Economy to contract by 6% this year, report finds

Goodbody Stockbrokers has revised down its gross domestic product (GDP) forecasts for the Irish economy for this year to -6 per cent in its latest economic commentary.

It says the labour market is now deteriorating at an unprecedented rate and that unemployment this year is likely to exceed Government estimates and hit 12.6 per cent by the end of the year. Goodbody had previously forecast a 4.2 per cent decline in GDP.

This loss of jobs is expected to contribute to a decline of 7 per cent in consumer spending this year, according to the report.

Goodbody economist Dermot O'Leary said given the seriousness of decline in the public finances in the short-term GDP outlook was becoming less relevant than the State “getting its fiscal house in order”. “We estimate that the budget deficit will reach 12 per cent of GDP in 2009 and 13 per cent in 2010, easily the highest in the euro-zone.”

The report notes that were the Government to run deficits of between 10 and 12 per cent over the next five years, its credit worthiness would deteriorate very quickly and the country would lose its AAA rating from credit agencies. These ratings deterime how much interest the State must pay on its borrowings.

“Given that budget deficits are still anticipated beyond then, it is unlikely that Ireland will retain its top credit rating status, but it could still retain a high ranking nonetheless, if the correct policy decisions are made,” Mr O’Leary said.

The report anticipates the debt to GDP ratio to rise to 80 per cent by 2012 and - allowing for the fact that there is an appetite for this level of debt on international bond markets - even at these levels, Ireland’s debt would still be close to anticipated debt levels in other European states, the report notes.

The report highlights the need for unpalatable decisions to be made including cuts in expenditure and in the public sector pay and pensions bill of around €20 billion, which accounts for around a third of all Government spending.