8.5% decline in economy may be bottom of cycle

THE year-on-year decline of 8.5% in the Irish economy in the first quarter of 2009 may turn out to be the bottom of the cycle.

That sharp fall in output could mark the low point of the economic slump in Ireland, according to the latest Bank of Ireland assessment of the economy.

In its quarterly bulletin, the bank says the annual rate of contraction is likely to slow to 4% by the fourth quarter, giving a drop of 7% for the year, which is more optimistic than the Government’s projection of around 9%.

Chief economist with the bank, Dan McLaughlin, warned the improvement in the rate of economic decline will not be enough to prevent further job losses, and he expects the unemployment rate to end the year at around 13%.

The economy has experienced contrasting performances with domestic demand down 6.6% in the first quarter compared with a year earlier. Net exports were up 16%, giving the balance of trade a welcome boost, he said.

The economist says domestic demand is likely to shrink further in 2010, but exports may pick up if a global recovery emerges.

That could leave GDP flat next year. He also expects consumer price inflation to return to positive territory in 2010 as the series of interest rate cuts come to an end while the budget deficit for this year should come in at around the Government’s target as the pace of decline in tax receipts continues to slow.

Domestic demand was likely to shrink further in 2010, but exports may pick up if global recovery takes hold.

With domestic demand still shrinking, McLaughlin says the economy will just stabilise next year, with output holding at this year’s levels, a slightly more optimistic scenario than some overseas forecasts. He expects consumer price inflation to return to positive territory next year as the current series of interest rate cuts come to an end.

Recently, the IMF said the economy would shrink by 13.5%, from 2008 to 2010 (the largest among advanced economies) and unemployment would rise to 15.5% next year.

The IMF sees a pick-up of 1% in the economy in 2011, and is predicting only modest growth for the coming years as the banking crisis works its way through the system.

“The incipient decline in wages will need to be sustained to help redress Ireland’s cost disadvantage.”