Ireland's central bank slashed its growth forecast for 2012 by almost three-quarters on Thursday and said a longer than projected global downturn would put Dublin's deficit reduction targets for this year and next in doubt.
The monetary authority said it expected a 0.5 percent uptick in gross domestic product (GDP) this year, down from the 1.8 percent it projected in October, putting it in line with Ireland's official creditors at the European Union, the International Monetary Fund and the European Central Bank.
Two Reuters surveys, one of chiefly European economists and the other polling mainly economists based in Ireland, recently forecast 2012 GDP growth of 0.3 and 0.7 percent respectively while the government currently projects growth of 1.3 percent.
The weakness in the external environment is the key development of recent months and its depth and duration will be central to the prospects for the Irish economy over the next year or so, the central bank's latest quarterly bulletin said.
If the external slowdown persists longer than currently projected, this would make the fiscal targets for this year and 2013 more difficult to attain.
Dublin traditionally waits until April to update its growth forecasts and Prime Minister Enda Kenny said the government was sticking to the forecast set when it unveiled its budget last December, which was itself a second downgrade in a month.
These reports are produced on a regular basis and they vary up and down, it's very difficult for anyone to accurately determine what the final growth figure might be, Kenny told Newstalk radio, referring to the central bank's figures.
Government has set its target out in the budget and we stand by that.
Notwithstanding the projected fall this year from expected GDP growth of 0.8 percent in 2011, the central bank said the government should on the face of it meet its budget deficit reduction target of 8.6 percent of GDP due to the fresh austerity measures and a somewhat better outturn in 2011.
However it said clearly the pattern of growth would to a degree determine developments in reaching this goal, a cornerstone of the EU/IMF agreement.
The bank said the country's lenders were also following another important part of the bailout deal in the deleveraging of their balance sheets but added that it recognised that progress in this area has to take account of adverse market conditions in the short term.
However, it saw unemployment peaking at 14.6 percent this year, compared with government estimates for the rate to fall from a high of 14.3 percent last year to 14.1 percent this year.
(Reporting by Padraic Halpin; editing by Carmel Crimmins/Ruth Pitchford)