Forecast for 2012 growth slashed over export fears

THE ECONOMIC and Social Research Institute (ESRI) has slashed its forecasts for next year, largely because of fears for exports growth. This is despite revising up its forecasts for economic growth this year, owing to better than expected figures for the second quarter of the year published since its last assessment.

The revised forecast is the result of a slump in the euro area, where it believes activity will be hindered by the sovereign debt crisis and austerity in three of the four largest economies: France, Italy and Spain.

Dr Joe Durkan, one of three authors of the report, said yesterday he believed the euro zone as a whole had scope for a co-ordinated fiscal stimulus. The report notes that while the US and Britain have taken the costs of bailing out their banking systems, Europe has not. Doing so in the short term, the think tank believes, will be among the factors dragging on growth in the euro zone economy next year.

On Irish prospects, the ESRI is more downbeat about 2012 by almost every measure when compared with its last assessment at the end of the summer.

On both the outlook for growth in gross domestic product (GDP) and the rate of unemployment it is the most pessimistic among the main domestic and international forecasters (see table). It is the only one of the organisations to predict a rate of GDP growth of less than 1 per cent next year.

These factors and others will depress consumer activity next year. While the ESRI had previously predicted private consumption would stabilise next year after a half decade of contraction, it now believes a further sizeable decline will take place in 2012.

The institute expects the Governments budget deficit targets to be met this year and next, but now believes progress will be slower than anticipated. As a result, the public debt is expected to be higher than previously forecast in 2012. Three months ago it predicted public debt would stand at 109 per cent of GDP next year; now it believes that figure will reach 115 per cent. The ESRI no longer advocates a larger package of budget cuts, saying a weaker than expected economy would be less able to bear more austerity.

Among the few positive forecasts is for the balance of payments. The ESRI believes the Irish economy will pay off more of its foreign debts next year than previously anticipated. This is to be seen in the current account, the difference between the economy’s total earnings from abroad and its total payments to foreigners. Next year it expects a current account surplus of 3.2 per cent of GDP.