A weakening of the US and British economies could undermine Ireland’s fragile situation, the Economic and Social research Institute has warned.
Urging the government to cut the budget deficit by more than the €3.6 billion required under the EU-IMF programme, it said the economy has bottomed out but we are still stuck in the midst of a seven-year recession that won't end until 2015.
It is important that markets see we are serious about it, Professor Joe Durkan of the Institute said today as the quarterly report suggested a €4 billion cut in December’s budget.
The country’s leading think tank also cut its forecasts once again because of the slowing world economy and the reluctance of consumers to spend.
The ESRI expects economic growth of just 0.2pc this year.
It "may" expand 0.7pc next year, depending on the state of the US and UK economies, the ESRI added.
"I believe we have bottomed out now," Mr Durkan said.
Prof Durkan has scaled back his forecasts for growth amid concerns about the economic situation overseas and in response to new data that showed that domestic demand continued to shrink.
The think tank now expects consumption to fall 1.3pc this year as consumers keep their hands in their pockets to save for the future and repay debts.
Unemployment is set to stay at the present levels and may even rise next year unless emigration picks up, he added.
The report was issued hours after the Central Statistics Office reported that the Live Register rose by 1,600 in August to hit 449,600.
Much of this unemployment is due to a lack of skills among former construction workers, Prof Durkan said.
Wages are likely to remain flat this year and rise next year although almost all of the increase will be cancelled out by new taxes, the think tank forecasts.
While praising the Government's decision to publish a three-year plan soon, Prof Durkan said it would have been better to have published a plan several months ago to allay consumer fears.
"The numbers that have been floating around would fill anyone with concern," he noted. "Explicit numbers will enable the private sector to plan."
Prof Durkan backed calls for Finance Minister Michael Noonan to take as much as €4bn out of the economy when he presents his December Budget.
Mr Noonan has promised the IMF and Europe to take €3.6bn out of the economy but many economists think he should go further to please the markets and ensure that Ireland makes the targets set out in the memorandum of understanding signed at the time of the bailout.
"If you overachieve it makes it easier for you in the markets," he said. Slower growth will force Mr Noonan to slash spending further.
The new agreement with the country's bailout partners, which is expected to cut the cost of borrowing, means that it will be possible for Ireland to reduce borrowing to just 1.5pc of GDP by 2015, the think tank says.
The current target is 3pc.
Amid concern about slowing growth in Ireland's two biggest markets, the ESRI sees exports rising 7pc this year and 7.4pc next year as domestic companies continue to shift their focus toward new markets.
He warned that food exports could be endangered by changes to the Common Agricultural Policy and urged Government to be "much tougher in terms of what we want" when it comes to negotiating with Europe.
The Organisation for Economic Cooperation and Development (OECD) warned yesterday that a sharp slowdown in merchandise trade growth had hit major world economies in the second quarter of 2011.
The deceleration in import and export growth affected all the Group of Seven industrialised nations and the bloc of BRICS emerging markets except Brazil and China, the OECD added.