Economy to shrink again in 2011, report predicts
Unemployment heading toward 16pc and further austerity measures may be needed, says Ernst & Young
Published 14/12/2010 | 05:00
Ireland's economy will shrink again next year and unemployment will head toward 16pc, a gloomy report on the country's prospects from Ernst & Young has said. Further austerity measures may be needed, it says.
While the Department of Finance expects growth of 1.75pc next year, the global accountancy company is forecasting a contraction of 2.3pc in terms of GDP.
The Government's projections were "overly optimistic'' and further austerity measures would be needed to rein in the deficit, the company claimed.
While the Government is expecting average growth of 2.75pc between 2011 and 2014, Ernst & Young estimated growth of just 0.8pc was more likely.
The company said it would be a challenge for the Government to fix the banks once and for all and to also control what it called "civil unrest".
Early elections may delay the latest cuts and tax increases and a new government "may even back away from some of the announced measures", claimed Ernst & Young.
"These factors increase the likelihood of some form of debt restructuring by the Government and banks,'' claimed the company in an analysis included in its eurozone outlook.
It said the recent €85bn IMF/EU package does end uncertainty for Ireland, but final tests were needed to see what the banks required in terms of extra capital.
Eventually Ireland should bounce back and become one of the fast-growing economies, but Ernst & Young sees major challenges before this happens.
"This seems a long way off and the Government and economy will have to overcome numerous hurdles," it said.
The key plank of the company's outlook is that consumer spending will not recover in the way the Government expects.
"The main drag on Irish GDP growth in the next two years will come from domestic demand," it said.
Ernst & Young said this demand would be hit by a range of factors, including the austere budgets, but also by the scale of migration from the country and a likely rise in interest rates. The company pointed out that those leaving would be bringing with them skills and purchasing power.
"As such we do not expect the domestic economy to recover until a number of years into the fiscal adjustment cycle and until after the banking system is restored to health," it said.
Ernst & Young wondered whether the €35bn of funding earmarked for the banks would be enough. "This will depend on the results of banking tests and stress analysis," it said.
Extra austerity measures may be needed if the deficit reduction plan goes off track.
"Any deviation above this path will result in the need to make cuts elsewhere, or consider the unpopular measure of lowering the jobseeker social welfare payment as was done in the 2010 Budget," it said.