THE GOVERNMENT’S budget difficulties increased yesterday as new figures showed the economy contracted in the second quarter of the year and that growth in the first quarter was less than previously estimated.
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.
The eurozone as a whole recorded growth of 1 per cent for the three months to June compared with the first quarter of 2010.
Ireland and Greece were the only two economies in the 16-member eurozone bloc to shrink in the second three months of the year. This accentuates Ireland’s outlier status and could make it more vulnerable to a loss of investor confidence.
Despite the contraction in the economy, there was no sell-off of Government debt after the figures were released at 11am.
Yields on Government bonds did rise earlier in the morning, but that appeared to be contagion from abroad rather than concerns about Ireland.
The absence of negative market reaction to the news on a still-contracting economy may ease pressure on the Government to tie itself into a budget adjustment in 2011 larger than the €3 billion figure it is already committed to. This is by no means certain, however, as the bond market has at times reacted with a delay to economic news.
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.