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News : Irish Last Updated: Apr 24, 2009 - 5:31:05 PM


Irish Economy: ESRI forecasts recessions in 2008 and 2009; Recommends deficit be held at 5.5% of GDP in 2009 - requiring toughest Budget since 1983
By Finfacts Team
Oct 7, 2008 - 9:29:34 AM

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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.

Quarterly Economic Commentary, Autumn 2008

7/10/2008

Dr. Alan Barrett, Dr. Ide Kearney, Jean Goggin and Martin O'Brien (ESRI)

Some of the main findings of the analysis as detailed by the authors  include:

  • This Commentary has been prepared at a time when the world's financial markets are in a state of unprecedented turmoil, to a greater degree than at any time since the current spell began. Other economic news within Ireland which has impacted upon our analysis includes disastrous third quarter Exchequer returns and an alarming rise in the numbers on the Live Register.
  • Given this background, it is unsurprising that the forecasts in this Commentary contain downward revisions to our previous forecasts. It is also unsurprising that we need to emphasize the uncertainty surrounding the forecasts and the possibility that further downward revisions may be applied.
  • We now expect GNP to contract by 1.3 percent in 2008, down from our summer forecast of 0.4 percent. However, it is with regard to 2009 that we have introduced a more severe downward revision. We now expect real GNP to contract by 0.7 percent next year.
  • Our forecast for a recession in 2008 is still largely the result of the housing downturn. 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 internal demand.
  • Based on figures from the Department of Finance, it appears that the general government deficit will be 5.5 percent this year. Our forecasts include a Budget for 2009 in which this same deficit holds in 2009. It should be noted that even stabilising the deficit will still require severe cuts in spending and tax increases, which will themselves contribute to the economic downturn.
  • 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 percent in 2008 and to jump further in 2009, averaging 8 percent. The net migratory outflow in 2009 is now expected to be 30,000.
  • In our General Assessment, we reflect upon the policy choices available to the Government in the current climate. We argue that the Government should aim to stabilise the General Government Deficit at 5.5 percent 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 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, we think that the 5.5 percent level is prudent. We also discuss how an increasing tax share may be unavoidable in the medium term, if desired levels of public services are to be maintained.

Executive Summary & Summary Table

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