With less than three weeks until the Budget, the pressure on the Government increased today after data published by the Central Statistics Office showed the economy has technically entered recession.
Figures from the CSO showed that gross domestic product (GDP) - which measures the value of all the goods and services produced in the State - fell 0.8 per cent in the second three months of this year compared to the same quarter of 2007.
This is the second successive quarter of contraction and means the economy is technically in recession. Gross national product (GNP), which also includes profits earned by multi-nationals, fell by 2.1 per cent, compared to a 0.9 per cent rise in the first quarter.
According Davy economist Rossa White, if the measure of economic activity is based on GNP, Ireland was not yet in recession.
"[However] the question of whether Ireland was in recession or not in the second quarter is nitpicking and almost inconsequential because we are there now in the third quarter", he said. White added that the data showed the domestic-owned economy was performing a lot worse than the multinational sector.
The main factors dragging the Republic into recession are the construction slump and weak consumer spending.
Investment in housing is down by almost 20 per cent. The contribution to GDP from the construction industry’s fell 12.2 per cent in the second quarter to €3.35 billion this year from €3.8 billion in 2007.
A consequence of the credit crunch has been a steep reduction in capital investment in the economy with the CSO data showing a 18.8 per cent fall between April and June compared to a year earlier.
Consumer spending has also slowed with CSO reporting a 1.4 per cent fall in volume terms in the second quarter.
The sale of goods and services overseas also decelerated rapidly, with net exports in the second quarter just €1.2 billion higher than the comparable three-month period in 2007.
Earlier this month, the Economic and Social Research Institute predicted the economy would contract by 0.4 per cent this year after growing by 6 per cent last year. It is the first time Ireland has experienced recession since 1983.
Speaking in New York today, Taoiseach Brian Cowen said the challenge for the Government in the months and years ahead is to make the right strategic decisions and strategic investments that will make Ireland more competitive.
"I think everyone understands that this is the economic environment in which we now have to operate," he said. " It means far less money coming in in tax revenues, exacerbated by our own particular issue of housing, and the fact monies are not coming in on that side of the equation either. So we're facing into some difficult times.
"Obviously bringing forward the Budget to October 14th is another opportunity to reinforce the strategic direction the government wants to take the country in in these circumstances. And there will be painful decisions taken, there are no easy solutions here, and that work is continuing."
In the Dáil, Minister for Finance Brian Lenihan defended the Government's performance on the economy in the face of strong Opposition criticism. "The fundamental factors regarding exports of our goods and services
are soundly based,'' he said. "The difficulties have arisen in the construction and banking sector and
have international causes. That situation is visible to all.''
However, he warned that taxation returns continue to fall drastically. "September is a key month for tax revenue and while we do not have full month data yet, early indications suggest that the poor performance in tax receipts witnessed over the summer months is continuing," Mr Lenihan said.
Fine Gael Spokesman on Finance, Richard Bruton, said the figures made for "grim reading."
"The tragedy is that the Government has been caught entirely flat footed by these more difficult times. Their reckless flirtation with the property bubble has seriously handicapped the Irish economy. At a time when the Government should be providing stimulus to the economy it is facing into an exchequer deficit of €11 billion. Quite simply this Government has left the cupboard bare", he said.
"These figures lend added weight to Fine Gael's determination to put the economy on to the agenda in the Dáil this week. It also sheds further light on why the Government are refusing to face up to the issues that need to be dealt with", Mr Bruton concluded.
Labour’s spokeswoman on finance, Joan Burton told the Dáil: “This is where ‘Cowenomics’ has gotten us. This is what the slump coalition has delivered in its 15 months of office,”
Ibec's Director of Policy Danny McCoy said the only positive news in the figures was that the traded sector is holding up, with goods exports growing by 3 per cent in the second quarter.
"The downturn in the construction sector has now spilled over into the rest of the economy, as consumer spending contracted by 1.4 pre cent," Mr McCoy said.
"It is clear that the Irish economy is heading for difficult times and the realities of Ireland's economic circumstances must be addressed in the Budget and other Government policies"
Dr Ronnie O'Toole, chief economist, at National Irish Bank said the weakness in residential construction was the "main culprit, with investment activity down almost 20 per cent".
This had been compounded by weaker consumer spending, which contracted in the second quarter, he said.
“Consumers went on strike around Easter, and this drop off in sales is evident in the figures released today.” The CSO said today consumer spending was 1.4 per cent lower in the second quarter than the same period last year.
Dr O'Toole said he expects consumer spending to remain weak this year and said wage growth should fall from around 4 per cent to 5 per cent to around 2 per cent, based on the recently agreed National Pay Deal.
Austin Hughes, chief economist at IIB Bank, said said a sharp weakening in consumer spending between the first and second quarters was the main negative influence on economic growth.
"A collapse in consumer sentiment and retail sales data had signalled this risk and also suggest it has continued through the third quarter.
"The deterioration in sentiment and spending is a good deal sharper than might have been suggested by trends in income and employment. So, it would appear that some combination of precaution and panic is causing consumers to aggressively curtail their outgoings," Mr Hughes said.