Everything is coming up roses as Irish economy returns to life

After all those months of gloomy talk about downturns and recession, it now seems the Irish economy experienced little more than a negative blip in 2001 and 2002. And as new figures from the Central Statistics Office testify, the economy put in a healthy year last year, particularly in the final months.

In the first quarter of this year, furthermore, it moved well beyond what many see as its potential when gross domestic product (GDP) grew by 6.1 per cent.

As one more optimistic economist put it yesterday: "The tiger's back - vroom, vroom!"

A more muted version of such enthusiasm is now widespread, as evidence of a positive economic picture continues to emerge on a regular basis.

Even the very measured Economic and Social Research Institute (ESRI) said earlier this week that it was raising its growth outlook to reflect "a strong rebound in Irish economic conditions".

The institute raised its GDP growth forecast for this year from 3.5 per cent to 4.6 per cent, and lifted its gross national product (GNP) growth forecast from 3.3 per cent to 4.3 per cent.

The upgrade came before the emergence of the latest numbers, thus proving that many economists were already coming around to the idea of a brighter picture even before the CSO's numbers emerged.

Of course, other evidence of an economic upswing had already been in circulation for a number of months.

Numbers released in May, for example, showed that the jobs market was approaching conditions it last witnessed at the height of the boom, with 53,000 new jobs created in the year to the end of February.

The manufacturing sector, as measured by the NCB Purchasing Managers' Index, has been growing its level of new business for the past 10 months as international demand boosts sales.

Studies from the ESRI and IIB Bank suggest meanwhile that consumers are feeling increasingly confident about the future.

Figures published by the Central Bank this week seemed to confirm this by showing that the value of both mortgage and other types of consumer debt is soaring at levels more than 20 per cent higher than at this stage last year.

Other types of private-sector credit, such as car or holiday loans, are again growing at levels last seen before the terrorist attacks of September 11th, 2001.

This growth is likely to raise eyebrows among the bank's economists, who have already warned that growth in mortgage debt must slow or the economy will be vulnerable when interest rates rise.

This issue aside, however, the growth in credit points to a belief among consumers that their jobs and futures are financially secure. This belief is likely to lead to growth in consumer spending this year, with personal consumption looking reasonably weak in the first quarter when compared to other constituents of economic growth.

Capital investment, for example, was up 12.4 per cent in the first three months when compared to the same period of 2003. This brought it to its second-highest level ever, with the highest achieved in the previous quarter.

A CSO breakdown of this expansion shows that the value of building activity was up 9.3 per cent and, within this, new housing construction was 22 per cent stronger.

Other machinery and equipment investment, which should offer an indication of business confidence, was up by 15 per cent. The CSO attributed the increase in large part to purchases of new cars - another sign of confidence.

Net exports, or exports minus imports, were up from €4.3 billion to €5.3 billion. This all combined to lift annual GDP growth in the first quarter to 6.1 per cent, while GNP was up by 5.1 per cent. Downturn? What downturn?

Such questions were particularly relevant yesterday when it emerged that the CSO had substantially revised its growth estimates for the previous few years.

Rather than the economy growing by 1.4 per cent in GDP terms last year, it now seems it expanded by 3.7 per cent. The upgrade was linked mostly to more positive figures for exports and investment.

"It's clear than the economy turned a corner in the latter part of 2003," said Dr Dan McLaughlin, chief economist with Bank of Ireland and one of the most bullish Irish commentators.

Others were slightly more bemused by the whole thing however, with the substantial revisions to last year's numbers leading one economist to question the value of any of the figures at all. Mr Oliver Mangan of AIB believes that the CSO's figures for both imports and consumer spending are still too low and predicted that more revisions would follow in the future.

Even with this, however, Mr Mangan acknowledged that the economic picture was definitely improving. He expects to raise his GDP growth forecasts from about 4 per cent to at least 5.5 per cent, although much of the rise will reflect new base effects.

Dr McLaughlin is sticking with his earlier forecasts of 5.5 per cent growth in GNP and GDP growth of 6 per cent, although he reserves the right to increase this in the future.

Upgrades from other commentators are meanwhile sure to emerge over coming weeks.

This trend will sit poorly with the forecasts used by the Department of Finance to frame its Budget last December. At that time, most evidence was pointing towards a more bleak economic picture and the Department had to take account of that when estimating how much the State would have to borrow in 2004 to fund its spending requirements.

Half-year Exchequer returns, to be published later today, are expected to confirm an ever-improving situation for the public finances. Economists warn against excessive excitement about what most expect to be a much-reduced borrowing requirement, particularly since this will have been boosted by one-off factors such as the €650 million from offshore account-holders.

Such caution is likely to be shared by Mr McCreevy, although he is expected to show some sympathy for hard-pressed taxpayers by using his new-found riches to support an increase in the tax bands when he stands up in the Dáil in the first week of December.