BoI expects economy to grow by 1%

GROWTH in the economy of 1% this year is on the cards, according to Bank of Ireland, which believes the pick up in the global economy will lift Irish exports.

It contrasts with the Government’s own forecast of a further fall of 1% in 2010, which is in line with the average projection for 2010.

Exports will provide the main economic stimulus while domestic demand should fall again.

The bank’s Quarterly Economic Outlook says the economy is stabilising, with GDP falling by just 0.3% in the six months to September, compared to a 7.5% drop in the previous six months.

The report’s author, Dan McLaughlin, chief economist with the bank, says he expects a positive figure to emerge for the year due largely to the stronger recovery in exports, given that “Ireland’s main markets are now growing again”.

Export volumes are due to pick up as 2010 unfolds and the bank sees a 3.5% rise for the year, while imports are set to fall by just 2%.

In effect exports will again provide the main support for the economy, said McLaughlin.

“One could state that the recession ended in the

second quarter of 2009, although this growth was due to a sharp fall in imports relative to exports, following a further decline in domestic spending,” he said.

Despite the pick up, domestic demand is set to fall again this year, albeit at a slower pace than 2009.

The recession has seen a collapse in capital spending expected to decline to only 14% of GDP in 2010, from an estimated 17% last year and a cyclical peak of 27.4% in 2005.

“We anticipate a 2% contraction in consumer spending (-7.2% in 2009) and a 17% fall in capital spending. A key component of this trend is the precipitous fall in residential construction, with a 50% decline likely in 2009, following a 34% fall in 2008,” Mr McLaughlin said.

The building and construction sector as a whole is still forecast to decline by over 22%, following a 36% decline last year, he said.

As a result house building is now down 3% of GDP from a cyclical peak of over 12% and “we expect a 42% fall in 2010,” he said.

Record low interest rates and falling consumer prices has eased the pressure on falling incomes.

Job losses will continue this year with the bank expecting a 65,000 decline, or 3.5%.

The Irish average inflation rate for 2009 was substantially below that of the euro average, emerging at -1.7% against +0.3% in the euro area, but is expected to pick up before the year end.