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News : Irish Economy Last Updated: Oct 25, 2012 - 4:25 PM

Irish Economy: Export growth insufficient to pull domestic economy out of recession
By Finfacts Team
Oct 25, 2012 - 2:33 PM

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The exceptional 9% growth in services exports on the year reflects the performance of the IT sector. FDI investments in this sector have continued through 2012, a sign that export growth will remain robust. However, recorded services trade may largely reflect the tax-efficient strategies of multinational corporations rather than 'true' value added in the Irish economy. This means that outflows of profits by multinationals should remain strong, pushing down on GNP, with employment demand weak due to apparent exceptional labour productivity growth in the traded services sector - - Davy.

Irish Economy: Davy Stockbrokers said in a report today that doubts exist on whether the robust growth of services exports and the multinational sector truly reflects economic activity in the Irish economy or merely tax-efficient strategies. In 2011 the gap between GDP (gross domestic product)  and GNP (gross national product) expanded enormously.  Export growth therefore may be insufficient to pull domestic economy out of recession.

Conall Mac Coille, chief economist, said: "Nominal GDP was 20% higher than GNP in 2011, up sharply from just 14% in 2009.

This means that international comparisons of Irish labour productivity growth and unit labour costs are flattered by the multinational sector. The growth of GNP per worker has been less favourable. In summary, the strong performance of the multinational sector has not translated into labour demand and employment.

In contrast, 70% of Irish employment in private business is in the labour-intensive SME sector, in companies with fewer than 250 workers. Bank lending to this sector remains stagnant, indicating that employment prospects remain bleak. The CSO's business demography statistics indicated that employment in SMEs in 2010 was 855,000, compared with 129,000 in traditional manufacturing and 63,500 in modern manufacturing, dominated by multinational sector companies.

So export growth, driven by multinationals, has not had sufficient traction to stop the contraction in Irish domestic demand or a recovery in Irish employment. That said, the level of private sector employment has been broadly stable since the beginning of 2011. The key driver of recent declines in employment has been planned public sector job cuts. The pace of public sector job cuts should slow slightly in 2013 and 2014, allowing overall employment to remain broadly flat."

Davy report [pdf]

Finfacts reports:

Irish Economy 2012: At least a third of value of Irish services exports is overstated

Irish Economy 2012: Only 50,000 Irish direct workers responsible for 69% of annual Irish exports

Davy revised down Irish GDP forecasts to 0.2% in 2012 and 0.9% in 2013.

The following is Davy's summary of its report:

  • We expect GDP growth of 0.2% in 2012, revised down marginally from our previous forecast of 0.4%.
  • Our forecast for GDP in 2013 is now 0.9%, revised down from 1.6%, reflecting weaker demand for Irish exports in our key trading partners.
  • Export growth is now forecast to equal 2.6% in 2012 and 3.2% in 2013, down from 5% in 2011.
  • Domestic demand will continue to contract
  • Although GDP expanded by 1.4% in 2011, GNP (which excludes multinational sector profits) fell by 2.5% and domestic demand by 3.7%.
  • While the robust performance of the multinational sector and associated jobs and investment announcements are welcome, the impact on domestic demand and employment has been limited.
  • We expect GNP to contract by 0.6% in 2012 and to be flat in 2013. Domestic demand will fall by 2.2% and 0.6% in 2012 and 2013 respectively.
  • Tax cuts will lead to further decline in consumer spending
  • Employment will expand marginally, by 0.3%, in 2013 as the pace of public sector job cuts slows.
  • But the planned €1.25bn of tax rises will push down on disposable incomes so that consumer spending falls by 0.5% in 2013.
  • Recent upward revisions to nominal GDP will make it easier to hit bailout targets in 2013, but the key challenge is whether Ireland can achieve nominal GDP growth in excess of 4% over the medium term to stabilise the debt/GDP ratio.

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