Ireland Economy 2012: Goodbody today published its Irish Economic Outlook for 2012, identifying six key issues to watch out for in the coming twelve months. The brokers expect GDP (gross domestic product) growth of 0.7% (previously 1.2%), but GNP (gross national product  -- mainly excluding profits of the multinational sector) is expected to decline by 0.8% (previously +0.7%), while domestic demand will contract by 2.6%. It is estimated that the debt/GDP ratio will rise to 124% in 2014.

Goodbody economists Dermot O'Leary and Juliet Tennent say that interest rate cuts will help Irish homeowners in 2012, but studies have shown that the more important determinants of arrears trends are employment and incomes. They are forecasting that the ECB will cut rates to 0.5% in Q1 2012. With 53% or €70bn of Irish mortgages on tracker rates, each 25bp cut results in €175m interest savings for households over the full year. Along with the December reduction feeding through in January, this would result in savings of c.€525m to households or 0.4% of 2010 disposable income. If the banks were to pass the cuts on in full to standard variable rate mortgages a further €315m could be saved (0.25% of 2010 disposable income).

Ireland’s first full year in an IMF/EU programme provided mixed results... -In contrast to other programme countries, 2011 saw the Irish economy return to modest economic growth. However, it is a fragile economic recovery totally dependent on net exports. The hurdles of stability in the banking sector, a labour market recovery and the question of debt sustainability have yet to be fully negotiated.

...but forecast downgrades... -The economists  are downgrading their forecasts for growth for 2012 on the back of trade and domestic demand. They expect GDP growth of 0.7% (relative to 1.2% previously), but GNP is expected to decline by 0.8% (+0.7% previously), while domestic demand will contract by 2.6%.

...highlight the challenges ahead, with a number of critical issues for 2012... -Goodbody identifies six key issues to watch out for in the coming twelve months: (i) A possible referendum; (ii) debt sustainability and the possible restructuring of the promissory notes; (iii) Ireland’s aims to tap the debt markets; (iv) banking trends; (v) fiscal consolidation efforts; (vi) a continuation of the falling unit labour costs and an improving current account position.

...and focus will have to move from austerity to growth -Goodbodyestimates that the debt/GDP ratio will rise to 124% in 2014, while the deficit will not reach the 3% of GDP deficit target by 2015. The Fifth Review of Ireland’s Programme, starting today, must focus on the issue of growth and debt sustainability, rather than just austerity. A restructuring of the c.€30bn in promissory notes provides an opportunity to reduce debt to a more sustainable level without the difficulties that Greece is currently experiencing with PSI (private sector involvement). Another important issue is the speed at which the banking system is deleveraging. The economists argue that this process of bank deleveraging should be slowed, but this will require further assistance by Europe for Ireland’s banking system.

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