Drugs and Prostitution Give Ireland's Economy an Unexpected Boost as Strong Growth Returns

Ireland's GDP grew by 2.7% in the first quarter of 2014, surprising analysts who had predicted growth of 1.2%.

The country's deficit stands at 6.7% of GDP, with the addition of drugs and prostitution to metrics reducing the deficit from 7.2% - thanks to the Central Statistics Office including the figures as part of an EU-wide strategy to make national accounts more comparable.

The move follows on from Britain and Italy adding illegal activity to their national figures for economic activity; the UK statistics office calculated that illegal drugs and prostitution provided a £10bn boost to the UK economy.

However, analysts have warned of the dangers of relying on figures from such practices to stimulate growth. Speaking to Reuters, the chief economist at KBC Bank Austin Hughes said: "After some numbers that appeared too bad to be true, you now have some that look too good to be true.

The government is working towards a deficit target of 3% of GDP by 2015.

The Central Statistics Office of Ireland also revised up the final quarter of 2013's performance from a 2.3% contraction to one of just 0.1%. The full year's performance was upgraded from a shrinkage of 0.3% to growth of 0.2%, after a change in EU rules allows member states to include statistics from drugs and prostitution in GDP measures.

The news is a further boost for the Irish government, after unemployment fell to 11.6% in June, which is a post-recession low. Youth unemployment fell to 15.4% from 16.4% year-on-year.

The growth in output has been attributed to strong performances in construction (which grew by 2.8% in Q1) and exports, which grew at 1.8%, adding €541m to the economy.

Having exited the €67.5bn EU / IMF bailout programme in December 2013, the Irish economy is beginning to show real stability.

The change in EU rules allowed Irish statisticians to add an extra €10bn to last year's GDP calculations, with government officials voicing optimism that the adjustment may lead to a reduction in spending cuts and planned tax hikes.

Hughes added: "These numbers are more volatile than the underlying economy. The picture that is emerging is a little more consistent with a general improvement of the economy, but it is a recovery that is a little choppy and a little uneven."

Ireland's gradual economic recovery has been reflected in the capital markets, where the government has undertaken a buyback of a sovereign bond which was due to expire in April 2016 and an exchange of another bond with a similar expiry date for a 2023 bond, with an interest rate reduced by 0.7%.

The buyback schemes will save Ireland more than €2bn a year in debt repayments.

A recent report by accountancy firm Ernst & Young spoke positively of Ireland's economic recovery, with economic advisor Neil Gibson saying: "Ireland is showing the characteristics that are required to put the economy back on a robust footing and this has been recognised by the international financial markets, which have differentiated Ireland from the 'Club Med' countries, as illustrated by the recent fall in bond yields."

Gibson warned, though, that fragile consumer confidence, a weak banking sector with limited private sector lending and an uneven pace of recovery were the biggest threat to the economy.

While Irish house prices are growing at their fastest pace since the property crash of 2007, but analyst have warned that house building is not keeping up with demand, sparking fears of a housing bubble developing.