Consumer spending improving as economic recovery broadens according to Bank of Ireland’s Quarterly Economic Outlook
The recent growth in the Irish economy has been led by the external sector and exports will continue to be the main driver of activity, boosted by global demand, with sales to the UK also supported by the past year’s rally in sterling against the euro, according to Bank of Ireland’s Quarterly Economic Outlook published today, 26 July 2010.
- Exports continue to drive economy
- Exchequer Borrowing Requirement may undershoot target
The recent growth in the Irish economy has been led by the external sector and exports will continue to be the main driver of activity, boosted by global demand, with sales to the UK also supported by the past year’s rally in sterling against the euro, according to Bank of Ireland’s Quarterly Economic Outlook published today, 26 July 2010.
“We have an economy which may grow by 1% this year in GDP terms, with a further fall in domestic demand more than offset by another strong performance from the export sector. The absence to date of a pick up in domestic activity has meant that the statistical recovery has not been widely felt throughout the economy, but a rise in consumer spending will provide some more tangible signs that the recession is over. However, we still expect GNP to fall this year, given the strength of exports, and therefore, the impact on multinationals profits, which will outpace the return on Irish assets held abroad”, according to Dr. Dan McLaughlin, Group Chief Economist, Bank of Ireland and author of the publication.
“The consensus view now projects marginally positive economic growth for the year as a whole, which is line with our own 1% forecast, which we are maintaining. A range of monthly indicators are now pointing to a broadening of the Irish recovery, including retail sales, which look set to record very strong growth in the second quarter. Consumer confidence has risen of late, but we are reluctant to postulate a sharp decline in savings rates until employment starts to grow. We expect overall consumer spending to increase in Q2 and to rise further as the year unfolds, although the carry-over effects of last year’s 7% fall will leave average growth for the year flat in 2010.
“Exports remain the main driver of the Irish economy accounting for over 90% of GDP, and the rise in the first quarter, 6.9% on a seasonally adjusted basis, was stronger than we initially expected. As a result, we are revising up our full year export forecast, and now project a 7% volume increase (the annual rise in Q1 was 5.5%). Imports also rose in the quarter, by 2%, and we now expect a positive import figure for 2010 as a whole and have pencilled in a 1.5% increase. This still implies a sizeable net stimulus from the external sector, as in 2009. We retain our 3% GDP forecast for next year, which is in line with the consensus, although there are enough uncertainties, both domestically and internally, to render any forecast more tentative than usual.
“Retail sales have risen strongly of late (boosted by a car scrappage scheme) and a significant increase in the second quarter looks assured. Households also appear to have adjusted their savings habit and, although the absence of timely official data makes any definitive conclusions on savings tentative, it does appear that the savings ratio has risen sharply since 2007 and may now be just under 11%
“The recent data also points to a possible cycle floor for house completions, although this still implies large annual falls in building and construction, with business spending on machinery and equipment also set to decline further. Indeed, total investment spending in 2010 will amount to only 12.5% of real GDP on our forecast, less than half its share at the peak of the boom in 2006. The depth of the Irish recession can therefore be seen as primarily due to a collapse in capital spending, with the fall in consumer outlays the other main factor.
“Ireland’s experience of price deflation may be coming to a close – we expect a return to positive annual inflation by year end and an average of over 1.5% next year. The pace of job losses has slowed and the unemployment rate may be at or near the peak, with many unemployed non-Irish nationals leaving the country, as employment is unlikely to rise until 2011. We maintain our existing labour force forecast, incorporating an average 50,000 fall this year, followed by a further modest decline in 2011, which leaves the average unemployment rate for 2010 at 13.3% declining to 12.8% next year.
“Finally, our view is that Exchequer borrowing excluding any capital injections to the banks may well emerge below the target. Tax receipts are broadly on target, capital spending is likely to undershoot, debt service payments may be lower than projected and the Central Bank surplus is running well above expectations. Moreover, fees for the 2010 guarantee on bank deposits is not included in the Budget arithmetic and may well amount to around €1bn by year-end”, concluded Dr. Dan McLaughlin.
Ends
26 July 2010
For reference:
Dr. Dan McLaughlin
Group Chief Economist
Bank of Ireland Global Markets
Tel: 01 609 3221
Anne Mathews
Media Relations Manager
Group Communications
Bank of Ireland
Tel: 01 604 3836 / 087 246 0358
View Bank Of Ireland’s Quarterly Economic Outlook (PDF, 127kb)