Ireland: Economy remains sluggish
July 25, 2011
On 4 July, the Department of Finance issued a statement regarding the state of public finances in the first half of 2011. News on the fiscal side was positive overall. The deficit reached EUR 10.8 billion in H1 2011, up from the EUR 8.9 billion deficit recorded in the first half of 2010 but within the EUR 10.9 billion target set by the Joint EU/IMF Programme of Financial Support. The increase was entirely due to payments to the country's debt-laden banks, which amounted to EUR 3.1 billion. Excluding these payments, the deficit would have been EUR 1.0 billion lower than in H1 2010. Furthermore, on 21 July, EU leaders agreed a series of new measures to tackle the debt crisis, which began to engulf other members of the community, such as Italy and Spain. While the measures were mostly targeted at resolving the Greek debt crisis, Ireland profited by the EU leaders' decision to reduce interest rate on rescue loans to 3.5%, compared to 5.8% agreed to in the Irish bailout package from November 2010. According to the government, the cut could reduce the cost of Ireland's bailout by as much as EUR 800 million. These positive developments were countered by Moody's decision on 12 July to reduce Ireland's credit rating to junk status, lowering it from Baa3 to Ba1 with a negative outlook. Moody's cited possibility of a second bailout by the end of 2013 as the main reason for its decision to cut Ireland's rating. The loss of investment grade led to a sell-off of Irish bonds and the yield on 10-year Irish bonds peaked at 14.55% on 18 July. Subsequently, yields dropped again and on 29 July, 10-year Irish bonds traded at 10.97% with the spread on German bonds at 843 basis points. While the economy grew at the fastest pace in three years in the first quarter (+1.3% quarter-on-quarter), recent economic indicators suggest that the economy deteriorated in Q2. In May, industrial production rose a working-day adjusted 0.3% over the same month last year, the slowest pace since April 2010 and well below the 8.6% increase tallied in April. The situation in the labour market remains gloomy, as unemployment edged up to 14.2% in June. As high unemployment negatively affects household spending, retail sales continued to underperform, adding a meagre 0.6% year-on-year in June. On the other hand, consumer prices dropped 0.1% over the previous month (+2.7% year-on-year), giving consumers some room to breathe.