Irish growth dependent on European recovery - ESRI

Thursday 16 May 2013 13.58
ESRI forecasts growth of 1.8% this year and 2.7% next year
ESRI forecasts growth of 1.8% this year and 2.7% next year

The Economic and Social Research Institute has said it is likely that growth in output and employment will continue this year and next.

In its latest Quarterly Economic Commentary, the ESRI forecasts growth of 1.8% this year and 2.7% next year.

If these rates are achieved, the ESRI says unemployment should fall just below 14% next year.

However, it says the growth forecast is crucially dependent on the European economy returning to growth in 2014. Without this, the Irish economy will not grow at the forecast rate.

Because of the uncertainty surrounding the international economy, the ESRI says there should be no easing up on the Government's drive to correct the public finances.

All the planned consolidation measures should be implemented as planned over the next few budgets, the institute added.

By doing so it said that "the deficit will be eliminated and the public finance contraction will not be weighing on the domestic economy".

Although the outlook is for an upturn in growth, the ESRI continues to have concerns about the weakness in the domestic Irish economy.

In particular it fears that the banks may not be able to lend enough money in the SME sector if the economy grows as forecast.

Research by the institute finds that access to credit is not the main problem for SMEs now, which is now finding customers for their products or services.

But if there is a growth in credit demand by SMEs on the back of a growing economy, the institute questions the capacity of the Irish banking system to meet that rising demand.

Concern over impact of 're-domiciling' on GNP figures

Another research paper looks in detail at the impact of a small number of UK companies that have relocated their registered office to Ireland over concerns at the direction of the UK tax regime.

The CSO has warned for the past year that the relocation or "re-domiciling" of a small number of companies has been distorting the Irish Gross National Product (GNP) numbers, which has previously been seen as a better guide to the health of the Irish economy than GDP.

The money held by these re-domiciled companies - around €7.4 billion last year, or 5.5% of GNP - is enough to distort the figures.

Analysis by Professor John Fitzgerald indicates that these inflows had the effect of reducing the recorded amount of profit outflows by multinationals based in Ireland, which had the effect of raising both the GNP figure and the balance of payments current account surplus.

Taking this into account, Professor Fitzgerald's analysis finds the economic contraction in 2009 was deeper than officially recorded, and that GNP contracted in 2010, rather than the 1% expansion recorded in the official statistics.

It also impacted last year's figures, which officially show GNP expanded by 3.5%, but the ESRI analysis says the real expansion was just over 2%.

The impact on the balance of payments surplus is more dramatic.

A surplus on the balance of payments indicates that a country is saving more than it is spending or investing.

Usually large surpluses are not sustained, and eventually lead to increased domestic demand as these savings are reduced and spent in the domestic economy.

However Professor Fitzgerald's research suggests that rather than running a current account surplus of 6% of GNP, the real number is closer to 1%.

This implies there will be less of a bounce for the domestic economy, as there is not as high a level of savings to be released as previously thought.

Keywords: economy, esri