Ireland's economy rebounded sharply in the first quarter as strong exports and profits from Irish-based multinationals compensated for flagging consumer demand in one of the countries worst hit in the euro zone's debt crisis.
Ireland needs solid economic growth over the medium term if it is to persuade skeptical investors it can shoulder a debt burden that has quadrupled on the back of a banking collapse and avoid following Greece into a second EU-IMF bailout.
Gross Domestic Product jumped 1.3 per cent in the first quarter on a seasonally adjusted basis, far exceeding expectations for a 0.8-per-cent increase, preliminary data on Thursday showed.
But economists cautioned that the jump from a revised drop of 1.4 per cent the previous quarter was more to do with external demand than any recovery at home. Consumer demand dropped 1.9 per cent in the quarter, the worst in two years.
"Overall the numbers continue to indicate that we're bouncing along the bottom. There's no real signs of growth in the economy overall in the short term because of the drag of domestic demand," said Dermot O'Leary, economist with Goodbody Stockbrokers.
"We've an economy which is going to be flat this year: GDP could be slightly up and GNP slightly down. I think the government are too optimistic."
Ireland's government, which is targeting average economic growth of around 2.3 per cent between 2011 and 2014, wants to make a tentative return to debt markets late next year but current market conditions suggests that will be a tall order.
The premium investors demand to hold Irish bonds rather than benchmark German bunds have nearly tripled over the past 12 months despite Dublin agreeing to an €85-billion EU-IMF bailout in November meant to draw a line under its crisis. On a Gross National Product basis, which strips out profits from multinationals based in Ireland, the economy shrank 4.3 per cent. Most economists view GNP as a more accurate picture of the Irish economy.
"It's slightly confusing because you have GDP and GNP going in separate directions but basically what that means is you have two separate economies, you have the export sector doing well and you have domestic demand continuing to weaken," said Mr. O'Leary.
Ireland's creditors at the IMF and the European Union use GDP to calculate the country's debt and deficit target so any improvement on a GDP basis, regardless of conditions on the ground, is good news for the government.
Official revisions mean Ireland's economy shrank 0.4 per cent, as measured by GDP, last year. That was a much better outcome than the preliminary estimate of an annual fall of 1 per cent released in March, but still the second worst performance in the euro zone after Greece.
Ireland's Finance Minister has said the country has enough funding under the existing EU-IMF package to see it through 2013, but with a budget deficit of €8-billion pencilled in for 2014, many analysts think the country will have to apply for loans from Europe's permanent rescue fund, the ESM.