THE IRISH economy will contract by 4 per cent in 2009, and the recession will last for two years, according to Ulster Bank's latest quarterly economic forecast, writes Ciarán Hancock, Business Affairs Correspondent.
According to its chief economist Pat McArdle, the economy will decline by 2.8 per cent this year, but will stage a "modest recovery" in 2010 with GNP rising by 0.3 per cent.
Mr McArdle also warned that the Government's latest estimates for tax revenues in 2008 are "too optimistic" and taxpayers face more pain over the next two years.
He predicted that 85,000 jobs would be lost in Ireland in 2009 as unemployment averaged 8.5 per cent, which would be the highest rate in 12 years.
"More than half of them will be in construction and the remainder split between manufacturing and services," he said.
"We believe the budget figures entail public sector job losses of . . . 11,000 as the Government attempts to curb spending on pay."
Mr McArdle said the stark nature of our budgetary situation had not been properly communicated by the Government. "I think the public has failed to grasp the severity of the financial situation," he told The Irish Times.
Mr McArdle said a combination of a further deterioration in exchequer finances this year and a weaker economy in 2009 was likely to result in next year's budget deficit rising to €14.5 billion, or 8 per cent of GDP, compared with the official 6.5 per cent forecast.
"The choices are stark," he said. "Either the deficit is allowed rise or further very substantial cutbacks or tax rises will be required."
Mr McArdle said the two-year recession would be brought about by a combination of factors, including "a more severe and prolonged housing market slowdown" as well as a deterioration in the labour market and a decline in consumer spending in favour of saving.
"Lower inflation and substantially lower interest rates will help, but will be overwhelmed by the other negatives."
Mr McArdle forecasts a decline of 1 per cent in consumer spending here this year and by 3 per cent in 2009 as the employment situation worsens.
"The economy will experience outright deflation in 2009, for the fist time since 1946. The projected 0.5 per cent fall in the Consumer Price Index reflects a significant drop in mortgage inflation as the ECB rate cuts feed through in addition to further falls in energy and food prices."
Mr McArdle estimates that house completions this year will be 48,000, down from the 78,000 achieved in 2007.
He is forecasting 20,000 house will be completed in each of the next two years. Ulster Bank predicts that property prices will fall by 30 per cent from their peak.
Official figures show that they have fallen by 14 per cent to date, although Mr McArdle believes the decline is probably closer to 20 per cent when time-lags in reporting are factored into the equation.
Ulster Bank has projected a decline of 0.8 per cent in non-residential construction this year and a 7 per cent contraction in 2009.
