Source: NCB Stockbrokers

Irish Economy: The Minister for Finance Brian Lenihan told the Dáil on Wednesday evening that the Department of Finance had raised its GDP (gross domestic product) growth forecast for 2010 to 1% and the GNP (gross domestic product) expected outcome to a shrinkage of 0.75%.

The Minister said: "Last December I outlined in my Budget speech that the worst of the recession was over. Last week, the Central Statistics Office confirmed that this is indeed the case - - GDP increased by 2.7% in the first quarter. That, as I have already said, is the fastest pace of increase in the EU. As a result, my Department has this evening revised its Budget Day forecast for GDP growth this year from minus 1.3% to positive growth of 1%. That deputies, is the tangible evidence that the economic plan that the party opposite wants us to abandon, is indeed bearing fruit. The driving force of this growth is exports. And it is true that GNP is still expected to contract by 0.75%. But that too is an improvement of almost 1% on the budget day forecast. Our plan is working: we must stick to it."

State agency Forfás says Gross National Product (GNP) is a better measure than GDP of the value added accruing to residents of the country. In Ireland, GNP is now considerably lower than GDP because of income flows to non-residents, especially profits and dividends of foreign direct investment enterprises. GNP is about 82% of the value of GDP. In 1970, the reverse was the case with GNP higher, because of income flows to Irish residents from abroad. As a result of this turnaround, GNP growth has been somewhat slower than GDP growth. Since 1970, real GNP has increased about four times. In the year 2008, GNP decreased by 2.8% while in the five years (2003-2008) it increased by an average annual rate of 3.8%.

The growth in exports has been especially noticeable. Since 1970, the value of exports has increased over twenty times in real terms. The other demand components making up GDP have increased to a lesser extent over the same period, e.g. personal consumption over four times, public expenditure about four times and investment about five times.

Foreign multinationals are responsible for about 90% of Ireland's tradable goods and services exports.

Some of the pre-crisis growth has resulted from increasing numbers at work. While GNP at constant prices increased by 19% between 2003 and 2008, the increase per person in employment was much less at 1.3%.

In the Dáil, the Minister said jobs are at the centre of this Government’s economic strategy. He said there are nearly 1.9 million people at work today: about half a million more than in 1997.

"Talking about creating jobs without addressing the more difficult and less popular issues of competitiveness and fiscal stability is just vacuous," he said. "Businesses will not prosper unless we win market share for our goods and services. Yet every measure we have taken to regain our competitiveness over the last two years has been opposed tooth and nail on the floor of this House. There is no rigour, no serious intent in the economic policies of the opposition. It is all just part of the political game."

Also on Wednesday, the OECD said in its annual employment report that its 31 mainly developed member countries need to create 17 million jobs to get employment levels back to where they were before the crisis. Ireland needs 318,000 jobs to return to pre-crisis levels.

NCB Stockbrokers economist Brian Devine, said in a client note earlier this week that the most significant figure in the national accounts data for the first quarter that was published last week was the downward revision of nominal GDP in 2009 from €163.54bn to €159.65bn. The budget is formulated from a starting base of nominal GDP having been €164.60bn in 2009. Devine said NBC forecast that the Government will still be roughly in line with its underlying nominal deficit target of €18.8bn in 2010 thanks to greater than forecast real GDP growth. However, the lower nominal base has implications for future receipts and also clearly the denominator in debt/deficit to GDP ratios. So NCB forecasts that the underlying (excluding interventions in the financials e.g. Anglo Irish Bank) General Government Deficit (GGD) to GDP ratio will be 12.0% of GDP in 2010.

Devine said while the “underlying deficit” may come in largely in line with target, NCB forecasts that the GGD as a percentage is going to reach 20.2%. The difference between this measure and the underlying deficit is the transfer of capital, via promissory notes, to Anglo Irish Bank primarily, but also Irish Nationwide. Eurostat, the EU statistics office,  will officially decide whether these instruments form part of the deficit or not. Last year's ruling that the €4bn transferred to Anglo should be included in the deficit figures points in the direction of these transfers being included in the deficit.

The economist said as stated by the Irish authorities to the European Commission, the willingness to avoid a further deterioration in INBS' financial position, which would represent a threat to the stability of the financial system as a whole, has determined the State intervention, rather than the possible return for the State as an investor.

Devine said it seems clear that promissory notes should form part of the deficit and debt. As such, the debt to GDP ratio will reach 87% by the end of 2010 before peaking at just over 100% in 2013, assuming the Government sees through in full the outlined fiscal consolidation (Chart 19, Appendix 1 above). The decline in the nominal value of the economy will make it more difficult for the Government to reach its target of reducing the deficit to GDP ratio to below 3% before 2014 without additional measures being implemented.