Ernst & Young cuts 2011 GDP growth forecast by 1.7%

ERNST & Young has cut its growth forecast for Ireland’s economy by 1.7% for next year.

Its Economic Eye Winter Forecast has cut expected GDP growth from 2.8% to just over 1%.

The consultancy group, which has announced it is recruiting 300 staff, is blaming the “large and front-loaded fiscal squeeze and a rise in net outward migration” for the sharp revision.

It says we are developing a two-speed economy with exports continuing to grow but the domestic economy struggling in the face of pay cuts and weaknesses in consumer spending.

The report also forecasts the Government will not meet its proposed deficit reduction by 2014.

All-island house values are not forecast to get back to peak values until after 2020, it said.

In the south, the report says the domestic economy will continue to struggle in the face of public spending cuts, weakness in the construction sector and pressures on consumer spending.

The country will emerge from recession in 2011 with a GNP growth rate of 1.0% rising gradually to reach 3.5% by end 2015.

Neil Gibson, the report’s author, said the “downgrading” was a reflection of the severity of the recession and the fiscal rebalancing due to be carried out.

Economic Eye confirms that our fiscal deficit is expected to exceed 30% of GDP for 2010 with the inclusion of the bank bailout cost – the worst of any fiscal position across the developed nations, including Greece.

The report notes the Government has done much to assuage fears about its fiscal position and that unlike Greece, “no rescue package would be required from the European Union and International Monetary Fund, to bail out the economy contrary to current speculation.”

Mr Gibson warned that the exact extent of international confidence in Ireland remains uncertain and cannot be ignored.

We have yet to approach foreign markets for funding since the bank bailout details were released, while the details of December’s budget remain to be seen.

“The signs are that investors are still nervous – with spreads on Irish bond long-term borrowing rates over German bunds recently hitting all time highs.”

Migration trend are adding to domestic pressures and the report shows migration flows have sharply reversed from a peak of over 75,000 net inflows to a net outflow of 35,000 – a fall of 110,000, equivalent to over 5% of the labour market in just two years.

House prices and overall economic growth will be severely impact by the subsequent fall in overall demand, consumer confidence and government investment, as a result of this outward migration trend, he said.