Ireland's debt rating under threat as economy contracts

Rating agency Fitch tonight warned it may downgrade Ireland and five other euro zone countries in the absence of a comprehensive solution to the region's debt crisis which it concluded may now be "technically and politically beyond reach".

The agency placed the ratings of Belgium, Spain, Slovenia, Italy, Ireland and Cyprus in credit watch “negative”, which means a downgrade is possible within three months.

Fitch also signalled it had placed its "outlook" on the long-term rating of France to negative from stable. However, it affirmed the country's senior debt rating at AAA.

The move comes on back of unexpectedly poor economic data for Ireland which showed economy weakened considerably in the third quarter, shrinking at the fastest rate in more than two years.

A rise in exports was not enough to keep momentum in the economy, with falling personal consumption and a significant decline in investment hampering the country.

According to initial estimates from the Central Statistics Office, gross domestic product fell by 1.9 per cent on a seasonally adjusted basis to almost €40.1 billion.The expectation had been for a 0.5 per cent drop over the quarter.

GNP, which excludes the repatriated profits of multinationals, declined at a faster pace, falling by 2.2 per cent compared with the second quarter of the year.

Personal consumption continued to fall, mirroring weak domestic demand in the economy. Compared to the previous quarter, spending was 1.3 per cent lower.

"Nervous consumers continue to maintain high levels of saving given uncertainty about future prospects," Davy chief economist Conall Mac Coille said.

Government expenditure was also weaker, falling by 1.3 per cent, while fixed investment declined by 20.9 per cent. NCB attributed tthe fall to a decline in machinery investment, particularly in aircraft.

Imports were 1.5 per cent lower over the quarter, with exports rising by 0.8 per cent.

At constant prices the economy contracted by 0.1 per cent compared with a year earlier, while GNP declined by 4.2 per cent.

The Irish Congress of Trade Unions said it was clear from the figures that austerity was not working.

"Current policies are making recovery almost impossible," said Ictu's David Begg said. "No economy can sustain the sort of ongoing damage that is being inflicted on us. The latest figures show, yet again, a big drop in domestic demand while retailers warn of more closures in the new year. We need growth and we need it quickly."

But NCB's chief economist Brian Devine said GDP figures were "extremely volatile" and as such, the stockbroker was not placing too much weight on a single quarter.

"The key message we have been trying to convey though remains intact - the economic backdrop in Ireland remains extremely challenging, it is a two-tiered economy, unemployment is not going down any time soon and despite all the good work to date Ireland is facing at least another five austerity budgets," he said.