Economy weaker than ESRI had thought

THE ECONOMY is weaker than previously thought and the risks to the recovery greater, according to the latest forecast from the Economic and Social Research Institute (ESRI).

In its Quarterly Economic Commentary, published today, the institute states that the economy will contract in 2010 by more than it had believed in July. And, although it maintains its previously held view that the economy will grow solidly in 2011, that expansion will be less vigorous than it thought three months ago.

The ESRI cited weaker consumer confidence and a larger budget adjustment as the reasons for its gloomier overall assessment. In July it assumed that the budget package for 2011 would be €3 billion. It is now working on the assumption of a €4 billion adjustment.

It also said it had “grave doubts” about the effects of the Government budget plans because “an austerity package of €15 billion within four years could damage the potential of the economy to grow its way out of recession”.

In 2010 the ESRI expects gross domestic product (GDP) to contract by 0.25 per cent, compared to a projection three months ago for expansion on a similar scale. For 2011 it expected GDP to grow 2.25 per cent, the first annual expansion since 2007. However, this forecast has been revised down by half a percentage point since July.

The gross national product (GNP) measure has also been revised downwards and, in addition, is weaker than GDP. It excludes returns on foreigners’ investments in Ireland, such as multinational profits and interest on Government debt. The ESRI now believes that GNP will contract by 1.5 per cent in 2010, a full percentage point more than previously thought, before growing by 2 per cent next year.

The ESRI believes private consumption – spending by households on goods and services, and the most important expenditure component – has been weaker this year and will be weaker next.

The change for 2010 reflects new figures for the second quarter, released since its last report, which showed that private consumption continued to shrink in the April-June period. More timely indicators, such as the ESRI/KBC confidence survey, have dipped in the third quarter.

In 2011, private consumption is expected to grow by 1 per cent. This represents a half percentage point reduction on the July forecast.

The weaker-than-expected economy will have an impact on employment in 2011, according to the report. While the institute’s estimates of the numbers at work and out of work in 2010 have not changed since July, it believes that total numbers in employment next year will be 5,000 lower than it previously thought.

The average jobless rate in 2011 will be 13.5 per cent of the workforce, higher than the 13 per cent it expected three months ago.

The strength of the export sector in the first half of 2010 and the solid outlook for demand internationally has resulted in the ESRI revising up its forecasts for exports in both 2010 and 2011. This partially offsets the downward revisions to other components of GDP/GNP.

The outlook for investment spending is weaker in both years according to the latest ESRI analysis. However, as most of the shake-out in the building sector has now happened, the decline in investment spending next year is expected to be much smaller than in recent years. Spending on plant and machinery is expected to grow.

Among the more positive aspects of the report was that the institute expects official interest rates to rise only in the second half of 2011, and that a single increase of a quarter of a percentage point will be implemented by the European Central Bank. This will limit increases in debt servicing costs for households and businesses.

Contributing to its more pessimistic overall assessment is the weakness of the financial system.

The report states that “a healthy banking system is further away than we might have thought”.