Economists cut forecasts for Ireland’s mid-term growth

ECONOMISTS have cut their forecasts for Ireland’s mid-term growth, a Reuters poll showed yesterday, underlining the challenge facing the government as it tries to cut its debt mountain.

The median forecast of 10 economists polled said gross domestic product (GDP) would grow by 2.0% in 2012, down from 2.2% in last month’s survey.

The economy will expand by 2.85% in 2013, below a forecast of 3.0% last month, the poll showed.

But the median forecasts for the budget deficit and peak debt size were in line with government targets, signifying cautious optimism that Ireland will succeed in its target of returning to private debt markets when its IMF/EU bailout runs out in late 2013.

The Government will cut its deficit to below 3% by 2015 and its debt would peak at 118% of GDP in 2013, according to median forecasts.

“Provided the political will continues to exist to adhere to current austerity plans, I continue to believe that Ireland can return to markets before the end of the current bailout period,” said Eoin Fahy, chief economist at Kleinwort Benson Investors, “But clearly it will be a close-run thing.”

Ireland has enjoyed strong export growth since it accepted the €85 billion bailout last year, but its overall growth has been held back by poor domestic demand.

Core retail sales, stripping out the sales of cars boosted by a scrappage scheme, will drop 2.5% in 2011, according to the median forecast of six economists polled, much larger than the 2% drop forecast in the previous poll.

The outlook for 2012 retail sales fell from growth of 0.75% to just 0.25%, suggesting next year’s budget targets could be at risk.

“At the end of the day, if consumers continue to remain cautious then the chances of generating enough overall economic growth to meet our budgetary targets will be seriously diminished,” said Alan McQuaid, economist at Bloxham Stockbrokers.

The poll also cut the mid-term forecast for Ireland’s gross national product (GNP), widely seen as a better reflection of living standards than GDP because it strips out profits from multinationals.

Ireland will register GNP growth of 1.7% in 2012, rather than the 1.8% forecast in the last poll. It will grow 2.3% in 2013, below the 2.45% forecast last month.

The forecast for headline GDP growth this year inched up from 0.70% from 0.68% a month ago, according to the median of 10 forecasts. The forecast for 2011 GNP growth fell sharply from +0.2% to -0.3%, the poll showed.

Outlook stable

- STANDARD & POOR’S kept Ireland at investment grade as the Government stepped up efforts to fight the banking crisis and pledged to narrow the budget deficit. In a statement yesterday, the ratings company affirmed its long-term rating on Ireland at BBB+ and said the outlook is stable.

“We believe that Ireland’s creditworthiness is sustained by a strong political consensus in favour of fiscal consolidation,” said Standard & Poor’s.

“We do not expect any further material costs to the Government of supporting the domestic banking system over and above the €64 billion in capital already injected,” it said.

Ireland sought an international bailout last year as investors shunned government and bank debt after the economy shrank about 15% since 2007. The state may seek to test investor demand in the second half of 2012 with a sale of Treasury bills, NAMA said last month.

Ireland’s marginal funding cost may fall to 6% or lower by early 2014, Standard & Poor’s said.

The yield on 10-year Irish bonds has fallen 3.8 percentage points to 10.27% since hitting a euro-era record of 14.08% on July 18. The spread on 10-year Irish bonds over German debt fell 21 basis points to 7.88%, the lowest level since June 8.

Net debt should peak at 110% of GDP in 2013, including NAMA debt, S&P said. The Government has pledged to reduce the deficit to 3% within four years.

— Joe Brennan, Bloomberg