NCB says the Irish Government has acted proactively to address the budget deficit; as a result Ireland has regained credibility on the international stage. But Budget 2010 was only Part 3 in a 7 part series, the Government intends to take a further 6% of GDP out over the period 2011-2014. If this is achieved it will still leave the structural deficit at 3.5% of GDP in 2014. In other words the public finances would still be extremely vulnerable to a downturn in economic activity. "We like many others welcomed the recent budgetary measures but there is a danger that the Government sits on its laurels and basks in the praise from the international media. They and we shouldn’t forget this is a multi-year process that is going to involve further cuts and tax hikes." In order to finance these deficits Ireland needs to accumulate debt and NCB is forecasting that the debt to GDP ratio will fall just short of 90% in 2014. This excludes €54bn worth of bonds issued by the bank rescue agency NAMA, which are backed by the Irish State

Irish Economy 2011-2015: NCB Stockbrokers says that following a contraction of GNP (gross national product) by 0.5% in 2010, an average growth rate of 3% is expected over the period 2011-2015.

NCB says Irish GDP (gross domestic product) will expand modestly, +0.6%, in 2010. The domestic part of the economy is forecast to decline by 3.5% in 2010 after dipping by 12% in 2009. Net exports are therefore set to be the main driver of growth in 2010 as the domestic Irish economy remains weak. The transfers of profits abroad will see GNP contract marginally at  – 0.5% (see bottom of page for information on the difference between GNP and GDP).

NCB used to be the home of two economists during the boom who even managed to make Bank of Ireland's Dan McLaughlin look like a pessimist. In their cart-before-the-horse view of the world, demographics, notwithstanding evidence from places like Africa and Pakistan, were the key to building a sustainable economy. Now, NCB economist, Brian Devine, challenges the Irish post-2010 consensus view is that GNP will grow at rates between 4-5% for a number of years. He says these views are informed by the typical recovery pattern of an economy following its exit from a recession; namely, the larger the fall the greater amount of spare capacity (labour and capital) available for an economy to utilise. The large amount of spare capacity allows the economy to grow above trend without encountering price pressures.

However, he says this recession is hardly a typical one. Devine says the IMF has shown in detail that recoveries following banking and property market crashes are far more sluggish than recoveries from typical recessions. More importantly, an examination of the prospects for consumption, investment and government spending all suggest a modest recovery in activity.

The broker on Tuesday published a report: A FRANK conversation about the Irish economy and Irish stocks

We at Finfacts have been making similar points for some time.

When foreign firms account for about 90% of Irish tradable exports and advanced economies will remain in intensive care for some years, caution is merited on medium term forecasts. Besides, Irish exports to key emerging markets, such as China and India are very low.

We export less to China than we do to Switzerland; we export less to India than we do to Hungary or Thailand.

So be cautious when desk-bound commentators recommend that Mandarin be put on the school curriculum.

Exports to China are less than exports to China.

Recent Finfacts articles:

Irish Economy: Economists announce new dawn; "Kickstarting" growth from behind a desk! ECB director terms them delusionists

Asia 2010 growth forecast upgraded - - region will be responsible for 60% of global growth of 4.4%; World's Emerging Markets will account for 75% of growth

The Big Tilt: Western companies unprepared for the rise of Asia; Senior executives should move to region

Rich countries face years of belt-tightening to reduce high debt levels; Deleveraging following crises lasts six to seven years on average

US Economy and New Normal: US GDP grew 3.4% annually in 1960-2007; Forecast growth to average 2.6% over next 10 years

IMF study says financial crisis alters pattern of US consumption; Implications for global economic development

IMF chief says many of world’s leading economies fooling themselves on foreign export demand driving their recoveries

NCB says price discounting by retailers has supported sales to-date. It expects price pressures to remain subdued in 2010, with the HICP (EU harmonised index of consumer prices) declining by – 1.2%. With prices dipping, consumer confidence stabilizing and consumer attitudes shifting towards value it expects the volume of retail sales to grow in 2010.

The report says retail sales represent approximately 45% of consumption with spending on transport, communications, professional services and housing making up most of the difference. Job losses and emigration (expected to total 40,000 in 2010) will weigh on overall consumption and as such consumption will contract marginally in 2010. From 2011 onwards, NCB expects consumption to grow at 2-3% per annum as employment and wages begin to grow and the savings rate starts to decline from its 2009 high of 11%.

Investment will once again be a major drag on the Irish economy in 2010, driven by another large decline in construction investment (-23%). Machinery and equipment investment is forecast to pick up in 2010 and average 5-6% growth over the period 2011-2014. The residential and commercial property market remains oversupplied and construction investment will remain subdued over the next number of years. In percentage terms, NCB expects there to be little uplift in nonresidential construction, in contrast to the residential new-build sector were there is likely to be quite a large increase in percentage terms as the number of completions rises from 15,000 to 25,000 in 2014.

Overall, it translates into modest increases in construction investment and total investment going from – 15%y/y to +7%y/y in 2014.

NCB says Ireland will not have a problem funding itself providing it sticks to its fiscal consolidation plan. Budget 2010 gave Ireland credibility but action is needed in each budget out to 2014. Government spending is expected to contract in each year between 2010 and 2014 as the government continues to shrink current expenditure in light of the budgetary deficits. All-in-all NCB says an average growth rate of 3% is more plausible over the period 2011-2015.

Brain Devine says the dichotomy between the domestic economy and the large exporting firms located in Ireland is evident from the industrial production figures and the national accounts. Irish GDP actually expanded in Q3 2009 on a quarter-on-quarter basis but GNP continued to decline. The earnings of those large multinational exporters, notably the chemical sector, which performed remarkably well in 2009 belong to the owners of the capital - - primarily US residents.

Because it does not receive much attention globally, he says it is worth noting that GNP is equal to GDP plus net factor payments, where net factor payments are the payments to Ireland’s factors (labour and capital) located abroad minus the payments to foreign factors located in Ireland. Ireland has a net factor deficit because of the large outflows associated with foreign direct equity investments, particularly by US multinationals. Therefore GNP in Ireland is significantly less than GDP. For example, as of Q3 2009, the value of Irish GDP was €163bn whereas GNP was €129bn. When it comes to the Irish economy it is important to look at both GDP and GNP, but GNP is the best measure of “Irish” output.