Economics Weekly by Lloyds TSB

Ireland may only account for 1-2% of euro-zone GDP, but it is punching above its weight at the moment. Are Irish eyes really smiling?…

Ireland may only account for 1-2% of euro-zone GDP, but it is punching above its weight at the moment. The Irish government has front-loaded its 4-year €15bn tightening programme to incorporate a €6bn adjustment next year alone, with the aim of lowering the deficit to around 9.25% of GDP versus an expected €12bn or so this year (excluding bank bail-out costs). But as yet, financial markets seem unconvinced. The 10-year Irish yield spread over German bunds remains high at well over 500bp, while Irish 5-year CDS remain ‘sticky’. The threat to the euro-zone recovery from volatility in peripheral government bond markets is alive and well in our view. This week’s data highlight will be the preliminary estimate of Q3 GDP, where we look for growth of 0.4% quarter-on-quarter after a 1.0% outturn in Q2. The latter was flattered by weak activity in Q1, so a pull-back in Q3 always seemed likely. For Germany, we see Q3 GDP growth at 0.7% after an impressive 2.2% in Q2.

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