Unemployment could hit 8.5% by 2010 as recession bites

THE unemployment rate could hit 8.5% by the end of next year as the economy remains in recession.

A report by Davy Stockbrokers shows the economic outlook for 2010 is clouded, with Irish real Gross National Product (GNP) to shrink 3.4% in 2009 following a 2% decline in 2008.

Davy said there has been a remarkable deterioration in the economy since March, sparked by a tightening of credit availability.

The drop in retail sales, a jump in unemployment claimants, with the rate now at 6.3% and lower indigenous manufacturing activity highlight the severity of the downturn, it said.

Huge progress in the banking sector is required if there is to be a turning point before the end of next year, according to the stockbrokers.

It also said Ireland is not breaking the EU rules as any economy experiencing a decline in GDP is not exposed to censure under the revised Stability and Growth Pact.

Under the budgetary rules agreed by eurozone countries, budgetary deficits cannot exceed 3% of GDP without EU prior approval — and only in exceptional circumstances.

Last month, Taoiseach Brian Cowen said the Government would breach EU spending guidelines this year and next.

Davy also said a cut in public sector employment is needed to avoid a steady rise in the debt to GDP ratio in the future.

It said the crucial variable is how the domestic financial system responds over the next 12 months. “If bank lending to credit-worthy businesses and households picks up, the recession will not be prolonged indefinitely. But that is far from certain. The worry is that credit contractions tend to be pro-cyclical and lengthy,” said Davy’s chief economist Rossa White.

The annualised increase in unemployment claimants in the first half of the year, at 60%, was the most since 1975 while in the third quarter, claimants jumped at an annualised pace of 66% compared with the previous three months.

Davy also predicts total sales of new homes may total 7,000 — 8,000 across the country this year.

It said there are at least 40,000 new unsold homes on the market and that unsold stock is increasing.