Ireland falls into recession

Ireland has become the first country in the eurozone to slip into recession, official figures showed today.

According to the Central Statistics Office, the country's once-booming economy shrank by 0.3% in the first quarter of the year and by 0.5% in the second. The technical definition of a recession is two or more consecutive quarters of contraction. The European commission thinks that Germany and Spain could be next.

Britain is also teetering on the brink of recession. Andrew Sentance, a member of the Bank of England's monetary policy committee, said last night all the "evidence suggests that the economy could start to contract in the second half of this year or in early 2009, giving us one or more quarters of negative growth over this period".

But he added that the downturn was likely to be "much milder" than the last major recessions in the mid-1970s, early-1980s and early-1990s, during which economic activity slumped for one to two years.

Another MPC member, Kate Barker, warned today: "The latest developments in financial markets have now increased the downside risks. There are real dangers that the impact of these will be a downturn in the economy which is unnecessarily large, and would therefore result in a large undershoot of the inflation target." She predicted lending by UK banks would remain constrained for a "considerable period".

Dubbed the Celtic Tiger during the late 1990s, the Irish economy is now facing its toughest time since being hit by high unemployment and emigration in the 1980s.

"All in all, it is clear that the Irish boom has well and truly turned to bust. And with the European Central Bank fretting about inflation concerns elsewhere in the euro zone, there is little help on the immediate horizon," said Jonathan Loynes, chief European economist at Capital Economics. He reckons that house prices, which have tumbled 14% from their peak, have much further to fall.
Ireland's finance department pointed to the crumbling property market and the global credit crunch as key factors. A spokesman said: "As expected, lower levels of new housebuilding had a major restraining influence on growth in the second quarter, as is evident from the very weak investment figures. Other factors at work include higher commodity prices, global financial market problems, weak demand in our major trading partners and adverse exchange rate movements."