Goodbody Stockbrokers predicts the Irish economy will contract by as much as 4 per cent next year and while it expects modest growth to return in 2010 it said the forecast was subject to “a high degree of uncertainty”.
In its quarterly economic outlook published today, the brokerage sharply reduced its growth prospects for the economy, predicting GDP would fall by 2.5 per cent this year and by 4 per cent in 2009.
It also claimed that the economic projections contained in the Budget were too optimistic and that the Budget deficit was likely to breach 8 per cent of GDP next year, rather than the 6.5 per cent targeted by the Government.
"The Minister for Finance will need to announce further corrective measures at some stage in 2009, and with it, a plan for medium-term economic recovery should also be prioritised," it said.
Goodbody economist Dermot O’Leary said: “Tough decisions on current Government spending cannot be deferred if Ireland is going to be prepared for a medium-term recovery, without taxation taking the full burden.”
Mr O’Leary said there was a general consensus emerging that debt levels will have to be gradually unwound in economies over the coming years.
He said that between 2003 and 2005 the Irish construction industry, in particular, benefited most from an easing in leading restrictions and low interest rates.
“This contributed to the investment/GNP ratio ballooning to 32 per cent in 2006, a record level.
A significant unwind is now in train, but judging from previous international evidence and the excess stock that has emerged over recent years, housing output in Ireland may remain low for a number of years,” he said.
The Goodbody report said one of the most surprising aspects of the recent downturn in the economy has been the speed of the change in labour market conditions.
"This is reflected in both the increase in the number of people unemployed and, secondly, and more
importantly, a fall in the number of full-time employed workers in the economy," it said.
Goodbody also said it was heavily cutting its earning per share forecasts on the two main banks, Allied Irish and Bank of Ireland, on the back of weaker economic prospects with operational restrictions from the Government Guarantee Scheme.