Quarterly Economic Commentary, Summer 2011

1/09/2011

Quarterly Economic Commentary, Summer 2011

The international situation has become more challenging as the recovery in the US and the UK has slowed down, and eurozone output growth in the first half of the year has been disappointing. There is now more uncertainty about the sustainability of the overall recovery and some concerns that the developed economies will slip back into recession. Within the eurozone there is now some anxiety about the overall debt levels of even the bigger economies and this has contributed to financial turmoil. From Ireland's perspective the revised bailout terms have been favourable and will permit an easier transition to fiscal balance here, as well as in Greece and Portugal. Domestic demand will remain very weak this year, with household expenditure, investment and government expenditure continuing to decline, However, investment in machinery and equipment looks set to rise sharply this year and next. GNP (GDP) is forecast to increase by 0.2 (1.8) per cent this year and by 0.7 (2.3) per cent in 2012. Unemployment is forecast at 14.3 per cent this year and 14.5 per cent in 2012, with the moderation in the rate of increase reflecting net outward migration. The Consumer Price Index (CPI) is expected to rise by 3 this year, with the HICP increasing by 1.3 per cent. The implicit consumption deflator, which takes account of changing consumer expenditure patterns, is forecast to rise by 1.3 per cent this year. All three measures of inflation are forecast to rise by 1 per cent in 2012. The balance of payments is forecast to record a surplus this year and next. The public finances are likely to remain within the targets set for the budget deficit, with revenue perhaps slightly better and expenditure slightly less than set out in the budget and in subsequent budget documents. The overall targets for 2012 are more or less predetermined but we think that it might be prudent to overachieve slightly as a precautionary measure. Credit conditions remain tight as banks have been obliged to reduce the size of their balance sheets. The private sector has been deleveraging and this has reduced the level of credit and the demand for credit. There are still outflows from the covered banks, but the pace has moderated. In our General Assessment we refer to the need to consider four restructuring agendas: in the labour market to deal with the structural unemployment problem; in the banking sector where the burden of adjustment has fallen primarily on the domestic economy; in the private sector where corporate and household indebtedness are a strain on growth; and, finally, in the public finances where the process of correcting the imbalances is well underway. The burden of the adjustments would be eased if the economy could grow faster. This could be achieved by increasing our competitiveness through reducing the price level, which has been kept high by other market distortions and administered prices. Such a reduction in the price level would impact on the wage level and other general costs that firms face.

Note to Editors: 1. The Quarterly Economic Commentary, Summer 2011, by Joseph Durkan, David Duffy and Cormac O'Sullivan (ESRI), will be published online on the ESRI website at 00:01 a.m. Thursday 1 September 2011. 2. The embargo is until 00:01 a.m. Thursday 1 September 2011. 3. Members of the media are invited to attend the media briefing to be held on Wednesday 31 August 2011, at 10.30 a.m. at The ESRI, Whitaker Square, Sir John Rogerson's Quay, Dublin 2. 4. This Quarterly Economic Commentary includes the following Research Bulletin articles:

• "The Macro-economic Impact of Changing the Rate of Corporation Tax" Conefrey, T. (Central Bank of Ireland), FitzGerald, J., ESRI Research Bulletin No. 2011/02/01 (Published 22/08/11).
• "The Banking Sector and Recovery in the EU Economy" Barrell, R. (NIESR), FitzGerald, J., ESRI Research Bulletin No. 2011/02/02. (Published 22/08/11).
• "Should We Be Worried About Income Inequality in Ireland?" Layte, R., ESRI Research Bulletin No. 2011/2/3. (To be published 1/09/11).
• "Investing in Child Health and Development: The Impact of Breastfeeding on Children's School Performance" McCrory, C., Layte, R., ESRI Research Bulletin No. 2011/2/4. (To be published 1/09/11).

These articles (when published) are available to download from our website, and copies will be available at the briefing. Comments and queries relating to these articles should be sent directly to the authors of the papers (Bulletin Articles are designed to be easily accessible to a wide readership. A reference or references to the full publication is included at the end of each Bulletin article, as is the contact email address of the authors).

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