Economic growth will contract this year and next and unemployment is expected to reach 7.5 per cent in 2009, according to the Central Bank which has sharply revised down its projections as the credit crisis and economic slowdown weigh heavily on the economy.
In its latest quarterly economic bulletin the Bank said it now expects growth in 2008 of -1.4 per cent, a marked downward revision from its August prediction that economic growth this year would hit 0.3 per cent.
The Bank has also become more pessimistic of the chances of a rebound in 2009 with a 1.3 per cent contraction in real gross national product now expected next year, compared with its prediction of a modest 1.8 per cent growth in August.
These downward revisions reflect the acceleration of the downturn in economic activity in recent months.
The Central Bank is now projecting that consumer prices will increase by 4.4 per cent this year, a substantial increase on the 3.2 per cent inflation rate it was forecasting last March although marginally lower than the 4.5 per cent predicted in August, with an easing of oil prices contributing.
Next year the Bank expects consumer prices to moderate significantly, easing to an average of 1.9 per cent.
"Headline inflation is expected to moderate, but only gradually, and looks set to remain well above target for the remainder of this year and well into next year," it said.
"Euro area growth is expected to recover progressively following a lull in the second and third quarters of 2008 with gross domestic product anticipated to gain momentum over the course of next year, supported by assumed lower oil prices, which will help strengthen real disposable incomes and boost private consumption," the bank said.
"This reflects the pattern of futures prices and base effects in food and energy and assumes that second round effects will remain subdued."
With Live Register data confirming an additional 80,000 people have signed on for jobseekers' benefits over the last 12 months, the unemployment rate is expected to average at 5.9 per cent this year before rising sharply in 2009 to 7.5 per cent.
The Bank notes the impact of the weakening labour market on social expenditure.
The Central Bank said tighter credit conditions and general uncertainty had a negative impact on investment spending, which contracted substantially in the second quarter in the euro zone.
The bank added that the global economy was showing clear signs of a significant slowdown in the face of prolonged financial stress.
"The major advanced economies look set to record essentially close to flat growth rates in the second half of this year," it said. "Recovery next year will depend on some improvement in credit markets and commodity prices maintaining recent downward adjustments."
