Irish short-term economic performance downgraded
Irish short-term economic performance downgraded
• Republic develops a two speed economy driven by exports
• 2010 exports figure equates to 100% of GDP
• Northern Ireland unemployment to remain above 6% indefinitely
• All-island house values not forecast to reach peak values till beyond 2020
Ernst & Young has today announced that it has downgraded its latest economic growth forecast for the Republic of Ireland (ROI) by 1.7%.
In its Economic Eye Winter Forecast , GDP for ROI has been revised down for 2011 from 2.8% to just 1.1% growth, following the recent bank bailout announcement, growing prospects of a large and frontloaded fiscal squeeze and a rise in net outward migration.
The forecast confirms that Ireland is developing a ‘two speed’ economy with exports forecast to continue growing in response to the rise in global demand for Irish goods and services. But the domestic economy will continue to struggle in the face of public spending cuts, weakness in the construction sector and pressures on consumer spending.
Economic Eye, the only all-island economic forecast, draws attention to the severity of ROI’s domestic growth – the full year 2010 GNP forecast has dropped by 4.2% (total annual value of the goods and services produced).
The report predicts that ROI will emerge from recession in 2011 with a GNP growth rate of 1.0% rising to 1.3% (2012), 2013 figure missing 3.0% (2014) and 3.5% (2015). However, with job numbers showing little sign of recovery the forecast confirms that it may feel less like a recovery in terms of public perception.
Commenting on the figures Neil Gibson, Senior Advisor to the Economic Eye, remarks, “This downgrading is a reflection of the severity of the recession with a recalculation of ROI’s GNP growth for 2010 – down by 2.9% from our summer forecast. The latest forecast highlights the extent to which the Irish domestic economy has suffered in the last 12 months in contrast to the external environment which has held up better”.
Revisions for Northern Ireland (NI) growth are more modest at less than a percentage point in each year. Positive growth in GVA in 2010 is projected on the back of better than expected manufacturing data. GVA growth in 2011 (1.5%) and 2012 (2.2%) though positive, are both revised downwards slightly, while the longer-term outlook remains unchanged.
Exports remain key
ROI exports are forecast to equate to 100% of GDP by the end of 2010 - one of the highest export to GDP ratios in the developed world (second only to Luxembourg). The measure is a significant increase on the corresponding figure of 80% GDP from five years ago and demonstrates the growing importance of the export sector to ROI recovery.
ROI export strength and sizable GDP contribution is contrast by NI’s smaller export base - at just 19% of NI’s total GDP. The forecast confirms that exports of services have been particularly crucial to ROI’s recent performance, growing in all but one of the last four quarters.
The latest NI manufacturing export figures for 2008/2009 recorded a growth of 7%. Robust manufacturing data and hotel jobs performance suggest that strong export performance is also a feature of the NI economy, if not as strikingly as in ROI and the UK where service sector exports make up a much larger proportion of overall exports.
Public sector debt a downside risk
Economic Eye confirms that ROI’s fiscal deficit is expected to exceed 30% of GDP for 2010 with the inclusion of the bank bailout cost – the worst fiscal position across the developed nations, including Greece.
The report says that the Irish Government has done much to assuage fears that, unlike Greece, no rescue package would be required from the European Union (EU) and International Monetary Fund (IMF).
However, Gibson warns that the exact extent of international confidence in Ireland remains uncertain as the country has yet to approach foreign markets for funding since bank bailout details were released, and details of December’s budget remain to be seen. “The signs are that investors are still nervous – with spreads on Irish bond long-term borrowing rates over German bunds recently hitting all time highs.”|
While NI does not have national debt stock or fiscal deficit, partly due to its reliance on Westminster funding, when expressed as a share of regional GDP, the net transfer from Great Britain’s taxpayers is roughly 35% in 2010; even greater than the ROI deficit which includes the bank bailout.
Migration trend adds to domestic pressures
Economic Eye also shows that migration flows have sharply reversed in ROI, from a peak of over 75,000 net inflows to a net outflow of 35,000 – a fall of 110,000, equivalent to over 5% of the ROI labour market in just two years.
Gibson says, “ROI house prices and overall economic growth will be severely impact by the subsequent fall in overall demand, consumer confidence and government investment, as a result of this outward migration trend.
“For NI, net migration has moved roughly into balance after a short boom period. The long-term outlook is for net migration to fluctuate either side of zero over the next five years, compared to a cumulative net inflow of 28,000 during the previous five years.”
Housing
House prices will continue to contract in both NI and ROI for the remainder of this year, in contrast to the UK where modest rises were enjoyed before prices started to fall back slightly in a double dip pattern. With the labour market remaining uncertain and demand for new housing in ROI extremely weak, given net migration outflow, house prices are forecast to fall once again in 2011.
Indeed, the forecast confirms that house prices on the Island will not regain their peak 2008 values before 2020 in either jurisdiction. This is in stark contrast to the UK where house prices are forecast to return to peak values by 2013.
Jobs
The report confirms that the rate at which jobs are being lost has eased, particularly in ROI where the sharp initial falls in construction and manufacturing have moderated.
The forecast is for unemployment in ROI to remain above 10% until at least 2018 with recent peak employment levels not returning until 2024. Unemployment will rise for an additional period of at least two years, although much depends on the extent of the migration response to labour market conditions and public sector job cuts.
In NI, the forecast is for unemployment to remain above 6% indefinitely. No return to peak 4% unemployment levels of 2005/2006 is forecast given NI’s greater reliance on a shrinking public sector for employment.
Indeed, the divergent fortunes of the domestic and international elements of the respective economies can be seen in the fortunes of their public services sectors. In NI, the report forecasts a reduction in public administration employment for NI of around 6,000 (-11%) between 2010 and 2015. In ROI, the forecast is for a similar contraction in public administration of around 10% between 2010 and 2015.
Political high wire
The forecast suggests that ROI will not meet its European Commission -3% GDP fiscal target by 2014. Instead, the projection is for the deficit to be reduced to -5.6% GDP by this time.
The scale of improvement in the deficit, from -32% in 2010 and – 11% in 2011, should not be understated. The forecast confirms that the likelihood is that the European Commission will look sympathetically on ROI if it stays on the rapidly improving deficit trajectory that the forecast anticipates.
In NI, a balancing act is also underway, though without the same level of risk in terms of overall economic stability or international reputation. The forecast advises the NI assembly that its main focus now needs to be on how best to apply cuts whilst positioning the region for longer term economic recovery.
Global outlook key to recovery
The global economy remains crucial to the prospects for economic growth across the Island.
Ireland’s 2011 GDP growth will remain one of the worst in the Eurozone, ahead of only Portugal, Italy, Greece and Spain – the so called PIGS nations.
In the longer-term, ROI is forecast to return to its position as one of the fastest growing Eurozone economies, as it climbs out of a very severe recession. Optimism for the ROI economy is built on its large export base, sectoral mix, strong skills base and low corporation tax.
NI’s economic growth is expected to lag the wider UK which is projected to perform well on the back of strong service sector growth, driven predominantly by London’s position as a global centre for financial and professional services activity.
Gibson concludes, “Despite the difficulties that still face the Irish economy in 2010, the outlook for a return to relatively strong rates of GDP growth in the medium term, well above the growth expectations for Greece and Portugal, is encouraging. This is premised on Ireland’s core economic and competitiveness fundamentals and the fiscal measures being taken.
"There are however major risks to the growth outlook in the medium-term. It is against this difficult backdrop of economic recession, cost of government debt and rising unemployment, that the December budget, which will be crucial to Ireland’s short and medium-term economic prospects will have to be set.”
