THE CURRENT alarm about Ireland's economic prospects dates back to last August, when the credit market problems began to emerge in the US, writes COLM McCARTHY.

As Irish economists revised their forecasts downwards, a chorus of politicians and business leaders reacted by accusing them of ". . . talking the economy down". The accusation is heard less frequently these past couple of months as the accumulation of hard information points to a serious and widespread slowdown in Ireland.

But some evidence is emerging internationally that the worst of the financial crisis is over. Central banks have cut interest rates and injected liquidity, stock markets have rallied and a Bank of England report last week argued that debt market write-downs have been overdone.

Major banks have raised fresh capital to repair their balance-sheets. So is it time to turn on the doomsayers again? After all, there was a bit of a downturn in 2002, but it passed fairly quickly and economic growth in Ireland resumed at a respectable pace: maybe this is just another blip in the onward march of Irish economic expansion.

The trouble is that the flow of hard economic statistics in Ireland these past six months has been unrelentingly negative. Real output and real income in the final quarter of 2007 were both below the levels recorded in the first quarter.

Virtually every single indicator has worsened appreciably in the period since, and there is no sign of any bottoming out. Consumer spending has stalled, unemployment has been rising rapidly, redundancies are up, external trade volumes are weak, tax revenues have stagnated and the Government's fiscal deficit is rising at an alarming rate.

Surveys of consumer and business confidence are registering their lowest levels since the series commenced.

To cap it all, the exchange rate of the euro against sterling and the dollar has appreciated dramatically. This matters more for Ireland than for the Continental eurozone members, since we do much more of our trade with Britain and the US.

There have been obvious competitiveness problems in the exposed trading sector for some years now, and productivity growth has stalled. All in all, this looks like a perfect storm, and there is reason not to expect any economic growth through 2008.

The housing sector, where the storm began, will not recover in 2009 either: housing starts have continued at a low level in recent months, and it looks as if it will take quite a while to work off the overhang of excess housing inventory in the hands of developers and investors. If there is to be a 2009 recovery, it is not likely to come from this source, and it is difficult to see it coming from manufacturing or export services, given the sharp appreciation in the exchange rate.

Public policy has fewer levers to press than was the case in previous downturns. The exchange rate has risen far too quickly and far too much. It would be nice to reverse the unwanted appreciation, but we abolished the Irish currency in 1997, and that option is no longer available.

The Government fiscal deficit will press up against the eurozone borrowing ceiling by year's end, and that means that any expenditure increases will have to be matched with tax revenue. In a zero growth environment, that means increases in tax rates, the formula pursued with such disastrous consequences in the 1980s. Any threat of increased tax rates in 2009 would do nothing for consumer and business confidence, and it would be a solid base for realistic pay talks if the incoming Taoiseach were to rule out increasing tax rates to fund Government in 2009 and beyond.

The Government also needs to tackle the productivity slowdown. It is insufficiently acknowledged that economic growth in Ireland since the end, in 2002, of the exceptional Celtic Tiger episode, has been mainly generated by a rapid increase in labour input and a high investment ratio.

Output per unit of input has been flagging, as has been pointed out consistently in reports from the Central Bank, the National Competitiveness Council and others.

The best place to start would be a real reform programme in the public sector, where employee numbers have soared with no evidence of service improvement. The proliferation of quangos has been particularly noticeable; many of them engaging in vacuous TV advertising campaigns, including a current slew of prime-time slots advertising "change", no less.

The Celtic Tiger period lasted from about 1994 to 2002. It has been followed by what might be called the Lap of Honour period, characterised more by idle boasting about Irish economic performance than by real achievement. Much of the growth recorded during these years was attributable to a credit-fuelled housing boom which, it is now clear, was a pure bubble.

The lasting emblem of those years should be the 100 per cent mortgage, which held out the promise of a foot on the housing ladder even for those who had never bothered to save up the price of a ladder.

 Colm McCarthy lectures in economics at University College Dublin