The economy is set to grow by 1.5% this year, with exports increasing by 6%, according to the Economic and Social Research Institute. But a further 25,000 jobs will be lost, and the ESRI believes some 50,000 people will emigrate this year.

In its latest quarterly commentary, the ESRI forecasts growth for the Irish economy of 1.5% of GDP this year and 2.25% for next year.

Gross national product, which excludes profits from the multinationals, should grow by 0.25% this year and 1.5% next year. This growth will be driven by continuing strong export performance.

But the ESRI says the combined effects of income tax increases in the Budget, continuing problems in the banking industry, and a collapse in consumer confidence will depress demand, leading to some 25,000 fewer jobs.

Unemployment is forecast to average 13.5% this year, dropping slightly to 13% next year.

But the ESRI expects emigration to pick up strongly, with some 50,000 forecast to emigrate this year. This compares to 44,000 who left the country in 1989, the peak year for emigration in the 1980s.

ESRI growth forecast

The ESRI is predicting GDP growth of 1.5% and GNP (excludes foreign multinationals) of 0.25% in 2011. This is significantly lower than the October forecast by the ESRI, which expected GDP growth of 2.3% and GNP growth of 1%.

The downward revision is mainly driven by the effects of the December Budget, which featured a much higher level of adjustment than expected in October.

The recession ended in third quarter of last year, but GDP growth has been entirely driven by exports. The domestic economy, in particular private consumption, has continued to contract, and the ESRI believes this contraction will continue through 2011 and into 2012.

The think-tank says one of the reasons for this is a significant deterioration in consumer confidence in the second half of 2010, when the state was effectively shut out of the bond market, and was forced to avail of the EU-IMF bail-out fund.

The ESRI also says the likely impact of the Budget on disposable income and anticipated further job losses in the financial and public sectors contributed to the fall in consumer sentiment. A measure of consumer sentiment from KBC Bank and the ESRI has fallen from 68 in June to 44 by December.

The ESRI expects the domestic economy to continue to contract, counterbalanced by expansion in the export sector.

Although the decline in demand is not as severe as it was in 2009, it will continue to weigh on economic recovery. The ESRI now believes consumption fell by 1% in 2010, a downward revision compared to the 0.5% forecast in October.

Because of the additional effects of the budget the ESRI has revised down its view on consumption for 2011, which is sees declining by 0.75%. This in turn will have implications for investment and employment prospects, which will carry over into 2012, when the ESRI foresees demand contracting by a further 0.5%.

ESRI investment forecast

The ESRI says that investment - mainly spending on construction and machinery - is now 14% of GNP compared with 26% in 2008.

Planning permissions are 58% lower in 2010 compared with 2009. House completions are down 47% and registrations down 50%. The institute estimates house completions reached 14,500 by the end of 2010, higher than their previous estimate.

It forecasts that 10,000 houses will be built this year and next year.

ESRI Budget comment

Over the next two years the ESRI calculates the Budget tax changes will add €3 billion to the burden of direct taxation, with a direct negative effect on personal disposable income.

The ESRI says the income tax increases were a negative feature of the Budget. It says it had favoured the introduction of a property tax rather than a direct tax on income.

Its projections for 2011 are close to the Budget projections for growth and employment, but are lower than the Government estimates for 2012.

This means their estimates for tax take will also be lower than the Government's estimate by €1.5 billion. This is offset by a lower estimate of interest payments on debt, which are almost €1 billion lower than the Department of Finance estimates.

ESRI on exports

Today's economic commentary says that 2010 saw exports increase by an estimated 10%. In the third quarter of last year, the total value of exports reached a record high of 103% of GDP.

Imports have also increased in 2010 after two years of declines, but the ESRI expects merchandise trade exports to run such a surplus that it will effectively pull the balance of payments back into surplus, effectively generating cash to repay debt with.

ESRI predictions on employment

According to the CSO's quarterly household survey there were 1.85 million people in employment in the third quarter of 2010 - a fall of 3.7% on 2009. This was the slowest pace of employment fall since the third quarter of 2008.

The number of unemployed stood at 299,000 in the third quarter of last year, an increase of 6.9% compared to a year earlier. This gave a seasonally adjusted unemployment rate of 13.6%.

The euro zone average in the second quarter of 2010 was 9.8%. Only Spain at 20.1% and Estonia at 18.6% have higher unemployment rates in the euro zone.

The Live Register peaked at 455,000 in August 2010, falling in each of the next three months to 438,000, before rising again in December to finish the year at 440,000.

For 2011, the ESRI forecasts employment to average 1.83 million, a decline of 25,000 or 1.25%. The institute expects unemployment to average 13.5% for the year, dropping slightly to 13% next year, with an expected rise in the numbers employed of just 6,000.

ESRI on emigration

Part of the fall in unemployment, and much of the reason for a stable rate in 2010 and 2011 the ESRI attributes to emigration, which it forecasts will pick up. The think-tank forecasts emigration will hit 60,000 in the year to April 2011 and 40,000 in the next 12 months.

Elsewhere in the report it estimates 50,000 people will leave the country in 2011. This figure exceeds the peak of emigration in the 1980s, when 44,000 people left in 1989 - although this was from a smaller population.

Between April 2010 and April 2012, the ESRI believes 100,000 people will emigrate. Combined with the 35,000 who left in the year to April 2010, this implies a net outflow of 135,000 people in the three years between 2009 and 2012.

The ratio of non-nationals to Irish nationals in this figure is unknown, but in 2009 the ratio appears to have been 60% non-nationals to 40% nationals.

ESRI on wages and inflation

The ESRI forecasts that wages will fall by 1% in 2011 and to remain stable in 2012 - the cumulative reduction in wages by the end of 2011 will be around 5%. Public sector wage cuts have far exceeded those in the private sector over the past year.

Inflation for the country is forecast for 2011 at 2% as measured by CPI, which includes mortgage interest. Rising oil prices, mortgage and insurance costs are the main drivers of inflation, with a majority of inflation indicators still in negative territory.

ESRI on interest rates

The ESRI forecasts that interest rate in the euro zone will rise to 1.25% by the end of the year, with further rises in 2012, which will see the main ECB policy rate rise to 2.25%.

Mortgage costs in Ireland have risen independently from the ECB policy rate. The average variable rate was 5.87% in August 2008. This fell back to 3.16% by June 2009.

However, due to the funding difficulties in the Irish banks, the standard variable rate now averages 3.87% as of November 2010 - an increase of 15% compared to a year earlier. This was the biggest single driver of inflation, which would otherwise have been negative.