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10 November 2011

Commission forecast for Ireland


Growth is expected to pick up to 2.3 per cent in 2013 as the non-traded sectors of the economy return to growth and the labour market begins to improve. Despite the slight upward revision to real growth in 2011, the deflator has been revised noticeably downward.

The government deficit ratio to GDP reached a record 31.3 per cent in 2010, including one-off banking sector support measures of 20 per cent of GDP. As compared to the spring 2011 forecast the deficit is down by 1.1 pps of GDP due to the revisions to the public finance data and nominal GDP.

The government deficit is estimated at 10.3 per cent of GDP in 2011. Despite permanent fiscal consolidation measures of 3¼ per cent of GDP, the structural deficit is estimated to decline by only ½ pp of GDP over 2010. The difference stems from negative potential growth and closing output gap, as well as negative domestic demand developments – the main source of tax revenue and job creation. Lower tax revenue and some overruns in mainly social spending are estimated at 0.3 per cent of GDP as compared to the spring 2011 forecast. However, these are more than offset by higher-than-expected non-tax revenue – fees on the bank guarantees (0.4 per cent of GDP) and interests on the bonds injected as convertible contingent capital into the domestic banks (0.1 per cent of GDP). The sale of the spectrum licenses announced in the 2011 budget is likely to take place in 2012 (one-off revenue of 0.3 per cent of GDP), but the Jobs Initiative announced in May 2011 has a deficit-improving effect of 0.1 per cent of GDP. The Jobs Initiative is budgetary neutral over the period 2011-14, while having a deficit-increasing effect of 0.1 per cent of GDP in 2012 and 2013, and positive effect of similar size in 2011 and 2014. It includes a temporary levy on pension funds yielding almost 0.3 per cent of GDP annually, which compensates for temporary reductions in some tourism-related VAT rates and social security contributions on low wages. Interest rate margin reduction on EU loans provided as part of the EU-IMF programme is estimated to produce savings of 0.2 per cent of GDP. One-off banking support measures (including possible capital injection in the credit union sector) of 11 per cent of GDP in 2011 are considered as financial transactions in the forecast until their statistical treatment is confirmed by Eurostat.

Over the medium term, growth is expected to pick up to 2.3 per cent in 2013 as net export growth continues to make a positive contribution and domestic demand stabilises as the household saving ratio begins to fall.

Lower growth stemming from weaker-than-expected global demand in 2012 is a very real risk, as exports comprise a large share of Irish GDP. However, the composition of Irish exports and their relatively non-cyclical relationship with global demand would offset this to some extent. Although growth has returned, a pick-up in employment is likely to lag considerably, which has particularly pressing policy challenges. On the upside, precautionary savings are high giving scope for a reduction and the Irish household sector is likely to find considerable relief in 2012 given its exposure to short-term interest rates.

Full forecast (Ireland)



© European Commission


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