ESRI Quarterly Economic Commentary:RESURGENT EXPORTS will drag Ireland out of recession later this year, with more favourable conditions in world trade acting as a "lever" to get the economy growing again, according to the Economic and Social Research Institute (ESRI).
The economy will stabilise this year and rise by 2.75 per cent in terms of its Gross National Product (GNP) next year, the ESRI’s latest Quarterly Economic Commentary (QEC) forecasts.
The performance will be predominantly due to a 2.25 per cent rise in exports in 2010 and a 4.5 per cent rise in 2011, the advisory body predicts. The forecast is predicated on the continued recovery in the economies of Ireland’s main trading partners.
“If the kind of export growth we expect doesn’t happen next year, the impact on the Irish economy would be quite severe,” said ESRI economist Alan Barrett.
QEC co-author Jean Goggin said a “multi-speed recovery process” was under way internationally, with the US likely to outperform the euro zone and Britain.
However, the premature withdrawal of monetary and economic stimulus policies could undermine that recovery. The design of appropriate exit strategies from the emergency policy measures introduced by central banks is now a priority for policymakers, she added.
The ESRI concurs with the widely held view that there will be no increases in the European Central Bank (ECB) key lending interest rate this year.
“This is good news for Ireland given the fragile nature of our recovery here,” said Ms Goggin.
However, rate increases imposed by Irish mortgage lenders in order to recover their margins will take Ireland out of its deflationary cycle and lead to an overall increase in consumer prices.
While mortgage costs rise, house prices will continue to fall. By the end of 2011, house prices will have fallen 50 per cent from their 2007 peak, the ESRI said.
A recovery in consumer spending will lag the bounce in exports. Consumption will remain subdued next year, growing by just 1.5 per cent, partly because recession-scarred consumers will continue to save a high proportion of their incomes.
The next few years will also be characterised by net emigration. There will be net emigration of 60,000 in the year to April 2010 and a further 40,000 in the year to April 2011, according to the forecasting body.
Looking to the medium term, the ESRI said it was still possible that Ireland could achieve average growth in Gross Domestic Product (GDP) of 5 per cent between 2011 and 2015, but “obstacles”, including a still-fragile banking sector, meant this rate would not be met next year.
As a result of another “tough” budget, the general government deficit (GGD) will fall to 10.75 per cent of GDP in 2011. This compares to 12 per cent this year, when the deficit will amount to around €19 billion.
State borrowing for bailing out Anglo Irish Bank and Irish Nationwide is not included in the calculation of the GGD. However, the interest paid on the debt is included. The interest cost of this extra borrowing increases the government debt by €4 billion, the ESRI said.
The ESRI dedicated the spring QEC to the memory of Terry Baker, who died in January after a short illness. Mr Baker was the founding editor of the QEC and edited it from 1968 to 1973 and again from 1983 to 1999, when he retired from the ESRI.
ESRI Bulletin Accompanying Articles
A round-up of the articles in the ESRI’s research bulletin, which was published alongside its spring Quarterly Economic Commentary.
- In a paper entitled
Get Back in the Game: Sport, the Recession and Keeping People Active,
ESRI economist Pete Lunn outlines the findings of the Irish Sports Monitor surveys, which have found that weekly participation in sport by adults dropped as the recession kicked in during 2008.
“Tight public finances and the fall in participation demand that policymakers refocus on their main target,” he notes. A focus on grassroots rather than elite sports, and individual sports rather than team sports, will have the best impact on public health, he concludes.
Government proposals to introduce a code of practice between grocery retailers and suppliers are flawed, according to ESRI economist Paul Gorecki.
- In a paper called Is a Code of Practice Needed for the Grocery Trade?, the author states the Government's "inherently contradictory" consultation paper on the issue should be withdrawn and reissued as, under the current proposals, suppliers will have more bargaining power, "very likely" leading to higher grocery prices for consumers.
- Economists Seán Lyons and Richard Tol write in their accompanying paper that the methods of calculating economic activity do not take into account the environmental damage caused by that activity.
“Similar levels of Gross National Product (GNP) might involve quite different environmental damage, with implications for both current and future welfare and economic activity.”
The authors have integrated economic and environmental data in the ESRI Environmental Accounts, which they say will allow them to allocate responsibility for particular emissions to particular sectors of the economy.
