ESRI: Pay deal vital to hit target

The Government’s prospects of achieving the spending cuts needed to meet year-end budget deficit agreed with the troika hinges on a successful completion of the Croke Park negotiations, according to the latest ESRI Quarterly Economic Commentary.

It forecasts that the budget deficit was 7.9% of GDP in 2012, which was well within the 8.6% target agreed with the troika on the back of a much better than expected. But the ESRI says it is unlikely that the robust performance last year will be repeated this year.

“Although an improvement in economic growth and labour market stabilisation will result in higher tax revenues, our expectation is that it will continue to be difficult to reduce expenditure levels in 2013 to the extent sought by Government. However, there could be sufficient momentum in changes sought in the current Croke Park negotiations to provide a significant carryover into 2014.”

The budget last December was less progressive than previous budgets, but overall the fiscal consolidation process since 2008 has been progressive, notes the ESRI.

The institute, similar to the Central Bank, has scaled back its growth forecasts for this year on the basis that the global economy remains under pressure.

The ESRI has pencilled GDP growing by 1.4% this year, which is marginally above the Central Bank’s forecast of 1.3% and 1.7% in 2014.

Merchandise exports could have fallen by as much as 2.5% in 2012 compared with the previous year. Exports from indigenous companies were weak, with food and drink exports particularly poor.

Production of beverages fell by 8%, and while domestic demand was weak here exports did not take up the slack.

However, exports of services grew by roughly 9% on the year helped by the expansion of firms in the IT and communications sectors.

The volume of investment contracted by 3.9%, but the value of investment increased by a marginal 0.6% last year.

The ESRI expects investment to grow by 3% in 2013 and 3.6% in 2014 on higher demand for machinery and equipment.

The combination of a weak labour market, household deleveraging and fiscal consolidation measures have all dampened personal consumption.

It is forecast to have contracted by 0.5% last year, which is more modest than declines in recent years.

“With economic growth prospects strengthening, accompanied by some improvements in the labour market and a continuation in the gradual climb of consumer confidence, we would expect to see a return to annual growth in personal consumption in 2014. However, additional budget consolidation measures to be introduced in December 2013 mean we are forecasting the volume of personal consumption will contract again by 0.5% in 2014.”