Irish economy stabilising, but challenges remain – Commission

The European Commission has revised downwards its predictions for Irish economic growth for this year and next, mainly due to weaker than expected exports and domestic demand.
In its latest Autumn forecast, the Commission predicts that the Irish economy – as measured by GDP – is expected to grow by 0.3% this year, by 1.7% in 2014 and by 2.5% in 2015.
This compares to earlier Commission growth forecasts of 1.1% for 2013 and 2.2% for 2014.
The Commission said that Ireland’s economic growth is stabilising, but it warned that maintaining the upward curve is proving to be more challenging that originally thought.
It added that a more robust economic performance is expected in the second half of 2013, which underpins the current forecast of 0.3% growth for the year as a whole.
Irish growth rates have been revised downwards on the back of weaker than expected developments in private consumption during the first half of the year, it noted.
Today’s report also said that the jobless rate is expected to decline faster than previously thought, but will remain high. The latest predictions pencil in a decrease in unemployment levels to 13.3% for this year, 12.3% in 2013 and 11.7% in 2015.
The Commission noted that inflation dropped from 1.9% in 2012 to 0.8% for 2013, and is expected to change slightly to 0.9% for 2014 and 1.2% for 2015.
The Commission also said today that the public budget balance is expected to decrease by 7.4% in 2013, by 5% in 2014 and by 3% in 2015. Gross public debt as a percentage of GDP is expected to fall from 124.4% in 2013, to 120.8% in 2014 and to 119.1% in 2015.
In its forecasts, the Commission said that the full year effect of the property tax and other tax measures from this year will produce “benefits” in 2014.
Euro zone economy turns corner but growth still subdued
The euro zone economy will expand slightly more slowly next year than previously expected because of weaker private demand and investment, new forecasts predict today.
Euro zone inflation will also stay well below the European Central Bank’s target over the next two years.
The European Commission forecasts, published today, are likely to add to arguments for an interest rate cut by the ECB, which is to discuss its next policy move on Thursday.
The European Union executive arm said in a regular forecast that the euro zone economy from next year will expand 1.1% in 2014 after a 0.4% contraction this year. In 2015, the euro zone is to accelerate to growth of 1.7%.
In May, the Commission forecast that the euro zone would grow 1.2% in 2014, but it then made more optimistic assumptions on private consumption and investment, even though assumptions of government demand remained unchanged.
“There are increasing signs that the European economy has reached a turning point,” EU Economic and Monetary Affairs Commissioner Olli Rehn said in a statement.
“The fiscal consolidation and structural reforms undertaken in Europe have created the basis for recovery,” he said.
Many euro zone governments were forced to sharply rein in spending over the last three years as investors began demanding unsustainably high prices for lending to them because of concern they might never get paid back.
The tight fiscal policy was one of the main factors behind the two-year euro zone recession, but it helped win back some investor confidence.
The Commission forecast the euro zone’s aggregated budget deficit would shrink to 2.5% of gross domestic product in 2014 and 2.4% in 2015 from 3.1% this year, as consolidation now continues at a slower pace to help growth.
Public debt will peak at 95.9% of GDP next year, up from 95.5% this year and then fall to 95.4% in 2015, the Commission said.
It also said that euro zone consumer price growth, which the ECB wants to keep below, but close to 2% over a two year horizon, will be 1.5% this year and next and only 1.4% in 2015 as unemployment stays at record high levels around 12%.
But euro money market traders polled by Reuters said the ECB might want to wait for more data before deciding to cut rates to a new record low and did not expect a change to the main refinancing rate this week.
Stronger euro could hamper export-led recovery
Meanwhile, the euro will appreciate at a record pace this year and continue to gain in 2014, the European Commission said today, potentially complicating the euro zone’s export-based recovery.

The Commission sees the euro, which hit a two-year high against the US dollar last month, gaining 5.8% against a dollar-denominated basket of industrialised economies this year and 0.9% next year.

Such a rise would outstrip the jump in the euro’s value in 2009, before the bloc’s sovereign debt crisis caused the currency’s value to plummet. It would be a greater appreciation than the averages notched up since its inception in 1999.

A sharply stronger euro makes the euro zone’s exports more expensive and could dampen the bloc’s recovery from its long recession.

Italy’s finance minister has called on the European Central Bank to cut interest rates to a new record low to try to reverse the euro’s rise. A majority of euro money market traders polled by Reuters this week expect the ECB to keep its main refinancing rate unchanged at its meeting this week.

However, ECB president Mario Draghi is to signal a readiness to ease policy further, after annual inflation in the euro zone fell to 0.7% in October, its lowest level in almost four years and well below the bank’s target of just below 2%.