The forecast of a decline of 9.2 per cent in Irish GNP in 2009 and of 1.2 per cent in 2010 together with the fall of 3.1 per cent in 2008 GNP, suggest that Ireland’s economy will contract by around 14 per cent over the three years 2008-2010. The ESRI says by historic and international standards, this is a truly dramatic development. Between 1990 and 1993, real GDP in Finland declined by 11 per cent, the largest such decline for an industrialised country since the 1930s.

The ESRI (Economic and Social Research Institute) says today that the Irish Economy will shrink 9.2 per cent in 2009, which will be the sharpest fall in economic growth experienced by an industrialised country since the Great Depression. The ESRI says employment in 2009 will be 187,300 lower than in 2008, on an annual average basis.

Last week, Germany's leading economics institutes said Europe's biggest economy will contract by 6 per cent of GDP (gross domestic product). The Eurozone is expected to contract by 4.1 per cent in 2009. The corresponding figures for the UK and the US are 4 per cent and 3.7 per cent. World trade has been registering stunning declines. According to the Dutch Central Planning Bureau, the annualised decline amounted to 23 per cent in the last quarter of 2008. For 2009, the OECD expects world trade to contract by 13.2 per cent. While the OECD, which represents 30 mainly developed countries, expects some degree of recovery in 2010, the pace of improvement is expected to be slow.

The ESRI says the wave of poor outcomes and indicators have led it to cut the forecast for 2009, from - 4.6 per cent in the Winter Commentary to -9.2 per cent (on a GNP - - Gross National Product  -- basis, a better measure of Irish activity as it partially reduces the impact which multinationals in Ireland have on GDP). For 2010, the ESRI expects to see a moderation in the pace of decline and for GNP to fall by 1.2 per cent. The forecast for 2010 is based on the assumption of activity bottoming out in the latter part of that year.

The ESRI says the implications of the downturn for employment are highly negative. It expects employment in 2009 to be 187,300 lower than in 2008, on an annual average basis.

Corresponding to this fall in employment, the number unemployed will average 292,200 in 2009, an increase of 155,500 on the 2008 figure (or 114 per cent). This implies that the unemployment rate would average 13.2 per cent. For 2010, further employment falls, amounting to 102,800, will see unemployment to rise by a further 73,300 and the rate to average 16.8 per cent in 2010.

The General Government Deficit is forecast to be 12 per cent of GDP in 2009 but for this to fall to 11.5 per cent in 2010. The forecasts take account of the measures announced in the April 7th Budget and assume full implementation in 2010. The ESRI says it has not, however, included any quantification of the possible impact on the public finances of the National Asset Management Agency.

On-going weakness in the domestic and international economies, plus the weakness of sterling, should lead to a continued trend towards moderation in price levels in 2009. On a HICP (EU's Harmonised Index of Consumer Prices) basis, inflation will average -1.1 this year. When interest rate cuts are factored in, CPI inflation in 2009 will average -4.6 per cent. For 2010, the HICP and CPI forecasts are 0.6 per cent and 0 per cent respectively.

In the General Assessment, the overall negative picture is noted but the economists say they also draw attention to some positive developments since the Winter Commentary. The assessment of the fiscal measures introduced in February and April is broadly positive and they expect to see these as important moves in the direction of restoring fiscal sustainability. A comprehensive assessment of NAMA is not possible at this point because further details will be needed in order to provide a more comprehensive and considered assessment of the proposal. However, the movement towards decisive action on the banking situation is a positive development. Finally, the ESRI draws attention to some “glimmers of hope,”as recently expressed by President Obama,  in the US and argue that policy must remain focused on the issue of competitiveness so that Ireland can participate in the global upturn.

Overall the ESRI expects exports to fall by 5 per cent this year in volume terms and by 4.5 per cent in value terms. For 2010 it is forecasting a further 2 per cent decline in volume and a 1.5 per cent decline in value. However, bearing in mind that the prospects for the international economy next year remain highly uncertain, the Institute does not expect to see a halt in the decline of Irish exports by the final quarter of 2010, in line with the expected signs of a modest recovery in the Euro Area and US economies. The ESRI says while projections suggest that the export performance this year will be disappointing by recent standards, it is worth noting that by international standards a contraction of 5 per cent in volume would be relatively modest. Exports are expected to fall by 9.8 per cent in the UK, by 11.4 per cent in France and by 16.5 per cent in Germany. For the OECD as a whole, export volumes are expected to fall by 14 per cent. Foreign-owned firms are responsible for about 90 per cent of Ireland's exports. Merchandise export growth decelerated significantly throughout the first half of 2008, and following a particularly poor performance in Q4 merchandise exports registered an annual decline of 0.6 per cent in volume terms. The contraction in value terms was considerably larger, estimated at 3.5 per cent. This is consistent with the decline in merchandise export prices throughout 2008. Overall, merchandise exports will decline by 5 per cent in volume terms this year, and by 4 per cent in value. For 2010, the ESRI is forecasting a further 2 per cent decline in volume, and a decline of 1 per cent in value. There was no growth in the volume of services exports in 2008, while in value terms they grew by 2.9 per cent. The Balance of Payments statistics provide a breakdown of services exports in value terms, and confirm the downturn across most sectors. Financial services exports contracted by 7.2 per cent in 2008, communications by 7.6 per cent and tourism exports by 2.2 per cent. The pace of growth in computer services and trade-related business services also fell considerably from 2007 levels – the latter grew by 9.8 per cent in value in 2008, following growth of 61.2 per cent in 2007. The ESRI expects non-tourism services exports to decline by 5.1 per cent in volume terms in 2009, and to decline by 5 per cent in value. Tourism exports will decline by 3.1 per cent in volume and cent in value. For 2010 the ESRI is forecasting a further 1.9 per cent decline in the volume of non tourism services exports, and a decline of 2 per cent in value. Tourism exports will fall by a further 3 per cent in volume and 2 per cent in value.

Some of the main findings of the analysis as summarised by the ESRI include:

• The wave of poor outcomes and indicators in recent months has led us to cut our forecast for 2009, from -4.6 percent in our Winter Commentary to -9.2 percent (on a GNP basis).
• For 2010, we expect to see a moderation in the pace of decline and for GNP to fall by 1.2 percent.
• Our forecasts suggest that Ireland's economy will contract by around 14 percent over the three years 2008-2010. By historic and international standards, this is a truly dramatic development. Prior to this the largest decline for an industrialised country since the 1930s had been in Finland, where real GDP declined by 11 percent between 1990 and 1993.
• We now expect employment in 2009 to be 187,300 lower than in 2008, on an annual average basis. Corresponding to this fall in employment, we expect to see the number unemployed averaging 292,200 in 2009, an increase of 155,500 on the 2008 figure (or 114 percent). This implies that the unemployment rate would average 13.2 percent.
• For 2010, we expect further employment falls, amounting to 102,800. We expect unemployment to rise by a further 73,300 and the rate to average 16.8 percent in 2010.
• We expect the General Government Deficit to be 12 percent of GDP in 2009 but for this to fall to 11.5 percent in 2010. These forecasts take account of the measures announced in the April 7th Budget and assume full implementation in 2010.
• We have not, however, included any quantification of the possible impact on the public finances of the National Asset Management Agency.
• In the General Assessment, the overall negative picture is noted but we also draw attention to some positive developments since our winter Commentary. Our assessment of the fiscal measures introduced in February and April is broadly positive and we see these as important moves in the direction of restoring fiscal sustainability.
• While a comprehensive assessment of NAMA is not possible at this point due to the lack of full details, the movement towards decisive action on the banking situation is a positive development.

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