THE economy may have moved out of recession in the third quarter of this year.
While the figures are tentative, they represent a significant change in the economic outlook for the Irish economy, a leading economist has said.
Alan McQuaid, chief economist, Bloxham stockbrokers, said the improving outlook could be undermined by failure of Government and the trade unions to deliver €1.3 billion in public sector pay cuts.
Mr McQuaid said the inability to agree the wage reductions could have serious consequences for the economy. “I think they are playing a very dangerous game of Russian roulette with the economy,” he said at the launch of his latest economic review in Dublin yesterday.
He said failure to deliver on the pay cuts could lead to a sharp hike in the cost of borrowing and a reversal of the positive growth trends beginning to emerge.
The positive growth in the third quarter emerged in the latest poll of economists by Reuters.
Though the poll was “tentative” and open to revision, Mr McQuaid said it showed a very positive shift is starting to take place faster than many had anticipated.
For it to continue the Government had to be seen to deliver on what it said it would in terms of cutting borrowing.
“The bond vigilantes are back” and any deviation from the fiscal strategy outlined would be punished by further credit rating downgrades, he said.
A heavy emphasis on taxes in the budget next week should also be avoided.
Most analysts now expect a carbon tax and possibly some move on water charges, he said. The emphasis has to be on spending cuts and that is why Mr McQuaid believes the deal on public sector pay is critical.
A move on taxes would damage consumer confidence that hit an 18-month high in October, and would also damage the recovery process, he said.
Provided the right things are done he says the economy will fall by just 1% next year and that could turn out to be neutral if the gains starting to come through globally are sustained.
In 2011, the economy will grow by 2.8% or more.
Recent European Union forecasts said Ireland and Slovakia will record the highest GDP growth in the EU in 2011 as the economy takes off again, he said.
Forecasts that unemployment would hit 17% next year is no longer on the cards.
With the recession over or bottoming out, unemployment will peak at 12.8% next year and fall to 11.7% the following year when Ireland will experience its first full year of growth since 2007.
The report highlights the mounting pressure on the national finances with the general government deficit heading for 12.1% in 2009, up from 7.2% last year.
It will slip further to 12.5% of GDP next year, way ahead of the 3% stipulated by the EU.
Bloxham stockbrokers says the global economy has started its transition from steep contraction to economic recovery, with growth of 3.4% the cards next year followed by 4.2% in 2011.
A decline of 1.2% is still the expected outcome for this year, it said.
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