DUBLIN (Reuters) - Ireland's economy shrank in the first quarter of the year but exports held up well, bolstering government hopes of meeting budget targets as international lenders praised the country's commitment to a tough bailout programme.
While the quarterly contraction was unexpected, an upward revision of earlier numbers meant it steered clear of recession in 2011, though stubbornly low levels of consumption at home clouded its growth prospects for the coming 18 months.
In a rare but anticipated fillip for policymakers' efforts to keep the euro zone debt's crisis in check, inspectors from Ireland's 'troika' of lenders again gave the country a clean bill of health on Thursday in their latest bailout review.
Also buoyed by a successful return to short-term debt markets last week, the country's finance minister said the government was on track to meet its budget targets for this year.
"The Irish economy experienced solid growth in 2011. Also our latest Exchequer returns show that our 2012 tax take continues to grow. Taken together, this data shows that we are on track to meet our 2012 deficit target " Michael Noonan said.
But the lenders from the European Union, European Central Bank (ECB) and International Monetary Fund (IMF) said prospects for growth were less rosy.
"Ireland's policy implementation remains on track despite challenging macroeconomic conditions," they said in a statement.
"Growth prospects for the remainder of 2012 and into 2013 remain modest, with weak trading partner growth dampening export demand despite further competitiveness gains."
Growth for 2011 was revised sharply upwards to 1.4 percent from a provisional 0.7 percent, the Central Statistics Office (CSO) confirmed on Thursday after inadvertently releasing the data for a short period a day ahead of schedule.
But gross domestic product shrank by 1.1 percent in the first quarter of 2012, against forecasts for a 0.
A breakdown showed that despite flat growth in its main trading partners in Europe, Ireland's exports rose by 2.6 percent quarter-on-quarter from January to March and by a better than initially thought 5 percent in 2011.
However a surge in imports - which the CSO said was largely due to aircraft purchases - led to a decrease in net exports and thus a drop in GDP.
"The negative impact on GDP may be temporary or reflect stronger demand going forward. The decline in GDP in Q1 does not appear too worrying, the key point being that export growth has remained robust," said Conall McCoille, chief economist at Davy Stockbrokers.
"Overall, the GDP release is a positive sign."
The revision upwards of fourth quarter GDP growth to an increase of 0.7 percent from the fall of 0.2 percent first thought also meant Ireland avoided joining most of the euro zone in returning to recession last year.
While the surprise first quarter drop means economic output contracted faster during that period in Ireland than in Italy, Spain and Portugal, the European Commission has forecast that only Ireland will deliver growth for the year as a whole.
The troika did not give any update on its April forecast for GDP growth of around 0.5 percent this year.
But the government needs expansion to speed up to between 2 and 3 percent from 2013 onwards if it is to eat into a debt pile set to peak at 120 percent of GDP, right on the limit of what most in the market consider sustainable.
The growth boost in 2011 helped ease the pressure, with Davy's McCoille estimating that last year's debt to GDP ratio was 106.5 percent, rather than 108.2 percent.
Noonan said it would also mean the debt would likely stay just below 120 percent next year but that the government's aim is to cut it to below 100 percent as a result of negotiations with its European partners on improving the terms of an expensive bank sector rescue.
But whatever happens in talks that are set to run until October, exports cannot handle the burden of Ireland's debt alone and a recovery will also be needed in a domestic economy weighed down by high levels of personal debt and an austerity programme that has still at least three more years to run.
Gross National Product (GNP), seen by some as a better measure of the state of the economy because it strips out the earnings of Irish-based multinationals, fell 1.3 percent in the first quarter, compared to an expected 0.8 percent increase.
Consumer spending also fell, by 2.1 percent, which together with an unemployment rate that climbed to a crisis-high of 14.8 percent last month, does not bode well.
Ongoing subdued domestic demand was reflected in consumer price data for June, when the index fell by a slightly more than expected 0.2 percent to stand 1.7 percent higher than a year earlier, separate figures showed on Thursday.
"We really need to see an improvement in domestic demand and there's no real sign that that is in prospect," said Dermot O'Leary, economist at Goodbody Stockbrokers.
(Additional reporting by Theresa Newman; Editing by John Stonestreet)