt that rates will not rise for some time. Overall, we expect the annual rate of CPI inflation to fall sharply in the first half of 2012, and for a more modest pace of deceleration to take it below 2% in the second half with an annual average of 2.0%. The path of the HICP is likely to be much more stable, ranging between 1.5% and 2% through the year, with an annual average of 1.6%.
“The supply of labour responds to market developments, of course, be it via a fall in participation or, in Ireland’s case, emigration. The participation rate is now 60.4 from a peak of 64.8, with a marked decline in the younger age group. Net emigration has risen, initially from non-Irish nationals leaving after losing their jobs but of late this has changed with more Irish nationals leaving – 40,000 Irish nationals lost their jobs in the year to the third quarter, but the rise in Irish nationals unemployed was just 20,000. For 2011 as a whole, we now expect an average fall in employment of 44,000 or 2.4%, with the numbers unemployed averaging 301,000 or 14.3% of the labour force. The latest data and the downward revision to our GDP forecast have also resulted in a more negative projection for employment in 2012, which we now expect to fall by 20,000 or 1%. This may well be matched by a similar decline in the labour force, however, so leaving the unemployment rate unchanged at 14.3%.
“Tax receipts were projected to rise by 9.9% in 2011, to €34.9bn, but in the event emerged at €34.0bn or 2.5% adrift of the Budget target. The shortfall only began to emerge in the final few months of the year and was largely due to a €500m undershoot in VAT, reflecting weaker than expected consumer spending (corporation tax was also behind profile by a similar amount but over half of this was due to timing factors, subsequently unwound in early January). Despite this, total revenue came in broadly on target thanks to a substantial overshoot in non-tax receipts, primarily due to monies from the bank guarantee scheme. Current spending emerged some €400m below profile with the result that the current budget deficit was €11.2bn against an €11.5bn Budget target and as such well below the 2010 figure of €12.6bn. For 2012, the Minister for Finance chose to raise an additional €1bn in revenue, largely through higher VAT and excise duties, and cut spending by €2.2bn, including €1.4bn on the current side, to give total Budget adjustments of €3.2bn, although the deflationary impact of the measures was expected to reduce tax revenue by €0.8bn. The Department of Finance believes that the Irish deficit is largely structural and that the structural deficit will fall modestly in 2012 to 8.0% of GDP from 8.6% last year, with the structural primary deficit declining from 5.3% to 3.8% of GDP. The risks to the Budget outlook appear to be on the downside, particularly in terms of the spending related tax receipts, although the figures are predicated on a 1.3% fall in real consumer spending.
“Fiscal policy, in contrast, will again have a contractionary impact and the scale of the fiscal problem is illustrated by the fact that the State will still have to borrow some €19bn in 2012, or over €15bn excluding banking related expenditure. The Government would like to return to the market at some stage over the next eighteen months but this will probably depend more on investor sentiment towards euro debt as a whole and most if not all the funding will come from the EU/IMF, which makes sense anyway from a financial perspective in the wake of the reduction in the interest rate paid on EU funds. In terms of funding in 2012, the EBR is forecast at €18.9bn and bond redemptions amount to €5.5m (due in early March) giving a gross funding requirement of over €24bn, or some €23bn assuming a similar inflow from the National Savings Schemes than in 2011.”, concluded Dr. Dan McLaughlin.
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