The Irish government has this afternoon issued its Medium Term Fiscal Statement (MTFS), which sets out its updated projections for the 2012-2015 period. In terms of the headline figures, the government has upgraded its 2012 GDP forecast to 0.9% from the previous 0.7%. This is ahead of NCB’s 0.5% projection, with the main variance being a more optimistic outlook on the drag from investment (MTFS -3.8%, NCB -5.0%) in the current year.
Looking ahead to the coming years, the government has cut its GDP forecasts for each of 2013, 2014 and 2015 to 1.5%, 2.5% and 2.9% respectively from the previous 2.2%, 3.0% and 3.0%. For reference, NCB sits on 1.5%, 2.0% and 2.2%. The government attributes the weaker outlook for the coming year to the “deterioration in the external environment”.
On the fiscal side, the government has signalled its resolve to press ahead with the ongoing fiscal consolidation measures, saying: “Continuing to run large deficits and thereby engaging in large volumes of borrowing is not a viable option. Devoting an ever-increasing share of revenue to debt servicing is a poor use of resources given the legitimate requirements of public service provision”. On that note, the MTFS projects that interest costs will reach just over €10bn by 2015, some 16% of that year’s forecasted total General Government revenue.
Despite calls for a step-up in the pace of consolidation, the government says that having weighed this up it has elected to retain the “previously identified fiscal adjustment path…given the need to support the emerging economic recovery”. To this end, the government has retained its forecasted consolidation targets (a total of €12.4bn, or circa 8% of GDP, over the 2012-2015 period). The lower than previously expected growth means that the General Government Balance (GGB) as a percentage of GDP will be -7.5% in 2013, -5.0% in 2014 and -2.9% in 2015, versus the previous projection of -7.5%, -4.8% and -2.8% respectively. For reference, NCB is on -7.4%, -5.2% and -3.4%.
Despite the lowering of the government’s projected GGB/GDP out-turns, these are still within the parameters set by the ECOFIN council.
As a result of the above, the General Government (gross) Debt as a % of GDP is now expected to peak at 121% in 2013, versus the 118.3% forecast in the 2011 MTFS and the 120.3% projected in the April 2012 Stability Programme Update.
Overall, today’s MTFS release contains few surprises, with the government’s growth projections coming down towards consensus. While the close proximity to the ECOFIN deficit limits leaves limited room for slippage on the fiscal front, we would caution against fiscal consolidation over and above the government’s targets at this point. This is because, as the MTFS projects, domestic demand is set to contract for a sixth successive year in 2013 (unemployment is now seen at 14.5% in 2013 versus the previous 13.6% estimate), while the weaker outlook for a number of Ireland’s key trading partners is also a concern (the Department of Finance estimates that every 1ppt move in the global growth rate moves Irish real GDP by 1.4-1.6ppt, reflecting the highly open nature of the Irish economy).
For a comparison of how the government’s projections have evolved over the past year along with our present forecasts, please click here: http://www.ncbresearch.com/PDF_Archive/2012-11/Comparison.pdf
Kind Regards, Philip O’Sullivan, Chief Economist