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News : Irish Last Updated: Jul 17, 2009 - 7:07:59 AM


Irish Economy: ESRI says recession to end in mid-2010; GNP per head will be back to 2001 level as "very modest rate of growth" emerges
By Finfacts Team
Jul 16, 2009 - 2:34:25 AM

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Irish Economy: The Economic and Social Research Institute (ESRI) says in its latest assessment of Ireland's economy, that the Quarterly Economic Commentaries between Spring 2007 and Spring 2009 contained downward revisions to its forecasts, first for 2008 and then for 2009. For this reason, it says possibly the most noteworthy feature of the Summer Commentary is that the forecast for GNP growth in 2009 is almost unchanged from the Spring issue, at -8.9 per cent. For 2010, the institute now expects GNP to contract by 2.3 per cent. It says while this is a downward revision on the Spring forecast for 2010 (which was -1.2 per cent), the broad conclusion to be drawn is that the size of the recession is becoming clearer. The ESRI says the contraction in the economy is expected to continue through this year and into next, with "a very modest rate of growth now expected to emerge in mid-2010." At that time, output will be over 13 per cent below its peak in 2007 and will be lower than the level recorded in 2005. Gross national product (GNP) per head will be back to the 2001 level.

Forecasts for the public finances show a General Government Deficit of 12.2 per cent of GDP this year and of 11.4 per cent next year. This is based on the full implementation in 2010 of the savings measures announced for that year in the April Emergency Budget and does not include any provision in respect of the State "bad bank" National Asset Management Agency (NAMA) for handling toxic property loans.

Dr. Alan Barrett said NAMA was “not necessarily the silver bullet” that would restore the Irish banking sector to full health.

“We think NAMA, and the principles behind NAMA are quite right. But just because you set up a NAMA doesn’t mean that banks will return to normal lending practices,” he said. “Having been so sorely burned, they could overreact and we would end up with innate conservatism in the system.”

In this scenario, he warned individual bankers may fear losses to the extent that they are unwilling to advance credit to the businesses and consumers who require them. Higher interest rates may also be charged as loss-making banks seek to improve their margins, he said.

The ESRI says the forecast for unemployment in 2010 is now 16.1 per cent, down from 16.8 per cent in Spring. It said it should be stressed that this change does not result from a more favourable view on possible employment losses. Instead, the economists expect a faster fall in participation and also a higher rate of outward migration over the period of the forecasts.

A net outflow of 40,000 in 2010, partly as a result of a sharp increase in unemployment among non-nationals is forecast.

Overall employment of foreign nationals fell by over 55,000 between Q1 2008 and Q1 2009 while the number who left the country totalled 20,800.

The data signals that many migrants who came to Ireland are staying because they expect to get further employment or they have put down roots here, the ESRI suggests.

On inflation, the ESRI expects the CPI to average -4.6 per cent in 2009 and -0.3 per cent in 2010. On wages, it forecasts falls of 3 per cent in 2009 and of 1.6 per cent in 2010, including in the public sector.

Dr. Barratt said he believed it was better to reduce the public sector pay bill through pay cuts rather than a reduction in staff.

“One of the general difficulties with job cuts is that if you let people go, there may be an upturn and then you have to hire them again. There is a value to keeping people in place,” he said.

The ESRI forecasts about 20,000 houses will be built in 2009 followed by 12,000 next year. This compares with 88,000 built in 2006.

The economists say the price fall in the cost of houses from peak to trough will be over 30%.

The ESRI makes clear that action has to be taken on the public finances and competitiveness before we will see any tangible benefits from the fruits of any global upturn.

In a paper published with today's report, ESRI researchers Séamus McGuinness, Frances McGinnity and Philip O’Connell say that between 1994 and 2001 earnings inequality fell among workers, meaning the tendency for technology-driven booms to favour skilled and educated workers did not take place in Ireland.

The researchers said that it was “not at all clear” that employment growth was “heavily concentrated in industries employing a high concentration of skilled labour” over the period. If it had done, it may have been expected to lead to greater wage inequality, with a premium placed on the skills of higher educated workers.

There was a marked reduction in wage inequality among male workers over the period, particularly between 1997 and 2001, which may have been related to the construction sector being the engine of rapid employment growth among men.

Authors of the report - - Dr. Alan Barrett, Dr. Ide Kearney, Jean Goggin - - their summary of conclusions :

Some of the main findings of the analysis include the following:

All of the Quarterly Economic Commentaries between Spring 2007 and Spring 2009 contained downward revisions to our forecasts, first for 2008 and then for 2009. For this reason, possibly the most noteworthy feature of this Commentary is that our forecast for GNP growth in 2009 is almost unchanged from the spring issue, at -8.9 per cent.

For 2010, we now expect GNP to contract by 2.3 per cent. While this is a downward revision on our Spring forecast for 2010 (which was -1.2 per cent), the broad conclusion to be drawn is that the size of the recession is becoming clearer. 

The contraction in the economy is expected to continue through this year and into next, with a very modest rate of growth now expected to emerge in mid-2010. By the end of 2010 GNP per head is expected to be lower than its value in 2002.

Our forecast for unemployment in 2010 is now 16.1 per cent, down from 16.8 per cent in Spring. It should be stressed that this change does not result from a more favourable view on possible employment losses. Instead, we expect a faster fall in participation and also a higher rate of outward migration over the period of the forecasts. We now expect a net outflow of 40,000 in 2010, partly as a result of a sharp increase in unemployment among non-Irish nationals.

In the General Assessment, we discuss how the likely extent of the downturn appears to be clearer now. While this is positive news in some respects, Ireland needs favourable outcomes in a number of areas if robust growth is to be restored beyond 2010. These include the global economic environment, the banking system, the public finances and competitiveness. In the case of each, concerns exist.

For example, the objective behind NAMA of removing development related loans from the books of the banks is correct from the perspective of enabling banks to resume lending activities. However, there is no guarantee that such lending will result.

Similarly, while progress has been achieved in restoring sustainability to the public finances, a huge amount of adjustment is still required.

The challenge of restoring competitiveness in the context of a fixed exchange rate remains considerable.

Executive Summary and Tables

This Quarterly Economic Commentary includes six Research Bulletin articles:

"Improving Access to Primary Care in Ireland: do GP charges matter?"
Layte, Richard, Nolan, Anne, ESRI Research Bulleting No. 09/2/1, June '09.

"Assessing Vulnerability of Selected Sectors under Environmental Tax Reform"
Fitz Gerald, John, Keeney, Mary, Scott, Sue, ESRI Research Bulletin No. 09/2/2, June '09.

"Drinking Water Quality"
Commins, Nicola, Lyons, Seán, Tol, Richard S. J., ESRI Research Bulletin No. 09/2/3, June '09.

"Did Ireland become More Unequal during the Boom?"
McGuinness, Seamus, McGinnity, Frances, O'Connell, Philip J., ESRI Research Bulletin No. 09/2/4, June '09.

"Job Mobility in Ireland"
Bergin, Adele, ESRI Research Bulletin No. 09/2/5, June '09.

"What do We Know about Large Scale Immigration and Irish Schools?"
Smyth, Emer, Darmody, Merike, McGinnity, Frances, Byrne, Delma, ESRI Research Bulletin No. 09/2/6, July '09.

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