THE IRISH economy will contract by 0.5 per cent in 2010, and will return to positive growth by the fourth quarter, economists said yesterday.

The revised estimates from Ulster Bank beat previous forecasts for a fall in gross domestic product (GDP) of 2.8 per cent.

Growth in gross national product (GNP) would be weaker, the bank said, contracting 1.2 per cent, but is more positive than previous forecasts of -3.2 per cent.

“While the forecast continues to call for GDP to fall on average this year, this masks the improving trajectory which is set to take hold over the course of the year,” the bank said.

“Quarterly growth rates tend to be extremely volatile, so we place more emphasis on the year-on-year changes in GDP. On this basis, the Irish economy will be back in positive growth territory by Q4 in our view, which would be the first positive growth rate in three years.” The bank said it revised its estimates upwards on the back of recent incoming news, but warned the key driver of growth would come from external demand, with domestic demand continuing to lag behind.

“Growth forecasts for Ireland’s main trading partners have been steadily marked higher in recent months,” the report said.

“Financial and economic conditions have generally continued to improve globally and each of the US, euro zone and UK economies is now growing again.

“Even if the international recovery is gradual rather than robust, it will offer important support to Irish exports which we anticipate will grow by 2.5 per cent this year on average, aided by an improvement in competitiveness brought about by declines in wages and prices across the economy.”

Ulster Bank said if the international recovery is sustained, the Irish economy could grow as much as 3 per cent in 2011.

Consumer spending will remain weak throughout the year, although the pace of decline will ease to 1.1 per cent, less than the 3 per cent decline previously predicted.

“The less negative outlook is supported by a steadier trend in retail sales lately and the likelihood of less precautionary saving as confidence stabilises in line with the expected stabilisation of the broader economy,” the bank said.

The report said that home-building would remain a substantial drag on growth during 2010, with housing completions forecast to fall to about 10,000 this year.

This compares to 26,800 in 2009. Prices will also fall, the bank said, predicting drops of as much as 45-50 per cent from the peak three years ago.

Unemployment will peak at about 13.4 per cent by the middle of the year, with no expectation of signs of net job creation until the end of the year.