The Cabinet rose for its five-week holiday on Tuesday seemingly determined to deny the extent of the rapidly worsening economic crisis.

The Government's extraordinary state of denial was in marked contrast to the distress that was being expressed throughout the country about lay-offs, short-time working and closures.

The 'head in the sand' approach was almost surreal against a background of the starkest analysis yet of the state of the economy.

Davy stockbrokers, which in May had predicted GNP growth of 1 per cent, now say it will decline 0.3 per cent this year and by 0.7 per cent next year.

The analysis casts serious doubt on the Government's repeated view that the country will emerge from the economic crisis within two years.

Indeed, Davy warns that the slump could continue "indefinitely".

The Government's policy remains to play down the crisis and to attempt nothing radical other than the public spending cuts announced earlier this month.

Yesterday a former Government minister sought to blame "bar-room economists in the Sunday Independent" for talking up the scale of the crisis.

Indeed, it seems to be Government policy to refuse to admit that a crisis exists at all and to try to shift blame to doom mongering by economists and the media, while at the same time hoping for an improvement in the world economy. But backbench TDs of all parties are facing a different reality, as they are being told daily of redundancies, short-time working and the threatened closure of, or cutting back by both new and long-established firms in every county.

In the first tentative indication that the world economy may eventually begin to recover, the price of oil dropped $2 to a fresh seven-week low on Friday in a volatile market.

The public here, meanwhile, is bracing itself for a 20 per cent increase in gas bills from September.

It now seems certain that consumer spending will remain almost unchanged next year, that investment will drop hugely, that exports will be weaker than anticipated and that unemployment will continue to soar.

With builders on their annual holidays, it also emerged yesterday from the Construction Industry Federation that an additional 20,000 jobs could be lost in its sector by the end of the year, bringing to 32,000 the number of job losses in the last 18 months.

What began 18 months ago as a slowdown has developed into catastrophic financial gridlock with the flow of cash through lending and borrowing now virtually stopped.

A spokesman for the Minister for Finance, Brian Lenihan yesterday claimed there was "some evidence of the easing of the credit crisis" with better than expected results by a number of US banks in the past fortnight.

But the reality is that, over the last two months, credit tightening has become much more severe, a development which has reinforced the slump. Sales of new homes, cars and durable goods have also dropped so significantly that cash flow has slowed to a trickle.

Last week, Davy warned that its chief concern now is that bank funding will not be available even to creditworthy businesses wanting to expand. Were this to happen, it would threaten the country's ability to take advantage of an eventual upturn in international economic conditions.

Mr Lenihan yesterday dismissed Davy's analysis, his spokesman stating: "This is just one of a number of forecasts. It differs from other forecasts such as the OECD, the ESRI, etc. These forecast a return to trend growth by 2010."

The Government's stated belief that the country will emerge from the crisis within two years, however, is increasingly starting to look like mere wishful thinking.

Davy last week warned of a "delay" in return to growth and of a threat to the economy's medium-term potential. It said: "The sheer amount of leverage in the system and the concomitant decline in asset values mean that there is a danger in the current stasis continuing indefinitely."

The number of people unemployed jumped 60 per cent, annualised, in the first half of this year, something which happened only once before, in 1975. Retail sales, meanwhile, have now declined for four straight months.

By the end of the year, it seems inevitable that the Government will have to revise its own predictions, forcing it to admit for the first time that the country is in recession.

Experts are now expecting that next year the recession will worsen significantly, with no guarantee that the country will emerge from it by 2010 or that the economy will return to normal levels of growth in the medium or even long term.

It seems likely also that the Government has underestimated its anticipated level of tax take this year: Davy last week predicted that the Government will miss its tax revenue target by €4bn, as opposed to €3bn. Further cutbacks, on an even more drastic scale, therefore seem inevitable.

Tom Parlon, director general of the Construction Industry Federation, yesterday said the key was to get the existing stock of unsold houses sold.

He told the Sunday Independent: "House builders aren't going to start new schemes, nor could they be expected to, until they've sold their existing stock. From Government's point of view, there is €1.5 billion in unclaimed VAT locked up in these houses.

"Somebody needs to take it in hand to restore confidence and get liquidity flowing. If this is done, you'll see the stock of unsold houses moving and building will start again.

"We have been making proposals about using the National Pension Reserve to put liquidity into the banking system and other measures to restore confidence in the housing market."

In relation to calls for the Government to assist the construction and banking sector, former Government Minister Frank Fahey yesterday told Newstalk radio: "What we must do is manage this downturn, we will get through it and we will see the housing and property market come back. Any intervention by the Government, such as reducing the stamp duty or propping up an ailing property market using taxpayers' money, would be a disaster, and the bar room economists in the Sunday Independent...shouldn't be allowed get away with that kind of nonsense."

However, earlier this month, Mr Fahey's colleague, the Fianna Fail TD Beverley Flynn said Irish banks should raise a rights issue to boost their finances and that should be underwritten by the National Treasury Management Agency.

"The banks are effectively closed to lending currently. Taking this action, I believe, would reverse this trend and in turn inject confidence in the economy.

"It would have a very positive influence and could well create the necessary momentum to turn around the current economic situation.

"Many people currently in a position to buy property or to get their first step on the property ladder are sitting on the fence because they feel house prices and commercial property might fall further. The reality is that even if they approach the banks to get a mortgage, the banks simply do not have the money to lend to them.

"The National Treasury Management Agency is an independent body and this is an opportunity for it to show confidence in the Irish banking sector," she said.

She also suggested that the Government examine a reduction in stamp duty on commercial property as a once-off measure.

"This would be a reduction from 9 per cent to 4 per cent for one year and would act as a vital stimulus for the market. Stamp duty on UK commercial property is at a maximum of 4 per cent and many Irish investors have gone overseas as it is cheaper to make such investments. This would be done as a specific contained measure for a 12 month period, purely to stimulate growth in the economy," she said.

Yesterday a spokesman for Mr Lenihan said: "The Minister for Finance, his Department, the Central Bank and the banking sector maintain an ongoing dialogue regarding the financial sector.

"The Government is taking action to ensure Ireland will avail of the improvement of the world economy by investing in our productive infrastructure and maintaining a prudent budgetary policy by controlling current expenditure.

"Ireland is a small open economy, therefore, export led growth will be key to our economic improvement.

"The Government actions will allow us to avail of the global upswing which will occur with the resolution of the credit crisis and increased demand in leading economies, possibly due to a moderation in the price of oil."

- JODY CORCORAN