Ireland's economy will flatline this year, defying government expectations for modest growth, the central bank said on Monday underlining the challenge facing Prime Minister Brian Cowen in salvaging the country's fortunes.
Cowen, the most unpopular Irish leader in modern history, will unveil a four-year plan next month for tackling the worst budget deficit in the EU and there doesn't appear to be any sign a recovering domestic economy will help narrow the gap.
The central bank cut its growth forecast for Gross Domestic Product (GDP) this year to just 0.2% from a previous estimate of 0.8% and despite the bleaker outlook warned the government could not shy away from savage cuts given international fears about Ireland's finances.
"Against the background of sharply increased concerns about fiscal sustainability, the main priority in the short-term is to ensure that the 2011 budget credibly demonstrates the first step of a reprogrammed tighter fiscal plan," the central bank said in its latest quarterly bulletin.
Cowen shocked Ireland's recession-weary taxpayers last week when he revealed they may end up with a bill of up to 50 bln euros for cleaning up years of reckless bank lending during the go-go years of the "Celtic Tiger" economy.
The bank bill will quadruple Ireland's debt levels from 25% of GDP before the crisis to an estimated 99% and means Cowen will have to make fiscal adjustments above an initial target of 3 bln euros in his 2011 spending plan.
The government still has a GDP growth forecast of 1% this year but is set to publish new forecasts this month.
EXPORTS THE KEY
On a Gross National Product basis, viewed as a better gauge of the domestic economy because it strips out profits of multinationals operating in Ireland and interest payments on foreign debt, the economy will shrink by 1.7% this year, the third straight year of decline, the central bank said.
The GNP forecast highlights how Ireland's economic growth prospects are almost entirely driven by exports and at the mercy of global demand.
Reflecting the threat of further slowing international growth, the central bank warned that a downgraded GDP growth forecast for next year of 2.4% was at risk of being cut further.
It had forecast 2011 GDP growth of 2.8% in its previous quarterly bulletin and 2.2% for GNP.
The central bank said the negative contribution from domestic demand should begin to moderate significantly over the next year as consumer expenditure picks up modestly and the contraction in investment expenditure bottoms out.
In an interview with Reuters, the chief executive of Danske Bank said it would be 2012 before recovery takes hold in Ireland particularly given the austerity measures ahead.
Ireland's deficit is expected to blow-out to an eye-watering 32% of GDP this year because EU accounting rules mean it has to add all of the banking bill to its shortfall figure.
The blow-out is a one-off and Cowen has said the costs of the bank cleanup will be spread out over at least a decade.
Even on an underlying basis, the central bank said it expected Ireland's deficit to be around 11.6% this year, nearly four times the EU limit.
Cowen has vowed to get the deficit to under 3% of GDP by 2014.
In the first eight months of the year, Ireland's underlying deficit figures have come in line with targets but Brussels wants Dublin to outline in greater detail next month how it will get its finances in line by 2014.
