Economy to contract by 4%, warns Central Bank

The Central Bank today warned the economy will contract by an alarming 4% this year.

As talks begin in earnest on saving €2bn in public spending, Governor John Hurley urged unions and employers to strike a deal to bring stability to the country’s finances.

“To support a return to more stable economic activity in the medium term, difficult decisions have to be taken and implemented now,” he said.

The Governor called on the social partners to take account of falling inflation, the dire state of the public finances and the potential for tax reform.

“While this will require painful choices, that will result in a short-term decline in living standards, it is also important that the measures taken are equitable and that the community as a whole benefits from this over the medium-term,” he said.

“With the right approach now we have the potential to grow solidly again.”

The Central Bank’s first bulletin of the year forecasts,

:: Gross Domestic Product, measuring all output in Ireland, to contract by 4%

:: Gross National Product, measuring homegrown output, to contract by 4.7%

:: Inflation will turn to deflation with the cost of living dropping by 1.9%

:: Unemployment will hit 9.4%

:: The state coffers will be €9.5bn euro in the red

:: Oil should fall to 51 a barrel

:: House building will fall to just 22,000 units

The report warned that the state no longer has the resources to fund the public sector wage bill and workers need to be realistic about wages.

Social partners have agreed a framework to open detailed talks on saving €2bn in public spending this year alone. Employers’ federation Ibec and trade union leaders from Congress will have intense negotiations over the next three or four days as the Government seeks to table a solution before next the next cabinet meeting next Tuesday.

The Central Bank’s forecast looked forward to 2010 suggesting the global economy could see a moderate recovery as activity stabilises and the recession levels off.

However, officials warned an improvement is not inevitable and requires sound economic management.

The bank’s January bulletin said the framework agreement will provide for continued infrastructural investment, promoting R&D, active labour market strategies and a focus on renewable energy.