The Central Bank, in the latest of its quarterly reports, forecast that the economy would contract by 6.9 percent in 2009 and by three per cent next year. Others, meanwhile, are looking to a contraction closer to eight percent.
The latest forecast is a good deal gloomier than the last time the Central Bank stared into the economic tea leaves. Back in January the bank was talking about a mere four percent drop.
“It is critical that firm and decisive action is taken to reverse the major deterioration in the general government deficit that has occurred and, if not tackled, is set to worsen,” the bank stated in the quarterly.
The Irish government will argue that this is precisely what occurred when finance minister Brian Lenihan unveiled an emergency budget last week, a package of tax hikes, revenue raising provisions and spending cuts that came on top of an earlier budget last October.
The Central Bank, meanwhile, is looking at an unemployment rate this year that will soar to 11.75 percent and rise even higher 14.4 percent in 2010.
Consumers, it noted, were cutting back in so-called “discretionary” spending, a trend that was resulting in more savings, ergo less demand for goods and services.
The housing sectors, as is the case in the U.S., is the focus of particular concern for Central Bank economists. The bank is pointing to the construction of roughly 18,000 houses and apartments in the republic in 2009, this as opposed to over 50,000 last years.
“The sharp deterioration in the fiscal position has triggered a concern in international markets about the scale of the exchequer’s financing needs in current difficult market conditions,” the quarterly report stated.
“In such circumstances, maintaining the confidence of financial markets requires restoring order to the public finances as a matter of urgency.”
Last week’s budget is aimed at stemming a possible rise in the national deficit that could reach 12.75 percent of gross domestic product. This, according to an Irish Times report, is the highest in the European Union and way above the EU limit of just 3 percent of GDP.
The Irish government is facing an EU deadline of 2013 to get it finances within the regulatory parameters. But the Central Bank is forecasting economic condition that will mitigate against this until at least sometime in 2011.
“Against this difficult background, it is vital now that we move quickly and credibly to confront the very significant challenges that we face and chart a path that will, in time, ensure sustainable recovery in growth,” the report advised. said.
Meanwhile, the bank is forecasting that inflation, as measured by the consumer price index, will drop slightly this year to four percent from an average of 4.1 percent in 2008.
That fall could be spurred to a degree by the budget which is likely to further curb demand for a number of goods covered by the index.