Back in recession after GDP falls

The 0.6% contraction in GDP over the first quarter of 2013, following on from the revised 0.2% shrinkage in the final quarter of last year, puts Ireland officially back in recession.

If the lack of growth in the economy continues for the rest of the year, then it will have serious implications for Ireland’s exit from the EU/IMF programme and October’s budget.

Much of the contraction stemmed from the reduction in net exports as the patent cliff saw a sharp drop in pharmaceutical exports. Investment also fell, while personal expenditure was down 3% compared with the previous quarter.

“GDP in the first quarter of 2013 fell 0.6% on the fourth quarter of 2012 — well below expectations — but much of the weakness may be temporary,” said Davy economist David McNamara

“As expected, the recovery in consumer spending at the end of 2012 partially unwound in the first quarter, while exports and investment also fell sharply.

“However, the recovery in industrial output suggests that the fall in goods exports will be temporary. In turn, investment was pushed down by a sharp decline in airplane orders, which could unwind in the second quarter.

“The second-quarter out-turn may provide a better steer on the health of the Irish economy, but today’s data are certainly a weak start to the year.”

To meet the 3% fiscal deficit target by 2015, the Government plans a fiscal consolidation strategy of €3.1bn this year and €2bn next year. This would mean a fiscal deficit of 2.2% in 2015.

The restructuring of the €28bn of promissory notes in February created about €1bn in savings over the next two years.

Ministers have suggested there is ‘wriggle room’ to cut income tax or ease off on spending cuts.

But at a budget conference on Tuesday, speakers including the ESRI’s John Fitzgerald, Trinity College Dublin’s Philip Lane, the IMF’s Peter Breuer, and former government adviser Alan Ahearne all said it was important for the Government to stick to the existing consolidation policy.

Mr Breuer said one of the main risks was lower than expected growth. If the economy grows by 1% each year for the next three years, then the fiscal deficit will reach 3.5% in 2015 and debt-to-GDP will reach 130% by 2018, he added.

Merrion Stockbroker economist Alan McQuaid, said the growth outlook hinges on the external environment: “Despite the poor first-quarter GDP figures, I still think that Ireland is better placed than most to benefit from the upturn in the world economy when it does come, but at the moment it is likely to remain the case of an economy performing well below its potential.”

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