BoI lowers growth forecast for year to 0.5%

ECONOMIC growth will be weaker than previously expected this year, according to the latest Bank of Ireland forecast.

GDP growth for 2011 is likely to be a “modest” 0.5%, according to the bank’s quarterly economic outlook published yesterday.

The bank’s economist, Dan McLaughlin, says a weak performance by the economy in the last quarter of 2010 and higher than expected unemployment has forced him to cut his growth outlook for this year.

He reckons the economy declined 1% in 2010, resulting in three years of economic decline. “The Irish economy is now seen to have contracted for a third consecutive year, with a total fall of 14.5% from the cycle peak in the final quarter of 2007.”

The figures raise further doubts that the Government will meet its 2011 budget targets. Its projections were based on growth of 1.7% this year followed by an outturn of 3.2% in 2012.

Taoiseach Enda Kenny has already been warned by Department of Finance officials that those forecasts are more bullish than those of the EU Commission and other independent forecasts.

Mr McLaughlin’s revised figures are based on a number of issues including much higher unemployment over the past six months than previously believed.

Much of that increase reflects the fact that the labour force has stopped falling, implying a much lower pace of emigration, “contrary to popular belief,” he said.

As a result unemployment is expected to average 14.4% this year, up from 13.6% in 2010, and that should undermine the growth outlook for 2011, he warned.

The second issue is the recent CSO figures suggesting GDP fell by a “massive 6.6%” towards the end of last year in nominal terms.

Real GDP was estimated to have dipped by 1.6% over the same period and the combined figures suggest 2011 got off to “a weaker start than most expected,” Mr McLaughlin said.

“As a consequence we are revising down our GDP growth forecast for the year to a modest 0.5%” which brings it into line with other forecasts, which is over 1% below the previous forecast, reflecting higher inflation and the impact of a much weaker carryover from 2010, he said.

Employment continued to fall in the last quarter of 2010 and was down by 16,000 or 0.9%, with the total unemployed jumping to 315,000 from 290,000.

That pushed the unemployment rate up to 14.7% from 13.7%, substantially higher than previously published monthly estimates.

Those figures have had “significant knock-on effects on the subsequent monthly data and on forecasts for this year as a whole,” he said. “The recent increase in oil prices presents a clear downside risk to world economic activity, however, and alongside rising ECB rates, will also result in higher Irish inflation than previously expected; we expect CPI inflation to average 3%, although the HICP measure may rise by only 2% and as such, below the expected euro average of 2.4%.”