IRELAND’S ECONOMIC downturn is forecast to continue for three years as consumer spending slows, according to a report by Davy stockbrokers which says unemployment may rise to 12% in 2010.

Rossa White, chief economist at Davy and report author, predicts the economy will contract 1.7 per cent this year. He has revised forecasts for 2009 from -2.8 per cent to -3.2 per cent. He expects the economy to contract by 0.5 per cent in 2010. “For next year it is almost certain the national income will drop sharply. It is simply a question of degree,” he said. The Irish economy is labouring under the collapse in residential construction and a severe decline in consumer spending.

Unemployment is expected to reach 10 per cent in 2008 and may peak at 12 per cent in 2010, according to the report.

Central Statistics Office data published this week estimates the unemployment rate hit 7.8 per cent in November with 277,200 people signing on to claim benefits. Last month alone 16,900 people joined the Live Register.

Although economic activity is expected to plateau next year, unemployment is likely to continue to rise into 2010.

“Employment will fall further due to the lag between economic activity and layoffs. In those circumstances, it is hard to see how consumer spending will remain resilient,” Mr Rossa said.

The report notes there may be a net outflow of workers in the year to April 2010 as Ireland ceases to be an attractive destination.

The abrupt stalling of consumer spending is one of the most notable features of the slowdown as people become more cautious and save any spare cash due to concerns over the security of their employment, the report noted.

Retail sales have declined 6.8 per cent from a peak while consumers’ personal wealth has suffered due to the declining value of their pension funds and property.

This has led consumers to compensate by saving more of their current income, Mr White said.

Davy forecasts a 3.8 per cent decline in consumer spending next year followed by a 2.5 per cent fall in 2010. A consequence of this is the economy will be 7 per cent smaller in cash terms in 2010 than it was in 2007.

Investment will fall 25 per cent next year and 14 per cent in 2010, led by falling homebuilding, according to the Davy report.