Irish Economy Returns to Growth With 2.7% Surge

Ireland’s economy returned to growth in the first quarter as pressure mounts on Prime Minister Enda Kenny to ease austerity after years of spending cuts and tax increases.

Gross domestic product rose 2.7 percent, the most since the end of 2012, the Central Statistics Office said in Dublin today. The decline in the previous quarter was revised to 0.1 percent from 2.3 percent initially reported. From a year earlier, the economy grew 4.1 percent.

Net trade boosted growth in the quarter, with exports rising 1.8 percent, outpacing a 0.8 percent increase in imports. Government spending dropped 2.1 percent.

Finance Minister Michael Noonan has said the budget adjustment needed next year to bring the deficit below 3 percent of GDP may be less than the 2 billion euros ($2.7 billion) envisaged. The country has already suffered about 30 billion euros of tax increases and spending cuts since 2008 after the collapse of a property boom sent the economy into a slump.

Noonan is facing increasing calls from the junior coalition partner, the Labour Party, to scale back austerity as it prepares to elect a new leader tomorrow. Deputy Prime Minister Eamon Gilmore resigned from the role in May after much of the party’s support was wiped out in local and European elections.

High Price

Gilmore said at the time that his party paid a “high political price” for policies needed to narrow the deficit, which was 13.1 percent of GDP in 2011, the year the government was formed. The two candidates to succeed him, Joan Burton and Alex White, have each said there is no need for a 2 billion-euro adjustment next year.

The European Union and the International Monetary Fund, which led the bailout of Ireland in 2010, have both urged the government to stick to its budget plans.

The CSO revised up 2013 GDP by almost 7 percent to 174.8 billion euros to reflect new European rules on accounting for research and development spend and illegal activities. This cut the nation’s budget deficit and debt-to-GDP ratio.

Conall Mac Coille, chief economist with Davy, Ireland’s largest securities firm, said in a note, said the 2013 debt-to-GDP ratio was actually 116 percent compared with a previous 123.7 percent estimate. The deficit fell to 6.7 percent from a 7.2 percent prior estimate.

“Clearly these are artificial gains but they will be used as cover to justify a smaller budget adjustment in 2015,” said Mac Coille.

In a further sign of recovery, reports this week showed services strengthened in June and unemployment fell to a five-year low of 11.6 percent. The rate peaked around 15 percent in 2012.

A 2 billion-euro budget adjustment “is out the window unless there’s some extraordinary development in terms of the economy,” said Austin Hughes, an economist with KBC Groep NV in Dublin, adding that the target may be cut in half.

Before it's here, it's on the Bloomberg Terminal.