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Though Ireland managed to exit recession technically in the third quarter, economists said the economy still faces significant hurdles to sustainable recovery.
Data released by the Central Statistical Office on Thursday showed that the gross domestic product increased a seasonally adjusted 0.3% in the third quarter, after a 0.6% decline in the previous three months. This is the biggest quarterly increase since the fourth quarter of 2007.
Meanwhile, the gross national product that exludes multi-nationals dropped 1.4% from the second quarter, declining for the sixth straight month. Economists view the GNP, which is the GDP adjusted for income flows between residents and non-residents, as a more relevant measure of economy's performance.
"Although Ireland is undoubtedly over the worst, this is unlikely to mark the start of a sustained economic recovery," Ben May, European economist at London-based Capital Economics said. The recent upturn was due to a modest boost from stockbuilding and a steep fall in imports, which the economist said were "hardly the foundations of a sustained and balanced recovery".
Net factor outflows hit a record EUR 8.6 billion in the third quarter, rising from EUR 7.9 billion in the previous three months. According to economist Alan McQuaid, this mirrors increased profit outflows from the multi-nationals and reduced profit inflows from Irish companies abroad, and an increase in government debt servicing costs.
McQuaid, who is chief economist at Dublin-based stockbroking firm Bloxham, said it can be easily assumed that the relatively sharper contraction in Ireland's GDP since its peak at the beginning of 2007 was due to the country's greater reliance on external trade, given the openness of its economy. "But, in fact, it is weak domestic demand that it is pushing the economy down, with a dramatic fall of almost 23% since the final quarter of 2007." Consumer spending declined 0.7% in the third quarter.
Fixed investment recorded the biggest decline in the third quarter, down 11.3% on the prevous three months. The biggest drag came from the construction sector. On December 14, the latest Ulster Bank/Markit purchasing managers' survey showed that the Irish construction sector continued to shrink in November, with new orders falling sharply. Respondents blamed the decline on increased competition for scarce tenders. Further, employment levels in the construction sector dropped at its fastest pace in six months. McQuaid said the sector is likely to remain the biggest drag on GDP in future.
Last week, the Irish finance minister Brian Lenihan said in his budget speech that the economy could return to positive growth within the next six to nine months. The government expects the economy to expand by around 1.25% in 2010, following an estimated 7.5% contraction this year. "Notwithstanding the difficulties of the last eight months, we are now on the road to economic recovery," Lenihan said.
Meanwhile, Capital Economics' May reckoned that the government's commitment to get the public finances under control could cause the economy to fall back into recession next year. Lenihan had announced around EUR 4 billion savings through spending reduction and pay cuts to public sector officials including the Prime Minister. Such "politically unpopular decisions" are in contrast to the situation in Greece, May said, citing that the Greek government had recently announced real wage hikes to most of its public-sector workers.
"With the Irish economy expanding again and the Government apparently willing to take the tough actions required to get the public finances on an even keel, Ireland looks set to avoid coming under the same kind of market pressures as those recently endured by Greece," May said. "Nonetheless, despite these tough measures, the Government's commitment to lowering the budget deficit to 3% of GDP by 2013, in line with the Stability and Growth Pact, is reliant on robust economic growth in 2011 and beyond." Capital Economics expects Ireland's growth to be weaker than official forecasts.
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