Irish Economy: The ESRI - - Economic and Social Research Institute - forecasts recessions in 2008 and 2009. It said today that it now expect GNP (Gross National Product) to contract by 1.3 per cent in 2008, down from our Summer forecast of a 0.4 per cent contraction. However, it says it is with regard to 2009 that it has introduced a more severe downward revision. It now expect real GNP to contract by 0.7 per cent next year. The ESRI recommends that the deficit should be held at 5.5 per cent of GDP in 2009, which means that the Budget would be among the toughest budgets since 1983.

The ESRI said that given the background of financial turmoil, it is unsurprising that the forecasts in the current Quarterly Economic Commentary contain substantial downward revisions to previous forecasts and it is also unsurprising that it emphasises the uncertainty surrounding the forecasts and the possibility that further downward revisions may be applied.

The forecast for a recession in 2008 is still largely the result of the housing downturn. This is reflected in the forecast for a contraction in investment of 19.8 per cent this year. However, a fall in the volume of consumption is also forecast. For 2009, a downturn in commercial building is expected, along with a fall in the Government’s consumption of goods and services. Weak international conditions in both 2008 and 2009 leave little scope for external demand to fill the gap left by falling domestic demand.

The ESRI says it appears that the general government deficit will be 5.5 per cent this year. It says forecasting the public finance situation for 2009 is difficult as any guidance provided, for example, in Budget 2008 is now largely irrelevant. The institute's analysis shows that even in a situation with voted current spending rising by only 0.6 per cent, voted capital spending falling by 13.5 per cent and extra revenue being achieved through the non-indexation of tax bands and allowances, the Gross Government Deficit (GGD) would just be stabilised at the 2008 level.

Employment is expected to fall in 2008 by 14,000 and by 47,000 in 2009. The rate of unemployment is expected to average 6.1 per cent in 2008 and to jump further in 2009, averaging 8 per cent. The net migratory outflow in 2009 is now expected to be 30,000.

With regard to inflation, the global downturn is expected to result in an easing in the demand for oil and hence in price moderation. The increased likelihood of interest rate cuts will also be positive for CPI inflation. Based on the assumption that ECB interest rates will be 3.25 by the end of 2009, the ESRI expect the CPI to average 4.5 per cent in 2008 before falling to 2 per cent in 2009.

In its General Assessment, it reflect on the policy choices available to Government in the current climate. The ESRI argues that the Government should aim to stabilise the General Government Deficit at 5.5 per cent of GDP in Budget 2009. This deficit level will imply that the Budget will be among the most deflationary budgets of the last quarter century. Ideally, it says that it would have been preferable for the Government to avoid adding to the downturn through a fiscal contraction. However, given the poor state of the public finances and the uncertainties surrounding the prospects for the economy, the ESRI says that the 5.5 per cent level is prudent. It argues that the focus of policy should now be on positioning Ireland to participate in the global upturn.