A combination of the credit crisis, the housing market collapse and high oil prices will drive gross domestic product (GDP) growth down 1.6 per cent this year, Bank of Ireland said in its latest Quarterly Economic Outlook today.
Dan McLaughlin, chief economist with Bank of Ireland, said the "result is that the Irish economy will contract by 1.6 per cent this year, its first decline in national income in 25 years, with net exports providing the only substantial support to activity" .
He said the outlook for 2009 was uncertain given the degree of dislocation in financial and credit markets "but a further decline in Irish output seems the most realistic assessment". He has forecast a 1 per cent fall in GDP next year.
Recent falls in inflation and an easing of oil prices since July were unlikely to be sufficient to spark the economy back to growth in 2009, the report noted.
Further sharp falls in construction spending looked inevitable next year as household incomes were squeezed by lower wage growth, falling employment and a higher tax burden, he added, noting that Budget 2009 "will add to the squeeze on personal incomes".
The bank has forecast average unemployment of 5.7 per cent this year with the number of jobless rising to 7 per cent in 2009.
An unemployment rate of 7 per cent - equivalent to 167,000 people out of work - would see the Irish economy move away from full employment for the first time in ten years, Mr McLaughlin said.
He pointed to live register data showing the number of people signing on for job seekers' benefits had risen by 80,000 in the year to September as an example of the rapid deterioration in the labour market.
Mr McLaughlin said two of the three shocks suffered by the Irish economy had been unexpectedly severe. The housing market correction had been anticipated and completions were over 30 per cent down in the first half of the year. Overall construction output was 18 per cent lower over the period, he said.
Job losses and the erosion of households' real spending power as the surge in oil prices over the first half of the year kept inflation high had depressed consumer confidence, the report noted.
Mr McLaughlin said he expects consumer sentiment this year to be flat.
Two potential positives for the Irish economy were highlighted in the report. "The first is inflation, which was likely to drift lower but may fall sharply now in the wake of the recent plunge in commodity prices, including oil."
"The second is interest rates, as there appears little reason now for the ECB not to cut rates aggressively in the face of falling euro zone output," he said.
