Ireland's economy shows signs of turning the corner - Latest PwC economic analysis shows

• Ireland’s economy, in GDP terms, is expected to show modest contraction of -0.7% in 2010 with expected growth of 2.1% in 2011
• Ireland is the only country in the Euroland expected to experience deflation in 2010. However, Ireland’s inflation for 2011 is expected to be 1.1% (HICP – Eurostat)
• Euroland economy is expected to grow in GDP terms by 0.9% for 2010 and 1.2% in 2011

Overall, economic recovery in Euroland remains muted, with GDP growth being driven by exports and government spending. The planned fiscal austerity is therefore a significant risk to recovery in many member states. The economy benefited from external demand growth, but both investment and consumer spending contracted. After a brief stagnation at the end of 2009, government spending picked up in Q1, highlighting the important role of fiscal stimulus while the economy remains fragile.

Ireland’s GDP growth for Q1 2010 ahead of Euroland, but remains volatile

Although the overall picture for Euroland was moderately positive, there was substantial variation amongst the member states of the monetary union. Five countries saw their economies shrink in Q1, led by the 1% contraction in Greece (see Chart 1 below). Good news came in the form of strong expansion in Ireland (2.7%) and Portugal. The major driver of Ireland’s GDP growth in Q1 was due to the multinational sector, primarily pharmaceuticals and software. Along with Greece, these countries are being closely monitored by the bond markets for signs of difficulty in servicing their sovereign debt obligations. However, favourable economic conditions are supporting Irish and Portugese public finances, although, for 2010, the economic outlook in those countries remains only moderately positive.

Overall, the Irish economy is expected to show modest contraction of -0.7% in 2010. Key underlying assumptions are low demand growth in key export sectors of the UK and the US as well as a challenging banking environment and high unemployment constraining domestic demand growth. However, a return to growth is predicted for 2011, to be in the order of 2.1% reflecting expected recovery in key export markets as well as the gradual improvement in Euroland financial markets. Furthermore, according to PwC’s recent CEO Pulse Survey, over two-thirds (68%) of Irish business leaders expect Ireland’s economy to return to growth by 2011 with the majority of Ireland’s CEOs expecting growth in both revenues and profits over the next year. Irish business leaders are also more positive about foreign direct investment. For example, a quarter more MNC CEOs with Irish operations are considering additional investment in Ireland compared to last year, up to 40% of MNC CEOs from 32% twelve months ago.

Chart 1: 2010 Q1 GDP growth rates – (source Eurostat)

Relative cost of raising sovereign debt sharply up for Ireland

While a lot of work has been done by the Irish Government to restore our fiscal position through the various austerity measures, Ireland continues to be closely monitored by the bond markets. The market’s tolerance for Euroland budget deficits has fallen, with the pressure to consolidate public finances rising after a brief respite in May in the wake of the Greek bailout. The relative cost of raising sovereign debt is sharply up for Spain, Greece, Portugal and Ireland (see Chart 2 below) and fiscal austerity is on the political agenda across Euroland, even in the relative safe haven of Germany.

However, any significant immediate negative impact on the Euroland economy from fiscal consolidation is unlikely. With the exception of Greece, Ireland, Portugal and Spain, most of the austerity measures are planned for 2011 and beyond.

Chart 2: Spreads over German 10-year bond yields (percentage points)

Source: Datastream

Weaker euro has boosted export competitiveness

Similar to our Euroland counterparts, the boost in Ireland’s exports has also been helped by improving international demand along with the weakening of the euro. In recent months, the euro has fallen in value against the pound, the yen and the dollar, improving the price competitiveness of Euroland exporters in key international markets. German exporters, for example, expect external demand to hold up, as reflected in upbeat forecasts by such bellwether companies as Siemens, whose chief executive believes that the euro has ‘given European industry a tailwind’. Such confidence helps explain the strong recovery in German stock prices, as well as the rise in Germany’s economic sentiment.

In Ireland, following significant cost-cutting and restructuring over the last year, we have seen some restoration of lost competitiveness which has manifested itself in keener pricing.

Speaking at the launch, Ann O’Connell, Consulting Partner, PricewaterhouseCoopers Ireland said:

“Although there are signs of improvement and greater confidence with Irish companies setting a smarter course for growth, challenges remain. We see Irish companies positioning themselves for the emerging opportunities, looking at new markets and products. It will be critical in order to rebuild our national prosperity that we develop our indigenous and FDI sectors side by side as well as upskilling our talent.”

Ends

Notes to Editor:

The tables below set out PricewaterhouseCoopers’ estimated forecasts for economic growth in the Euroland (excluding Malta, Cyprus and Luxembourg) economies in 2009, 2010 and 2011:

EUROLAND REAL GDP GROWTH PROSPECTS

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