Economy 'to grow' by 3% next year

Ireland’s economy will return to a growth rate of 3 per cent next year, according to the European Commission.

In its spring forecast published today, the commission predicted the economy would contract by 0.9 per cent this year, revising its previous forecast of -1.4 per cent upward.

The Commission’s figures suggested the economy shrank by 7.1 per cent last year, slightly less than its initial estimate of -7.5 per cent.

Economic and Monetary Affairs Commissioner Olli Rehn said Ireland had taken bold and credible steps to pull its economy around and the measures were paying off now.

The downturn had produced a “dramatic deterioration” in the Irish public finances, with a large general government deficit emerging and feeding into a steep increase in the debt ratio from its low pre-crisis level, the Commission said in its report.

While domestic demand contracted heavily last year, it said, a much less pronounced contraction in GDP could be expected this year, before positive growth next year.

The pace of recovery, however, will depend on the speed at which “imbalances accumulated in the past” can be corrected, it warned.

The rebalancing of economic activity from construction to more productive sectors, the recovery of competitiveness, the clean-up of household and corporate balance sheets and further consolidation of the public finances would be crucial, it said.

In its report, the commission predicted unemployment would reach 13.8 per cent this year, an improvement on its previous forecast of 14 per cent for 2010, before easing slightly to 13.4 per cent in 2011.

In its prediction for the euro zone as a whole, the Commission said economic growth is likely to be stronger this year than previously thought and the budget deficit should be lower.

However, it warned of risks from sovereign bond market tensions. It said economic growth in the 16 countries using the euro would be 0.9 per cent this year, rather than 0.7 per cent it forecast in February. This is down to stronger global growth which is likely to drive demand for euro zone exports, the Commission said.

"We must now ensure that growth will not be derailed by risks related to financial stability," Mr Rehn said in a statement.

"The EU recovery continues to be surrounded by high uncertainty, illustrated by the recent tensions in sovereign-bond markets," the Commission statement said, adding risks to the forecasts were broadly balanced.

Additional reporting: Reuters