Economy to shrink by further 2.3pc before growth rate picks up in 2012
THE Government should begin to prepare the markets and the public for the possibility the economy will shrink again this year, Ernst & Young said yesterday in a report that predicted the economy will shrink 2.3pc.
Economist Neal Gibson urged political leaders to exploit any default by Greece to renegotiate Ireland's bailout deal this year rather than wait and see what might happen.
The comments came as European Union leaders said they would decide on additional aid for Greece by the end of June but ruled out a "total restructuring" of Greek debt.
"It would make sense for Ireland not to make some sort of similar deal," Mr Gibson said yesterday. "You should do it when your hand is strongest."
He suggested Irish politicians were probably having these conversations at the moment "if not officially, then unofficially".
Mr Gibson's forecasts are much gloomier than many other economists or the Government's, because he believes consumers will pull back spending by 4pc this year and more than 3pc next year as they worry about job security, inflation eats into earnings and around 35,000 people emigrate.
The economist sees growth returning in 2012 but at a much slower rate than other economists.
Other factors which has lead Mr Gibson to slash Ernst & Young's forecasts are the slight slowdown in the world economy and predictions that oil prices will remain high.
Saying that it was an "absolute Godsend" that Ireland does not have to borrow this year, he predicted the Government may try to restructure its debt to lower interest payments or extend the maturity on its borrowings as the economy contracts.
Both Finance Minister Michael Noonan and Taoiseach Enda Kenny said yesterday that Ireland would not need to extend the bailout and would return to the markets late next year.
While Mr Gibson is more pessimistic, he said Ireland would survive the crisis better than others. "Ireland is not Greece or Portugal," he said. "Ireland has a genuine prospect of being able to pay off its debts because it has such a strong international business base."
Ireland may avoid seeking additional bailout funds from the EU when the current financing runs out at the end of 2013, he said.
"The international markets must believe the same thing we do, which is fundamentally Ireland's economic prospects are very strong," Mr Gibson said. "One would hope by 2012, early 2013, the markets would have come around to that view."
One in five people have lost their job since the recession began but the jobs market will remain subdued for decades, he forecasts. It will be 20 years or more before Ireland employs the same number of people as it did during the boom. "That is a very significant and unique problem," he added.
The economy would also take a long time to recover, he said. Previous reports "have predicted a 10-year recovery timeframe for the Republic. The last forecast suggests recovery will take even longer because of the country's mounting debt burden."