The current financial crisis is the most serious since the Great Depression and the Irish economy is unlikely to return to growth before 2011, the governor of the Central Bank said today.
Publishing his 2008 annual report today John Hurley said the Irish economy was likely to contract by 8.3 per cent this year and by around 3 per cent in 2010.
A gradual recovery was unlikely to take hold until 2011. Unemployment would average 13 per cent this year before rising to 15 per cent in 2010, he said.
This economic contraction had led to a sharp fall in inflation with prices forecast to drop 4 per cent this year and to remain flat in 2010.
He said Ireland had been exposed and vulnerable to global financial and economic shocks given its open economy and the nature of its economic growth before 2007, which he said had become “quite unbalanced” as construction reached “unsustainable levels”.
Mr Hurley said the pace of deterioration in Ireland – as in other countries – had worsened since last autumn.
“In Ireland, this was reflected in consumers reining back spending even further and firms responding to the changed economic environment by cutting production and acting quickly to lower costs. With exports weakening, this has accelerated the fall-off in demand and has been reflected in a sharp rise in unemployment,” Mr Hurley said today in a statement.
“Experience, both here and overseas, suggests that the best way to restore fiscal balance is to place more emphasis on reducing expenditure rather than increasing taxation. Therefore, while some broadening of the tax base is necessary, it is desirable that the primary focus of fiscal-consolidation measures should be on reductions in public spending,” he said.
He said the Irish banking system, faced significant challenges but said the inherent problems that needed to be addressed were now “much clearer”.
Mr Hurley, who will step down from his role at the end of September, said his warnings about the risks to the country’s banking system and the State’s reliance on property-related taxes were unheeded.
“The warnings were set out by me pretty clearly,” Mr Hurley told journalists in Dublin today, adding that “behaviour didn’t change”.
Fine Gael finance spokesman Richard Bruton said the bank regulatory failures that occurred in Ireland were “a failure to act, not a failure of structures or analysis”.
“The Central Bank governor has said that his warnings - to the Government on excessive reliance on property taxes, and to the banks on the risks they were taking – all went unheeded.
“The unmistakeable conclusion is that the Government was at the centre of a web which simply did not want to know about the massive risks being taken with the Irish economy.”
Mr Bruton said the bank had also painted “a very grim picture of the trend in unemployment under present policies”.
Labour Party finance spokeswoman Joan Burton said today’s report “highlights once again the depth of the economic hole that Fianna Fáil has gotten us into”.
She said the Government was “mesmerised by the crisis” with “no coherent plan of action on jobs and businesses”.
“As global economic forecasts improve, and other economies look to the first signs of recovery, the Central Bank is predicting more misery for Ireland in 2010.”
Ms Burton said that as the rest of the world begins to emerge from the crisis, Ireland would be left behind, as a result of “the mismanagement of the economy by Fianna Fáil”.
Additional reporting Bloomberg