ESRI predicts growth in economy of 0.9% this year

THE ECONOMIC and Social and Research Institute is predicting that growth in the Irish economy will be of the order of 0.9 per cent this year.

While this is greater than yesterday’s forecast from the European Commission of 0.5 per cent, it is down considerably on the ESRI’s previous forecast of 2 per cent given at this time last year.

It also follows a similar downward adjustment by the ESRI of its full-year growth figures for 2011. It is now forecasting growth of 0.9 per cent for 2011, down from the 2.2 per cent forecast in its autumn report.

The economy is predicted to return to stronger growth, of about 2.3 per cent, in 2013.

In its first forecast for this year, the ESRI expects that growth will once more be driven by external demand in 2012 “as domestic demand will remain weak”.

However, while considerable risks to the downside remain, Prof Joe Durkan, one of the authors of the ESRI’s Quarterly Economic Commentary, is nonetheless cautiously optimistic. “There is a better chance that things will be better than worse,” he noted.

If growth this year was to fall to just 0.5 per cent, Prof Durkan said it might put the budgetary targets in danger. However, he would be more concerned about other countries in the EU meeting their targets, such as the UK and France.

According to the ESRI’s forecasts, the public finances will continue to worsen in 2012, with Government debt as a percentage of GDP jumping to 115 per cent and peaking thereafter at 120 per cent in 2013. This is marginally higher than the forecast in Budget 2012.

With debt such a focus, the Government’s announcement on Wednesday that it would reinvest a third of revenues generated from the sale of State assets in job creation, which is estimated at € 1 billion, was treated with caution.

Prof Durkan said his preference was that the revenues raised would be used to pay down debt.

“One would like to see the debt paid down as quickly as possible,” agreed co-author David Duffy.

Exports are forecast to grow by 3.4 per cent in 2012, and 3.8 per cent in 2013, down from 6.3 per cent in 2011.

The rate of export growth faltered in the second half of 2011, and if this was to continue it could hurt growth.

“If the slowdown was to continue, given that the external side is the main driver of growth, then it would reduce the growth forecast,” Mr Duffy noted.

Unemployment is expected to more or less stabilise at 14.0 per cent in 2012 “both because of migration and because of a reduced participation rate”, before falling back to 13.7 per cent in 2013.

Consumer spending will continue to fall, although the rate of decline will abate. It is forecast to fall by a further 1.8 per cent this year, and 1.0 per cent next year.

On the issue of whether there might be an alternative to the “dampening effect” of austerity on economic activity, Mr Duffy said that options were “limited” but that structural reforms, such as improved competitiveness, could help boost growth.