Domestic demand will strengthen the recovery

The growth in GDP has slowed considerably from the 2.2% recorded in 2011. Most forecasts are for Irish GDP to grow by 0.0% to 0.5% this year, after expanding by just 0.2% in 2012.

The slowdown has been caused by a sharp fall-off in export growth to about 0.5% this year from 5.4% in 2011. This is partly attributable to the weaker global economic environment, notably in the eurozone, where GDP contracted in 2012 and 2013.

GDP has also been depressed by the marked decline in exports from the key pharmaceutical sector, following the expiry of patents on some products manufactured here. Exports from the chemical and pharmaceutical sector fell by €3.75bn in the first eight months of this year, equivalent to 3.8% of GDP.

However, the fall in pharmaceutical exports is being offset by a sharp decline in profit repatriations. Balance of payments data shows a fall of €3.35bn in so-called reinvested earnings income in the first half of 2013. Thus, the real impact of the decline in pharma output has been on the profits of the multinational companies concerned, rather than the economy itself.

This decline in profit outflows is not taken into consideration in GDP, but it is accounted for in GNP. In contrast to GDP, GNP has been performing quite well this year, and is likely to expand by about 2%. This GNP growth is consistent with other data pointing to improving economic conditions this year. Business investment picked up sharply in the opening half of the year. Exports rebounded in the second quarter as the global economy improved.

Consumer spending picked up in quarter three. Meantime, a broad range of survey indicators are also pointing to a strengthening economy. Indeed, recent months have seen consumer sentiment, the purchasing managers’ indices for the services and construction sectors, as well as the OECD leading indicator for Ireland, rise to their best levels since 2007-08.

Labour market data also points to an improving economy. The unemployment rate has fallen to 13.3% from over 15% in early 2012. Employment grew by 1.8% in the year to Q2 2013. It would appear, then, that GNP is giving a better picture than GDP of what is actually happening in the real economy.

Economic activity is expected to gain momentum in 2014. Domestic demand should begin to see modest growth. Both business investment and construction activity have started growing again. Consumer spending should be helped by the improvement in labour market conditions and consumer confidence.

Fiscal policy is also turning less contractionary. In the budget, unexpected savings meant the Government was able to scale the €3.1bn of fiscal consolidation measures originally planned for 2014 to €2.5bn.

The budget also contained stimulatory measures to boost growth and employment. This was still a tough budget, but was less draconian than those of recent years. Thus, it will have less of a negative impact on the economy. Meanwhile, exports in 2014 should benefit from the improving global economic environment and a waning of the effect of the expiry of patents in the pharma sector.

Overall, we look for the economy to grow by over 2% next year. The IMF expects GDP growth in advanced economies to double from 1.2% in 2013 to 2.5% by 2015. Ireland has made significant gains in competitiveness and attracted a lot of new foreign direct investment in recent times. It looks very well placed to take good advantage of stronger global growth.

With the domestic side of the economy, notably construction activity, also expected to improve, we look for GDP growth to pick up close on 3% in 2015.