UPDATE 2-Irish economy on sounder footing as bailout ends

Thu Dec 19, 2013 9:14am EST

* Grows 1.5 pct q/q in Q3, easily beats forecasts

* Shows recovery gaining momentum

* Construction, investment surge, exports dip

By Padraic Halpin and Conor Humphries

DUBLIN, Dec 19 (Reuters) - Ireland's economy grew more than twice as fast as expected in the third quarter, thanks to buoyant construction and investment, putting it on a sounder footing as it emerges from an international bailout.

After becoming the first euro zone member to complete its rescue programme last week, Ireland is counting on a lift in construction and consumer spending to spur on its tentative recovery next year.

Gross domestic product expanded 1.5 percent quarter on quarter, data showed on Thursday, more than double analysts forecasts for 0.7 percent and the fastest quarterly growth since the second quarter of 2011.

The economy has now expanded for two successive quarters after struggling for the previous 18 months. While it still faces challenges, including heavy household debt and high unemployment after a five-year property crash, the jobless rate has dropped to 12.5 percent from last year's 15.1 percent peak and property prices in Dublin at least have started to pick up.

"This certainly suggests that there is a good bit of momentum in the economy and that the consumer is slowly coming back," said Conall Mac Coille, chief economist at Davy Stockbrokers.

"Construction spending is up 15 percent on the year which is an extraordinarily large rate of expansion."

While construction is building off a low base after the property crash devastated the economy, there was an equally eye-catching rise in investment, which jumped 11 percent compared to the previous quarter.

Consumer spending, which accounts for half of economic activity, was up 0.9 percent quarter on quarter, rising for a second quarter in a row following a sharp contraction earlier this year as households continued to suffer under the weight of debt and austerity measures that were a condition of the bailout.

The rise in consumption helped compensate for a 0.8 percent quarterly dip in exports.

After a slow start to the year, economists said Thursday's data suggested the government will meet or slightly better its overall growth target of 0.2 percent for this year and that its 2 percent forecast for 2014 should be attainable.

"They're encouraging numbers pointing towards relatively modest growth this year but you should see a stronger recovery take hold through next year," said Austin Hughes, chief economist at KBC Bank Ireland.

"The momentum that's building in domestic demand, in investment is pointing towards 2 percent growth looking a reasonable outcome for next year."

Ireland needs annual growth of between 2 and 3 percent to take hold from next year if it is to achieve a target to cut debt - set to peak above 120 percent of GDP this year - by a quarter by the end of the decade.

The government is placing construction at the heart of its economic strategy and in its recent budget for 2014 announced tax breaks for the industry - even though the sector defined the "Celtic Tiger" boom and bust.

Thursday's data showed that the economy grew by 1.7 percent in the third quarter from a year earlier, well above forecasts for 0.5 percent growth. Second-quarter growth was revised up to 1 percent quarter-on-quarter, more than double the initial estimate.

The government is also hoping that its decision to bring in a less stringent budget for next year will improve consumer confidence. Finance Minister Michael Noonan told Reuters this week he hopes the more positive outlook will allow him to ease back on austerity again next year.

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