ESRI says return of domestic demand to fuel recovery

Domestic demand is likely to contribute to Irish economic growth this year for the first time since 2007, marking a major turning point in the State’s economic recovery, the Economic and Social Research Institute has said.

The economic think-tank has also revised upwards its estimates for employment growth this year to 2.5 per cent, the equivalent of about 60,000 jobs, based on recent labour market data, saying the economy was now on course to return to full employment by 2020.

In its latest quarterly commentary, the institute delivered its most upbeat assessment of the health of the economy since the crash. While the estimated growth in domestic demand would only be a modest 0.9 per cent this year, it was a “portent of stronger recovery” in 2014 and 2015, the ESRI said.

This pick-up in domestic activity combined with continued growth in the export sector would see gross national product (GNP), which excludes the impact of multinationals on the economy, grow by 2 per cent this year and by 2.7 per cent next year, significantly ahead of the Government’s projections.

The ESRI, however, predicted gross domestic product (GDP), the more traditional measure of economic activity, would only grow by 0.3 per cent this year, principally because of the drag on growth posed by the so-called patent cliff in the pharmaceutical sector.

However, as this wears off, it said GDP growth would accelerate to 2.7 per cent next year.

It said the third-quarter employment figures from the Quarterly National Household Survey, which indicated the economy created 22,500 jobs in the three months to September, had prompted it to revise downwards its forecast for unemployment for 2014 to 12 per cent.

Based on the current trajectory of the economy, it predicted that unemployment would fall to less than 10 per cent in 2016, and to full employment by 2020.

“Although substantial net outward migration is expected to continue, the improvement in labour market conditions remains the most concrete evidence of recovering economic activity at present,” it said. In its analysis, the institute said that while the recent budget was “somewhat less stringent” than it had previously advocated, it would, nonetheless, act as a drag on activity next year.

However, the higher growth forecast for GNP in 2014 should also see an outperformance on the public finances, with the general government deficit coming in at about 4.4 per cent of GDP, comfortably inside the troika-agreed target of 5.1 per cent. It also held out the possibility that Minister for Finance Michael Noonan would be able to achieve the troika-agreed deficit target of 3 per cent by 2015 without any adjustments in next year's budget, thereby ending a long series of austerity budgets.

However, the ESRI said all this was contingent on recovery taking hold in Ireland’s big export markets, most notably in the US and the UK, where growth prospects for 2014 range between 2 and 3 per cent.

Recovery in the euro zone remained a possible stumbling block, it said. The situation for the euro zone remained “much less favourable”, with contraction likely this year and uncertainty surrounding the mooted 1 per cent growth forecast for next year.

The ESRI said housing completions would be approximately 8,200 this year, a decline on 2012. It noted the current low level of supply was contributing to the strong growth in house prices in the Dublin region. While the number of house completions was expected to rise marginally next year, the housing supply constraint was likely to remain a factor in the market over the short term.

However, it did not view the strength of the Dublin market as the re-emergence of a bubble, as some commentators suggested. “The current increases from a low base are taking place after a period of a substantial decline in prices, and the number of transactions remains far below its long-run average.”

It also said that mortgage draw-downs remained subdued, suggesting the price increases were not been driven by credit growth.