A recession in the US would inflict significant damage on the Irish economy, according to a recent assessment by the International Monetary Fund (IMF).

Shocks to US economic growth have a larger impact on the pace of Irish economic activity than economic shocks of a similar magnitude in the euro area or Britain, the IMF study has found. As a result, a downturn in the US spells economic trouble for the Republic.

"If the downside risks to US growth are realised, this is likely to have a significant adverse impact on Irish growth since . . . shocks to the US economy tend to have stronger effects on the Irish economy than those originating in other partner economies," the IMF concludes in a working paper entitled Spillovers to Ireland, released earlier this month.

In its latest global economic assessment, published on Tuesday, the IMF forecast that US real Gross Domestic Product (GDP) would increase by just 1.5 per cent in 2008 compared to a growth rate of 2.2 per cent in 2007. More pertinently, however, the IMF projected US growth would weaken throughout 2008, decelerating to an annual rate of 0.8 per cent by the final quarter of this year.

In addition to the threats posed to future growth by externally imposed shocks, the Irish economy faces problems of its own making in the years ahead. The IMF points out that, since 2001, there has been a marked deterioration in the Republic's international competitiveness.

Competitive losses take some time to crystallise in reduced levels of employment and output. On this basis, the IMF working paper concludes that "the past erosion of competitiveness may yet have a more substantial impact on economic activity" and that the competitive losses already sustained "could have a substantial negative impact on the Irish economy over a longer time horizon".

Using econometric modelling, the IMF estimated the impact on the Republic of an economic shock that reduces annual economic growth in each of our major trading partners by one percentage point.

"The calculations indicate that shocks that cause one percentage point declines in annual US, euro area and UK GDP over a four-quarter horizon cause annual Irish GDP to decline by 1.75, 1.5 and 0.25 percentage points respectively in the same time frame. Thus, Irish economic activity appears to be very sensitive to developments in the US and the euro area, but much less so for the UK," the IMF working paper concludes.

Thus, despite the Republic's membership of the euro and its extensive trade ties with Europe, the performance of the US economy remains the principal external influence on the pace of Irish economic growth.

The importance of the US to the Irish economy stems from two principal sources.

First, the US is the Republic's largest single export market. In 2006, exports of goods to the US accounted for 18.3 per cent of total Irish merchandise exports.

Second, the US is the principal source of foreign direct investment in the Republic. In 2005, there were 473 US companies operating in Ireland and they accounted for 47 per cent of the foreign enterprises supported by IDA Ireland. These US companies employed 93,331 people, or 70 per cent of the employment provided by IDA-sponsored foreign enterprises in Ireland.