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Spiralling oil prices will set recovery back

Spiralling oil prices could be the final nail in the coffin for a speedy economic recovery -- and prolong the Irish recession by another three years, leading economists have warned.

Oil prices, which edged dangerously close to $120 a barrel last week as the crisis in Libya escalated, are another headache for the incoming Government. Record unemployment, inflation and the prospect of higher interest rates were already thwarting the new Government's changes of getting the economy back on its feet.

"The Irish economy has not come out of its current dip as yet," said Tony Foley, senior economist with Dublin City University. "If we have higher interest rates, major problems with oil, and if we have to pour more money into the banks, it could be 2013 before we come out of this dip."

Ireland is technically out of recession thanks largely to multinational profits and growth in exports. However, our domestic economy -- which includes pubs, restaurants and shops -- has not yet recovered.

"The domestic economy is not out of recession yet -- and it could limp on in this condition for another three years," said Stephen Kinsella, an economics lecturer at the University of Limerick.

"The collapse in domestic consumption and investment, as well as the rowing back of government expenditure, are clear signs this could happen."

Paul Harris, head of natural resources risk management with Bank of Ireland, said high oil prices "could impact the country's rate of return to economic recovery".

Indeed, it could take "the best part of a decade" before domestic demand -- the amount of money spent by consumers, businesses and the Government -- returns to its pre-crisis peak, warned Chris Scicluna, deputy head of economic research with the investment bank Daiwa Capital Markets Europe.

"Domestic demand in Ireland will remain depressed for several years to come because of the necessary huge adjustments required to repair private and public sector balance sheets, weak wages growth and high unemployment," said Mr Scicluna.

"Overall, economic growth will be, at best, sluggish. Unemployment will continue to rise -- probably above 15 per cent. Current emigration trends are also likely to be maintained. Property prices will continue to decline, raising the spectre of further financial sector and fiscal losses."

While the Department of Finance expects the economy to grow by 1.7 per cent this year, the International Monetary Fund thinks the economy will grow by just one per cent. "It is more likely that growth will be closer to, if not below, the IMF forecast," says Donal Donovan, a former deputy director of the IMF who is an adjunct professor with UL.

Lloyds Banking Group, which recently pulled Halifax out of Ireland, said last Friday it only expected the economy to grow 0.5 per cent this year.

"Unless the new Government hits the ground running and generates huge confidence, domestic consumption won't improve," said Mr Foley. "Taxes are not coming down, wages are not going up -- but interest rates and oil prices are. There's not going to be much money left to spend."

Sunday Indo Business