11 May 2012

Commission forecast for Ireland

Given the competitiveness improvements achieved since 2008, Ireland may see an increase in its market share of global trade. The low-interest-rate environment may allow a smaller contraction in private consumption while still supporting the necessary household balance sheet repair.

Risks to the macro-economic and fiscal outlook remain broadly balanced. Downside risks include the continuing squeeze on disposable incomes as households seek to deleverage in light of the substantial fall in their net wealth since 2008, the bulk of it due to declining property values. Lending to the SME and household sector continues to contract. On the production side, there is potential for a number of drugs falling off-patent this year and thus depressing industrial output. In terms of upside risks, any improvement in trading partner growth may pass through to increased exports and employment.

The Irish economy returned to growth in 2011 after three years of contraction. GDP increased by 0.7 per cent for the year, although the divergence between the export-orientated and domestic sectors continued. While net exports added 4.7 pps to growth, domestic demand continued to contract, as household balance-sheet adjustment continued, and both fiscal consolidation and contracting employment reduced disposable incomes. The effects of public and private sector deleveraging will continue to weigh on growth in 2012. However this will be offset again by external demand, so that overall real GDP growth of 0.5 per cent is forecast for this year. Growth is then expected to pick up to 1.9 per cent in 2013 as domestic demand stabilises and trading partner growth increases.

The headline government deficit stood at 13.1 per cent of GDP in 2011. Excluding one-off bank support measures of 3.7 per cent of GDP, the underlying deficit was 9.4 per cent of GDP. The better-than-expected outturn reflects expenditure savings achieved through tight expenditure control, prudent design of the budget and higher-than-expected revenues from fees for bank guarantees and government's investment in the banks. These, together with savings on the interest bill (following reductions in margins on EU loans), outweighed the effect of the challenging macro-economic backdrop.

Full forecast (Ireland)

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