Upside data surprises prompt forecast revision according to Bank of Ireland’s Quarterly Economic Outlook

GDP now expected to rise by 1.5% Fiscal deficit may emerge below target

Growth in the Irish economy has surprised to the upside in the first half of the year; GDP rose by 1.6% in the second quarter following an upwardly revised 1.9% expansion in Q1, the first consecutive quarterly gains in five years. As a result, we are now revising our forecasts for the full year and now project GDP growth of 1.5%, with GNP set to rise by 1%, according to Bank of Ireland’s Quarterly Economic Outlook published today, 11 October 2011.

According to Dr Dan McLaughlin, Group Chief Economist, Bank of Ireland and author of the publication: “Exports remain the main driver of that expansion, although growth in that sector has slowed of late, albeit offset by a more rapid deceleration in imports. Capital spending has also grown strongly in the first half of the year, adding to the growth momentum, and at some €22bn the inflow of Foreign Direct Investment in the first six months of the year already exceeds the total for last year as a whole.

“Consumer spending remains weak, however, and we still expect a 2.5% fall in 2011. Much is made of the rise in the savings ratio evident in recent years but we believe that the ratio has not changed much this year – the fall in consumer spending reflects a significant squeeze on real incomes, as inflation has accelerated while earnings are still falling, albeit modestly.

“The rise in Irish inflation was strongly affected by higher mortgage rates and the next year may well see lower inflation given the prospect of lower ECB rates at best and unchanged rates at worse. The Irish unemployment rate may also ease, albeit modestly, and the latest data shows that the cycle of falling employment may be close to a turn, although we do not envisage significant job creation given the composition of Irish growth.

“Investor sentiment towards Ireland has also changed for the better (2-year bond yields have fallen from 22% to under 6.5% in the past two months) in part because Ireland is meeting its fiscal targets. Indeed, the underlying deficit may emerge below target although the weakness in VAT represents a downside risk. The global environment also represents the major risk to the outlook, as an EU slide into recession or near-recession would clearly damage Irish exports and hence the main engine of the Irish recovery“, concluded Dr Dan McLaughlin.

Ends

For reference:

Dr Dan McLaughlin                                                  Anne Mathews

Group Chief Economist                                           Media Relations Manager

Tel: 01 609 3221                                                        Tel: 076 623 4771