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THE ONLY WAY IS UP?

The OECD became the latest forecaster to raise its forecast for the Irish economy which it did last month as part of its twice-yearly Economic Outlook.

The latest projection from the Paris-based policy advice body envisages that the Irish economy will contract by 0.7% on average this year in GDP terms, much less than the 2.3% decline projected in its previous forecast round in November.  Moreover, its forecast for next year was revised up by even more.  The economy is now expected to grow by 3% in 2011, up considerably from the 1% it was pencilling in in November.

The forecasters at the OECD are far from alone in taking a more upbeat view on Irish growth dynamics.  Other prominent international observers who have been busy marking up their Irish forecasts recently include the IMF and European Commission.

Indeed, the forecasts of such large international institutions tend to mirror, and often lag, the pattern of changes in the views of the Irish economics community.  One recent poll of a panel of domestic financial-sector forecasters revealed that the consensus, or average, forecast is for real GDP to be unchanged this year (i.e. zero growth) which compares with an expected decline of over 1% in the same poll at the end of last year. The average GDP growth forecast for next year has also been marked up and is now at 3.2%, up from about 2.7% some six months ago. So it’s clearly not just overseas analysts who have become somewhat more optimistic lately.

So what’s behind this pattern of upward growth revisions? Well, the simple fact is that a range of Irish economic indicators have provided evidence of earlier-than-expected recovery.

The latest trade numbers for example show that following a very strong pick-up in the early months of the year, Irish goods exports surged by over 12% in the first quarter of this year compared with the final quarter of last year.

Timely data on the performance of the private services sector is thin on the ground which is very unfortunate given that services account for more than half of total GDP (and over half of all Irish exports). But we do have the monthly Purchasing Managers Index which does provide a timely steer. Significantly, this signalled a return to expansion in the April survey after a period of contraction which lasted for well over two-years and showed a further pick-up in May.

Elsewhere, underlying (i.e. excluding cars) retail sales enjoyed their first positive quarter in Q1 since the end of 2007 while the unemployment rate was steady at 13.4% for the first four months of the year before rising to 13.7% last month.  Such indicators point to some signs of stability in areas which had seen enormous weakness during the depths of the recession.

In the case of both manufacturing and services, the key driver of the more positive trends which have emerged is the clear improvement in the international environment.  Ireland is a very open economy, with exports amounting to some 90% of our GDP, so the global growth dynamic plays a very important role in shaping the Irish outlook.

Broadly speaking, the incoming news on the performance of Ireland’s key trading partners, the euro zone, UK and US has confirmed that recovery is ongoing, especially in the US where the recovery has been gaining in strength.  And the recent weakness of the euro is also helpful, with a 20% fall vs. the dollar and a 12% decline vs. sterling since late last year giving a timely boost to the competitiveness of the Irish export sector.

Overall, the upward revisions to Irish growth forecasts recently have had solid foundations in the form of a much-improved international picture and some stronger than expected domestic economic news.

However, while the turn in the global cycle has boosted Ireland’s growth performance and outlook, our openness also leaves us vulnerable in the event that the global recovery falters.  That is a risk which investors have been more worried about lately.  Concerns about the implications of the sovereign debt crisis have begun to cast a shadow over global growth prospects.  This has been reflected in downward pressure on global stock markets over the past couple of months, for example, implying that that the adjective ‘cautious’ is very much appropriate in describing the greater optimism among analysts of the Irish economy lately.

Simon Barry is Chief Economist Republic of Ireland with Ulster Bank Capital Markets

Photo courtesy of Ian Humes

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