Eurozone EY Eurozone Forecast September 2013 Austria Belgium Cyprus Estonia Finland France Germany Greece Ireland Italy Luxembourg Malta Netherlands Portugal Slovakia Slovenia Spain
Outlook for Ireland Return to sustained growth now looking likely Finland Estonia Ireland Netherlands Germany Belgium Luxembourg France Italy Austria Slovenia Slovakia Portugal Spain Greece Malta Cyprus Published in collaboration with
Highlights There are signs of a nascent recovery in Ireland. The labor market is starting to stabilize and the Purchasing Managers Indices (PMIs) for both manufacturing and services point to growth, albeit at a modest pace. After increasing by 0.1% in 2013, we expect GDP to rise by 1.7% in 2014, accelerating to growth of 2.8% a year in 2015 17. Net trade is likely to be the main driver of growth in the near term. The Government s steady reform implementation has led to improved competitiveness, while demand in Ireland s main trading partners the UK and the Eurozone is beginning to pick up. Exports are forecast to increase by more than 4% in both 2014 and 2015, which should provide significant support to the Irish economy. Consumer spending has been very weak, but it is likely to bottom out soon. Falling unemployment, easing inflation and less severe austerity in 2014 should encourage consumers to spend. However, these positive factors are likely to be partially offset by ongoing household deleveraging. We expect consumption to start increasing by Q2 2014. GDP growth 2013 0. 1% GDP growth 1. 7% Ireland s bailout from the European Union (EU) and International Monetary Fund (IMF) is scheduled to expire in November 2013. The country s chances of being able to make a full return to financial markets now appear good. The Government undershot its deficit target for 2012 by a considerable margin, while 10-year government bond yields have been below 4% for much of 2013. But a number of downside risks still dominate the outlook. The upturn in the global economy has been less robust than we had expected and a further cooling of international demand cannot be ruled out, which would hurt Irish exports. And there remains the risk of an increase in the number of defaults in the housing market. Mortgage arrears have risen to record levels and the central bank has given commercial lenders more power to repossess properties. If the number of repossessions starts rising, this would have negative knock-on effects for the rest of the economy. 2014 Exports of goods and services growth 2013 0 % Investment will continue to be constrained in the near term by problems in the banking sector and tight credit conditions. However, business confidence has been rising steadily and the housing market and construction finally seem to be on the mend. These factors suggest that investment will start rising in 2014, after falling by 5.2% in 2013. 2013 Unemployment 13. 5% EY Eurozone Forecast September 2013 Ireland 1
Return to sustained growth now looking likely GDP disappointed in Q1, but rising optimism about the outlook The Irish economy contracted by 0.6% in Q1 2013, driven by an unexpected fall in exports. GDP growth in 2012 was also revised down from 0.9% to just 0.1%. These figures were disappointing and, in light of the weak Q1 data, we now expect the economy to increase by just 0.1% in 2013 as a whole, compared with the estimated 0.8% forecast in our June report. However, there are signs that a nascent recovery is beginning to take hold. The labor market is starting to stabilize, with employment increasing for four quarters in a row and the International Labour Organization unemployment rate down by more than one percentage point in Q2 2013 on a year earlier. The PMI surveys for both services and manufacturing are also indicating an increase in output, albeit at a modest pace. As such, we expect the economy to have started expanding again in Q2, with GDP growth forecast to accelerate to 1.7% in 2014 and then a little below 3% a year in 2015 17. Net trade will be the main driver of growth The Irish economy is heavily dependent on exports, which account for more than 100% of GDP. Since the financial crisis, services exports have underpinned the strong performance overall. But looking ahead, we expect goods exports to start increasing robustly as well. The Government s steady reform implementation has led to a significant fall in Ireland s labor costs and therefore greater cost competitiveness, while demand in Ireland s main trading partners the UK and the Eurozone is beginning to pick up as well. Ireland s strength lies in fast-growing sectors, such as information, communications and technology, and agriculture, and we see exports in these sectors increasing robustly. Overall, we forecast exports to rise by more than 4% in both 2014 and 2015, outpacing the growth in imports. This should provide significant support to the economy. but consumer spending is also likely to bottom out soon Consumer spending has been weak. After declining in 2012 as a whole, it fell again sharply in Q1 2013. However, developments in the wider economy suggest that the persistent declines in consumption should come to a halt by the beginning of 2014. Ireland (annual percentage changes unless specified) 2012 2013 2014 2015 2016 2017 GDP 0.1 0.1 1.7 1.8 2.6 4.0 Private consumption 0.3 2.2 0.1 0.6 1.2 2.1 Fixed investment 0.7 5.2 3.9 2.9 4.1 6.1 Stockbuilding (% of GDP) 0.2 0.4 0.0 0.0 0.0 0.0 Government consumption 3.8 2.2 3.7 2.3 0.5 0.6 Exports of goods and services 1.6 0.0 4.6 4.1 5.4 5.4 Imports of goods and services 0.0 2.1 2.2 3.6 5.1 4.6 Consumer prices 1.9 0.8 1.6 1.8 1.8 1.8 Unemployment rate (level) 14.7 13.5 12.9 12.2 11.4 10.6 Current account balance (% of GDP) 4.4 4.2 4.3 4.2 4.1 4.0 Government budget (% of GDP) 7.5 7.6 4.8 3.0 2.0 1.2 Government debt (% of GDP) 117.6 125.7 126.1 124.9 121.8 116.7 ECB main refinancing rate (%) 0.9 0.6 0.5 0.5 0.5 0.7 Euro effective exchange rate (1995 = 100) 115.5 119.4 117.7 114.1 112.8 112.1 Exchange rate ($ per ) 1.28 1.31 1.24 1.19 1.18 1.18 Source: Oxford Economics. 2 EY Eurozone Forecast September 2013 Ireland
The labor market is finally showing signs of stabilizing. Employment has risen for three consecutive quarters, driven to some extent by an increase in part-time employment, and the unemployment rate was 13.5% in June, down from 14.9% a year earlier. We expect unemployment to have peaked, and forecast a gradual decline over the coming months. Inflation has also eased considerably, slowing to 0.7% in the year to July, from 1.7% in 2012 as a whole. Coupled with a less extreme pace of austerity in 2014, this will support consumers purchasing power and therefore spending. However, household debt at close to 220% of disposable income is still very high compared with pre-crisis norms of around 190%. Therefore, we expect households to continue paying down debt, which will offset some of the positive factors influencing consumption. Overall, consumption is expected to continue declining over the course of 2013, but we expect a sustained recovery to take hold by mid-2014, as favorable developments in the labor market and improving real incomes improve confidence levels and gradually encourage households to spend more. Investment is showing signs of picking up Investment is still likely to be constrained by a fragile banking sector and therefore tight credit conditions. But there are grounds for optimism beyond the near term. Despite the Government s encouraging efforts to address issues in the banking sector, it is still struggling from the aftereffects of the housing bust. Ireland s non-performing property loans rose to 12.3% in Q1 2013, from 11.5% in Q3 2012 and the central bank has given lenders binding deadlines for tackling mortgage arrears. As such, credit conditions in Ireland are still very tight, which will restrict companies from investing in the near term. However, data from business surveys, such as the PMI, has been showing ongoing increases in business confidence. This is likely to translate into higher investment in the medium term, when the banks are in a healthier state. Figure 1 Contributions to GDP growth Figure 2 Government deficit and debt % year 15 Forecast % year 10 Forecast 12 GDP 8 Exports 9 6 6 4 2 3 0 0 2 3 Net exports 6 9 Domestic demand 12 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 Source: Oxford Economics. 4 6 8 Imports 10 12 2005 2007 2009 2011 2013 2015 2017 Source: Oxford Economics. EY Eurozone Forecast September 2013 Ireland 3
Return to sustained growth now looking likely Furthermore, the housing market and construction sectors, which had taken a major blow during the financial crisis, are finally showing signs of bottoming out. House prices have risen consecutively in the three months to June. There are indications of a rise in new orders, which should feed through to higher activity in the construction sector in the months ahead. These factors suggest that, having fallen for the past six consecutive years, both residential and business investment should begin to pick up again soon. We forecast overall investment to decline by 5.2% in 2013 and then increase by around 4% in 2014. and successful return to financial markets seems probable Ireland s EU-IMF bailout is scheduled to expire in November 2013 and the country s chances of making a full return to financial markets now seem good. The Government s strict implementation of economic reforms resulted in the budget deficit coming in at 7.5% of GDP in 2012, more than 1 percentage point below the target of 8.6% of GDP. Furthermore, the Government has already made an initial foray into financial markets by issuing long-term debt. Ten-year government bond yields have been trading below 4% for the majority of 2013, which is comfortably affordable. Finally, in its 11th and penultimate review of the Irish economy in July 2013, the EU and IMF judged that economic reforms in Ireland were on track and approved the disbursement of the next tranche of funding. Due to savings from the promissory note repayments, Ireland now has some fiscal room to ease the pace of austerity in 2014. However, the IMF believes that fiscal consolidation should continue as planned a view that has been echoed by the Irish finance minister. This should also help to keep investor confidence intact and ensure a safe exit from the bailout. In order to smooth out the bailout-exit process, the Government has expressed interest in applying for the precautionary credit line from the European Central Bank (ECB). This will allow it to qualify for the outright monetary transactions program under which the ECB has pledged to buy Eurozone countries sovereign bonds on the secondary market to ensure that bond yields remain low. But the Irish Government is reluctant to accept any further onerous conditions on the fiscal, structural or financial front. Meanwhile, downside risks continue to dominate The upturn in the global economy has been less robust than we had expected and a further cooling of international demand, particularly in emerging markets, cannot be ruled out. This poses a downside risk to the economy, especially given the heavy reliance on exports to drive the recovery. There also remains a risk of an increase in the number of defaults in the housing market. With the central bank setting an ultimatum for banks to tackle their non-performing loans, there is a possibility of a sudden increase in housing repossessions. This would be damaging for the banking sector and will also dampen consumer and business confidence, which would have adverse knock-on effects on the rest of the economy. Figure 3 Bond spread and stock market Figure 4 Unemployment % year 30 20 Investment Forecast % 16 14 Ireland 10 12 0 10 10 20 Consumption 8 6 4 30 2 Germany 40 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 Source: Haver Analytics. 0 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Source: Oxford Economics. 4 EY Eurozone Forecast September 2013 Ireland
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