Over the last two years, declines in GNP have been more severe than that in GDP owing to growth in net factor income flows abroad. These increases largely stem from two factors: the repatriation of profits earned by foreign-owned multinationals in Ireland to their parent companies abroad, and the increasing interest payments required to service Irish Government debt. In addition the significant contribution of the international financial services industry to the Irish external balance sheet has impacted on the composition of investment income flows. The Central Bank says while companies, including multinational corporations, continue to comprise a significant portion of Ireland’s external balance sheet, the foreign assets and liabilities of financial enterprises are considerable.

Irish Economy: The Central Bank said today that the Irish economy is undergoing a modest recovery this year following an exceptionally deep and protracted decline in the previous two years. It forecast today an increase in GDP (gross domestic product) of about 0.8 % this year and a decline of about 1.0 % in GNP followed by growth in the range of 2.2 to 2.8 % in both measures in 2011.

In its latest Quarterly Bulletin, the Bank said the economy’s growth prospects will be influenced by domestic developments, particularly in relation to the three key policy issues at present - - the normalisation of the banking sector, the consolidation of the public finances and the improvement in the economy’s competitiveness position. As regards the banking sector, the Bank said  the general deterioration in financial market conditions during the second quarter was a negative development for the sector, as it was in other countries and, despite some improvements, conditions remain difficult.

In parallel with the actions at a European level, such as the conduct of stress-tests by European supervisors and the establishment of the Eurozone support mechanisms for countries in financial difficulty, Ireland has received EU approval to extend the guarantee on banks’ liabilities in order to support the sector until conditions normalise. The Central Bank said the combined effect of these measures, both at European and national level, should support further improvements in market conditions that will allow the process of the normalisation of the banking sector to proceed.

Forecast Highlights

• The level of output, as measured by Gross Domestic Product (GDP) is forecast to record a small increase of about 0.8 % this year following a decline of 7.6 % in 2009. Gross National Product (GNP) is, however, likely to continue to decline this year, albeit at a relatively modest pace of about 1 %, compared to a decline of 10.7 % in 2009.

• The divergence between GDP and GNP last year and as forecast for this year reflects the impact of significant net factor income outflows which are included in GNP but not in GDP.

• Recently released Quarterly National Accounts data point to a somewhat stronger than expected rebound in GDP and confirm the predominant contribution from exports to the recovery in aggregate demand. Domestic demand, however, continued to contract.

• Next year, with the adjustment in domestic demand expected to have run its course and assuming further momentum in the recovery in external demand, GDP growth is forecast to increase to about 2.8 % with GNP increasing at a rate of about 2.2 %.

• Total export volumes are projected to increase by 3.3 % this year with a further increase of about 4.8 % in prospect for 2011. Import demand has been boosted by the recovery in export volumes but remains constrained by the weakness in domestic demand. This improved trade performance should contribute to a significant improvement in the balance of payments with the prospect of a small surplus next year.

• On average, employment declined by 8.1 % last year and is likely to decline further, by about 3.9 % this year. Some stability should return to the labour market next year reflecting a more reasonable balance between external and domestic sources of growth. However, while likely to be on an upward trend by the end of the year, employment on average is likely to decline slightly by about 0.3 % next year. A decline in labour supply has mitigated the impact of lower employment in the rate of unemployment, which is nevertheless expected to increase to an average of 13.5 % this year before declining slightly to about 13.3 % in 2011.

• The consumer price level is projected to record a further decline this year.

• The Harmonised Index of Consumer Prices (HICP) inflation rate is forecast to average about −inflation is forecast to average 1.2 %.

• Annual inflation is set to turn positive during the final quarter of this year but core inflationary pressures are likely to remain subdued into next year, as labour market weakness persists. HICP inflation is forecast to average about 0.9 % in 2011, remaining below the euro area average and indicating a further improvement in price competitiveness with respect to our trading partners in the euro area.