Time for another forecast upgrade as Irish recovery comes into view…

• Incoming news in recent months has prompted us to make another upward revision to our forecasts for Irish economic growth for this year.  We now see GDP growth at -0.5% this year vs. -2.8% previously.  GNP growth is set to be somewhat weaker at -1.2%, but this too is a less negative picture compared with the previous forecast of -3.2%.

• While the forecast continues to call for GDP to fall on average this year, this masks the improving trajectory which is set to take hold over the course of the year.  Quarterly growth rates tend to be extremely volatile, so we place more emphasis on the year-on-year changes in GDP.  On this basis, the Irish economy will be back in positive growth territory by Q4 in our view, which would be the first positive growth rate in three years. 

• The key driver of the return to growth is the major support from external demand.  Growth forecasts for Ireland’s main trading partners have been steadily marked higher in recent months.  Financial and economic conditions have generally continued to improve globally and each of the US, euro zone and UK economies is now growing again.  Even if the international recovery is gradual rather than robust, it will offer important support to Irish exports which we anticipate will grow by 2.5% this year on average, aided by an improvement in competiveness brought about by declines in wages and prices across the economy.

• While the international recovery is not without risks, on the basis that it can be sustained through and beyond this year, the Irish economy should see a further strengthening of its growth dynamic into 2011 when we see GDP growth exceeding 3%.
  …but a resumption of growth does not signal any near-term return of a feel-good factor as domestic demand set to lag the expected improvement in exports…

• The improving outlook for exports is beginning to filter through to the monthly PMI surveys of manufacturing and services activity which are picking up some increases in international orders.  However, the domestically-focused construction sector remains a clear laggard.  In particular, home-building will remain a substantial drag on growth this year.  House completions fell by almost 50% last year to 26,800 units and we continue to forecast a further substantial fall, to around 10,000 this year. Home prices also have further to fall and our base case remains a 45-50% cumulative drop from the peak three years ago.

• Consumer spending also remains under pressure and we expect another year of decline, albeit that the 1.1% drop we now anticipate is lower than the 3% previously projected and substantially less than the estimated 7.4% fall last year.  The less negative outlook is supported by a steadier trend in retail sales lately and the likelihood of less precautionary saving as confidence stabilises in line with the expected stabilisation of the broader economy.

• The unemployment rate has further to rise, though we expect it to peak at a lower level of 13.4% by around the middle of the year, vs. 15.4% previously.  The pace of job-shedding is easing but employment is still falling and it will probably be the final quarter of this year before we see net job creation re-emerge.

Government gets payback from markets for its fiscal strategy; but vital that sustained corrective action is maintained in coming years…

• solid progress is being made to stabilise the public finances.  Without the major corrective action taken since mid-2008, last year’s deficit (in general government terms) would have been closer to 16% of GDP compared with the estimated outturn of 11.3%.  The deficit will probably fall slightly in 2010 following the €4bn (2.5% of GDP) package announced in the December Budget, helped by the likelihood of an upside surprise in tax receipts as growth looks set to be stronger than the Minister had anticipated last month.

• Ireland is far from the only country internationally with a high deficit problem, but the Government’s considerable action to date is helping to foster a more positive view of Ireland’s fiscal position among international investors.  The spreads on Irish government bonds have fallen since the Budget, both in absolute terms as well as relative to other high deficit countries including Greece and the UK for example.  However, the fiscal challenge remains huge and maintaining the confidence of the markets will require further sustained corrective action in the coming years.  Other key policy priorities will be effective implementation of NAMA (on which there has been some slippage on timing) and progress on the recapitalisation of the banking sector.

	2007	2008	2009E	2010F	2011F
GROWTH
Consumer Spending (%YOY)	5.9	-1.0	-7.4	-1.1	2.4
Investment (%YOY)	2.3	-15.5	-29.8	-19.3	7.4
- Housing	-6.4	-26.3	-41.1	-33.2	11.8
- Other Building & Construction	19.7	8.6	-20.8	-18.0	4.0
- Machinery & Equipment	13.9	-15.4	-18.2	-5.2	5.0
Government Spending (%YOY)	6.9	2.6	-1.2	-3.0	-0.7
Exports (%YOY)	8.6	-1.0	-2.4	2.5	4.3
Imports (%YOY)	5.6	-2.1	-9.3	-3.0	3.6
Real GDP (% YOY)	6.0	-3.0	-6.8	-0.5	3.5
Real GNP (% YOY)	4.4	-2.8	-11.1	-1.2	3.5
Housing Completions	78,027	51,724	26,820	10,000	13,000
PRICES
CPI (% YOY) Average	4.9	4.1	-4.5	-1.2	3.0
HICP (% YOY) Average	2.8	3.1	-1.7	-1.3	0.8
LABOUR MARKET
Employment (% YOY) Average	3.7	-1.1	-8.2	-4.2	1.1
Unemployment Rate annual avg.%	4.6	6.4	11.6	13.2	12.4
PUBLIC FINANCE
General Government Balance (% GDP)	0.2	-7.2	-11.3	-11.0	-9.6
EXCHANGE AND INTEREST RATES
ECB Refi Rate (End of Period)	4.0	2.5	1.0	1.5	2.5
EUR/$ (End of Period)	1.46	1.40	1.43	1.39	1.30
EUR/£ (End of Period)	0.74	0.96	0.89	0.82	0.78

Simon Barry,

Chief Economist, Republic of Ireland

E- mail: Simon.Barry@ulsterbankcm.com

Tel: + 353 1 643 1553

Mobile: +353 86 3410142

Lynsey Clemenger

Economist

E-mail: Lynsey.Clemenger@ulsterbankcm.com

Tel: + 353 1 643 1565