Double-dip recession threatens Republic
Pressure is mounting in the Republic of Ireland for a tougher Budget this December, as new figures showed that the economy shrank by 1.2%.
The decline, announced an hour after the National Treasury Management Agency failed to borrow as much short-term cash as it had hoped, and the yield - or interest charged - on the 10-year Irish bonds spiked to a new record, prompting fears that Ireland may be sliding back into a recession.
Finance Minister Brian Lenihan said the economy was "sluggish" but ruled out the possibility of a so-called double-dip recession.
Mr Lenihan said the figures showed homegrown business has stabilised and that weaknesses in the economy came from a surge in imports over the three months.
He said: "We must export our way out of our current difficulties."
The Department of Finance said it will revise the official growth forecasts next month when it will also publish a pre-Budget outlook.
Stephen Taylor, equity analyst with Dolmen Stockbrokers, said: "This is probably going to mean a tougher Budget. To be honest, they should probably look to bring the Budget forward a little bit to settle bond markets."
Austin Hughes, chief economist at KBC Bank, believes the Budget should contain "adjustments of between €3bn and €3.3bn in Budget 2011, and greater clarity on subsequent years.
Problems for the public finances were intensified by the scale of deflation in the economy.
Although the purchasing power of national income fell by 4% on last year, its actual cash value - on which taxes are paid- fell 6%.
Bloxham Stockbrokers' Alan McQuaid said: "There is very little chance of Ireland posting positive GDP growth for the year as a whole, and forecasters, including those at the Department of Finance, will have to revise down their projections for both this year and next.
"This will only add to the pressure to deliver a further €3bn to €4bn in budgetary adjustments in the December Budget as well as trying to boost activity."