Central Bank Governor John Hurley says the economy will contract by 6% this year with a similar fall likely in the level of employment.
The Central Bank boss made his comments at the Joint Oireachtas Committee meeting on Economic Regulatory Affairs today. In January, the Central Bank had predicted that the economy would contract by 4.7% in 2009.
Mr Hurley said the exceptionally unfavourable global economic and financial conditions were making the already very difficult domestic situation even worse.
He said that while the initial downturn in activity was driven by the sharp decline it the property and construction sectors, this has now broadened out into a marked weakening of domestic demand as well as a fall in exports.
Mr Hurley said the disruption to global finance markets, which was triggered in August 2007, has evolved into the 'most severe systemic crisis in almost a century'. He said the extend of the turmoil has been far worse than had been predicted and it remains very unclear when the crisis will end.
However, he also said that the Irish economy still has some strengths - favourable demographic trends, a capacity for a rebound in productivity growth and a flexible labour market. He also pointed out that at the start of the crisis, the country's public debt as a percentage of GDP was low.
He said it was time for unpalatable measures in the short-term to ensure that the public finances remain sustainable and enable a return to competitiveness.
Mr Hurley said he is in favour of the European Central Bank examining the possibility of 'quantitative easing' measures. He said such moves would typically include 'printing money' and buying assets to stimulate the economy, but added that the ECB had made no decision on the matter.
The Central Bank chief also told the Committee meeting that the first the Central Bank knew of money circulating from Anglo Irish Bank, through Irish Life and Permanent and back again, was when the PricewaterhouseCoopers report highlighted it.
He did not say whether he was aware of such practices in other banks.
He also said that the behaviour of the banks did not change as a result of regular warnings from the Central Bank.
Economy to shrink by 8% - Ulster Bank
Ulster Bank has produced the gloomiest economic forecast yet for this year, predicting that the economy will shrink by around 8% this year.
The bank's quarterly economic outlook said prospects for the world economy had deteriorated sharply in the last three months. Ulster Bank expects another fall of almost 3.5% in 2010.
The bank's report says the outlook for consumer spending has worsened significantly, and it expects a decline of 6.5% this year, mainly because of the increase in job losses.
Ulster Bank sees the unemployment rate hitting 14% by the end of 2009 and 16% by the end of 2010. It adds that higher unemployment and the fall in tax revenue will put further severe pressure on the public finances.
Its report says the Government will find it difficult to achieve the spending cuts and tax increases needed to reach its targets, and that the eventual deficit will be 11% of GDP, compared with the Government's 9.5% target.
Ulster Bank also believes consumer prices will drop by 4% this year, reflecting falls in mortgage rates, energy and food prices.
It has lowered its forecasts for new home building to 18,500 this year and 15,000 next year, but non-residential building will be a bigger drag on economic growth from next year.
