Irish Economy 2012: The ESRI (Economic and Social Research Institute) says in its latest commentary on Ireland's economy that the financial crisis currently gripping the Eurozone, coupled with tightening fiscal policy across the region, are likely to send the single-currency area back into recession. Against such headwinds, the public think tank says Ireland’s road to recovery will become much more difficult, dependent as it is on export-led growth.

The ESRI Quarterly Economic Commentary Winter 2011 says that if the Eurozone were an economy with a fiscal and monetary authority, the present situation would call for an expansionary fiscal policy and a looser monetary policy accompanied by a realistic level of restructuring of the banking system. In the absence of such a structure, coordinated action is the obvious approach, yet the structures are not there to achieve this and the ECB has resolutely set its stance against a much more activist approach.

"The present situation contains elements reminiscent of policy during the Great Depression, when a mounting crisis was confronted by an orthodoxy that resulted in great poverty that could have been avoided," Dr. Joe Durkan lead author of the report said . "Without decisive intervention the Eurozone economies will be seriously constrained, will grow very poorly and make the resolution of the debt crisis more difficult."

GDP (gross domestic product) will increase by 2.2% in 2011, and GNP (gross national product, which excludes the profits of the dominant multinational sector) will increase by 1.2%. Given the external environment, growth will slow significantly next year. GDP in 2012 will grow by 0.9%, whereas GNP will contract by 0.3% as export growth will not be enough to counterbalance weak domestic demand and government austerity.

Exports are forecast to grow by 6% this year, but with external demand expected to be weak next year, The ESRI cut its forecast for 2012 to 4.7%.  The unemployment rate will average 14.5% in 2012 -- about 300,000 people, up from an average rate of 14.2% this year.

The consumer price index is expected to average 2% in 2012 and the EU harmonised measure is forecast at 1.9%.

Under the terms of Ireland’s EU-IMF bailout, the target budget deficit in 2012 is 8.6% of GDP. The ESRI expects a level of 8.3%.

Debt as a ratio of GDP is expected to be 115% in 2012 compared with 105.5% this year.

The ESRI concludes: "For Ireland, the critical issue is the external environment. In the short-run, i.e., 2012, we should comfortably meet the Troika targets, but it will become progressively more difficult to do so as the external environment worsens. The best hope both for meeting the targets and for employment purposes is for growth to resume. In an unfavourable external environment and seriously constrained on the fiscal side, this means pushing very hard on the competitiveness front and this involves the structural adjustment we outlined in
previous Commentaries."

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