BoI: Exports help economy grow in first quarter
The Bank of Ireland Quarterly Economic Outlook has revealed that the Irish economy grew in the first quarter of 2010 with the export sector being one of the main contributors.
Dr Dan McLaughlin, Group Chief Economist, Bank of Ireland and author of the publication said: "The consensus view in Ireland is that the economy will return to growth in the second half of the year, although it is thought this will be not be sufficient to offset a first-half decline, leaving annual GDP growth for 2010 in negative territory, albeit marginally so.
"The latest data challenges this view, however, as industrial production has soared in the first two months of the year, with retail sales returning to positive growth in February, boosted by the car scrappage scheme. This implies that the economy grew substantially in the first quarter, which if true makes a positive GDP reading for the full year much more likely, and we retain our 1% growth forecast.
"GDP has fallen by over 12% over the past eight consecutive quarters. The fall in GNP, which measures the income of Irish residents, has been even larger at 17%, marking this recession as unusually long and steep relative to Irish historical experience and our euro peers where GDP fell by 4.1%.
"One factor in this Irish underperformance is the scale of the decline in capital spending where for example capital formation plunged by some 30% in 2009, thereby reducing GDP by 6.6 percentage points and taking investment’s share of GDP down to 17% from a cycle high of over 27% in 2005. Personal consumption was the other main catalyst behind the fall in Irish output, with a 7.2% decline last year reducing GDP by 3.5 percentage points.
"Irish exports fell marginally last year against a backdrop of a plunge in world trade and it is not unreasonable to expect a rise in exports in 2010 given the global recovery and a return to growth in Ireland’s main markets. Consequently, the external sector is again likely to be the main driver of the Irish economy, offsetting another large forecast fall in capital spending, notably in building and construction.
"Service exports rose in volume terms in 2009 and exceeded merchandise exports in the fourth quarter, highlighting how the composition of Irish exports has shifted away from the manufacturing of IT equipment, the staple of the 1990s.
"The trend in the labour market remains a constraint for Irish households (we expect a further fall in employment and wages) but disposable income in the aggregate will be cushioned by government transfers, falling taxes in total and falling prices. The net result is that real disposable income may be flat this year following a sharp decline in 2009 and we expect consumer spending to stabilise, on the assumption that the savings ratio is broadly unchanged, following a steep increase last year.
"Prices in Ireland are falling on an annual basis, unlike the trend in the euro area, but we expect this to change by the year end, although average inflation for 2010 is likely to remain negative, at -1.2%. Mortgage interest, which last year fell by almost 50% on annual basis, is now much of a less factor in inflation. The annual decline in March had slowed to only 16%, reflecting base effects and some upward movement in mortgage rates over the last few months.
"Employment fell by over 8% in 2009 with the pace of decline slowing from 73,000 in Q1 to 23,000 in the final quarter. The pattern of notified redundancies is similar, averaging over 7,000 a month in Q2 2009 to under 6,000 in the first quarter of 2010. Migration also impacted the labour market, with the large net inflows common in recent years giving way to a net outflow with 8,000 migrating in the year to April 2009 but the figure for April 2010 may well have reached 50,000 or more. Migration labour has been hit harder by job losses; non-Irish nationals in employment fell by over 16% in the year to Q4 2009, or by 50,000 against a 6.7% decline for Irish nationals.
"The fall in the labour force has meant that the rise in the unemployment rate has been less steep than many expected, although the figures have recently been revised higher. The unemployment rate was unchanged at 13.4% from the first quarter and we expect this figure to be the average for the year, with a modest decline in 2011, reflecting a stabilisation in employment and some further modest falls in the labour market.
"Finally, a return to positive growth, if export led, may not have a huge impact on the exchequer’s finances but we expect the Budget to emerge still broadly on target by year-end. Similarly, a rise in Irish exports may also translate into strong multinational profits with the result that the income of Irish residents, as measured by GNP, may fall by 1%, despite the forecast 1% rise in GDP,” concluded Dr McLaughlin.
