Analysts lower growth forecasts

Lower wages are driving the Irish export market but a continued fall in domestic demand has led analysts to downgrade their forecasts for the economy for this year and the next year.

Investec Ireland export analysis report, found that Ireland had made gains in competitiveness. Head of treasury, Investec Ireland, Aisling Dodgson, said falling wage costs have allowed exporters to be more productive.

“Various indicators show that Ireland has regained the ground it lost over the first half of the previous decade as labour costs have been restrained and as firms have striven to improve productivity.

“Data from the European Central Bank also shows that Ireland has also made gains in competitiveness relative to the rest of the euro area of around 18% over the past five years. Ireland’s ever-improving competitiveness will aid the Irish economy, and its exports, in mitigating against the increasing challenges posed by the global slowdown.”

Ms Dobson said foreign direct investment will locate to Ireland due to increases in competitiveness which will help bolster the economy through the downturn.

“Ireland’s continued attractiveness as a location for Foreign Direct Investment (FDI) should provide further support in the face of the tough conditions. Ireland has met all of its mid-year performance targets under its IMF support programme and this is also likely to reinforce Ireland as a location to do international business from,” she said.

While making the country into a more competitive export base for companies may suit multi-nationals, it is having a negative impact on the domestic economy.

Taking a broader view of the Irish economy, Goodbody’s economists Dermot O’Leary and Juliet Tennent believe the fall in domestic demand will cancel out the growth of the export sector.

“Following last week’s weaker-than-expected Q2 data on employment and GDP we are downgrading our forecasts for the Irish economy both for this year and next. The trends in the economy are characterised by a familiar trend of a strong contribution from net exports and a continued downward trend in domestic demand.”

Goodbody downplayed a recovery in the economy. They said the economy was just “bouncing along the bottom”.

The Goodbody analysis also looked at the true state of unemployment. The economists disagreed with the official reported rate of 14.8%. They argued the true state of unemployment is closer to 20%.

“The true state of the unemployment situation is significantly worse if one counts those that are ‘under-employed’, that is willing to work more hours than their current part-time position provides.”

Taking these factors into account Goodbody’s downgraded their outlook for 2012 to 0.3% growth and they predicted growth of 1.3% in 2013.