Irish deficit to top eurozone for five years says Ernst study
Published 30/09/2010 | 05:00
IRELAND'S public deficit will remain the highest in the eurozone until 2014 at the earliest, according to a gloomy new report that says the continent's economy will slow and the best is already behind us.
Most of Europe enjoyed strong growth in the second quarter but that growth is now slowing "sharply" as government spending cuts begin to bite, according to Ernst & Young's latest quarterly report on the eurozone's 16 economies.
The report sees the region's combined economy expanding 1.5pc this year as the German economy surges, and by 1.4pc next year.
Unemployment here and elsewhere is still expected to continue rising until mid-2011, peaking at more than 16.3 million across the single currency area.
"The second quarter of 2010 is likely to mark the peak in growth for some time," said Marie Diron, an economist at Ernst & Young. "The full impact of the announced spending cuts and tax increases across Europe is yet to come. And signs that the US recovery is slowing mean that exports are unlikely to be as strong a driver of recovery as had been previously hoped."
In Ireland, the public deficit will hit 11.7pc of gross domestic product, well ahead of Spain (-9.6pc), Greece and Portugal (both on -8.5pc), the report adds. The figures do not include the likely cost of bailing out Anglo Irish Bank which could well push the official figure to twice this level this year.
Despite this year's underperformance, Irish growth will outperform all other 15 eurozone members in 2011 with a rate of 2.9pc, the report predicts.
"Despite the difficulties that still face the Irish economy in 2010, the outlook for a return to relatively strong rates of GDP growth in the medium term, well above the growth expectations for Greece and Portugal, is encouraging. This is premised on Ireland's core economic and competitiveness fundamentals and the fiscal measures already in place, which other economies have yet to take," Ms Diron forecast.
The economist sees inflation returning next year after the protracted deflation witnessed over the past 18 months is replaced by rising prices.
Unemployment, which is the third highest in the eurozone after Spain and Slovakia, will continue to rise and remain higher than most other countries until 2014 at the very earliest, the report says.
The problems experienced by banks in Ireland and the rest of Europe mean that the possible default by a eurozone country or even the break-up of the single currency remains possible, the report concludes.
"It is still unclear to what extent governments will be able to deliver on their fiscal plans, and that uncertainty is reflected in still very large spreads on government bond yields and financial market volatility.
"So, while the dire scenarios of sovereign debt default or even a European Monetary Union break-up seem more remote than in May, such developments remain risks within the next few years."
The economist expects that the ECB will keep interest rates unchanged until mid-2011 and continue providing as much liquidity as banks need until shortly before that date.
"Modest recovery in some of the countries in Northern Europe will be dragged down by the south of the eurozone embarking on a painful fiscal restructuring. If anything, our forecast predicts a widening between the two regions," Ms Diron added.