The Government’s budget difficulties are increasing as new figures showed the economy contracted in the second quarter of the year and bond yields hit a fresh high.
According to data from the Central Statistics Office yesterday, very strong growth of exports of both goods and services was not sufficient to prevent the overall economy contracting again. Gross domestic product (GDP) fell by 1.2 per cent compared with the first quarter.
Analysts had been expecting the economy to grow.
CSO figures today show exports continued to rise in July, and the trade surplus also rose during the month, growing the trade surplus by 29 per cent to €4.2 billion.
Meanwhile, the yield on 10-year Government bonds rose to 6.576 per cent earlier today, before falling back slightly to 6.553 per cent at 12.53pm. The spread between Irish bonds and the German bund was 427 points.
Irish bond yields have surged in recent weeks, reflecting concern over Ireland's sovereign debt levels.
Just before the release of the GDP numbers yesterday morning, the National Treasury Management Agency (NTMA) sold €400 million of short-term Government debt.
As has frequently been the case in recent weeks, it was obliged to offer a higher interest rate than at its most recent auction of similar debt.
A second measure of economic activity – gross national product (GNP) – was less negative, contracting by just 0.3 per cent. GNP excludes the impact of the multinational sector’s repatriated profits and interest on borrowings paid to foreigners.
Offering hope that a sustainable recovery may not be far off, the contraction in GNP was the lowest quarterly rate of decline since the downturn started more than two years ago.
By the GNP measure, the economy shrank for the ninth consecutive quarter, bringing the cumulative contraction since its peak in 2007 to 17 per cent.
Minister for Finance Brian Lenihan denied the economy was sliding into a double-dip recession and insisted the figures indicated the economy was stabilising.
However, he conceded that the lack of growth posed serious challenges for the Government in the forthcoming December budget.
“The pace of decline in consumption and investment is easing and is broadly in line with projections.
“The second quarter figures are affected by a spike in imports in part resulting from an increase in royalty payments that depressed the overall GDP figure,” he said.
Mr Lenihan also pointed to the fact that the decline in GNP was just 0.3 per cent, compared to a decline of 1.2 per cent in the first quarter.
However, Fine Gael said the lack of a credible fiscal policy was fuelling unease among investors.
“The problem is that the Irish economy is now seen to be in great difficulty as a direct result of the Irish Government’s approach,” said deputy finance spokesman Kieran O’Donnell.
“The reality is that the international markets have now realised that the Government is at sixes and sevens on its banking and economic policy.
“Even before the release of the latest GDP figures showing that the economy is again contracting, the yield on Irish bonds had continued to rise,” Mr O’Donnell said.