Unemployment rate forecast to peak at 15.5%, business investment to drop

Ireland’s unemployment rate will peak at 15.5% and business investment will drop by 5% next year, as credit conditions remain very tight, according to Ernst & Young’s eurozone economic forecast.

However, Ireland’s GDP growth has been revised upwards from 0.6% to 1% in 2013.

The unemployment rate in Ireland is forecast to reach 14.9% by the end of this year. Across the eurozone the employment outlook is equally bleak. The forecast sees region-wide jobless rate peaking at 12% in the first quarter of 2014 with the total unemployment rates reaching 26% in Spain and 27% in Greece.

Corporate investment in Ireland will track trends across the eurozone. Investment is seen as dropping by 1.7% this year and by 5% in 2013. Moreover, by 2016, the forecast expects eurozone investment will still be below pre-crisis levels.

Overall, eurozone GDP is expected to contract by 0.5% this year before posting a marginal growth rate of 0.1% next year on the basis that concerns about the euro’s stability and debt deleveraging will constrain potential.

Ernst & Young’s& senior economic advisor Marie Diron, said: “The recent so-called bazooka provided by ECB, in the form of a bond purchase programme, will only serve as a temporary ‘sticking plaster’ for the eurozone, albeit an essential one. We believe a more radical approach will be necessary over the coming months to ensure even the weakest of recoveries next year and in the future.”

There may be another ECB interest rate cut on the way if the economy deteriorates further, although this is likely to be at the end of the current easing cycle.

However, a more effective course of action would be for the ECB to pursue fully- fledged quantitative easing, Ms Diron said.

“The events of the past five years are likely to have caused permanent damage to the potential output growth of many of the eurozone economies, with the largest losses coming in countries at the epicentre of the sovereign debt crisis. This together with austerity measures, credit constraints, weakening foreign demand, and a failure to address long-term competitiveness issues will weigh on growth for the next decade.”