The Irish economy will shrink by 8.3 per cent this year but a gradual recovery will start late next year, the Central Bank's assistant director general told an Oireachtas Committee today.
In his opening statement to the Joint Committee on Enterprise, Trade and Employment, Tom O'Connell said history has shown that downturns in economic activity that are preceded by problems in the banking sector tend to be more severe, and that this is proving to be the case both in Ireland and overseas.
Mr O'Connell said the Central Bank expects GDP to contract by 8.3 per cent during 2009 while the fall is output is likely to be about 3 per cent next year with some gradual recovery emerging as the year progresses but not taking hold until 2011.
He added that unemployment is like to average around 13 per cent this year and will likely to rise to 15 per cent in 2010.
Mr O'Connell was reiterating projections made by outgoing governor of the Central Bank, John Hurley earlier this month.
Mr O'Connell said there had been a 'substantial erosion" of the country's competiveness in recent years due to wage increases and other rising costs. However, he said that attempts to resolve this issue were underway.
"There is much evidence that Ireland still retains a relatively flexible and adaptable economy, which, allied to our skills base and the capacity for a rebound in productivity growth, holds out the prospect of a return to a potential growth rate of 2 to 3 per cent once we come through the current difficult patch. However, our ability to realise this potential will be very much dependent on how we deal with the significant challenges that we currently face.
The assistant director general also told committee members that Irish households were the third most indebted in the EU in 2007 with financial liabilities amounting to 198 per cent of disposable income.
He said that in the first half of 2009, household borrowings from banks have declined by around 1.5 per cent with credit outstanding to households falling by €3 billion over from January to May as a result of a fall in consumer credit with mortgage lending remaining relatively static.
Mr O'Connell said that bank deposits were now on average 8 per cent lower in the first five months of this year.
"With domestic deposits just 3 per cent lower, there has been a more significant fall in non-resident deposits. Banks are also reporting tighter margins as competition for deposits increases," said Mr O'Connell.
Representatives from Bank of Ireland, AIB, the Financial Services Authority of Ireland, Irish Credit Bureau and the Irish Association of Pension Funds are also attending the cross-party committee today.
