Evidence suggests Irish economy is slowly recovering

Analysis: Growth will be primarily due to exports as domestic demand sluggish

In the ESRI’s latest outlook for the Irish economy, we forecast that growth will improve in 2013 and 2014. If we are right, growth, as measured by GNP, will amount to 1 per cent this year and 1.5 per cent in 2014. The corresponding growth rates for GDP are 1.8 and 2.7 per cent. As has been the case over the past number of years, this growth will be primarily due to increasing exports and we expect that this export growth will continue to be driven predominantly by the service sector. We are currently forecasting that domestic demand will grow by around 0.7 per cent in 2013 and 2014.

If the growth rates we forecast are realised, what will they mean for the Irish economy? One of the main impacts of the crisis has been a sharp increase in the numbers unemployed. We would expect to see some reduction in the unemployment rate to an annual average just below 14 per cent in 2014. Indeed, unemployment (both short and long term) began to fall towards the end of last year. If our forecasts prove to be correct, then this means an annual average below 300,000 unemployed in 2014.

While this is a positive development, it is not all due to job creation. Unfortunately some of the reduction will reflect continuing high emigration. It is hoped that as we move into 2014 an increasing amount of the fall in unemployment will be due to job creation and that emigration levels will be lower.

If there is, as we anticipate, some recovery in the labour market over the next two years then we expect that there will be some moderate increases in average annual earnings. Because of high unemployment and continuing uncertainty in the economic outlook, we would expect that households will continue to save for precautionary reasons, so the saving rate will remain high. In addition, since households are continuing to pay down accumulated debt, it is likely that any growth in household consumption will be moderate.


The public finances look set to benefit from a combination of economic recovery and the deals on promissory notes and extending the maturity of EU/IMF programme loans. Taking account of these it looks likely that the deficit targets set as part of the bailout programme will continue to be met and probably exceeded.

However, we argue again in this commentary that the remaining consolidation measures should be introduced as planned. This is because uncertainty remains for domestic and international growth. Even at the end of the consolidation process the government will still be running a deficit. In addition there is a continued need to reduce government debt. At the end of 2013 it is estimated the debt will be €207 billion, equivalent to 123 per cent of GDP. Such a high debt means interest costs of approximately €8 billion this year.

Our forecasts of growth in the Irish economy are based on forecasts showing the European economy returning to growth in 2014. This is a crucial assumption.

In recent years forecasts for economic growth in Ireland’s main trading partners have been consistently revised downwards. For example, over the past two years, forecasts for world economic growth have been revised from approximately 4 per cent in 2013 to around 3.3 per cent. The expectation at present is that growth in the world economy will pick up in 2014.

If the anticipated international upturn does not occur, then the outlook for the Irish economy is less positive than we have forecast. However, what the current forecasts do suggest is that the Irish economy is slowly recovering.

Dr David Duffy, research officer with the Economic and Social Research Institute, co-authored the latest ESRI Quarterly Economic Commentary with research assistant Kevin Timoney.