DUBLIN (Reuters) - Ireland’s economy will shrink by less than previously expected in 2010 as the improved international outlook boosts exports and consumer confidence recovers, a government-funded research body said on Wednesday.
In its latest quarterly economic commentary, the Economic and Social Research Institute (ESRI) said its forecast contraction for gross domestic product (GDP) next year was now 0.25 percent, down from the 1.1 percent it predicted in October and below the government’s forecast for a 1.3 percent drop.
Output will continue to fall at the start of 2010, it said, but growth will resume in the second half as improvements in the international economy boost exports despite domestic factors, such as falling consumption, acting as a drag on growth.
For this year the ESRI forecasts a 7.25 percent drop in GDP.
“At the macro-level, our forecasts suggest the worst is over and that the rate of economic contraction experienced in 2009 will not continue,” the ESRI, which is independent but partly funded by the Finance Ministry, said.
But it said it remained concerned about the health of the banking system, which it said was a vital factor in achieving recovery, as it was unclear what the implications of the National Asset Management Agency (NAMA) — the “bad bank” being created by the government — would be to the taxpayer.
“There remains uncertainty over the capital needs of the banks post-NAMA and whether these needs will be met by private sources,” it said, reiterating comments from Ireland’s central bank Governor Patrick Honohan that some capital needed by banks would come from government.
The ESRI welcomed the government’s budget for 2010, saying that it should contribute to restoring confidence in the economy. It also noted the value of having broad political consensus behind the target of 4 billion euros of savings.
“It is possible to have substantially more confidence at the end of 2009 relative to the beginning,” it added, “This is because of the decisive action taken by the government.”
But it criticised the exclusion of pensions from cuts and warned further tough action, such as tax rises, would be needed in 2011 and beyond to correct the public finances.
It also said the possibility of euro zone interest rate increases while Ireland’s economy was still fragile, and the impact of a continued weakness of sterling on Irish exports, were factors which risked stifling recovery next year.
The body said it expected job losses, which surged this year, would continue but at a slower pace with unemployment peaking close to 14 percent towards the end of 2010.
The ESRI predicts Ireland’s budget deficit will hit 11.75 percent of GDP this year, below its previous estimate of 12.9 percent, before improving marginally to 11.5 percent in 2010, a downward revision from its previous forecast of 12.8 percent.
Editing by Stephen Nisbet