Eurozone Crisis Continues to Threaten Recovery
The Ernst & Young Economic Eye Summer Forecast has downgraded its latest GDP growth forecast for the Republic of Ireland (ROI) from 0.1% to -0.1% this year, because of continuing weak domestic demand and the ongoing Eurozone crisis.
The report forecasts a feeble recovery in 2013 of just 0.6%, and 1.4% in 2014, before the economy returns to a stronger growth rate of 3% in 2015.
Commenting on the figures Neil Gibson, Economic Advisor to Ernst & Young, remarks, “We predicted 2012 would be a tough year for Ireland. Despite Ireland’s progress on the implementation of the EU-IMF programme, the on-going problems of the Eurozone together with weak domestic demand, rising unemployment and a decline in real incomes along with austerity measures have conspired to downgrade short term growth prospects”.
Charting a more rapid course to recovery depends on continued export growth and improved consumer confidence. The value of exports in the ROI is 3% higher now than at the end of 2007. Economic eye predicts export growth of 1.6% in 2012, followed by 3.7%, 4.1% and 4.0% in 2013, 2014 and 2015 respectively. A strong export performance is forecast to re-establish ROI as one of Europe’s faster growing economies in the longer-term, with overall growth averaging 4.3% between 2015 and 2020.
However, exports alone will not be enough to return Ireland’s economy to sustained growth. Improved consumer spending, business investment and other elements of domestic demand will be required to herald a true recovery, particularly in the labour market. Consumer spending is forecast to contract by 2.6% and 1.3% in 2012 and 2013, before seeing growth of 0.4% and 1.5% in 2014 and 2015.
Mike McKerr, Managing Partner at Ernst & Young Ireland said; “Consumers across the Island continue to suffer from a decline in real income and this is affecting domestic businesses. Only when consumer spending, supported by a recovery in government and investment spending, begins to grow alongside exports will we see a stronger, sustainable recovery with employment growth. This underpins the importance of a strong domestic economy to compliment our international business base.”
The report has downgraded Northern Ireland’s (NI) Gross Value Added (GVA) growth from 1.1% to 0.1% in 2012 and 1.0% in 2013 and 2.1% in 2014, despite the region avoiding the scale of austerity experienced in ROI. NI’s relatively small export base hampers the region, with growth predicted to lag someway behind both the UK and ROI in the medium and long-term.
Policy is focused on boosting exports, but this will be challenging without the weapon of a lower Corporation Tax rate. NI’s growth will be insufficient to offset the contraction predicted in ROI in 2012, meaning the overall All-Island domestic economy (GNP) will contract by 0.7%.
Economic Eye suggests that the Island of Ireland will need to increase employment by over 400,000 to reach a desirable 70% employment rate by 2022. This is almost double the current forecast for growth – suggesting a significant challenge ahead. ROI’s unemployment rates are set to rise to 14.9% in 2012 and 15.2% in 2013. Unemployment levels will begin to fall from 2014 (15.1%). NI employment rates are forecast to rise to 8.9% in 2012, 9.3% in 2013 before we start to see a decline in 2014 of 8.9%, though welfare reform may push rates higher.
Gibson comments; “Job creation has moved up the policy agenda in both ROI and NI but it is difficult for government to create jobs against an austerity backdrop. They must focus on making it easier and more affordable for businesses to increase their workforce and build and maintain an environment within which businesses can thrive. The continued success in attracting international firms to locate on the island is very welcome but the pressures on domestic business are set to remain significant for some time severely constraining the number of jobs available.”