Ireland Becomes First Euro Nation to Enter Recession

By Fergal O'Brien

Sept. 25 (Bloomberg) -- Ireland became the first euro area economy to slide into a recession, as homebuilding and consumer spending slumped and the global financial crisis intensified.

Gross domestic product contracted 0.5 percent in the three months through June from the previous quarter, when it shrank 0.3 percent, the Central Statistics Office said today in Dublin. From a year earlier, the economy lost 0.8 percent.

The housing collapse, coupled with the global credit crisis, forced the Irish government to slash spending to keep its deficit in check and pushed the benchmark stock index to fall more than any other in western Europe this year. Ireland's slump may be followed by recessions across Europe, according to the European Commission, which has cut its forecasts for growth across the euro area.

``Italy looks to be the next candidate'' to enter recession, Julian Callow, an economist at Barclays Capital, said in a note. ``Germany is also emerging as a major candidate.''

Ireland's contraction follows a decade-long boom, sparked by exports in the mid-1990s and then extended by record homebuilding. The economy has expanded around 7 percent a year for a last decade, three times the euro-area average. Ireland hasn't had a full-year economic contraction since 1983.

Now, home building is plunging as house prices drop. Bank of Ireland Plc, the country's second-biggest bank, said on Sept. 17 it will slash its dividend by 50 percent and post a drop in first-half profit as loan losses mount. House prices fell 9.4 percent in July from a year earlier.

`Torpedoing the Economy'

``The housing market is torpedoing the economy,'' Pat McArdle, chief economist with Ulster Bank Ltd. in Dublin, said in a phone interview. ``The third quarter will definitely be worse.''

From a year earlier, consumer spending fell 1.4 percent in the second quarter, the first year-on-year decline in at least 11 years, according to the statistics office. Exports rose 2.4 percent and imports fell 1.1 percent.

``It is clear that the domestic economy has already entered recession, as evidenced by the fall in consumer and investment spending,'' Dermot O'Leary, chief economist at Goodbody Stockbrokers in Dublin, said before today's report. ``Judging by the state of our main trading partners, it may be too big of an ask for them to take up the slack.''

To contact the reporter on this story: Fergal O'Brien in Dublin at fobrien@bloomberg.net.