Irish Economy: The Ernst & Young Economic Eye autumn report says the Irish fiscal deficit will remain above 5% of GDP (gross domestic product) until at least 2014.

The report on the  island of Ireland economy, forecasts a fall in GDP (gross domestic product) by 6.7% in 2009 - - revised down from 7.8%  - - with Northern Ireland (NI) experiencing the worst economic contraction on record for this period. However, tentative recovery is forecast with the all-island economy estimated to contract just 0.3% in 2010.

The report produced in conjunction with Oxford Economics, says that while the worst of the recession may be over there are still many hurdles ahead. A range of challenges remain which according to the forecast risk the possibility of a ‘double dip’ recession, with real recovery for both the Republic of Ireland (ROI) and NI still 12 -24 months away.

The forecast highlights likelihood of major spending cuts and further tax rises as ROI struggles to meet its EU deficit obligations and NI faces the prospect of public sector cuts as a means to control costs.

Neil Gibson, special adviser to the Ernst & Young Economic Eye said: “Business surveys, corporate announcements, a resilient consumer and economic data all point to a modest improvement in the economic mood North and South of the border. This emerging optimism should however, be tempered by the fragility of current conditions and a growing realisation of the scale of problems in public finances in both jurisdictions.”

ROI out of depression and growth to outstrip UK and Northern Ireland by 2011

The report says fears that the ROI would experience a recession three times as deep as Northern Ireland have proved unfounded, following a tough stance on fiscal policy and a general pick up in global economic conditions. By 2011 the Economic Eye predicts that GDP growth in the ROI will outstrip the UK and Northern Ireland, as extreme budget rebalancing measures take effect.

By contrast NI's decline has intensified since the spring forecast, contracting at its highest levels on record, with GDP forecast to decline by 4.3% in 2009 down from 2.9% in May.

Tax hikes and spending cuts on horizon for ROI

The report says for the ROI to meet its EU stability and growth pact deficit obligations of -3% of GDP by 2013 the Economic Eye predicts that government will have to either cut spending by 4% per annum until 2013, create an extra €2.5bn in new tax measures, or have a combination of both spending cuts and tax increases - - with 2% cuts and €1.1bn new tax measures.

This week, the European Commission agreed to extend the adjustment period to 2014.

The report says fiscal deficits are projected to remain above 5% of GDP until at least 2014 in both ROI and the UK/NI.

Quarter of a million unemployed in this recession

E&Y says unemployment figures across the Island of Ireland remain worryingly high (up 43,000 for all-island in Q2) with job losses in the ROI double the rate of NI and three times that in the UK. The forecast predicts unemployment to peak at 13% in ROI before falling back below 10% in 2013.

The picture for NI is almost as bleak with job losses at levels more severe than in any other region in the UK --  falling back only modestly from highs of 7.5% to 6.75% in 2013. Overall, the report forecasts net job losses of over a quarter of a million in ROI and 35,000 in NI during this recession, with the construction and manufacturing sectors the hardest hit.

“Unemployment, falling tax receipts, rising benefit costs, unsustainable financial commitments and two sets of public finances in disarray mean we are in for a very tough 12 months,” Gibson warned. “We’re certainly not out of the woods yet.”

On migration trends Gibson said: “The forecast is for a significant emigration of workers - -  it is not until 2014 that the ROI returns to a positive net migration inflow. In the face of a more modest economic expansion NI’s net flow will fall in the medium term to a net balance. “