Higher oil prices may be starting to take a toll on economic growth. New figures from the Central Statistics Office (CSO) show a sharp fall in Irish industrial production in August.
Meanwhile internationally there has been a drop in German investor confidence and an unexpected decline in French industrial output. Irish industrial production, which had been strong in July, fell back sharply in August, dropping 13 per cent on the previous month.
The CSO figures showed output in the month running 12.6 per cent below the same month last year and while the industrial figures can be volatile from month to month, the latest data may be due in part to the fall-out from higher oil prices. On a three month basis, the figures show that production i the June to August period was 1.6 per cent down on the previous quarter.
Other recent data showed an 8 per cent monthly fall in exports to non-EU countries in August. Forecasters will now be closely watching the figures in the months ahead, as most have anticipated that a pick-up in international growth will feed through to higher exports and production here and bolster economic growth.
However research presented at an Economic and Social Research Institute (ESRI) conference yesterday predicted that Irish growth could remain healthy, unless oil prices continued their upward path and were sustained at high levels.
Oil prices rose to record levels again yesterday. Brent crude for November delivery yesterday hit $51.50 (€41.77) a barrel in morning trade before retreating to $50.43 a barrel. In the US, crude prices hit $54.45, another new high, before dropping below $53 in later trade.
The ESRI calculations show that if oil prices rose from last year's average of $30 to around $43 a barrel, then it could knock just over 0.5 of a percentage point of the Irish growth rate in the first year and leave GNP more than 1 per cent lower in year two. This would still leave growth at a respectable level, given that the ESRI is predicting growth of around 5 per cent this year and next.
However ERRI economist Mr Danny McCoy points out that this research was undertaken on the basis that two thirds of the rise was temporary in nature. Also, oil prices have now risen to well over $50 a barrel a rate which, if sustained, would have significant implications for global and thus Irish growth.
The rise in oil prices has already shown through in some nervousness in recent Irish consumer confidence indicators. The latest indicators suggest that Continental European economies, where growth is weaker, are also suffering.
In its monthly assessment of German investor confidence, the Mannheim-based ZEW institute reported the third consecutive decline in sentiment to a 16-month low. Its expectations indicator, which has had a median value of about 35, fell from 38.4 in September to 31.3 in October.
"The reason for the greater pessimism can be found in the continuing surge in oil prices and expectations that global economic dynamism is easing," the institute said, while other indicators suggested that demand for German exports may be weakening.
French industrial output also recorded an unexpectedly sharp drop of 1.9 per cent in August compared with the previous month. - (Additional reporting Financial Times)
