The Central Bank has significantly cut its growth outlook for this year due to slowing exports and says the domestic economy is going to remain in recession this year.
In its latest quarterly economic bulletin, the bank has predicted that GDP growth will moderate to about 0.5% in 2012. It had earlier forecast GDP growth of 1.8% for this year. It also said that GNP will decline by about 0.7%.
The bank said this is a significant downward revision on its previous projections and is mainly due to the weaker short-term prospects for external demand. Expectations for domestic demand have also weakened somewhat.
The Central Bank warned that the depth and duration of the current global economic weakness will be central to the prospects for the Irish economy over the next year or so.
It noted that the performance of exports last year tracked the worldwide trend with Irish exports seeing a relatively strong performance in the first quarter followed by a significant slowdown in the rest of the year.
The Central Bank said that a slowdown in export growth is also likely this year reflecting the muted near-term outlook for growth in the country's main trading partners. But it added that a pick-up in export growth in 2013 is possible if the projected recovery in world demand during the second half of this year materialises.
It added that exports will continue to contribute positively to overall GDP growth, which will offset the continued slowing of domestic demand.
But despite the significant reduction to growth forecasts, the bank still believes the Government will hit its 8.6% target of deficit of GDP.
The Central Bank has also predicted a further decline in the domestic economy as consumer spending remains sluggish and people continue to worry about their finances.
It says that higher energy prices and increased VAT rates will impact inflation this year, while wages are expected to remain flat.
