UPDATE 2-Irish comeback in doubt as economy shrinks in Q3

Fri Dec 16, 2011 10:24am EST

* Ireland's Q3 GDP falls 1.9 pct Q/Q vs -0.5 pct forecast

* Falls from euro zone's second-best performer to worst

* Weaker global outlook seen hurting growth prospects

* Weak growth could undermine Irish debt sustainability

By Padraic Halpin and Conor Humphries

DUBLIN, Dec 16 (Reuters) - Ireland's economy contracted at its fastest pace in over two years in the third quarter after a global slowdown hit export growth, casting doubt over Dublin's ability to transform itself into the euro zone's comeback kid.

Gross domestic product slumped 1.9 percent on a seasonally adjusted basis, compared to a Reuters poll forecast of a 0.5 percent fall, making Ireland the worst euro zone performer in the third quarter apart from Greece, which no longer publishes seasonally adjusted figures.

In the second quarter, Ireland had been the second-best in class behind Estonia.

"Ireland's third quarter GDP figures rather spoil its emerging image as a 'poster boy' for other debt-laden peripheral euro zone economies," said Jonathan Loynes, Chief European Economist at Capital Economics.

"The figures ... put something of a dent in hopes that Ireland was starting to reap the rewards of its economic reforms and austerity measures," he said. "Ireland's future prospects within the single currency are far from secure."

Ireland's quarterly GDP data are notoriously volatile due to the inclusion of the earnings of Irish-based multinationals.

But a slowdown in exports is a worrying development for Prime Minister Enda Kenny, who is relying on trade to prop up a domestic economy battered for years by austerity measures and to enable the country to emerge from an EU-IMF bailout in 2013.

Analysts said Ireland should still achieve full-year GDP growth this year, the first since 2007, but below the 1 percent forecast by the government.

EUROPEAN ROLE MODEL

Held up as a role model for other indebted euro zone nations, Ireland is now in danger of losing the battle to repair its precarious debt position and return to bond markets in 2013.

Europe's failure to solve its sovereign debt crisis and a ramp-up in austerity measures threatening economic growth across the currency bloc is darkening the outlook for Ireland.

"Ireland's ability to generate the growth rates necessary to guarantee the sustainability of its public debt and then regain sufficient confidence to be able to return to the financial markets for funding will obviously depend on some sort of lasting resolution to the euro zone debt crisis," said Sonia Pangusion of IHS Global Insight.

"From a debt sustainability point of view, growth is the name of the game."

Ireland's official creditors at the European Union and the International Monetary Fund expect GDP growth of around 1 percent next year and have warned it could deteriorate in the months ahead if its trading partners slide into recession.

If growth falls behind targets, the government would have to sharpen austerity measures futher to meet its IMF-EU deficit targets, risking a backlash against Kenny's government.

But in a positive sign for Dublin, the IMF advised the government on Thursday against increasing the amount of fiscal adjustment if growth weakens for fear of further depressing domestic demand.

EXPORT GROWTH SLOWING

Friday's data shows exports are struggling to compensate for a domestic economy drubbed by an unprecedented housing crash and prolonged austerity measures, including 3.8 billion euros ($5 billion) of fiscal adjustment pencilled in for next year.

Exports grew, but at 0.8 percent the improvement was the weakest quarterly performance in nearly two years. The current account surplus came in at 850 million euros compared to a surplus of 1.18 billion euros in the same period last year.

"The big risk next year is clearly the euro area slowdown and how that effects exports," said Conall Mac Coille, chief economist at Davy Stockbrokers.

Gross National Product (GNP), seen by some economists as a more accurate indicator of the state of the economy because it strips out the earnings of Irish-based multinationals, was down 2.2 percent in July-September, well below analysts' expectations of a flat performance.

Consumer spending dropped 1.3 percent in the third quarter, while capital investment sank nearly 21 percent.

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