Irish Economy 2009: The Central Bank said today, Ireland is currently experiencing an unprecedented contraction in output, following the earlier unsustainable construction-driven surge in activity, which peaked around the beginning of 2007. This fall in national output is set to persist this year and next. Exceptionally difficult global economic and financial conditions are making our domestic economic adjustment worse. While the initial downturn in activity was driven by the sharp decline in the Irish property and construction sectors, this has now broadened out into a marked weakening of domestic demand that is being significantly amplified by the fall in export demand as a result of the movement into recession of all our main trading partners.

The Bank says in its Quarterly Bulletin published today, that reflecting the scale and speed of developments, Irish economic performance has deteriorated markedly — the depth of the contraction in activity has deepened significantly, there has been a sharp rise in unemployment and a rapid deterioration in the fiscal position. With the global recession deepening and domestic demand exceptionally weak, the overall outlook for growth has continued to deteriorate in recent months.

The Central Bank says its latest forecasts, which do not anticipate the potential impact of the fiscal measures in the Emergency Budget, to be announced on 7 April, suggest, that GDP will fall by close to 7 per cent this year, with a slightly greater fall likely in the level of employment. The downturn in activity is set to continue into next year, with the economy set to contract by a further 3 per cent in 2010. As a result, GDP is projected to fall cumulatively by more than 12 per cent over the three years 2008 to 2010, implying a broadly similar fall in living standards. This is in line with the experience of other countries that have faced similar corrections in the past.

The Bank says on the performance of the Irish economy, output is contracting in almost all sectors, and this is in turn resulting in a sharp deterioration in labour market conditions. This is being accompanied by a severe contraction in the level of discretionary expenditure and a corresponding rise in precautionary saving by consumers; the household savings rate, for example, is projected to double between 2007 and 2009.

Domestic demand is likely to contract by over 10 per cent this year with about half of this decline accounted for by the housing market where the decline in activity is set to accelerate. It seems likely that about 18,000 housing units will be completed this year, representing a decline of two-thirds from last year’s outturn of about 52,000 units. Based on the trend in housing starts, a further decline of about one-third to 12,000 units is likely next year. As a result, the share of housing in Irish GDP is set to decline to about 3.7 per cent of  GDP next year. This contrasts sharply with the peak in housing market activity in 2006 when housing accounted for 12.7 per cent of overall GDP, about twice the typical share in other advanced economies.

The Bank says as a small open economy with exports accounting for almost 80 per cent of GDP, Ireland is being significantly affected by the international downturn this year. Based on projections by international agencies such as the IMF and OECD, weighted import demand in our main trading partners will fall significantly this year and will be barely positive in 2010. This is reflected in the Bank’s projection for Irish exports which sees significant declines in the volume of exports both this year and next.

The loss of output in the economy in 2009 and 2010 is likely to result in a broadly similar loss of employment and a sharp rise in the rate of unemployment which is forecast to average 113⁄4 per cent of the labour force this year rising to an average of about 141⁄2 per cent in 2010.

The Central Bank says in terms of the medium-term potential, it is important to recognise that the Irish economy retains some important strengths. Demographic trends are still relatively favourable (as they are in Africa - -Finfacts), there is the capacity for a rebound in productivity growth and the Irish labour market continues to be more flexible than most. However, our ability to realise our potential in the medium-term will be very much dependent on how we now respond to the current significant challenges that we face.

In the public finances area, it is critical that firm and decisive action is taken to reverse the major deterioration in the General Government Deficit that has occurred and, if not tackled, is set to worsen. The significant measures already announced regarding the public finances, in addition to the decision to take further substantial action next week, signal a determination to make this difficult adjustment.

The Bank says it is imperative that such action is taken, as fiscal sustainability is necessary for the restoration of confidence in the economy — both on the part of domestic residents and foreign creditors — and the return of healthy growth in the medium-term. It says it is also critical that we adhere to the time frame for correcting the excessive deficit by 2013, which is being proposed by the European Commission. The sharp deterioration in the fiscal position has triggered a concern in international markets about the scale of the Exchequer’s financing needs in current difficult market conditions. In such circumstances, maintaining the confidence of financial markets requires restoring order to the public finances as a matter of urgency.