Ireland climbed out of recession on Wednesday with the economy returning to growth in the first quarter, after suffering one of the deepest downturns of any advanced industrialised economy.
Ireland’s return to growth, in spite of having undertaken a huge fiscal retrenchment over the past two years which prolonged the downturn, will provide encouragement to other European economies facing up to tackling rising public deficits.
However, the 2.7 per cent increase in gross domestic product in the first three months of the year has to be set against the 15 per cent contraction in output in the past two years, as the housing market collapsed, and global demand for Irish goods declined.
Brian Lenihan, the finance minister, said on Wednesday the return to growth “provides concrete evidence that the co-ordinated measures taken by government to address competitiveness, the public finances, and the banking system are paying off.”
Ireland, as one of the first EU economies to tackle its deficit, is providing an encouraging example to other countries such as the UK and Germany now grappling with the issue of when to withdraw the fiscal stimulus.
Paul Krugman, the Nobel-laureate economist, argued last week that Ireland had seen little reward for its brave fiscal measures. “Virtuous, suffering Ireland is gaining nothing,” he wrote in the New York Times. He was referring to the reaction in the bond markets, where Ireland is still paying 3 per cent more than Germany to finance its budget. But Irish ministers argue they had little choice but to tackle the deficit.
“Had we not done so, the deficit would have ballooned towards 20 per cent of GDP – a level at which the very financial survival of this country would have been at risk,” Mr Lenihan said at the time of the December budget.
Ireland has slashed public sector salaries by about 15 per cent. Welfare has been cut, including 10 per cent off child benefit. New income and health levies have also been imposed.
The return to growth reflects a buoyant performance by the export sector, particularly the foreign-owned multinationals, who have benefited from the euro’s decline and from Ireland’s falling cost base. Ireland sells close to 60 per cent of its exports outside the eurozone – to the UK, US and other economies.
On the domestic economy, the evidence of recovery is less clear: consumer spending is stabilising; shops report higher sales. Securicor and the other companies shifting cash between bank branches report increased volumes, according to officials. But many parts of the economy are still shaking off the effects of the property crash, with dole queues rising – a problem only ameliorated by the re-emergence of emigration, a hugely emotive issue in Ireland.
The government is looking for further reductions in current spending of €2bn (£1.6bn, $2.4bn) in 2011 and 2012 and €3.5bn in the two years to 2014, when the fiscal deficit is set to fall to 3 per cent of GDP. Last year it was 14.3 per cent, the highest in the EU, although this year it is set to fall to 11.6 per cent.
But those budget reductions assume the economy returns to a growth rate of between 3 and 4.5 per cent over the period, which many economists fear may prove over-optimistic.
The International Monetary Fund warned last week against “consolidation fatigue” in a note ahead of publication of its annual report on Ireland, expected next month.