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News : Irish Economy Last Updated: Apr 15, 2011 - 9:01 AM


Central Bank forecasts Irish GDP growth of 0.9% in 2011 / 2.2% in 2012; Unemployment / inflation forecasts raised
By Finfacts Team
Apr 14, 2011 - 11:09 AM

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The Central Bank today forecast Irish GDP (gross domestic product) growth of 0.9% in 2011 and 2.2% in 2012. The Bank also raised its unemployment and inflation forecasts - -  the jobless rate in 2012 will still be above 14%.

In its Spring Quarterly Bulletin (page should be updated with a link to the report sometime Thursday morning), the Bank says that after contracting significantly over the last three years, economic activity is projected to return to positive growth this year. Recently released preliminary National Accounts data showed further dips in real GDP and GNP (gross national product, which excludes profits of multinationals operating in Ireland) of 1% and 2.1% respectively last year. The economists say the underlying pattern behind these figures has not changed for some time, however, nor is it likely to do so, with the weakness in domestic spending gradually moderating but exports growing quite strongly.

This year, the external stimulus is projected to finally outweigh the still negative, though reducing, drag on output growth from domestic sources. Real GDP is expected to grow by 0.9%, rising to 2.2% in 2012. However, real GNP is expected to remain broadly unchanged in 2011, with a return to positive growth of 1.6% next year. This represents the Bank’s central scenario but it says uncertainty remains high, given the extent of the fiscal and other adjustments in the economy, so that a range of both stronger and weaker outcomes are entirely plausible.

The Bank says although output growth is set to re-emerge, employment and disposable incomes will remain under downward pressure in the short term, so for many people there is likely to be little sense of improvement in their economic situation. The outlook for domestic demand remains subdued. Employment is forecast to fall further this year before stabilising in 2012, higher taxes are adversely affecting disposable incomes and households are reducing their indebtedness. Reflecting these developments, consumer spending is projected to contract further this year before stabilising next year.

The Central Bank says that given the scale of the reduction in public capital spending, a further significant decline in investment spending is also in prospect this year.

Exports grew strongly last year, recording their largest annual percentage increase in a decade. The Bank says as a small and very open economy, the continued strength and sustainability of the recovery in the global economy will have an important bearing on the country’s prospects. The evidence suggests that the global economy has gathered momentum again in the early part of 2011, although the pattern of recovery across the major industrialised economies remains uneven.

Overview

  • Preliminary National Accounts data for 2010 recorded a decline of 1% in GDP terms and a decline in the volume of GNP of 2.1%. This is the third successive year in which the economy has contracted, although the pace of decline eased significantly compared to 2009, when GDP and GNP fell by 7.6% and 10.7% respectively:

  • A strong export performance made a significant positive contribution to output growth last year but this was offset by a continued, albeit moderating decline in domestic demand, which was mainly accounted for by a further contraction in investment, particularly in the construction sector. Consumer expenditure declined broadly in line with the contraction in real disposable incomes, with the savings rate stabilising around the elevated level reached in the previous year;

  • The projection for output growth this year and next remains broadly unchanged compared with that published in the previous Bulletin. Exports will remain the main growth driver both this year and next, offsetting a gradually moderating negative contribution from domestic demand. Accordingly, GDP growth of 0.9% and 2.2% is forecast for 2011 and 2012, respectively. GNP is expected to be broadly unchanged this year and to grow by 1.6% in 2012:

  • Exports performed strongly in 2010, with an average annual increase of 9.5% in volume terms. This was the largest such increase since 2000 and contributed to a significant improvement in the current account of the Balance of Payments where the deficit was reduced to 0.9% of GNP from a deficit of 3.7% of GNP in 2009. It is envisaged that the shift from domestic demand toward exports as the main driver of growth will continue into 2011 and 2012 and as a result, the current account is expected to move into surplus in 2011, with a projected surplus of 1.5% of GNP. Further widening of the surplus to 3.1% of GNP is projected for 2012;

  • In seasonally adjusted terms, the unemployment rate increased sharply, quarter-on-quarter, in the final quarter of 2010, rising from 13.7% to 14.7%. The magnitude of this increase has particular implications for the unemployment outlook due to significant positive carryover effects. As a result, the unemployment rate has been revised upwards, with an average of 14.3% in 2011 followed by 14.1% in 2012;

  • The decline in wages across the economy gathered pace in 2010, largely driven by the public sector wage cut that took effect in January 2010. Looking ahead to 2011 and 2012, wage developments are expected to be predominantly influenced by developments in the private sector. As a result, cyclical factors, in particular spare capacity in the labour market, are expected to largely determine movements in pay over the projection period. Compensation per non-agricultural employee is expected to fall by 0.3% in 2011 followed by a modest increase of 0.1% in 2012 amid the gradual stabilisation in labour market conditions;

  • Challenging labour market conditions will continue to constrain demand and the pricing power of firms during 2011. However, the Bank’s inflation projections have been revised upwards since the last Bulletin due in the main to the impact of recent developments in oil prices and medical insurance charges. Accordingly, the annual EU HICP (Harmonised Index of Consumer Prices) inflation rate is projected to average about 0.8% this year. Meanwhile, CPI inflation is likely to be significantly higher than HICP inflation for 2011, reflecting the impact of mortgage interest rate developments. A stabilisation in consumer demand is reflected in a projected increase in the HICP price level of 0.5% and the CPI price level of 1.3% during 2012.

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