Country Report Ireland February 2009

Summary

The extent of downside risk to the Irish economy is without precedent. Even the Economist Intelligence Unit's current forecast, of three successive years of negative economic growth, may prove optimistic.
We expect the economy to suffer a sharp contraction in 2008-10, because of the collapse in the construction sector, depressed private consumption and falling exports.
The Irish banking system remains in a precarious state despite liability guarantees and recapitalisation by the government. The full nationalisation of all of the banks is a small but conceivable possibility over the outlook period.
The rejection of the EU's Lisbon treaty by voters in June 2008 has generated a crisis in Ireland's relations with the EU. Its membership of the bloc might be put at risk if a second referendum is not passed by voters.
From balance in 2007, the budget deficit is estimated to reach 6.6% of GDP in 2008 and over 12% in 2009-10. Deficit funding issues could arise as massive bond issuance creates problems for fiscally weak countries such as Ireland.
Despite daunting challenges over the forecast period, we expect the coalition government to remain in office.

Union representatives refused to accept a de facto cut in public-sector salaries (via a large increase in pension contributions) on February 3rd 2009. This amounts to the collapse of the long-standing social partnership mechanism.
The government imposed the pay cut and insists that it will not bow to pressure to reverse the move. However, some question remains over its ability to face down interest groups, given a series of recent U-turns.
On February 12th the government announced a revised recapitalisation programme for the banking sector, expanding the available monies from €5.5bn, as contained in the original plan of December 2008, to €7bn.
The government announced expenditure cuts worth €2.1bn in an attempt to meet its deficit target of 9.5% of GDP for 2009. These cuts will almost certainly not be enough to meet the target and further measures will be needed.
The clearest indication of weakening consumer spending is provided by monthly retail sales data, which recorded an 8.1% fall in sales volumes in the year to November 2008.
The percentage of the workforce claiming unemployment benefit reach 9.2% in January 2009, almost double the January 2008 figure. The number of claimants surged by 33,000 (or 11.3%) on December 2008.