Irish economy expected to contract by 9% this year

THE EUROPEAN Commission predicts the Irish economy will contract by 9 per cent this year as Europe struggles to cope with its worst recession since the second World War.

It also predicts the budget deficit will widen to 12 per cent in 2009 in a sharply revised economic forecast that diverges significantly from the Government’s budget predictions.

“We have estimated for Ireland minus 9 per cent , so it’s a more pessimistic figure than the one that was taken into account by the Government when they drafted the new supplementary budget presented a few weeks ago,” EU monetary affairs commissioner Joaquin Almunia said yesterday at the publication of the EU spring forecast.

Finance Minister Brian Lenihan predicted the economy would contract by 7.7 per cent and the budget deficit would widen to 10.75 per cent in 2009 last month when he presented his emergency budget.

This was already significantly higher than the commission’s January economic forecast, which predicted gross domestic product (GDP) would fall 5 per cent in 2009 before a mild economic recovery set in during 2010.

The commission’s revised forecast paints a more gloomy scenario, with a further 2.5 per cent contraction of the economy next year and unemployment reaching 16 per cent.

It predicts the Irish budget deficit of 12 per cent in 2009 will be the highest in the euro zone and warns this could widen significantly to 15.6 per cent on a no-policy-change basis.

General government debt is forecast to increase to 79.9 per cent of GDP by 2010, roughly three times higher than the figure recorded for Ireland in 2007.

Despite the ever worsening forecasts, Mr Almunia said the supplementary budget put forward by the Government last month was a positive one.

“We think the Irish Government are doing a good job in tackling the consequences of a deep recession of the Irish economy,” said Mr Almunia, who nevertheless warned recovery would occur more slowly in Ireland when compared to the average recovery among states using the euro.

The commission’s sharp revision of its January 19th forecasts for Ireland mirror a similar downgrade to the wider euro zone and EU economies.

Despite what it called some “positive signals” in recent days, the commission said the economy of the 16-country euro currency zone would shrink 4.0 per cent this year and by 0.1 per cent next year.

It previously predicted a 1.9 per cent contraction this year and 0.4 per cent growth in 2010.

“The European economy is in the midst of its deepest and most widespread recession in the post-war era,” said Mr Almunia. “The outlook is still gloomy, but for the first time since mid-2007 some positive signals have appeared in the last week,” he told journalists.

Euro zone manufacturing activity declined at its slowest pace in six months in April, and there were signs across its four leading economies that the worst of a severe recession may be over, according to a new survey. Financial markets have moved higher in recent weeks and there has been an improvement in several surveys of business confidence.

“We are no longer in a free-fall,” said Mr Almunia.

“We have the feeling the bottom is closer and closer, and thanks to fiscal stimulus and monetary stimulus ... we will avoid any new falls.”

However, the spring forecast points to a major increase in unemployment with 8.5 million jobs shed in 2009 and 2010, with the highest rates of increase in Spain and Ireland.