Ireland top economic performer but debt poses ‘uncertainty’

Ireland has re-emerged as one of Europe's top performers but high debt levels continue to pose an "uncertainty", according to the European Commission.

The commission forecast economic activity here would remain “resilient” in 2015 and 2106 with domestic demand taking over from exports as the main driver of growth.

In its Spring statement, the Commission revised downwards slightly its growth forecast for Ireland for next year, predicting growth of 3.5 per cent next year compared to 3.6 per cent forecast four months ago.

Ireland is still expected to be the fastest growing economy in the European Union next year, but will now share that accolade with Luxembourg which is also expected to grow by 3.5 per cent next year.

The unemployment figures are also expected to improve, with unemployment now expected to fall to 9.2 per cent next year, lower than the 9.6 per cent forecast in January.

This is in part due to the weaker euro, which is expected to boost labour-intensive indigenous production, the Commission said.

Public debt is forecast to fall to 103.8 per cent of gdp next year, though the Commission notes that the marked improvement of the debt to gdp ration largely reflects the liquidation of the Irish Banking Resolution (IBRC)

Overall, growth in the European Union is expected to reach 1.5 per cent next year, up from the level of 1.3 per cent previously forecast.

Unveiling the economic forecasts for the European Union, EU Commissioner Pierre Moscovici said that while Europe was benefitting from a number of specific factors including low oil prices, a weaker euro and the impact of the ECB's quantitative easing programme launched earlier this year, it was also showing signs of a "cyclical" recovery.

He also added that countries needed to “deliver on investment and reforms and stick to responsible fiscal policies.”

Other countries that are expected to experience strong growth next year include Slovakia, Lithuania and Malta. France is expected to grow by 1.7 per cent next year, with gdp growth of 1.4 per cent forecast for Italy, though it will continue to struggle with high public debt levels.

In its analysis of the Irish economy, the European Commission notes that the profitability of Ireland’s domestic banks continues to improve “which should boost their capacity to extend credit.”

While noting Ireland’s “exceptionally strong exports”, which grew by 12.6 per cent last year, it notes that some of these exports include the production of goods abroad on behalf of Irish-domiciled multinationals.

The Commission also warns that wage increases, if not in line with productivity “would erode competitiveness.”

The Commission also significantly cut its growth forecasts for Greece this year, though it still expects the Greek economy to grow by 2.9 per cent next year.

“We now expect GDP to grow by only 0.5 per cent before a strong rebound to 2.9 per cent in 2016. We still believe that there’s a genuine basis for significant growth in 2016 provided that the discussions get back on track and the reform progress can continue in Greece,” Commissioner Moscovici said today.

Discussions between Greece officials and international lenders are continuing in Brussels today, with Greece due to pay a €200 million payment to the IMF tomorrow.

The European Central Bank’s quantitative-easing program “is having a significant impact” on financial markets and the economy, the commission said. “Fiscal policy is also accommodating growth.”

Lower oil prices, the euro’s depreciation and steady global growth also are supporting the European economy, it said.

Tuesday’s report shows that while the euro area is slowly recovering, France, the bloc’s second-largest economy, will not expand as quickly in 2016 as the EU forecast just three months ago.

Italy, the third-largest euro-zone economy, will see its debt pile get larger this year as it records growth of 0.6 per cent, according to the forecasts.

The Brussels-based commission forecast euro-area inflation to start creeping up again and avoid the deflation it predicted in February. Yet it will remain below the ECB’s goal of just under 2 per cent throughout this year and next. Inflation will stand at 0.1 per cent in 2015, before quickening to 1.5 per cent in 2016, the commission said. Consumer Prices Euro-area consumer prices ended a four-month streak of declines in April, underpinning ECB president Mario Draghi’s claim that his program of quantitative easing is already having an impact.

Additional reporting by Bloomberg