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ESRI Summer 2010 Economic Summary

In recent months, economic indicators and data have produced a mixed picture of the performance of the Irish economy. While data on retail sales, consumer confidence and exports all point to signs that a recovery is already underway, the numbers from the Live Register, income tax returns and the most recent estimates of quarterly GNP would suggest that the economy is still contracting. Coupled with the recent difficulties on sovereign debt markets in Europe, and the on-going crystallisation of the banking losses for the government estimated to be at least €25 billion, the short-term prospects for the Irish economy continue to be precarious. In particular the forecasts we present in this Commentary are critically based on the assumption that difficulties in international financial markets will be resolved swiftly.

Based on the most recent quarterly data from the CSO, we estimate that there could be marginal positive growth in GDP for 2010 of ¼ per cent. This is driven exclusively by a strong pick up in export growth, together with a very anaemic resumption of private consumption growth (¼ per cent). Public consumption and investment are expected to continue to contract in 2010, and GNP is also likely to fall slightly by ½ per cent.

We expect a resumption of growth in 2011, concentrated in growth in external demand, but also reflecting a modest resumption of domestic demand. The recession has led to a dramatic fall in investment's share of GNP, from over 30 per cent in 2006 to an estimated 14 per cent in 2010. We expect this adjustment to have ended in 2011, with total investment forecast to grow by 2¼ per cent. Overall we expect GDP to grow by 2¾ per cent, with GNP growing more slowly at 2¼ per cent.

The implications for employment of the recession have been dramatic. We now expect employment in 2010 to be 72,000 lower than in 2009, on an annual average basis. This implies a cumulative fall in employment of 266,000 since 2007. Corresponding to this fall in employment, we expect to see the number unemployed averaging 286,000 in 2010. This implies that the unemployment rate would average 13¼ per cent. For 2011, we expect employment to stabilise, with unemployment falling marginally to 13 per cent.

We expect the General Government Deficit to be 11½ per cent of GDP in 2010. Including the cost of the bailout monies for Anglo Irish Bank and INBS, this figure would be 19¾ per cent. For 2011, we expect the deficit to fall to 10¼ per cent of GDP. This is based on the assumption that a full €3 billion package of austerity measures is implemented in the 2011 budget.

In the General Assessment, we discuss the government's plans for further fiscal austerity measures. Given the vulnerability of the Irish economy to the vagaries of market sentiment on our sovereign debt, we argue that it is imperative that the government adhere to its programme of fiscal consolidation. Within the confines of this austerity programme, it is vital that whatever resources are available be used strategically to help tackle the growing problem of unemployment. We argue that public funds would be better used in re-skilling and up-skilling people who are unemployed as opposed to using spending on infrastructure as a form of employment creation.

Source: The Economic and Social Research Institute in Ireland. The full document may be obtained by going to http://www.esri.ie/irish_economy/quarterly_economic_commen/latest_quarterly_economic/

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