Page last updated at 17:10 GMT, Thursday, 26 March 2009

Record decline hits Irish economy

House construction - generic
The construction industry has been particularly hard hit by the recession

The Irish Republic's economy has suffered its largest contraction in recent decades.

The economy shrank by 7.5% in the last three months of 2008 compared with the same period a year earlier, the official statistics office said.

The construction industry, which has faced a housing market slump, suffered a 24% fall in output, the biggest fall on record.

In the whole of 2008 the economy shrank by 2.3%, the first decline since 1983.

Once known as the Celtic Tiger due to the strong growth it enjoyed, Ireland has experienced a sharp downturn, becoming the first eurozone country to fall into recession in 2008.

We are of the view that GDP is set to decline in the order of 6.5% for the current year
Deirdre Ryan, Goodbody Stockbrokers

The declines announced by the Central Statistics Office (CSO) were significantly larger than had been expected.

Analysts are now expecting Ireland's economy to shrink by much more than expected in 2009.

"We are of the view that GDP is set to decline in the order of 6.5% for the current year... given the extent of the downward momentum at the turn of the year as evidenced by today's data," said Deirdre Ryan from Goodbody Stockbrokers.

Housing market collapse

Analysts suggest Ireland is having a tougher time than most during the recession because added to the general economic crisis it is also dealing with a dramatic collapse in house building.

Irish homes built
2006: 90,000
2007: 77,000
2008: 45,000
2009: 20,000 (estimate)
Source: Construction Industry Federation

During the housing boom in 2006, house building accounted for 15% of Irish GDP.

"At its peak in 2006 90,000 dwellings were built. That was clearly at an unsustainable level," said Dr Alan Barrett from economic think tank ERSI.

In the last 12 months it is estimated only half that amount were built.

"We had hoped the market would gently decline but it essentially evaporated between 2007 and 2008," said Dr Barrett.

Problems for the construction industry are getting worse because of a lack of government funding for public infrastructure projects, according to Cathal Lee, a spokesperson for the construction industry in Ireland.

"The decline was first felt in the residential sector. It has now spread to commercial developments and to general contracts and projects like schools and hospitals," he said.

Ireland's deteriorating economy has also hit public finances hard.

Ireland's budget deficit is expected to reach 9.5% of GDP in 2009, the highest in the EU and far above the EU rules of 3%.

Unemployment has nearly doubled, too. At the start of 2008 it was running at 5%. It is now more like 10%.

The country is also suffering from deflation - a period of falling prices - which could pose a big risk for the economy because it encourages people to defer purchases in the hope of getting them cheaper later on.

People are being very careful with their money according to Sean Murphy, director of policy at Chambers Ireland, which represents 13,000 businesses.

But he is remaining positive believing the decline in sales is "indicative of the flexibility of Irish society and their willingness to drive down debt and increase their personal savings".

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