Worst may be over for All Island economy – but EU deficit obligations imply major spending cuts and tax rises on horizon for Republic
Dublin/Belfast - The Island of Ireland economy will shrink by 6.7% in 2009 – revised down from 7.8% - with Northern Ireland (NI) experiencing the worst economic contraction on record for this period. However, tentative recovery is forecast with the all-island economy estimated to contract just 0.3% in 2010, according to the latest Ernst & Young Economic Eye (pdf, 2mb) launched today.
However, whilst the worst of the recession may be over there are still many hurdles ahead. A range of challenges remain which according to the forecast risk the possibility of a ‘double dip’ recession, with real recovery for both the Republic of Ireland (ROI) and NI still 12 -24 months away.
The forecast highlights likelihood of major spending cuts and further tax rises as ROI struggles to meet its EU deficit obligations and NI faces the prospect of public sector cuts as a means to control costs.
Neil Gibson, Special Advisor to the Ernst & Young Economic Eye explains, “Business surveys, corporate announcements, a resilient consumer and economic data all point to a modest improvement in the economic mood North and South of the border. This emerging optimism should however, be tempered by the fragility of current conditions and a growing realisation of the scale of problems in public finances in both jurisdictions.”
ROI out of depression and growth to outstrip UK and Northern Ireland by 2011
Fears that the ROI would experience a recession three times as deep as Northern Ireland have proved unfounded, following a tough stance on fiscal policy and a general pick up in global economic conditions. By 2011 the Economic Eye predicts that GDP growth in the ROI will outstrip the UK and Northern Ireland, as extreme budget rebalancing measures take effect.
By contrast NI decline has intensified since the spring forecast, contracting at its highest levels on record, with GDP forecast to decline by 4.3% in 2009 down from 2.9% in May.
Tax hikes and spending cuts on horizon for ROI
But the issue is particularly pressing for the ROI, according to the forecast. For ROI to meet its EU stability and growth pact deficit obligations of -3% of GDP by 2013 the Economic Eye predicts that government will have to either cut spending by 4% per annum until 2013, create an extra €2.5bn in new tax measures, or have a combination of both spending cuts and tax increases - with 2% cuts and €1.1bn new tax measures.
Quarter of a million unemployed in this recession – Net migration till 2014
Unemployment figures across the Island of Ireland remain worryingly high (up 43,000 for all-island in Q2) with job losses in the ROI double the rate of NI and three times that in the UK. The forecast predicts unemployment to peak at 13% in ROI before falling back below 10% in 2013.
The picture for NI is almost as bleak with job losses at levels more severe than in any other region in the UK – falling back only modestly from highs of 7.5% to 6.75% in 2013. Overall we are likely to see net job losses of over a quarter of a million in ROI and 35,000 in NI during this recession, with the construction and manufacturing sectors the hardest hit.
“Unemployment, falling tax receipts, rising benefit costs, unsustainable financial commitments and two sets of public finances in disarray mean we are in for a very tough 12 months,” cautioned Gibson. “We’re certainly not out of the woods yet.”
On migration trends Gibson comments “The forecast is for a significant emigration of workers - it is not until 2014 that the ROI returns to a positive net migration inflow. In the face of a more modest economic expansion NI’s net flow will fall in the medium term to a net balance. “
Today’s information also provides information on ROI’s foreign workforce. Q2 data alone saw a decrease of 35,000 or 9.8% in the number of non-ROI nationals in the ROI labor force.
Still an attractive location to do business
Speaking at the launch of the forecast Mike McKerr, Senior Partner, Ernst & Young Ireland, said that while organisations needed to remain vigilant when dealing with the scale of the economic challenges ahead, there remained some clear signs of optimism for Irish business particularly in the medium term.
“Organisations continue to see Ireland as a desirable location to do business even during a recession. Taxation levels, skills, its position within Europe and access to international markets are notable strengths for the ROI and key to investment decisions. “
“While for NI the record in attracting global firms is more modest than in ROI, it still holds an impressive track record compared with other regions in the UK.”
In addition, McKerr highlights the strength and quality of ROI exports as playing a critical role our attractiveness and overall economic recovery. Today’s forecast confirms that 84% of ROI’s GDP is export driven, one of the highest in the world.
“Irish exports have stood up remarkably well and are down just 1% in 2009 – this is cause for hope in terms of our recovery.”
Improving fiscal position number one priority for both governments
The Economic Eye shows that there has also been more favourable corporation tax returns than expected in the first nine months of 2009 in ROI. However, despite this the ROI general government deficit has been revised up by the Department for Finance from 10.8% GDP to around 12%. In the UK the public sector net borrowing requirement is similarly forecast to rise to around 12% of GDP by the end of 2009.
Gibson says, “With both countries facing significant debt repayments and in addition ROI having EU criteria on deficit levels to adhere to, improving the fiscal position is rapidly becoming the number one priority for both governments. Closing the gap will be a tough ask and both economies will struggle to achieve their aims during the next five years. Fiscal deficits are projected to remain above 5% of GDP until at least 2014 in both ROI and the UK/NI.”
Labour market challenge will leave lasting legacy post recession
Gibson concludes, “For both economies the export-led route out of the recession will be slow, with overall growth held back by the domestic and government spending pressures as companies struggle to access finance – with prospects for growth in the jobs market remaining at best modest.
“We still forecast that it will be well over a decade before the ROI economy reaches 2007 employment peaks although the outlook is more favourable than it was six months ago. It is this labour market challenge that will prevent the recovery being felt by many consumers in the North and South – ensuring a long-term legacy impact from the recession.”
Ends
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About Economic Eye
The Ernst & Young Economic Eye is an economic forecasting forum launched by Ernst & Young in conjunction with Oxford Economics – a world-leader in quantitative analysis and economic forecasting. It provides unrivalled detailed economic analysis of the all-island economy throughout the year. These forecasts include analysis and predictions of a range of key economic indicators on all-Island basis including GDP, inflation, employment, and interest rates. The forecasts will also include an element of sectoral and geographic detail.
The initiative is designed around the hugely successful Ernst & Young sponsorship of the Independent Treasury Economic Model (ITEM) Club which has been running in the UK since 1988. The ITEM Club is one of the UK’s best-known independent economic forecasting groups and is unique in its use of the same economic model for its UK forecasts, as the UK Government’s Treasury department uses for its policy analysis and Budget forecasting.
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