THE RECOVERY of the Irish economy will lag behind those in other countries and is unlikely to begin until 2011, according to a report from Goodbody Stockbrokers.

According to Goodbody’s latest economic forecast, Ireland’s economy will contract by 8.7 per cent this year, followed by a 4.6 per cent drop next year, before growing by 1 per cent in 2011. The report says any recovery here is heavily dependent on a global economic revival.

Goodbody economist Dermot O’Leary said the country was going through a period of devaluation as wage costs fell sharply. While the extent of these changes was painful, the process would improve competitiveness.

“An internal devaluation is a more painful process than a nominal one, but it is a necessary condition to take advantage of an international upturn in a currency union,” he said.

Nominal wages in Ireland have fallen by up to 8 per cent over the last year, while those in competitor countries were flat or rising, the report found. Although modest growth is forecast for 2011, this will also be when unemployment peaks at 17.5 per cent.

Mr O’Leary said international evidence suggested the jobless rate would remain high even after the economy returned to growth due to employer caution about rehiring. When employment fell by this extent in Finland in the early 1990s, “it took 18 years for it to return to its pre-recession level”, he said.

To counter this, the government had to develop policies to “avoid the very damaging phenomenon of long-term unemployment”.

One positive consequence of the economic slowdown was the removal of an imbalance caused by a dependence on foreign credit to fuel a property-driven investment boom evident in 2006.

Mr O’Leary said this would be largely eradicated in two years time, leaving the State less vulnerable to external shocks. He said the economy that emerged would be very different to that of 2006, with exports expected to account for an increasing share of economic output.

Consumer prices are forecast to decline 4 per cent this year.