Irish Economy: IBEC, the business group, today published revised economic forecasts for 2010 and 2011. With a global recovery underway, the employers' union says in its quarterly economic review, that economic output will fall by 1.6% next year, with the economy emerging from recession. It predicts growth of 1.7% in 2011.

IBEC says total manufacturing has performed well by international comparisons, with a decline by just 1.1% in the first half of the year compared with the first half of 2008 and a strong seasonally adjusted quarterly increase of 4.7% in the first quarter giving way to a 2.6% fall in the second. In the July-August period output fell by 3.7%. The performance of individual sectors of manufacturing, however, is diverse with only the mainly US-owned chemicals/pharmaceutical and medical devices sectors recording very strong growth, while the normally resilient ICT (IT and telcos) sector and most of the traditional industries experiencing sharp declines.

The review says that in the first eight months of 2009 the ICT sector fell by an annual 26% and in July-August the pace of decline accelerated to 36%, suggesting the sector is not on a recovery path. The traditional sectors fell by an annual 14.5% in the first six months of the year and recorded a further decline of 15% in July-August.

It says a further difficulty for manufacturing has been the downward pressure on selling prices. The CSO data for example record that while the volume of manufacturing output decreased by an annual 13.8% in the month of August, the fall in the value of turnover was 23.5%, implying sharp price reductions in response to mounting competitive pressures resulting in a harsh squeeze on margins.

IBEC senior economist Fergal O’Brien said: “The world economy is pulling out of the worst recession since the second world war. This is great news for an open economy such as Ireland; indeed, our worst fears may turn out to have been just a little overcooked.

“The drop in GDP in 2010 may not be as great as we first thought, but GDP will nonetheless fall by 1.6%. We expect consumer spending to fall by 3%, but think that unemployment will remain below 14%.

“The economy will pull out of recession during 2010 and return to annual growth in 2011, when we expect GDP to expand by 1.7%. Consumer spending will lag the upturn, expanding by 1.5%. We expect exports to provide the main impetus to the economy, growing by 3% in 2011.

“However, despite these more positive forecasts, major problems remain. The public finance deficit is unsustainably high and our excessively high cost structures have eroded competitiveness making our goods and services difficult to sell on international markets.

“A resumption of export-led growth is contingent on taking corrective action now. It will be painful, but a prolonged slump with high unemployment would be worse still.

“We believe that the current relatively short window of deflation must be seen as an opportunity to make progress on the major policy challenges of addressing our competitiveness difficulties and correcting the public finances. Ireland has no option but to cut our cost and wage levels closer to those of our trading partners,” concluded O’Brien.