Country Report Ireland June 2009

Outlook for 2009-10

• The extent of downside risk to the Irish economy is without precedent. Even the Economist Intelligence Unit's current forecast, of four successive years of negative economic growth, may prove optimistic.
• Our central forecast is that the coalition government will remain in office, but the risks to this forecast are rising fast.
• We expect the economy to suffer depression-type conditions in 2009-10, because of the collapse in the construction sector, depressed private consumption and falling exports.
• The budget deficit is estimated to exceed 12% in 2009-10. The risk of default is small but real.
• The Irish banking system is in a precarious state despite liability guarantees and public recapitalisation. In April the government announced a plan to buy from the banks non-performing loans with a book value of up to 90bn.
• The rejection of the EU's Lisbon treaty by voters in June 2008 has generated a crisis in Ireland's relations with the EU. We expect acceptance in a second vote in October 2009, although this is far from certain.

Monthly review

• Politics has been dominated by local and European Parliament elections, to be held at the beginning of June. The senior coalition partner, Fianna Fail, is braced for its worst election in eight decades.
• The junior partner in the coalition, the Green Party, has demanded a review of the programme for government. Combined with criticism of Fianna Fail by a senior Green, the possibility of withdrawal from government is increasing.
• Michael Somers, the head of the National Treasury Management Agency under whose auspices a "bad bank" is to be set up, raised doubts about the plan when questioned by a parliamentary committee.
• The tax advantages for US corporations operating in Ireland are likely to be considerably diminished owing to changes proposed by that country's president. This will reduce Irelands attractiveness as an investment location.
• In May the minister of finance, Brian Lenihan, travelled to a number of European financial centres to market Irish government debt. This is likely to have helped ensure that a 1bn issuance later in the month was successful.
• In the first quarter of 2009 overall sales volumes fell by 21.6% year on year. When the motor trade is stripped out of the data, the first-quarter decline of sales volumes narrows to 7.8%.

SOURCE: Country Report