GDP growth to miss target by half, EC forecasts
It says people will not spend as much or cut back on saving to the extent that the Government had factored into its growth forecast of 1.75%, and the Commission lowered its growth expectation to 0.9%.
Income will also be lower than expected over the following years because of lower fees from the bank guarantee scheme as the banks are restructured and a smaller dividend from state bodies after frontloading in 2011.
As a result of lower growth, the state’s budget deficit will not now be cut to the required 3% until 2015, a year longer than expected. This was factored in to the conditions of the EU/IMF loan, Economics Commissioner Olli Rehn said presenting the forecast.
However, in 2012 growth at 1.9% will outpace the EU average and be almost as much as that for Germany. Mr Rehn said that Ireland had very strong fundamentals. “Ireland has a flexible and open economy which has the capacity to rebound relatively rapidly.
“The Irish are a smart, resilient and stubborn people who will overcome the challenges.”
Commission officials said there were lengthy discussions with the Irish authorities and the troika — ECB, European Commission and IMF — in Dublin over to what extent the macro-economic suppositions underlying the four-year plan were realistic.
“The troika thought they were on the high side. If you take the less optimistic view of growth over the four years of the programme, then the 3% level will not be reached by 2014, which is why we decided with the Irish authorities to move the deadline to 2015,” he said.
If growth turns out to be faster than the troika expects, then the deficit will be reduced faster, he added.
In an indication of the continuing drag on the economy of the banking collapse, the Brussels forecast warns that government deficit and debt could be greater depending on whether the banking sector needs further funding.
How quickly people begin spending again depends on having a viable banking sector that extends credit to the economy, the report notes.
The pace of recovery will also depend on how quickly jobs lost in the construction industry can be created in more productive sectors, a clean-up of household and corporate balance sheets and increasing competitiveness.
As feared the recovery, led by exports of capital rather than labour intensive products, means that job creation will be very slow. While unemployment peaks at 13.75% this year, net emigration is expected to continue.
The report notes that cutbacks in state spending of 9% of GDP over the past two years have barely halted the deterioration of the underlying general government balance mainly due to bank bailouts. This year capital injections into Anglo Irish Bank and two smaller building societies account for almost 20% of GDP in promissory notes pushing the deficit to 32.3% of GDP.
While the full amount of the promissory notes is included in this year’s figures the borrowing needs are spread over 10 years. But even with the coming budget cutting spending by 3.7%, the deficit will be 10.25% next year, higher than the Government’s forecast due to slower growth.
The national debt will increase from 65% last year to 97% this year and reach 114% of GDP by 2012.
