Ireland avoided slipping back into recession in the third quarter but its modest growth rates underline the huge challenge ahead in tackling its financial crisis. Ireland's debt levels have quadrupled on the back of a banking sector meltdown and it needs solid economic growth to ensure it can meet repayments and fiscal targets set down in an 85 billion euros EU/IMF bailout agreed last month.
Gross Domestic Product (GDP) rose 0.5 percent in the third quarter, data on Thursday showed, rebounding from a 1 percent drop in the previous quarter but missing expectations for a 0.8 percent increase as a strong export performance only partially compensated for weak domestic demand.
"The small rise in Irish GDP in Q3 is clearly encouraging, but it does not alter our underlying view that the government faces an enormous task to reduce public debt to a sustainable level without defaulting," said Ben May of Capital Economics. Despite securing external aid that will cover its funding requirements over the next three years, yields on Irish debt remain sky-high due to fears Dublin will restructure its debt in the future.
The premium investors demand to hold 10-year Irish paper over German bunds rose 9 basis points on Thursday to 543 basis points. Ireland's government is targeting average economic growth of 2.7 percent between 2011 and 2014 and it seized on the third quarter performance as proof that it was on track. "Today's figures show that the economy has stabilised and is now on an export-led growth path," Finance Minister Brian Lenihan said in a statement. "The budget day forecast for economic growth of 1.7 percent in 2011, which is in line with the consensus forecast, remains on track."
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