As Portugal, Greece, and Spain dominate the headlines with public protests, banking woes and bailouts, Ireland — one of the euro zone’s original crisis economies — is set to return to growth in 2013, according to Danske Research.
Despite the weakening global economy and sluggish growth of just 0.01 percent in the second quarter of 2012, Ireland is “heading out the crisis,” Danske analysts wrote on Monday.
“We expect Ireland to return to stronger growth in 2013-14 driven by exports and helped by a stabilization in domestic demand,” Frank Oland Hansen and Owen Callan said.
There are growing signs that Ireland’s economy is finally emerging from a slump that continues to plague other countries of the so-called PIIGS — Portugal, Italy, Ireland, Greece, and Spain. On Monday, Ireland’s September Purchasing Managers’ Index (PMI) posted a reading of 51.8, higher than the 50.9 reading in August, even as the rest of the euro zone contracted.
Danske’s forecast is for Ireland’s gross domestic product(GDP) to grow about 0.8 percent in 2013. “As the economy gains further traction, growth is projected to be as high as 2.3 percent in 2014,” the bank’s analysts wrote.
Prudent fiscal management by the government is helping to reduce the country’s budget deficit, which is expected to narrow to 8.3 percent of GDP in 2012 and 7.5 percent of GDP in 2013, Danske said.
In the domestic market too, Danske notes an improvement, with house prices rising 0.2 percent in July and 0.5 percent in August — the biggest monthly increase since February 2007.
“The housing market appears to have stabilized and has now shown two consecutive months of modest price increases. The turnaround reflects an improved economic environment, low interest rates and the absence of new supply," the analysts wrote.
“[The report] is not really surprising to me,” Edmund Shing, head of European equity strategy at Barclays, told CNBC. “The Irish economy is totally unlike those in southern Europe. … It is more technically advanced and driven, there is more inward investment … it has a huge benefit over the southern euro zone.”
The one risk for Ireland is rising unemployment, with the jobless rate hitting 14.7 percent in August, a factor that has contributed to a young labor force fleeing the country.
The Financial Times reported on Sunday that Irish emigrationhad reached the highest level in 25 years, a trend that is unlikely to change before the economy starts to recover next year.
“We expect that the unemployment rate may start to climb again in the coming months and that it will only decline moderately in 2013-14,” Danske’s Hansen and Callan wrote. “The outward migration is expected to slow as the economy recovers.”
Ironically, it could be the euro zone paymasters who could stymy the country’s recovery, say analysts, as finance ministers of Finland, the Netherlands, and Germany drag their feet over banking union, which could pave the way for the direct recapitalization of Ireland’s troubled banks.
Indeed, the three triple-AAA nations released a statement on Tuesday 25th September, saying the European Stability Mechanism (ESM) could only be used for future bank recapitalization — not, for example, for Ireland’s troubled banks that it cost the country 64 billion euros ($82 billion) to bail out.
“Direct ESM bank recapitalization … seems to be for the distant future only,” Danske said in the report, a view reiterated by Edmund Shing at Barclays.
“The real issue facing Ireland is that of the bank recapitalization deal and whether Ireland will be able to re-negotiate a deal with Europe over its debt,” Shing said. “If they can re-negotiate the bank bailout deal, things will look better for Ireland.”