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Ireland - Growth in economy revised downward

02 May 2011

Following three successive years in which output fell, the Irish economy is expected to grow once again this year, according to the latest Stability Programme Update, a document all European Union member states are obliged to produce twice a year.

While near-term prospects remain subdued on the whole, reflecting significant headwinds on the domestic front, a strong export performance is projected to translate into Gross Domestic Product (GDP) growth of around 0.8% in 2011 and 2.5% in 2012.

Exports are expected to continue supporting economic activity over the medium term, with a gradual pick-up in domestic demand also foreseen as the recovery broadens out and spills over to the labour market. For the period 2013-15, the Irish economy is forecast to grow by +3% per annum on average.

Amid continued high uncertainty, this growth outlook is subject to a number of risks, though these appear broadly balanced at this time.

Whereas the medium-term outlook is for a return to robust and more balanced growth, short-term prospects are more muted than those set out at the time of Budget 2011.

This downward revision to the short-term growth forecast reflects the latest data to hand, which, in the main, point to weaker than expected domestic activity that will not be compensated for by somewhat stronger external demand. While the possibility of such an outturn was previously identified, these risks are now materialising, and so are taken into account in this Update.

Economic activity contracted for a third consecutive year in 2010, falling by -1% in GDP terms and by just over -2% on a Gross National Product (GNP) basis. Owing to a strong rebound in exports, this decline was, however, markedly less than that seen in the preceding two years. The solid export performance (up +9.5% year-on-year, with both goods and services exports recording robust growth) followed in part from strengthening external demand, but also from improvements in competitiveness.

However, with households, firms and the government still working through past imbalances, from excessive indebtedness to an over-reliance on construction, all components of domestic demand fell in 2010. While the pace of the contraction eased somewhat, investment was nonetheless down by almost -28% in the year, with personal consumption shrinking by -1.25% and government spending by -2.25%.

Last year also saw imports rebound, by more than a traditional final demand model would suggest, but by less than the pick-up in exports. As a result, net exports contributed positively to economic activity. While this was not sufficient to offset the drag from domestic demand, it resulted in a significant improvement in Ireland's current account position, a positive development.

High-frequency indicators such as retail sales and consumer confidence data suggest that weak domestic demand conditions have persisted into this year. In contrast, recent readings of the new export orders components of the Purchasing Managers' Indices, particularly in the manufacturing sector, have been buoyant, pointing to a continuation of positive export momentum into 2011.

Overall, the short-term picture emerging is one of an export-led, but relatively jobless, recovery. This is in line with a priori expectations, recoveries of small open economies such as Ireland typically take this form, and underlies the policy focus at government level on measures that will enhance job creation.

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