According to the latest national accounts date released in mid December, the Irish economy expanded by 0.5% on a GDP basis and 1.1% on a GNP basis in the third quarter of last year compared to second quarter, which is very encouraging news.  Indeed, this marks the first quarter since the final three months in 2007 that the economy has expanded on both measures.  Labour force survey figures, also published in the closing weeks of 2010, show that the unemployment rate had fallen to 13.2% by Novemer from a peak of 13.7% in July.  Meanwhile, Exchequer Returns in recent months show a pick up in tax receipts, which rose by 2.5% year-on-year in the three months to December. Thus, despite all the gloom and yet another very severe budget, there are rays of light in the Irish economy.

However, the GDP data for the third quarter confirms that a two-tier economy has emerged in Ireland.  The export sector is booming while the domestic sector remains in deep recession.  What marks Ireland out from other countries is the sheer size f its export base, which is now approaching 100% of GDP.  In most other countries, exports amount to 20-30% of GDP.  Thus, when this sector is growing strongly in Ireland, it has the capacity to add greatly to economic growth and the export sector here is certianly powering ahead.  Exports rose by over 13% year-on-year in the third quarter of 2010, after averaging growth of almost 7% in the first half of the year.

Encouragingly, this is broad based growth, with exports of services as well as goods performing strongly.  This strong performance is reflected in the industrial sectory of the economy.  While the upturn in manufacturing had been led by the multi-national sector, it is encouraging to see that there is also evidence of a recovery in output from indigenous owned firms.

However, domestic spending, in particular, investment, is continuing to contract sharply.  Fixed investment fell by 31% year-on-year in the third quarter of last year and has been generally declining at this rate since the final quarter of 2008.  It reflects continuing steep falls in both residential and other construction activity, as well as lower spending on machinery and equipment.

Government spending also continues to fall, declining by 5.2% year-on-year in the third quarter of 2010, a continuation of a pattern evident since early 2009 when the government started to tighten fiscal policy aggressively.  The Irish government has implemented severe corrective fiscal measures to curtail the deterioration in the budget deficit.  Fiscal tightening amounted to 6% of GDP in 2009 and 2.5% of GDP in 2010, and the underlying budget deficit has been stabilised at below 12% of GDP.

Consumer spending was also down in the third quarter of last year, falling 1.3% year-on-year, although the pace of decline slowed considerably in 2010 from the 7% fall recorded in 2009.  Although the decline in high street spending looks to have bottomed out, households are likely to remain constrained in terms of spending decisions given the widespread evidence of moderation in wage inflation, as well as tight credit conditions.  Incomes also continue to be squeezed by contractionary budget measures, including higher personl taxes.  Furthermore, the personal savings ratio has risen markedly, though this should be a positive from spending once economic conditions stabilise further.  Meanwhile, the ongoing difficulties in the housing market are adding to the negative backdrop for consumer spending.

While GDP was up in the third quarter compared to quarter two, it was still down by 0.5% on levels recorded a year earlier.  Indeed, its looks set to fall by around 0.5% in 2010 as a whole.  This is, however, a much better outturn than expected at the start of the year.

Turning to 2011, GDP is expected to rise by around 1%, which is in line with recent forecasts from the IMF and European Commission.  Exports are expected to continue growing strongly, while both consumer and government spending should see similar falls to 2010.  However, the rate of  decline in fixed investment should slow appreciably, simply because it has contracted to such an extent already.  A good example is new housing, where output has fallen from a peak of around 90,000 units to about 14,000 this year and may declinse to around 8,000 next year.  Thus, we have already seen the build of this fall, and the drag on GDP growth from declining investment activity is set to ease markedly from next year.