Economy will expand modestly in 2011, ESRI predicts

THERE WILL be “modest” growth in the economy in 2011, the Economic and Social Research Institute (ESRI) predicts, but the number of people employed will remain static, while wages will continue to fall.

In 2011, the ESRI predicts GNP will grow by 2.75 per cent and GDP by 2.5 per cent, with the recovery led by a surge in exports.

In its latest commentary, the ESRI also states the cost of bailing out Anglo Irish Bank and Irish Nationwide Building Society (INBS) is “manageable” for the economy, but it adds taxpayers should never have been faced with such a financial burden “due to the behaviour of the private sector”.

The ESRI gives a “tentative estimate” that the Government will have to pour at least €73 billion into fixing the banking system, a figure that equates to 47 per cent of 2010’s gross domestic product (GDP). This includes a €40 billion investment in the National Asset Management Agency (Nama).

However, it identifies a net cost to the State of €25 billion in relation to the bailout of Anglo Irish Bank and INBS. It does not expect the State to recover this sum.

“The potential for getting a return there is very limited,” said Alan Barrett, one of the authors of the ESRI’s Quarterly Economic Commentary (QEC). This net cost of €25 billion equates to 15 per cent of GDP.

“This is manageable and is not going to threaten the solvency of the State,” Prof Barrett said.

“Even though the burden is manageable, it should never have arisen in the first place . . . If Anglo is of systemic importance, it should always have been regulated as such.”

Despite the burden on taxpayers as a result of the collapse of Anglo Irish Bank and INBS, Prof Barrett said it was important to remember the deficit was largely caused by the gap between tax revenues and Government spending.

By the end of 2010, nominal rates of income per head of population will have fallen below 2003 levels. Although some of the data is not yet available, it estimates that average earnings fell 2 per cent in 2009 and expects a fall of 3 per cent this year.

There will be “another tough budget to come”, as the Government seeks to bridge the deficit, said co-author Jean Goggin.

Tax revenues “continue to disappoint” in 2010, she said. However, the pace of decline in returns from most tax categories has slowed, with the “notable exception” of income tax.

Despite these difficulties, the ESRI forecasts the economy will stabilise this year, with GDP falling by just 0.5 per cent and gross national product (GNP), which excludes profits made by multinationals based in Ireland, coming in flat.

However, jobs will not grow between 2010 and 2011, it said. The rate of unemployment will ease slightly from an average of 13.75 per cent this year to 13 per cent next year, partly as a result of predicted net emigration of 60,000 in the year to this April and a further 40,000 in the year to April 2011.

The ESRI said there would be further job losses, particularly in the financial sector and the public sector.

The ESRI’s commentary echoes a report by the Central Bank last week, which also predicted unemployment would stay at 13 per cent next year.

The prospect of widespread industrial action in the public sector posed a risk to Ireland’s “reputational credit” in international lending markets and has the potential to increase Government borrowing costs, it said.

The ESRI’s 2011 forecasts are based on the assumption that the Government will implement its planned budgetary savings of €3 billion.

“This may well prove difficult to achieve,” the forecasting body said. If imposed, the savings package will knock 1 per cent off the economic growth rate in 2011, but will serve to narrow the State deficit.

Meanwhile, Nama chief executive Brendan McDonagh and the chief executive of the National Treasury Management Agency, John Corrigan, will appear before the Oireachtas Joint Committee on Finance and Public Service today.