Economy to shrink by 4.7% this year, says Central Bank

The Irish economy is set to contract by 4.7 per cent this year amid a crisis in the public finances and the deepening global recession, the Central Bank warned today.

In its latest Quarterly Bulletin published today the bank said the country faces significant job losses but could return to growth by over the medium term if certain problems are tackled now. It notes that the global economy may return to moderate growth in mid-2010.

The bank said it was now necessary to consider "how the tax base might be broadened" to increase revenue flowing into Exchequer coffers. A reduction in the number and scope of tax avoidance schemes, should, for example, be considered as should a tax on property.

"Until very recently, the Exchequer benefitted substantially from the strength of property related transaction tax revenues. Without this revenue, alternative sources need to be considered," the statement said. "It might be noted in this regard, that Ireland is an outlier internationally in not applying annual charges to residential property holdings."

The bank said the dip in output would see unemployment average 9.4 per cent this year - up from 6.2 per cent last year. Inflation was likely to fall by 1.9 per cent after showing an average increase of 4.1 per cent in 2008, the bank said.

While gross domestic product is forecast to decline 4 per cent, gross national product is likely to contract 4.7 per cent.

Central bank governor John Hurley said it was vital to correct a sizeable deficit in public finances and to improve the country's competitiveness position. He described the Irish economy as being in an “exceptionally difficult period”.

The Government is in talks with unions and employers this week in a bid to cut public spending by €2 billion and reduce the amount it has to borrow.

According to the Central Bank the Exchequer deficit will hit 9.5 per cent of gross domestic product this year - more than three times the 3 per cent limit set by the European Union and up from 6.2 per cent last year.

“In particular it is vital that we move to correct the sizeable deficit in the public finances and that we improve our competitiveness position, which is all the more important in the light of the global downturn. This is essential to support employment and investment in the future,” Mr Hurley said.

"The Government and social partners have demonstrated a commitment in the past to dealing with these issues and we are now seeing that commitment again. Clearly, the discussions in the coming days will be critical.”

Mr Hurley said cognisance must be taken of the changed outlook for inflation and the “extremely difficult situation facing the public finances” and said ways of broadening the tax break must be examined.

House completions will probably drop by more than half to 22,500 this year as property demand “remains muted,” according to the bulletin.

Capital investment will fall 25 per cent as a building slowdown deepens, while consumer spending will decline 2.5 per cent.

Exports will probably decline 0.7 per cent this year, the bank forecast. Sterling has fallen 15 per cent against the euro in the last six months, which the bank said is of “particular concern for indigenous exporters.”

The Government has also forecast a 4 per cent contraction for the economy this year, while the Commission, the European Union’s executive arm, sees GDP shrinking 5 per cent, the most of any western European nation.