EU cuts growth forecasts for Ireland

The European Commission has cut its growth forecasts for the Irish economy.

The commission revised down its 2013 growth forecast for Ireland from 1.9% to 1.4%, with this year’s forecast also marginally down from 0.5% to 0.4%.

On the back of an increasingly challenging global outlook, the commission has also revised down 2013 export growth for Ireland from 4.25 to 3.5%.

The projected unemployment rate has been revised upwards from a previous forecast of 13.7% in 2013 to 14.4% in 2014. The commission only expects a gradual fall in the unemployment rate to 13% by 2015.

Its debt sustainability analysis shows Irish gross debt peaking at 119.5% over 2013-2014 and declining thereafter to 102% by 2020.

But formidable challenges remain to bring Ireland’s debt position under control, it stated. “A stress scenario with a 1% lower GDP growth shows that, in the absence of additional consolidation measures, debt would veer away from the sustainable path.

“In particular, sticking to the currently agreed annual adjustment in 2013-15 in the face of lower growth, and thus missing the programme nominal deficit targets, would result in a deficit of 5.2% of GDP in 2015, well above the programme target of below 3% of GDP.

“Even assuming that the deficit ratio would be reduced by 0.5% each year over 2016-20 would bring the deficit ratio to below 3% only in 2020, and result in a debt level of 122% of GDP in 2020, with a peak not achieved until 2016-17,” the commission said.

The update notes that the funding challenges for Ireland’s banks continues to impair the flow of credit to the economy. Moreover, bank asset quality continues to deteriorate.

But there will be an easing up in the deleveraging targets for the banks. “The reduction in non-core asset volumes will continue to be monitored according to PLAR 2011 targets but the framework will put more emphasis on monitoring banks’ overall liquidity and funding of core operations, as opposed to just deposits.”

The update states that banks have to continue with their restructuring plans in an effort to work through arrears. It notes the authorities are looking at phasing out the Eligible Liabilities Guarantee scheme, which is weighing on the banks’ profitability.

Moreover, it stresses the need for some mechanism to hive off non-performing assets, such as tracker mortgages, from the banks.

The commission welcomed the Jun 29 announcement promising to break the link between the banks and governments.

“A key source of risk stems from the possibility that Irish economic activity fails to expand as forecast, both in the near- and in the medium-to-longer term.

“In the medium term, a return to a solid pace of sustained growth in the 2%-3% range (through increasing investment from current low levels and an unwinding of the precautionary element of saving) is essential to buttress the sustainability of domestic (public and private) debt and the recovery in banks’ profitability.”