Celtic Tiger tamed as economy collapses

The Celtic Tiger's unwelcome status as among the European economies hardest hit by the global downturn was confirmed yesterday with the publication of exceptionally depressed data on the Irish economy.

The Irish Central Statistics Office reported that the nation's GDP contracted by 7.5 per cent year-on-year in the fourth quarter of 2008, as consumer spending dropped and industrial output was severely damaged. Capital investment was especially affected. The figures left Ireland with an annual GDP growth rate of minus 2.3 per cent in 2008, its worst year since 1983.

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And worse is to come. The governor of the central Bank of Ireland has forecast GDP will fall by more than 6 per cent this year and the unemployment rate will average more than 11 per cent.

The collapse of the Irish housing boom has been one significant factor in the fall in activity, but, as an open economy whose major trading partner, the UK, has devalued its currency savagely and cut VAT, Ireland has particular problems, highlighted in the rise in cross-border shopping to Northern Ireland. It has also suffered from the relatively large size of its banking sector and the need to recapitalise it.

The deterioration in the Irish economy and its public finances – with taxes markedly lower – has led the ratings agency Fitch to place its sovereign debt on "negative watch".

Ireland is among the weakest members of the single currency zone, with premiums on its debt over the relatively safe and favoured German bunds reaching record levels, indicative of the strains developing within the euro area.

Ireland's Finance Minister Brian Lenihan was urged to reverse last year's VAT increase.

It was increased from 21 to 21.5 per cent in October, just before the UK's VAT cut from 17.5 to 15 per cent.