By Conor Humphries and Stephen Mangan
DUBLIN (Reuters) - Ireland was one of the best-performing economies in the euro zone last year, continuing a gradual recovery from its financial crisis, though it tailed off in the second half as exports stalled, official data showed.
The country, which last week took its biggest step yet towards exiting an EU/IMF bailout later this year by selling 5 billion euros (4.2 billion pounds) of 10-year debt, is one of few euro zone economies to have managed to eke out mild growth.
It grew for the second year in a row in 2012, data showed on Thursday, expanding 0.9 percent as forecast by the government and beating analysts' projections for 0.6 percent growth.
The economy was flat in the fourth quarter, but beat expectations and narrowly avoided falling back into recession thanks to consumer spending, which rose for a second quarter.
That is an encouraging sign for this year with the government targeting getting growth back to the 1.5 percent level seen in 2011. However, with yet more harsh spending cuts and tax hikes on the way to cut one of the highest budget deficits in Europe, Ireland will not be able to rely on a domestic recovery, leaving it still vulnerable to shaky global demand.
"The pressure on domestic demand is easing at a time when the global outlook is uncertain and that is reassuring," said Austin Hughes, chief economist at KBC Bank Ireland, after data showed consumer spending rose in the fourth quarter by 1 percent from the previous quarter.
"While it certainly wouldn't be right to say that the good times are back, it does give you more optimism that the current Irish growth model isn't broken. The worst of the domestic demand adjustment seems to be behind us. I would be a little more encouraged for 2013."
Flat fourth-quarter gross domestic product (GDP) confounded analysts' expectations for a 0.3 percent dip that would have put the economy back in recession, defined as two consecutive quarters of falling quarterly GDP.
It also beat a 0.6 percent contraction recorded for the euro zone as a whole. Of euro zone countries that have reported data, only Estonia and Slovakia grew in the last quarter, with Germany marking its worst performance since the height of the global financial crisis in 2009 with a 0.6 percent dip.
Irish GDP for the third quarter of last year was revised down to a decline of 0.4 percent from the previous quarter, compared with an initial estimate of a 0.2 percent contraction, as exports fell by more than initially thought.
Exports improved in the fourth quarter, but only grew by 0.5 percent and have now failed to keep pace with imports for three of the last four quarters.
The government sees economic growth accelerating to above 2.5 percent in 2014 and in 2015, a level needed to put government debt, set to peak at 121 percent of GDP this year, on a downward trajectory.
"It's a bit worrying when you see growth contracting in Q3, flat in Q4 and a continued export slowdown but overall it's positive," said Conall Mac Coille, chief economist at Davy Stockbrokers.
"Growth is slowing year on year, but it doesn't really change the government's picture too much because targets are for 2015. I don't think today's numbers will impact that target too much."
(Writing by Padraic Halpin; Editing by Susan Fenton)