By Conor Humphries and Padraic Halpin
DUBLIN (Reuters) - Ireland's economy grew by 2.7 percent in the first quarter and new European Union rules on calculating output significantly increased the size of the economy, raising the chances the government can ease its austerity measures later this year.
Employment and consumer sentiment had been improving for the past 18 months, until an unexpected drop in fourth-quarter gross domestic product set back a recovery that had been gathering strength since the completion of an EU/IMF bailout last year.
But along with the bright start to the year, a report on Thursday revised the fourth-quarter data to show a decline of -0.1 percent instead of -2.3 percent. The overall figure for 2013 was also revised to 0.2 percent growth from the original 0.3 percent contraction.
"After some numbers that appeared too bad to be true, you now have some that look too good to be true," said Austin Hughes, chief economist with KBC Bank.
"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."
The figures on Thursday were revised so much they showed the economy contracted in 2012 by 0.3 percent, rather than growing 0.2 percent for the year, as previously estimated.
The rise in the first three months of the year was driven by a 1.8 percent increase in exports. The domestic economy remained subdued, with personal consumption falling 0.1 percent in the first quarter compared with the previous three months.
Economists polled by Reuters see the economy growing by 2.3 percent this year, more than the 2.1 percent expansion the government has pencilled in.
BUDGET BOOST
New EU rules allowing countries to include illegal drugs and prostitution in GDP calculations added 10 billion euros, or 6 percent, to the size of the economy in 2013 and a similar amount in preceding years, the Central Statistics Office data showed.
Finance Minister Michael Noonan said last month that the technical adjustment could reduce the amount of tax hikes and spending cuts needed next year to meet an end-2015 deficit target of 3 percent of GDP.
The revision turned out to be bigger than Noonan and analysts had expected. Ireland's debt-to-GDP ratio is now calculated at 116 percent and its deficit at 6.7 percent of GDP in 2013. Previous estimates were 123.7 percent and 7.2 percent, Davy Stockbrokers said in a note.
Under pressure after bruising local elections in May, Noonan wants to reduce the planned 2 billion euros (1.59 billion pounds) of tax hikes and spending cuts in October's budget. He has said he will have room to do so if tax figures and economic data are sufficiently positive.
"Barring any extraordinary development, it probably means that the adjustment next year is looking really around the 1 billion mark," KBC's Hughes said, referring to the revisions to the 2013 data, the new methodology and improved tax figures.
The GDP data, which followed figures on Wednesday that showed Ireland's tax take remained above target at the end of June, will also come as some relief to Labour, a junior coalition party, which will choose a new leader on Friday.
The favourite to take over as leader, Joan Burton, has said she will stick to EU-imposed deficit reduction targets but that austerity had reached its limits in Ireland.
(Editing by Larry King)