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News : Irish Economy Last Updated: Aug 24, 2010 - 4:49:58 PM

Medium term economic recovery in Ireland will be largely jobless; Average annual unemployment rate of 12.6% will hold until at least 2014
By Michael Hennigan, Founder and Editor of Finfacts
Jun 24, 2010 - 3:01:15 AM

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Big 4 accounting firm Ernst & Young’s quarterly Eurozone Forecast (EEF - - pdf) forecasts that any medium term economic recovery in Ireland will be largely jobless and an average annual unemployment rate of 12.6% will hold until at least 2014.

The Irish Live Register, which includes unemployed, casual and part-time workers, increased to a record 439,100 in May and job creation is dependent on what are expected to be tepid recoveries in Europe and the US. Irish full-time employment fell by 115,700 on an annual basis with declines in both male (-91,800) and female (-23,900) full-time employment in 12 months to Jan/Mar 2010.  The number of people unemployed for at least a year (long-term ) rose to 112,600. Finfacts said earlier this month that it is striking, particularly when viewed from afar, that the issue of jobs and unemployment does not appear to be as urgent a public issue in Ireland as it does in the United States. SEE: Ireland: A jobs crisis in search of a national strategy

The EEF notes that that Ireland’s cost base has fallen further than any other country in the Eurozone in both 2009 and 2010. In 2009 inflation rates fell by 1.7% and the full year forecast for 2010 is for an additional fall of 1% - the inflation rate drop forecast for Eurozone members this year. The longer term forecast is for Ireland to experience the slowest inflation rises across Eurozone region, second only to Greece until at least 2014, with an average inflation rate of just 1.2% per year.

A statement on the report had the title: Ireland’s cost base falls to the lowest in Eurozone - - this is clearly wrong as the falls in prices in the past two years do not offset a decade of surging costs. There has been no structural reform and in the private sheltered sectors of the economy, professional fees and other charges will resume their upward trend on signs of a recovery: SEE: Irish and Eurozone Competitiveness Indicators 1999 - 2009

At a regional level, the report says the imminent threat of default may have passed but the crisis is far from over in the Eurozone.

The EEF has revised its forecast for the region’s growth down to 0.8% this year and 1.3% for 2011. Furthermore, unless the Eurozone seriously tackles structural reforms that are the root of the massive challenges it faces, the risks of an economic “lost decade” like that of Japan in the 1990s are significant, particularly for countries in Southern Europe.

Marie Diron, Senior Economic Advisor to the Ernst & Young Eurozone Forecast said, “The repercussions of the sovereign debt crisis will mean economic growth in the Eurozone being 1-2.5% lower per annum than in the US over the next five years. The impact on jobs is just as striking. While during 2010-14, the US economy will generate more than 10 million new jobs, employment levels will barely change in the Eurozone.”

Mark Otty, Area Managing Partner, Europe, Middle East, India and Africa for Ernst & Young said, “The sovereign debt crisis has hit an already fragile Eurozone economy very hard. Businesses across Europe will look to their governments and to the pan European institutions for firm leadership and policy coordination. Muddling through is simply not an option if Europe is to be a long term contender on the world economic stage.”

Ireland’s economic rebound – ‘Best in Eurozone’ - - EFF confirms that despite a slight economic fallback in 2010, Ireland is well placed within the Eurozone to experience a rebound in economic growth over the next 18 months. EFF confirms that by year end 2010, Ireland will rank 15th of the 17 Eurozone countries in terms of its GDP growth (-1.0%) - - just marginally ahead of Portugal (-1.1%) but well ahead of last placed Greece (-4.8%).

However, despite its poor performance this year, EFF confirms that Ireland has a number of key economic competitive advantages over the other so called ‘PIIGS’ countries, which will ensure the economy will rebound strongly. This will see Ireland jump from its current 15th position to 2nd position in terms of GDP growth in 2011 at 2.8% (behind Slovakia on 4%) - - this will be the greatest recovery rate for any of the Eurozone members.

The EFF confirms corrective action taken by the Irish government has shielded Ireland from a Greek-style financial crisis. 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 who are just now introducing similar budgets cuts in the face of greater public unrest as demonstrated by protests in Greece and Spain.

EFF also confirms that Ireland’s cost base has fallen further than any other country in the Eurozone in both 2009 and 2010. In 2009 inflation rates fell by 1.7% and the full year forecast for 2010 is for an additional fall of 1% - the inflation rate drop forecast for Eurozone members this year. The longer term forecast is for Ireland to experience the slowest inflation rises across Eurozone region, second only to Greece until at least 2014, with an average inflation rate of just 1.2% per year.

In terms of employment, the EFF results for Ireland are less optimistic. Revisions from the Spring edition of the EFF show that Ireland is currently in 16th position having been overtaken by Spain as the country which has the highest unemployment rate in the Eurozone region. Ireland is forecast to end 2010 with a 13.8% unemployment rate, lower than Spain (19.4%) but ahead of Greece (12.6%). The medium term EFF results forecast that any medium term economic recovery in Ireland will be largely jobless. Ireland is forecast to rise just one place to 15th position behind Greece and Spain with an average annual unemployment rate of 12.6% - a position which it will hold until at least 2014.

Mike McKerr, Senior Partner of Ernst & Young’s Irish firm comments, “Today’s forecast provides further evidence that Ireland is finally turning a corner and provides reassurance that we will not experience a ‘lost decade’ of economic growth as many had feared. We also see how strongly Ireland is positioned against our Eurozone peers. Though the medium term outlook is for any recovery to be largely jobless - - we forecast that Ireland’s short term economic recovery will outperform all members of the Eurozone in the next 12-18 months. Our continued focus on falling costs remains key to Ireland’s ability to compete on international markets, attract foreign investment and restore its economic footing.”

A lost decade for Southern Europe? - - Given the more drastic deficit reduction plans in Greece, Spain and Portugal that were announced in May, the two-speed Europe that the EEF highlighted in its April forecast is now expected to be even more marked. While GDP growth in the principal Eurozone countries in Northern Europe (Germany, France, the Netherlands and Belgium) is expected to average 1.7% per year in 2010-12, EEF predicts negative growth of -0.1% per year in the same period in Southern Europe.

As a result GDP per capita in Greece will fall from 89% of the Eurozone average in 2007 to 83% in 2012. In Spain, it will fall from 93% of the Eurozone to 88%, a relative level last seen in 1998.

Diron said, “The South is heading not for just one or two bad years but for several years of very low, or even negative growth. Although Ireland, which is often included with its Mediterranean neighbours, will bounce back from 2011, Greece, Spain and Portugal are not expected to get back to their pre-crisis levels of activity until 2014.”

With notable divergence from the North: The forecast suggests the outlook in Northern Europe is relatively optimistic for two main reasons. Firstly, countries like Germany and the Netherlands enjoy strong competitiveness levels, after years of robust productivity growth and wage moderation and they are in a good position to reap the benefits of a robust recovery at the global level.

Secondly, while significant, the fiscal adjustment that is needed in the North is manageable and governments can push ahead with deficit reductions without impacting growth substantially.

Euro continues to weaken and interest rates on hold until 2011: EEF expects the euro to fall to US$1.05 by the end of next year, before rising back slightly as Eurozone growth picks up. In effective terms, against a basket of currencies representing the Eurozone trade structure, this means that the euro will depreciate by around 20% from its peak at the turn of the year.

Diron said, “Ongoing worries about the fiscal sustainability of some Eurozone countries, and their reluctance to tackle the underlying problems, are weighing heavily on the euro. The euro currently stands at under US$1.20, its lowest value since early 2006 and nearly 20% below its value at the beginning of 2010.”

Given the weaker growth outlook and the absence of inflationary risks, EEF believes that the ECB will keep interest rates on hold until mid-2011.

No rapid recovery in business investment: This will not be a business-led recovery either. EEF is forecasting a further 2.8% drop in business investment in 2010 after a dramatic 14% drop last year. From 2011 onwards the forecast does predict moderate growth in business investment but even by 2014 the level will not recover to pre-crisis figures.

Negative outlook for unemployment and consumer spending: Uncertainty about the economic outlook will encourage companies to postpone new hiring. There will be no fall in the unemployment rate across the Eurozone until 2012 and even with a modest decline to 9.4% by 2014 that is still 2% higher than in 2007. The number of unemployed will rise further, to peak at around 16.8 million in the first half of next year from under 16 million currently.

Together with cuts in benefits and/or tax increases in many countries, these combined factors imply muted income growth. As a result, private consumption is forecast to be broadly flat this year at last year’s depressed levels. Even in 2011, consumption growth is still forecast below 1%, gradually increasing towards 1.8%.

What’s next?: According to EEF, monumental reforms will be needed to ensure that wide-ranging imbalances and structural weaknesses are addressed. Furthermore, the sovereign debt crisis has exposed fundamental flaws in the Eurozone’s institutions that require policy coordination to achieve a more sustainable monetary union.

Diron concludes,
“While restoring sustainable public finances is necessary, the current trend to cut deficits in a very rapid manner, even in countries that do not have any problems to finance their deficits and refinance their debt, risks being counter-productive. In particular, countries that can afford to reduce their deficits more gradually should do so in order to help sustain growth in the Eurozone in general and in the South in particular.”

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