Ireland emerges from recession after steep economic drop

DUBLIN -- Ireland climbed out of recession Wednesday, with the economy returning to growth in the first quarter after suffering one of the deepest downturns of any advanced industrialized economy.

The development occurred despite Ireland's having undertaken a huge fiscal retrenchment over the past two years, prolonging the downturn. It is likely to provide encouragement to other European economies, such as Britain and Germany, that are preparing to tackle rising public deficits and decide when to withdraw a fiscal stimulus.

However, the 2.7 percent increase in Ireland's gross domestic product in the first three months of the year has to be set against the 15 percent contraction in output in the past two years, as the housing market collapsed and global demand for Irish goods declined.

Brian Lenihan, Ireland's finance minister, said Wednesday that the return to growth "provides concrete evidence that the coordinated measures taken by government to address competitiveness, the public finances and the banking system are paying off."

Paul Krugman, an economics Nobel laureate, argued recently that Ireland had seen little reward for its brave fiscal measures. "Virtuous, suffering Ireland is gaining nothing," he wrote in the New York Times. He was referring to the reaction in the bond markets, where Ireland is still paying 3 percent more than Germany to finance its budget. But Irish ministers say they had little choice but to tackle the deficit.

"Had we not done so, the deficit would have ballooned toward 20 percent of GDP -- a level at which the very financial survival of this country would have been at risk," Lenihan said at the time of the December budget.

Ireland has slashed public-sector salaries by about 15 percent. Welfare has been cut, including 10 percent off child benefits. New income and health levies have also been imposed.

The return to growth reflects a buoyant performance by the export sector, particularly the foreign-owned multinationals, which have benefited from the euro's decline and from Ireland's falling cost base.

Ireland sells close to 60 percent of its exports outside the eurozone: to Britain, the United States and other countries.

Domestically, the evidence of recovery is less clear: Consumer spending is stabilizing; shops report higher sales; and companies shifting cash between bank branches report increased volumes, according to officials. But many parts of the economy are still shaking off the effects of the property crash, with unemployment-benefits lines growing -- a problem only exacerbated by the reemergence of emigration, a highly emotional issue in Ireland.

The International Monetary Fund warned last week against "consolidation fatigue" in a note ahead of publication of its annual report on Ireland, expected in July.

-- Financial Times