David Prosser: Storm warning across the Irish Sea

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Outlook Another warning arrives from across the Irish Sea. Forecasts that Ireland's economy would grow by 0.5 per cent in the second quarter proved hopelessly optimistic: in fact, GDP slipped 1.2 per cent.

The slowdown was prompted by hugely disappointing consumer spending, with households' disposable income taking a hit from the exceptional austerity measures Ireland has introduced to get borrowing under control. And now some in the bond markets are calling for an even firmer dose of austerity, because the Irish deficit reduction programme was based on a better performance from its economy than this. Where will it end?

Now, we should be careful of too close a read-across. The United Kingdom is not Ireland, for all sorts of reasons. Still, we ought to pay attention. Forecasters, from the CBI to the OECD to the Government's own Office of Budgetary Responsibility, have already cut their estimates of how quickly Britain's economy will grow because of the deficit reduction plans announced by the coalition Government. Those forecasts may still be too optimistic.

George Osborne was terrified that being less aggressive might send the country into a tailspin of rising borrowing costs. But Ireland gave the bond markets what they demanded and a return to recession was the result. This is a painfully close reminder that the Chancellor's preferred policy options could prompt an equally vicious circle of another kind.