Economic signs are slightly more encouraging
Labour force figures published earlier in the month show the unemployment rate had fallen to 13.2% by November from a peak of 13.7% in July. Meanwhile, exchequer returns show tax receipts rose 6.6% in the three months to November.
Thus, despite all the gloom and another very severe budget, there are rays of light in the Irish economy. However, the GDP data confirms that a two-tier economy has emerged. The export sector is booming while the domestic sector remains in deep recession.
What marks Ireland out from other economies is the sheer size of its export base, which is now approaching 100% of GDP. In most other countries, exports amount to 20-30% of GDP. Thus, when this sector starts to motor, it adds greatly to economic growth. And it is certainly starting to motor.
Exports rose by over 13% year-on-year in the third quarter, after averaging almost 7% growth in the first half of the year. Encouragingly, it is broad-based with exports of both goods and services up 13% in the third quarter. It is also encouraging that on the industrial side of the economy, there has been a recovery in output from both indigenous and foreign-owned firms.
Domestic spending, however, is continuing to contract sharply, in particular investment. Fixed investment fell 31% year-on-year in the third quarter and has been generally declining at this rate since the final quarter of 2008. It reflects continuing steep falls in both residential and other construction activity, as well as on spending on machinery and equipment.
Government spending also continues to fall, declining by 5.2% year-on-year in the third quarter, a continuation of a pattern evident since early 2009 when Government started to tighten fiscal policy aggressively.
Consumer spending was also down 1.3% year-on-year, although the pace of decline has slowed considerably in 2010 from the 7% fall recorded last year.
GDP, however, was still down 0.5% on year earlier levels. Indeed, it looks set to fall by around 0.5% in 2010 as a whole. This is a much better outturn, though, than expected last January.
Turning to next year, we expect GDP to increase by around 1%, in line with forecasts from the IMF and European Commission.
Exports are expected to continue growing, while both consumer and government spending should see similar falls to 2010. However, the rate of decline in fixed investment should slow appreciably, simply because it has contracted to such an extent already.
A good example is new housing, where output has fallen from a peak of around 90,000 units to 14,000 this year and may fall to 8,000 next year. Thus, we have seen the bulk of this fall, and the drag on GDP growth from declining investment activity is set to ease markedly from next year.
Where we disagree with other forecasters, such as the IMF, is on the medium term growth prospects for the economy.
The IMF sees Irish GDP growth averaging 2.7% in the period 2012-2015. We think it could be 1% higher at 3.75% for the period.
Net exports added about 3.75% to GDP in both 2009 and 2010 but this was more than outweighed by the contracting domestic sector.
Even the IMF sees the domestic sector returning to a positive growth path from 2012 onwards and expanding by close to 3% by 2015.
Given the performance of our exports, this should signal a pick-up in economic growth to significantly higher levels than envisaged by the IMF and others.
