Domestic demand in Ireland is likely to remain weak, but the global recovery from the recession should boost Irish exports and driver recovery, a new economic survey said today.
However, it was too early to say the recession in Ireland was at an end, the report said.
Bank of Ireland’s Quarterly Economic Outlook also revised its forecast for GDP growth for the next year, now estimated at 1 per cent up from a previously flat reading. GDP is expected to contract by an average of 6.5 per cent for 2009, down from an earlier prediction of 7 per cent.
The report said it was expecting exports to rise in the coming months and grow more strongly in 2010.
"This export-led growth remains the most likely driver of an Irish recovery as some key components of domestic demand remain weak. Consumer spending, for example, has been constrained by falling employment, flat to negative wage growth, a rise in the tax rate and a rise in the savings ratio," said Bank of Ireland's chief economist Dan McLaughlin.
A previous economic forecast had speculated that the worst may have passed for the economy. Mr McLaughlin said the bank was still optimistic this was the case, with the contraction in Gross Domestic produc (GDP) halting in the second quarter of the year.
However, annual GDP will still show a loss, due to a significant fall-off in activity earlier in the year.
The economy had undergone a "substantial rebalancing", Mr McLaughlin said, with house building accounting for only 3.3 per cent of real GDP, down from 11.5 per cent in 2005. Construction's importance to the economy has been cut to under 12.5 per cent.
Households, meanwhile, had cut discretionary spending in favour of rebuilding savings, while exports acounted for 88 per cent of GDP in the second quarter, from 79 per cent in 2006.
"Despite the second quarter data, it is too early to say that the recession in Ireland is over, although a positive quarterly growth reading is certainly possible in Q4 or the first quarter of 2010," Mr McLaughlin said.
"This is likely to be driven by exports and business spending, rather than the consumer, and these are volatile in the short-term, although one would expect exports to pick up on a more consistent basis next year assuming that the global recovery maintains momentum."
Employment rates will keep falling, Mr McLaughlin said, but an "exodus of immigrant labour" means it could peak at 13.5 per cent, and average 13.3 per cent next year.
He also forecast a return to positive inflation rates in the latter half of 2010, after months of deflation.
"The more widely quoted measure of Irish prices, the CPI, has recorded a much sharper fall in inflation, largely due to the influence of mortgage interest. This accounts for 7 per cent of the index and has fallen by some 50 per cent over the past year, thereby reducing the CPI by 3.5 percentage points. However, the deflation cycle also appears to be at a turning point, and we expect the annual inflation rate to return to positive territory in the second half of 2010."
