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Last Updated: Tuesday, 19 August, 2003, 16:11 GMT 17:11 UK
Celtic tiger's recovery falters
Ireland's economy is unlikely to recover this year, the Department of Finance has warned as it slashed its growth forecast.

Hapenny bridge, Dublin
Dublin experienced a boom economy in recent years
The former Celtic tiger - which showed the strongest growth rate in Europe over the past 10 years - is now expected to grow by just 1.5% in 2003, compared with the government's previous prediction of 3.5%.

The government blamed the international economy, and said that "the prospects of an immediate international recovery have diminished".

However, the good news is that the slowdown will reduce inflationary pressures, with prices now expected to rise by just 3% by the end of the year.

Irish finance minister Charlie McCreevy said that the public finances were broadly on course, but that the economy had to regain its competitiveness if it was to be in a position to benefit from any international upturn in 2004.

The slowdown will, however, increase public borrowing from 0.7% of gross domestic product to 1%.

Euro tiger

Ireland's economy has boomed in recent years on the back of a huge expansion of inward investment, with many foreign multinationals using Ireland as a production platform to sell into the European Union.

A few years ago, observers feared that the boom would get out of control, leading to high inflation and a big government deficit.

Ireland's membership of the eurozone was also questioned on the grounds that it would not be able to raise interest rates to cool the boom.

But in fact, the economy has already slowed sharply of its own accord.

Last year, the domestic economy grew by only 0.1%, while overall economic output - reflecting the production of multinationals that export abroad but repatriate profits - grew by 6.9%.

In the previous five years, growth had averaged over 9% per year, fuelling a property boom in Dublin and the return of many Irish expatriates to their home country as unemployment rates tumbled.

Although unemployment has now risen from 4% to 5.2% this year, it is expected to stabilise at that level.

Future prospects are being made more difficult by the high value of the euro, which makes Irish exports less competitive.

Ireland's two leading export markets are outside the eurozone - the United Kingdom and the United States.

Higher growth to come?

The government says that the Irish economy is capable of a growth rate of 5% "if expectations of wages, prices and public spending adjust to the new environment of increasing international competition and weaker global demand".

The Bank of Ireland has forecast that growth will return to 4% next year as investment and exports pick up.

Private sector forecasts are more cautious, however, with Alan McQuaid of Bloxham Stockbrokers suggesting that GDP growth will be closer to 3% next year, before rising to 4% in 2005.

Whatever happens, Ireland's fate as a small, open trading nation will be closely tied to that of the international economy.

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