Irish economy likely to contract by 8.7% in 2009 and by 2.5% in 2010: Ireland’s eventual recovery likely to be export led, facilitated by improvements in cost competitiveness

The latest economic analysis from PricewaterhouseCoopers (PwC) predicts a sharp contraction in economic output in 2009. The Irish economy is forecast to contract by 8.7% in 2009, following the 2.3% reduction in output in 2008. A recovery is unlikely to begin before the second half of 2010.

A combination of rapidly rising unemployment, the continued correction in house prices, and lack of available credit is constraining household budgets. Precautionary saving is likely to increase in response. Weak demand has also given rise to deflationary pressure, which may help stimulate spending unless deflationary expectations become entrenched.

Export businesses have been impacted by a collapse in demand in Ireland’s main trading partners, as well as an increasingly strong euro. The Government’s supplementary budget, announced on 7 April 2009, will help contain significant tax shortfalls and the rise in public sector debt. However, it is likely that the economic cost of the budget measures will be a more severe recession in the short term, as consumers and businesses alike face higher tax costs.

PwC’s latest CEO Pulse survey shows that Irish businesses are taking fundamental action to tackle the challenges head-on, albeit confidence is at an all time low. The survey shows that by the end of 2009 the majority of Irish businesses will have restructured or be in the process of restructuring their operations, undertaken cost reviews and introduced workforce reduction initiatives. Thus by the end of 2009, the survey suggests a substantially recalibrated cost base by Irish businesses and in so doing Ireland Inc will have gone a long way to improve its competitiveness.

European Position
At the European level, the contraction of the Euroland economy gathered pace in the fourth quarter of 2008, bringing the overall growth rate for the year to 0.9%, the lowest since 2003. The Q4 contraction was driven by a 4% fall in investment and a 6.7% reduction in exports, which are pushing unemployment higher. Consequently, consumer confidence and spending are on a downward trajectory.

Despite the depth of the recession, the institutional reaction to the recession has been cautious, with relatively small fiscal stimulus commitments and limited interest rate cuts. The Euroland economy is forecast to begin expanding again only in 2010, but the recovery is expected to be slow.

Yael Selfin, Head of Macro Economic Consulting at PricewaterhouseCoopers, commented that:

“Given the sharp deterioration in the economic conditions in Ireland, it is unsurprising that confidence remains very low. The tax measures announced in the supplementary Irish budget will compound the pressures on Irish consumers and businesses in the short term. Due to the scale of the anticipated budget deficit, an upturn is likely to be export-led. As this will rely on economic recovery elsewhere, the outlook for the Irish economy will remain negative until well into 2010.”

Notes to editors

  1. The table below sets out PricewaterhouseCoopers’ forecasts for economic growth in the Euroland (excluding Malta, Cyprus and Luxembourg) and UK economies in 2008 and 2009:Table 1 – Euroland and UK real GDP growth prospects

    Table 1 – Euroland and UK real GDP growth prospects

  2. About PricewaterhouseCoopers
    The member firms of the PricewaterhouseCoopers network provide industry focused assurance, tax and advisory services to build public trust and enhance value for its clients and their stakeholders. More than 155,000 people in 153 countries across our network work collaboratively using connected thinking to develop fresh perspectives and practical advice.

  3. For more macroeconomic analysis by PricewaterhouseCoopers, please visit www.economics.pwc.com