Markets pay scant attention to positive news
The markets apparently perceive the Irish news flow as negative, particularly on the banking front. There is also concern that the costs of providing further support to the banking system will be reflected in this year’s general government deficit.
However, the markets are paying little attention to the flow of reasonably positive news, apart from the recent high monthly rises in the Live Register. This is an imperfect indicator of changes in employment and labour market changes will also lag other economic indicators.
Our expectation is that there will be no change in real GDP in 2010 compared with 2009. Other forecasters, including the Finance Department, expect growth of up to 1%. The Central Bank recently forecast a rise in real GDP of 0.8% this year. Though our central forecast is for no change this year, we believe any possible revisions will be to the upside. We expect the economy to grow by at least 2.5% next year with a further acceleration to 4% in 2012.
In judging Ireland’s economic prospects this year, it is important to remember that the downturn in the construction sector, the bulk of which is now behind us, will knock about 3.5 percentage points off the change in average real GDP in 2010. Within this, the fall in residential housing investment will account for a reduction in real GDP of 2 percentage points. Excluding construction investment therefore, real GDP will rise by about 4%. All of this growth in non-construction activity, however, will come from the contribution of net trade. Domestic demand will fall by about 4% in 2010, but this compares with a much steeper fall of 12.5% in 2009.
Domestic demand will start to recover in the course of 2010 and make a positive contribution to growth in 2011. The evidence for this Irish economic recovery can be seen in a wide range of short-term indicators. The most important indicator, of course, was the quarterly rise in real GDP of 2.7% in the first quarter of the year.
It’s true this followed a decline of similar magnitude in the previous quarter but the negative drags on growth are diminishing.
The largest contributor to the rise in real GDP in the first three months was the 17.2% increase in manufacturing production.
While a significant part of this growth came from the modern sectors, it was heartening to note that output in the traditional, more indigenous, sector rose by almost 3% in the first quarter on top of a quarterly rise of over 1% in the last quarter of 2009. CSO data shows some slippage in activity in the second quarter but growth in the traditional sector was maintained, with a rise of 2.3% over the first quarter. This performance reflects the rise in global economic activity and the improvement in competitiveness here which has led to a rise in Irish exports.
In the domestic market, there is clear evidence that consumer sentiment and spending have improved. Retail sales have been boosted by the rise in car sales associated with the scrappage scheme.
However, non-garage sales have also risen over the past two quarters. Clearly, the poor state of the labour market will continue to inhibit consumer spending but with a high savings ratio, the personal sector is reasonably well placed to spend more as conditions improve.
Government spending and construction will continue to have a negative effect on domestic demand this year and in 2011 but rising consumer spending will offset theses factors by next year.
