Return to recession narrowly avoided

IRELAND avoided slipping back into recession in the third quarter, but its modest growth rates underline the huge challenge ahead in tackling its financial crisis.

Ireland’s debt levels have quadrupled on the back of a banking sector meltdown and it needs solid economic growth to ensure it can meet repayments and fiscal targets set down in an €85 billion EU/IMF bailout.

Gross Domestic Product (GDP) rose 0.5% in the third quarter, rebounding from a 1% drop in the previous quarter but missing expectations for a 0.8% increase as a strong export performance only partially compensated for weak domestic demand.

“The small rise in Irish GDP in Q3 is clearly encouraging, but it does not alter our underlying view that the Government faces an enormous task to reduce public debt to a sustainable level without defaulting,” said Ben May of Capital Economics.

Despite securing external aid that will cover its funding requirements over the next three years, yields on Irish debt remain sky-high due to fears the Government will restructure its debt in the future.

The Government is targeting average economic growth of 2.7% between 2011 and 2014 and it seized on the Q3 performance as proof that it was on track.

“Today’s figures show that the economy has stabilised and is now on an export-led growth path,” Finance Minister Brian Lenihan said in a statement.

“The budget day forecast for economic growth of 1.7% in 2011, which is in line with the consensus forecast, remains on track.”

Economists polled by Reuters expect Ireland to generate 1.6% GDP growth next year.

Many investors doubt that Ireland with reach its medium-term growth targets, given that the Government is pushing through unprecedented cutbacks and tax increases to cut the worst budget deficit in Europe. All components of domestic demand fell in Q3 from the previous three months and consumer consumption fell 0.5%, its biggest drop since the fourth quarter of last year when Ireland was still in recession.

Exports rose 3.6% while imports increased 1.4%.

“To be absolutely confirmed that we are past the worst, we’d want to see things like consumer spending and capital investment within the economy rise,” said Eoin Fahy, chief economist at Kleinworth Benson Investors. The European Commission has estimated Ireland will grow at just 0.9% next year, just over half the Government forecast, and has already given Ireland until 2015, an extra year, to get its deficit under control. Ireland has committed to cutting its deficit under the EU/IMF deal and the EU has given it until 2015 to get its shortfall below an EU limit of 3% of GDP.

Ireland’s shortfall will blow out to 32% of GDP this year due to the one-off inclusion of a €30bn bill for bailing out the banks.

Gross national product (GNP), seen by some economists as a more accurate indicator of the state of the economy, jumped 1.1%, beating expectations for a 0.2% increase.