EY Economic Eye - ROI Winter Forecast 2012

A Slowdown in the Global Economy Challenges Ireland’s Export Sector

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Is there an alternative to austerity?

Key highlights:

  • ROI - GDP will remain flat in 2012  
  • ROI - feeble recovery predicted in 2013 rising to 1.9% in 2014
  • ROI - consumer spending forecast to contract in 2013 before rising to 1% in 2015
  • ROI - Unemployment levels forecast to peak in 2013 to 15.3%
  • Exports remain strong but external factors expected to impact growth

The latest EY Economic Eye Report  forecasts Gross Domestic Product (“GDP”) in the Republic of Ireland (“ROI”) will remain flat for 2012, rising to 1% in 2013 and 1.9% in 2014. Most worrying, exports declined in Q2 of 2012, the first drop in over six quarters.  This does not auger well for hopes of an export led recovery, particularly as the domestic economy remains stagnant. 

The report has downgraded Northern Ireland’s (“NI”) Gross Value Added (“GVA”) growth from 1% to 0.5% in 2013 and 2.1% to 2% in 2014, despite the region avoiding the scale of austerity experienced in ROI.   ROI consumer spending is projected to continue to contract in 2013 by -1.1%, for the fifth year out of the previous six. This is expected to rise slowly in 2014 and 2015 to 0.5 and 1% respectively as austerity measures begin to ease and the labour market improves.

Neil Gibson, Economic Advisor to EY’s Economic Eye commented, “Government is expected to deliver further austerity measures of €3.5bn in December’s budget in order to continue to meet deficit reduction targets. The debate on the merits of austerity is shifting with serious questions being asked about the negative impact these measures have growth.   Countries, such as Ireland, that have adopted austerity measures are still experiencing significant economic contraction.  However, this debate is unlikely to have a significant bearing on the December budget as ROI remains committed to targets set by the European Commission and the IMF”.

Exports
Exports are the only component of GDP expected to contribute positively to ROI growth.  However, with the Eurozone in recession and signs of slowdown in the US and major emerging markets like China and India - Economic Eye forecasts modest growth in the export sector from 5% in 2011 to 3.2% in 2012 and 2.9% in 2013 before rising to 4.4% in 2014.   NI’s relatively small export base hampers the region, with growth predicted to lag behind both the UK and ROI in the medium and long-term. 

Gibson comments, “Slowing rates of growth in key global economies, such as China and India and the potential impact of the US ‘fiscal cliff’ together with the Eurozone debt crisis gives rise to real concern for Ireland’s export and manufacturing sector.   Against this backdrop, optimism around export-led growth across the Island has been dampened.  If the US were to head over the so called ‘fiscal cliff’ the effects would be considerable because close to a quarter of ROI manufactured exports go to the US (just under 10% in NI). 

Jobs
Job creation is firmly at the top of the political agenda with stimulus polices both north and south having a strong focus on supporting new employment opportunities and the long terms outlook is positive. However, unemployment levels in ROI are forecast to peak in 2013 to 15.3% before they start to stabilise in 2014 and moderately improve to 14.8% in 2015. Northern Ireland (“NI”) unemployment rates are forecast to rise to 8.5% in 2013, before improving in 2015 to 7.9%. 

Gibson comments, “The Action Plan on jobs published this year aims to create over 100,000 jobs in ROI, while in NI, the Jobs and Employment Initiative has been boosted to £200 million. Both, however, entail a redistribution of, rather than an increase in, overall public expenditure. Policy makers must focus on making it easier and more affordable for businesses to increase their workforce and build and maintain an environment within which businesses can thrive”.

Is austerity working? Is there an alternative?
The issue of austerity will remain a major focus of policy discussion - in particular, the extent to which austerity measures can provoke the unintended consequence of further reducing GDP, a view consistent with the traditional Keynesian view that recessions are deepened by spending cuts and mitigated by an increase in public expenditure to compensate for weak demand.

Gibson comments, “While it is commonly asked ‘is austerity working’, equally it needs to be asked, ‘is there an alternative’? With many countries still running deficits and borrowing to finance budget shortfalls, a complete abandonment of deficit reduction is not an option. However, more careful consideration of fiscal stimulus approaches and or a slowdown in the pace of deficit reduction are increasingly now gaining traction as an alternative way forward”.

This will remain a theoretical policy debate in the ROI and NI as both operate in a restricted policy space given the role of European Commission/ECB/IMF Troika and the UK Government respectively.