UPDATE 2-Ireland avoids recession, debt doubts remain

* Irish Q3 GDP rises 0.5 pct Q/Q vs f’csat +0.8 pct

* Growth in net exports outweighs fall in domestic demand

* Govt says still on track for 2011 GDP growth of 1.7 pct

* Investors fear Irish debt restructuring in future

(Recasts, adds more comment, market reaction)

By Carmel Crimmins

DUBLIN, Dec 16 (BestGrowthStock) – 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
(IE10YT=TWEB: ) over German (DE10YT=TWEB: ) 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.”

Economists polled by Reuters expect Ireland to generate 1.6
percent GDP growth next year. [ID:nLDE6B10J0]

DOMESTIC DEMAND

Many investors doubt that Ireland with reach its medium term
growth targets, given that Dublin is pushing through
unprecedented cutbacks and tax increases to cut the worst budget
deficit in Europe.

All components of domestic demand fell in the third quarter
from the previous three months and consumer consumption fell 0.5
percent, its biggest drop since the fourth quarter of last year,
when Ireland was still in recession.

Exports rose 3.6 percent while imports increased 1.4
percent.

“To be absolutely confirmed that we are past the worst, we’d
want to see things like consumer spending and capital investment
within the economy rise,” said Eoin Fahy, chief economist at
Kleinworth Benson Investors.

The European Commission has estimated Ireland will grow at
just 0.9 percent next year, just over half the government
forecast, and has already given Dublin until 2015, an extra
year, to get its deficit under control.

Ireland has committed to cutting its deficit under the
EU/IMF deal and the EU has given it until 2015 to get its
shortfall below an EU limit of 3 percent of GDP.

Ireland’s shortfall will blow out to 32 percent of GDP this
year due to the one-off inclusion of a 30 billion euros bill for
bailing out the banks.

On an underlying basis, Ireland’s shortfall will be nearly
12 percent this year and 9.4 percent next year still the highest
in the euro zone despite record cutbacks.

Gross national product, seen by some economists as a more
accurate indicator of the state of the economy, jumped 1.1
percent, beating expectations for a 0.2 percent increase.

GNP strips out the profits of multinational firms operating
in Ireland but the income of foreign listed companies
headquartered in the country is recorded in this measurement
until they pay out dividends.

A slew of companies, including insurance firm Beazley
(BEZG.L: ) and advertising group WPP (WPP.L: ) have moved their tax
domicile to Ireland in recent years.

(Reporting by Dublin bureau; Editing by Ron Askew)

UPDATE 2-Ireland avoids recession, debt doubts remain