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The Irish economy is expanding again after nine months in recession, putting it on track to become the first of the bailed-out euro zone countries to exit its sovereign rescue program.
The growth figures came as welcome news to the coalition government, which is desperate to see an economic uplift, however modest. That's because Ireland is to receive the last of its €67.5-billion ($93.5-billion) in bailout funds from the European Union and the International Monetary Fund late this year and must start funding itself through bond sales next year. If the economy had remained in recession, selling bonds would be difficult to impossible.
Ireland's gross domestic product grew 0.4 per cent in the quarter to the end of June over the first quarter. But it was still 1.2 per cent lower than it was a year earlier, thanks to the three successive quarters of negative growth. The bright spots were personal spending, which was up 0.7 per cent, and exports, up 4.3 per cent.
"It gives us hope that we can sustain the pace of job creation and it gives us very strong hope that, as we exit the [bailout] program, we will have a growing economy with lots of additional people going back to work," said Irish Finance Minister Michael Noonan.
Some economists think the second-quarter growth signals that the worst is over for Ireland, which was felled by a spectacular property bust and the cost of guaranteeing its banking system in 2010. The jobless rate, while still high at 13.4 per cent, is coming down and the real estate market appears to have bottomed out. The euro zone countries as a whole are out of recession, meaning export growth is virtually certain.
"Despite the positive short-term outlook, the recovery should remain subdued as both fiscal consolidation and private deleveraging are likely to continue weighing on domestic demand," ING economist Anthony Baert said in a note. "In our view, Ireland is on track to leave its [bailout] program, but the jury is still out."
While Ireland is considered the least damaged of the bailed-out countries, which include Greece, Portugal and Cyprus, it is still too early to say if it can fully fend for itself. Its budget deficit, projected at 7.5 per cent, is the euro zone's highest, and well ahead of the 3-per-cent limit. Its debt-to-GDP is expected to reach 123 per cent this year, the third highest in the euro zone, behind Greece and Italy. Public sector salaries remain high. Ireland may need additional help through an international credit line even if it formally leaves the bailout program by next year.
Ireland has another problem, besides the uncertainty of its ability to go it alone. It must decide soon whether to dial down the austerity measures or leave them intact. Prime Minister Enda Kenny and his coalition partner have been debating whether to implement in full another €3.1-billion in spending cuts and tax hikes in 2014, or to settle on a smaller number. If the Irish economy stops growing, and the wide deficit remains intact, the EU and the IMF will put the government under enormous pressure to keep all the austerity measures in place.
The EU and the IMF do not want Ireland to blow its deficit targets. If they let Ireland get away with doing so, other countries may demand equal treatment. Irish austerity may be here to stay.
Eric Reguly is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers.
Eric Reguly