Irish economy may contract by record

Bloomberg

Gross domestic product may decline 8.3 percent this year, the Dublin-based institute said in its quarterly report yesterday, more than double the contraction it forecast in December.

The contraction over the three years would be the worst in an industrialized economy since an 11 percent decline in Finland between 1990 and 1993, the ESRI said. Ireland, once the fastest-growing economy in the euro region, is struggling to contain a swelling budget deficit and deal with a surge in unemployment after the collapse of a housing boom and as companies from Dell to Royal Bank of Scotland Group cut jobs.

"We’re remarkably exposed" to the global slump, said Alan Barrett, senior economist at the ESRI. "But it always comes back to housing," which during the boom accounted for more than 20 percent of economic growth.

Ireland’s $240 billion economy will probably shrink 1.1 percent in 2010, according to the institute. It receded by 2.3 percent last year, the first full-year contraction in a quarter century. The budget deficit may climb to 12 percent of GDP this year, four times the European Union limit, even as Prime Minister Brian Cowen’s government raises income taxes and cuts spending on public services.

The institute said the measures, announced in an emergency budget on April 7, as well as an additional levy on public workers to cover their guaranteed pensions, may limit the deficit to 11.5 percent in 2010.

"Our assessment of the fiscal measures introduced in February and April is broadly positive and we see these as important moves in the direction of restoring fiscal sustainability," the report said.

It said unemployment may increase to 13.2 percent by the end of the year and climb to 16.8 percent by the end of 2010. Meanwhile, Alan Barrett, a research professor at ESRI, said Ireland should nationalize its banks to end uncertainty surrounding the industry rather than buy 90 billion euros ($118 million) worth of their real estate loans.

Cleaning the books

Finance Minister Brian Lenihan plans to cleanse banks of loans to property developers that have crippled them as the country faces the worst recession in its history. He said last week he wants to "speedily" set up the National Assets Management Agency, which will buy the loans from lenders including Allied Irish Banks at a discount.

"The aim is to end uncertainty," Barrett said. "Nationalization would do that, while NAMA won’t, and the banks may end up being nationalized anyway." Lenihan has said he may provide extra capital to the banks if needed, paving the way for the government to take majority stakes. The state has already taken over Anglo Irish Bank and is pumping 7 billion euros into Allied Irish and Bank of Ireland, the nation’s two biggest lenders.