IMF predicts growth here of less than 2pc in 2011
Gloomy economic forecast would deal heavy blow to Lenihan's plan to stabilise finances
THE Irish economy will grow by less than 2pc next year, and shrink by a further 1.5pc this year, a gloomy forecast from the International Monetary Fund said yesterday.
A shortage of credit will hamper global recovery, and the European economy faces particular difficulties, the IMF says in its twice-yearly World Economic Outlook. This follows Tuesday's publication of the financial stability outlook from the Washington-based organisation.
Growth of 1.9pc for Ireland, as forecast by the IMF, would be a serious blow to the Government's plans to stabilise the public finances.
In its latest review of the world economy yesterday, the IMF said there was no room for budget stimulus in Ireland, because of the size of the deficit, although it recommends careful fiscal stimulus in other economies.
Government plans envisage the economy growing 3pc next year and a small contraction in 2010. The Economic and Social Research Institute last week forecast 2.5pc growth in 2011.
Added to another tough Budget in December, growth on this scale should bring the deficit close to 10pc of output (GDP) next year, the Department of Finance calculates. Lower growth might leave the deficit little changed from this year's expected 11.5pc of GDP.
The forecast Irish growth is ahead of the expected 1.5pc expansion in the euro area, but below Ireland's potential growth rate -- generally put at 2-3pc a year.
The IMF sees the US economy expanding by 2.6pc, Britain's by 2.5pc and Japan's by 2pc.
"There are several powerful forces holding back the recovery in Europe," the report says. "Sizeable fiscal and current account imbalances are constraining recovery in several euro area countries, with potentially negative spillover effects to the rest of Europe."
"In the near term, the main risk is that, if unchecked, market concerns about sovereign liquidity and solvency in Greece could turn into a full-blown and contagious sovereign debt crisis," the report said.
The IMF says the world economy has so far recovered better than would have been expected. Its report now projects global growth of 4.2pc this year -- up 0.3 percentage points from its January forecast. Growth next year is seen at 4.3pc, unchanged from January's estimate.
But a shortage of credit could hamper recovery as banks repair their balance sheets and remain reluctant to lend. Among major economies, the "financing gap" between demand and supply in credit is biggest in Britain, where it is put at 9pc of GDP over 2010-11.
The gap in the euro area is seen as just 2pc of GDP, but is likely to be much higher in the Irish economy.
Such gaps imply that "either borrowing needs need to be scaled back, or that market interest rates will need to rise", the report says.