Economy to shrink by 6%, predicts Goodbody

Tue, Feb 17, 2009, 00:00

THE ECONOMY will contract by 6 per cent this year as the fallout from severe recession becomes “extremely difficult” to manage and Ireland remains vulnerable to external shocks, according to a new report from Goodbody Stockbrokers.

The Government will have to provide further equity to the banking system, while “unpalatable” decisions will have to be made in the form of cuts in social welfare payments, a reduction in the public sector wage bill, tax hikes and a widening of the tax base, according to the report A Rocky Road Aheadby Goodbody economists Dermot O’Leary and Deirdre Ryan.

The report, which is one of the gloomiest prognoses for the Irish economy yet, concludes that the short-term outlook is becoming irrelevant given the precariousness of State finances.

“The real question is whether Ireland can get its fiscal house in order,” it states.

The burden of closing the gap on the Exchequer deficit will have to be shared between spending cuts and tax increases, according to Goodbody. A reduction in the public sector pay bill, through both pay cuts and a reduction in employee numbers, is “unavoidable”, the report says.

More controversially, Goodbody says that “careful consideration” must be given to cuts in social welfare payments now that Ireland’s annual inflation rate has turned to deflation.

“Due to falling prices, it is possible to decrease payments without cutting the real value of the payments,” according to the authors, who add that grant payments in the education sector “may also have to be reconsidered”.

Siptu general president Jack O’Connor said he was “dismayed” by the recommendations in the report. “It is appalling that people threatened with unemployment, and in many cases with the loss of their homes and occupational pension entitlements as well, can expect nothing better from the elite of the financial services industry than the suggestion that their meagre social welfare benefit may be reduced,” Mr O’Connor said.

The report notes that the rapid increase in unemployment – up 82 per cent in the year to January 2009 – is likely to have an adverse impact on consumer spending. The authors estimate that spending will fall by 7 per cent this year and by a further 5 per cent in 2010.

Outlining the Irish economy’s fiscal frailties, Goodbody said that, on the basis of the Department of Finance’s revised stability programme, Ireland’s debt levels were on track to exceed 87 per cent of gross domestic product (GDP) by 2013.

“While Ireland did have debt levels in excess of this in the 1980s, it is questionable whether international bond markets would fund such an increase in the current environment,” the report states.

Meanwhile, the gross cost to the Government of injecting further equity in the banking system could amount to 5 per cent of GDP, or about €9 billion. “However, this cost could be reduced by offloading these investments in the future. The cost of doing nothing is impossible to calculate but is likely to be significantly greater.”