Irish GDP Turns Positive, Sort Of

Ireland, the first euro zone country to fall into a recession in 2008, reported today that Q1 GDP expanded by 2.7% from Q4 09.  While the headline is impressive, even if Q4 09 was revised to show a 2.7% contraction rather than -2.3% as initially reported.  The year-over year rate improved to -0.7% from a revised -5.8% in Q4 09.  The economy has contracted for the past two year by more than 14% on a cumulative basis.

However, the details are somewhat less encouraging.  The domestic economic remains weak.  The June employment rate reported today rose to 13.4% from a revised 13.2% in May. Exports surged 6.9% in Q1.  This is the largest increase on record and given the fragility of foreign demand, exports cannot be counted on to the same extent going forward.

The gross national product as opposed to the gross domestic product–the difference being that the former excludes the foreign sector–actually contracted by 0.5%.

Ireland is pursuing among the most ambitious fiscal austerity programs.  OECD forecasts an Irish budget deficit of 11.7% this year and 10.8% next year. It was 14.3% last year, the largest in the euro zone.    The government aims to bring to back below 3% by the end of 2014.  Taxes have been hiked and salaries of some government workers, nurses and professors have wages cut by up to 20%.

June has been a difficult month for Irish bonds.  The 10-year yield is up 67 bp this month and 100 bp over the quarter. Greece and Portugal were the only euro zone bonds that did worse.

The euro zone reported June inflation 1.4%, but Ireland, like other countries on the periphery, is experiencing outright deflation.  May CPI was -1.1% year-over-year, but it is past its worst, which was last October.  Then the year-over-year rate was about -6.5%.   Irish inflation is likely to turn positive in July or August.  Ireland reports June CPI in the middle of July.