Country Report Ireland

Outlook for 2008-09

• Brian Cowen, who became taoiseach (prime minister) on May 7th, is unlikely to change broad policy direction, but will face far greater challenges than his predecessor as the economy slows sharply.
• The Economist Intelligence Unit believes that the three-party coalition, formed in mid-2007, will remain in office over the outlook period. The risk of premature collapse is limited.
• Apart from environment-related policies, the governing coalition, in office since mid-2007, has taken a gradualist approach to policy reform. Differences on policy and confronting vested interests will hinder reform.
• With a slowdown in growth on the one hand and unusually high headline rates of euro area inflation on the other, the European Central Bank (ECB) is expected to keep interest rates close to the current rate of 4%.
• GDP growth is expected to slow sharply in 2008-09, mainly because of the ongoing slowdown in the previously overheated property sector. If the decline in house prices were to accelerate, a recession would be likely.
• Unemployment will rise over the outlook period, as the construction sector shrinks, but inflation and the current-account deficit will both fall.

Monthly review

• The referendum on the Lisbon treaty will be closer than we originally anticipated. Advocates of the treaty have not gained the traction that their number and organisation would suggest. Rejection is possible.
• Mr Cowen is enjoying a honeymoon with voters according to opinion polls. His high satisfaction rating has given a fillip to his party in the polls. He is seeking to use this to secure ratification of the Lisbon treaty.
• The government has ordered a review of private public partnership (PPP) financing arrangements following the collapse in mid-May of five PPP deals.
• The economy is weakening more rapidly than we expected, with consumer and investment spending weakening sharply in the first quarter (quarterly GDP data will not be published for some weeks yet).
• Ireland’s rate of consumer price inflation, according to the HICP measure, picked up in the early months of 2008, reaching 3.7% in March before easing back to 3.3% in April.
• Recent increases were driven largely by global trends (particularly food and energy prices). Partially offsetting these developments have been an easing of domestic price pressures.

SOURCE: Country Report