DUBLIN (Bloomberg) -- Ireland’s economy will fall into a recession this year for the first time in more than two decades, the Economic and Social Research Institute said as it slashed its forecasts for construction, exports and consumer spending.

Gross domestic product will drop by 0.4 percent this year, after rising 5.3 percent last year, the Dublin-based institute said in a report published Tuesday. The group, reducing its 2009 forecasts for the fifth time in less than a year, had predicted growth of 1.8 percent in March.
The economy’s first full-year contraction since 1983 would follow a decade-long boom sparked by exports in the mid-1990s and then extended by record homebuilding. Higher borrowing costs and the credit squeeze have curbed housing demand, while the economy is also facing rising unemployment and slower overseas growth that is curbing export orders.
“We now see much slower consumption growth accompanying the ongoing housing correction and the less favorable international environment,” said Alan Barrett, an economist at the institute. “The longer-term picture for the economy is the same, but the bottom of the downturn is deeper.”
That downturn is already being felt. As house prices fall and construction contracts, builders are cutting jobs, pushing unemployment to a nine-year high of 5.4 percent and dragging consumer confidence to a record low. The financial industry is also reducing staff. Aviva Plc., Britain’s biggest insurer by premiums, Monday said it plans to shed as many as 580 jobs in Ireland over three years as it relocates some functions to India.
----------------------Housing output
Household spending may grow 1 percent this year, according to the ESRI, while exports may rise 4.8 percent. It previously predicted growth of 3 percent and 5.4 percent, respectively. The institute also cut its forecast for housing output by 20 percent to 40,000 and said total company investment, which includes construction, will drop twice as fast as previously estimated.
The ESRI is defining “recession,” as a year-on-year contraction, rather than on a quarterly basis, Barratt said.
Overall economic growth will accelerate to 2 percent in 2009, the ESRI said. In a separate study last month, the Medium Term Review, the institute predicted economic growth will rebound next year and average close to 4 percent through 2015.
“The economy is better placed to recover from the recession than it was in the 1980s, as unemployment and government debt are at much lower levels,” Barrett said. “Back then, there was almost a collective sense of, ‘There’s no way out of this.’ We’re not in anything like that now.”
------------------------Most pessimistic
The ESRI’s forecasts for this year are the most pessimistic among economists in Dublin. Davy, Ireland’s largest securities company, in May predicted 2008 GDP growth of 1.7 percent. Allied Irish Banks Plc., the biggest lender by market value, last week cut its growth forecast to 1.3 percent from 2.2 percent.
Cooling economic growth will push unemployment up to 6 percent this year and 7.1 percent in 2009 from 4.6 percent in 2007, the ESRI forecasts show. It will also curtail tax revenue and Ireland will post a budget deficit of 3.9 percent next year. The European Union sets a limit of 3 percent on borrowing.
“What the government experienced in terms of revenue buoyancy in the last number of years will probably never be repeated,” Barrett said. “There is a sense that we are returning to normality.”