IT WILL take at least two years for the economy to pick up again, with unemployment to hit 15 per cent in the meantime, according to the Central Bank.
The bank’s latest forecasts see the economy shrinking by 8.3 per cent this year in GDP terms, following a decline of 3 per cent in 2008.
The drop will be sustained into next year before “a stabilisation and gradual recovery” take hold in the second half of 2010.
This outlook is contingent upon global demand improving next year as conditions at home remain bleak. Taking advantage of an eventual recovery in demand from trading partners will, the bank warns, require increased competitiveness, notably in wages.
The bank says there is “little prospect of any recovery in domestic demand before 2011”. At that stage, “modest” economic growth could re-emerge.
The forecasts, included within a Quarterly Bulletin, mark an increased pessimism from the Central Bank, which in April was expecting a 7 per cent decline in the economy this year. The more depressed outlook was signalled by the Central Bank governor John Hurley earlier this month.
Unemployment is forecast to average 12.75 per cent this year before climbing to 15 per cent in 2010. Inflation is expected to fall in line with demand, having already declined to minus 5.4 per cent in June. A “trough” of minus 5.8 per cent is expected during the third quarter.
Yesterday’s bulletin detailed “a further contraction in housing output and declining disposable incomes” which will together weigh on consumer demand.
House completions are on track to fall by more than 60 per cent to 20,000 this year and could fall as low as 12,000 next year, the bank says. This would leave housing investment accounting for less than 4 per cent of GDP, compared with a peak of 12.8 per cent in 2006. There is a downside risk to the forecasts “as some developers face severe financial difficulties”.
The Central Bank notes that house prices fell by a cumulative 21 per cent between February 2007 and May this year.
“With additional tax changes weighing on future disposable incomes and further losses in employment in prospect, house prices may fall further.”
Consumer spending is set to fall by 8 per cent this year and to drop by a further 4.5 per cent in 2010 according to the bulletin. Wages are forecast to fall by 3.9 per cent in 2009 and 3.1 per cent next year.
On a positive note, the bank said exports had performed impressively in the first half of this year, posting just small declines. The bulletin also notes that the performance largely reflected a buoyant chemicals sector.
More traditional, “labour intensive” firms with a dependence on the UK and the associated currency problems have fared less well, the bank said.
