Final piece in deficit target jigsaw fits

Analysis:An ever-shrinking domestic economy and an ever-growing export sector. Until recently, these were the two near-constant output trends in the economy in the post-crash era.

Now, almost simultaneously, both look to be changing. Just as signs emerge suggesting that the contraction in the domestic economy is bottoming out (in part owing to statisticians’ data revisions), the upswing in exports appears to be levelling out.

The net effect is that the economy remains as flat when measured by the measure that matters most – inflation-adjusted GDP (see chart). If a choice could be made, less export growth in exchange for an end to domestic contraction would be preferable for two reasons.

Firstly, domestic economic activity tends to be considerably more labour intensive. Until the domestic economy stops contracting, there is little chance that employment levels in the economy will stabilise.

Secondly, because the export sector can stop to catch its breath without setting off warning lights.

Since 2010, Ireland Inc’s earnings from abroad have exceeded outlays to foreigners. The swing from deficit to surplus on the balance of payments has gained momentum this year.

In the second and third quarters, current account surpluses of 8.1 per cent and 7.5 per cent GDP were clocked up. These were among the largest in the EU.

Given developments in the first nine months of 2012, the full-year surplus is unlikely to be less than 5 per cent of GDP. Such a surplus would be historically and comparatively large, and well above Government and troika projections.

Ireland will have to run surpluses for some years to rebalance its economy, but it can afford smaller ones, for a time at least.

Michael Noonan will take some comfort in yesterday’s numbers. They have all but removed the one remaining risk to meeting his budget deficit target this year.

With figures for the first nine months of the year now in, it is all but certain that the Government’s full year nominal GDP forecast will be met, ensuring the final piece in the deficit target jigsaw fits.