The Central Bank has forecast a smaller contraction in the Irish economy in 2009 in its latest quarterly bulletin.

The Central Bank with a new governor, Patrick Honohan, a former professor of economics at Trinity College, says the economy will contract by 7.8% in 2009 compared with forecast of 8.3% in July.

The Bank said following an annual rate of GDP decline of 8.4% in the first six months of 2009, the pace of deterioration is set to ease in the second half of the year due to a gradual improvement in the world economy.

The Central Bank said hopes are rising that the downturn in the broader international and European economies may have reached a turning point. However, Ireland’s recovery from recession will be slower than elsewhere.

The Bank said that although a large part of our current problems stem from the character of economic growth in the years preceding 2007, given the highly open nature of the economy, Ireland could not have escaped the impact of the global downturn which has resulted in output falls in most of our main trading partners.

The trend in key monthly indicators, along with the evidence from sentiment surveys, suggests that the most intense phase of economic contraction occurred in the fourth quarter of 2008 and the first quarter of 2009.

For 2010, the Bank said the Irish economy is again likely to record negative growth of about 2.3% with a return to modest, sustainable, growth by 2011. But it cautions that this outlook was dependent on a recovery in growth in Ireland's major trading partners.

The Central Bank expects that employment is likely to continue to decline at a moderating pace in the second half of the year and for much of 2010 with a reasonable prospect of some stability by the end of the year. It predicts that joblessness will average 12% in 2009, compared with its its July forecast of 12.8%.

The Bank added that unemployment will rise to an average of 14% next year, down from 15% in July.

The Central Bank said inflation has declined considerably since last year. The average rate of inflation, as measured by the Harmonised Index of Consumer prices (HICP,) is forecast to decline to about −1.5% in 2009 while the Consumer Price index is forecast to decline by 4.2% over the same period.

Inflation in both the HICP and CPI of about −0.5% and −0.4%, respectively, is forecast for 2010.

On exports, the Bank said the overall performance of Irish exports has been quite robust this year given the exceptional weakness in world demand. On a seasonally adjusted basis, exports of goods and services increased by 0.2% in the second quarter following a decline of 0.7% in the first quarter. The Bank said this represents a much stronger performance than that of most of Ireland’s trading partners where export volume declines over this period have typically been in double digits. However, looking behind the strong headline number, the performance of individual sectors has been mixed. While the broad chemical sector, and in particular pharmaceuticals, performed exceptionally well, other sectors, such as IT and the more traditional labour intensive sectors with a large exposure to the UK market, experienced export volume declines on a par with international norms.

For the year as a whole, and into next year, the underlying trend in Irish export volumes should show some improvement in line with the expected modest recovery in external demand. However, sector specific factors in the IT sector will weigh on overall export volume growth which is expected to remain negative both this year and next. For this year overall, export volumes are forecast to decline by 2.7% with the rate of decline easing to 0.3% in 2010.

The bulletin says housing output is set to decline by almost 60% this year to about 22,000 units with a further drop to about 10,000 next year  -- down 90% from the peak level of housing output in 2006.

The Bank forecasts that for the year as a whole, consumer spending will decline by 7.6%. It says that given the likelihood of a further fall in disposable incomes, consumption is set to shrink further next year, although at a slower pace than in 2009. It says that at this stage, a decline of about 4% is likely.

Government borrowing, at €28.3 billion in the first eight months of 2009, more than doubled relative to the same period of 2008.

The Central Bank said it supports the introduction of a property tax.