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News : EU Economy Last Updated: Apr 16, 2010 - 11:51:10 AM

Irish average annual GNP growth in 2011-2014 forecast to be 3.3%; Eurozone GDP growth in same timeframe predicted to be 2%
By Finfacts Team
Apr 16, 2010 - 9:36:55 AM

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Irish economy

The short-term outlook for the Eurozone remains challenging with GDP growth expected to rise by just 1% in 2010 and 1.6% in 2011, according to Ernst & Young’s new quarterly Eurozone Forecast (EEF), released today. Critically, unemployment is set to continue to rise until the first half of 2011 to a peak of more than 17 million people. Irish average annual GNP (gross national product- - excluding profits of the multinational sector) growth in 2011-2014 is predicted to be 3.3%. Growth in Eurozone GDP (gross domestic product) in that timeframe will be 2%.

This new quarterly economic forecast is based upon the ECB’s own forecast model and is uniquely placed to offer insight on macro economic trends across the Eurozone as well as in the 16 countries. Mark Otty, Area Managing Partner of Ernst & Young in Europe Middle East, India and Africa comments, “We may be out of recession in the Eurozone, but it is a very feeble recovery and the economy still faces significant headwinds compounded by the Greek financial crisis. Whilst there are some bright spots we estimate that it will not be until mid 2012, five years after the global downturn began, that the economy will have staged a full recovery.”

Ireland results: Ireland’s 2010 export results will be the worst in the Eurozone  - - seven times smaller than the Eurozone average and rising just 0.6% in comparison to 4.3% growth across the Eurozone region. This is largely due to the fact that Ireland is an export led economy and will be exposed to changes in international demand for Irish products and services.

The forecast says Ireland currently has the highest unemployment rate in the Eurozone region, after Spain, Construction job losses make up just under half of the almost 250,000 net jobs lost in Ireland in the recession to date. During 2010 Ireland’s unemployment rate will be almost 25% higher than the Eurozone average, rising to 37% greater than the average by 2014 – although this rate is still lower than Spain and Greece.

The future outlook for the Irish economy beyond 2011 is distinctly more positive. Ireland is one of the few Eurozone economies which boasts critical mass in exporting international financial services, software and hi-tech manufacturing. Ireland’s high productivity and the strength of its high value export market growth will make it one of the fastest growing countries in the Eurozone. Average annual GNP growth in 2011-2014 is predicted to be 3.3% (3.4% for GDP).

Measures announced by the Irish government since July 2008 equate to a cumulative fiscal tightening of almost 9% GDP between 2008 and 2011- - a significant response when compared to the fiscal decisions taken by other Eurozone economies ,the UK and US. It is the severe action taken by the Irish government that has shielded Ireland from a Greek-style financial crisis.

While the size of the cost adjustment has been extensive, EEF believes that it will help to further distinguish Ireland from Portugal, Greece and Spain, where similar steps have yet to be taken. For example, labour costs have risen sharply in these nations and across the Eurozone in the last year, but Irish costs have fallen 3%. This combined with a low corporation tax, Ireland’s success at attracting foreign direct investment and a strong balance of high-skilled manufacturing exports, all support Ireland’s future as one of the fastest growing Eurozone countries.

Mike McKerr, Senior Partner of Ernst & Young’s Irish firm comments “Today’s forecast demonstrates the size and severity of the recession in Ireland in comparison to the Eurozone region. However, the forecast also gives hope for our medium and long term performance. Though 2010 will merely see the Irish economy stabilise in comparison to other nations, our strength of exports, a lowering of our cost base and a favourably low euro, all ensure that Ireland is poised for a strong and sustainable recovery.“

A two-speed Eurozone with a North South divide: EEF confirms that Eurozone recovery will not be at an even pace. Recent events have highlighted the challenges faced by countries with weak fiscal positions – not only Greece, but also Portugal, Spain, Ireland and, to a lesser degree, Italy. As a result, there will be an opening of a North-South growth-divide, according to the forecast.

Otty says:“Germany, France and the Benelux economies are gaining momentum while growth in the Eurozone’s Mediterranean economies and Ireland will be held back by efforts to reduce their budget deficits. Growth in the Mediterranean economies and Ireland is forecast to average only 0.6% combined per annum over 2010-12, compared to 1.8% in Germany, France and the Benelux.”

This compares to the five years prior to the crisis when Greece, Ireland, Portugal and Spain together grew at an average rate of 3.5% per year while their northern neighbours grew by less than 2% per year. As southern countries tend to have lower income levels, the expected North-South divide implies that Eurozone convergence will be reversed over the next couple of years.

Rising unemployment on the horizon: Even the Eurozone’s strongest economies such as France and Germany will be hampered by further cuts in employment levels. Although the forecast does not predict a rapid escalation in unemployment, the economy needs to grow significantly before productivity returns to pre-crisis levels and employment begins to recover.

EEF expects unemployment to rise further this year and in 2011 to 17 million across the Eurozone as a whole. Marie Diron, Senior Economic Advisor to the Ernst & Young Eurozone Forecast, adds, “Despite Eurozone GDP falling by 4% in 2009, employment numbers dropped by less than 2% last year. Government schemes and protective labour legislation in the Eurozone have helped lessen the personal cost of the recession. But, if European companies are to regain competitiveness, the adjustment to staffing levels needs to happen. We expect it to take place this year and next.”

Fiscal retrenchment will hold back growth: A consequence of the Greek crisis for the Eurozone as a whole is that fiscal tightening will have to happen more quickly than previously intended. The report’s baseline forecast shows a significant reduction in deficits, from nearly 7% of GDP on average across the Eurozone in 2010, to under 3% of GDP by 2014. This will inevitably weigh on the pace of recovery in the medium term.

With the Eurozone governments and the ECB facing acute challenges, the forecast suggests that policy in the short term needs to remain focused on growth and employment. The ECB should defer any increase in interest rates well into 2011 particularly as there appears to be little appetite for many banks to start lending in the near future.

Otty comments: “The Eurozone economy seems destined to go through many more twists and turns over the coming months. Furthermore, when interest rates finally do start to rise, the increases are likely to be gradual because the ECB will have to take into account the impact of the withdrawal of government stimulus packages and marked tightening in fiscal policy that will need to kick in.”

It is likely to be a long haul back to growth and that by 2012 the majority of Eurozone countries will be back to something like pre-crisis levels of activity. However, this means that the Eurozone will lag other major regions of the world. Otty concludes:
“The financial crisis and subsequent recession in the West have only accentuated the flow of capital and wealth from developed to developing markets. Achieving 2% growth in the Eurozone from 2012 onwards, whilst a real achievement compared to a 4% decline in 2009 fades into insignificance when the US is averaging 3% or more and Asian markets at least 5 or 6%. Longer term European governments and policy makers have to start worrying about closing that gap.”

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