Economy to expand by 3.4% this year, ESRI predicts

Think tank says Ireland will be euro area’s fastest-growing economy

Minister for Finance, Michael Noonan: has pledged to help hard-pressed middle-income earners in October’s budget. Photograph: Dara Mac Dónaill

Minister for Finance, Michael Noonan: has pledged to help hard-pressed middle-income earners in October’s budget. Photograph: Dara Mac Dónaill

Thu, Aug 7, 2014, 01:00

The Republic’s economy will expand by 3.4 per cent this year on the back of a strong export performance and a resurgence in domestic demand, making it the fastest-growing economy in the euro area, the Economic and Social Research Institute (ESRI) has predicted.

However, it warned the Government would not be in a position to implement a neutral budget until 2016 at the earliest, contrary to the assertions of several economic commentators.

In its latest quarterly commentary, the economic think tank delivered another upbeat assessment of the economy, saying several headline indicators were now pointing to a “relatively strong recovery”.

It warned certain issues could still hamper the country’s progress out of recession, most notably the weak prospects for growth in the euro zone.

It noted that recent policy measures by the European Central Bank were unlikely to provide “the requisite stimulus necessary” for a more significant rate of output growth.

The ESRI also said the weak flow of credit from the country’s ailing banking sector was having negative effect on consumption and investment, resulting in a phase of “creditless recovery”.

“The need for domestic financial institutions to repair impaired balance sheets, and the resulting pressures to deleverage, appear to be constraining the amount of finance available for the real economy,” it said.

Nonetheless, the institute said the better-than-expected 2.7 per cent jump in economic growth in the first quarter, allied to recent positive exchequer data, was extremely positive. On the basis of these trends, it projected gross national product, which which strips out the effects of multinational profit flows, would grow 3.4 per cent this year and 3.8 per cent next year.

It said gross domestic product, the more traditional measure of economic growth, would expand 3 per cent this year, and 3.7 per cent next year – the latter being significantly ahead of the Government’s own projection.

The institute also said it expected further declines in unemployment this year, predicting the headline rate would fall to 9.8 per cent next year.

It predicted the consumption component of domestic demand, which has floundered since the crash, would rise 2 per cent this year on the back of improving conditions in the labour market.

It also noted that retail sales have shown strong growth so far this year, in contrast to last year, with sales of both cars and household goods on the up.

Never

theless, it noted average weekly earnings were still down on an annual basis in the first quarter, largely as a result of the new taxes and charges associated with the ongoing budgetary consolidation.

The ESRI said it was too early to pinpoint the size of the budget adjustment needed to deliver the troika-agreed budget deficit target of 3 per cent next year. However, its forecasts were predicated on a €1 billion adjustment, significantly less than the €2 billion previously envisaged.

On current trends, it said a €1 billion adjustment, or possibly a bit less, should be sufficient to deliver a budget deficit of 2.5 per cent next year.

“Within this framework, cuts in some taxes would only be possible if other taxes are raised and expenditure is further cut so as to achieve the necessary budgetary adjustment,” it said.

The ESRI said it would be 2016 at the earliest before the Government could implement a neutral budget, despite some assertions to the contrary.

Minister for Finance Michael Noonan has pledged to do something for hard-pressed middle-income earners, who have borne the lion’s share of austerity, in October’s budget.