We forecast Irish real GDP growth to be a below-consensus 0.8% in 2013, as bleak external demand for Irish exports and an intensification of the government's fiscal austerity programme weighs heavily on the country's prospects for a strong economic recovery.

The government's commitment to reducing Ireland's fiscal deficit to 3.0% of GDP in 2015 will see the impacts of austerity intensify over the next few quarters. We expect the fiscal deficit to fall to 5.1% GDP in 2013, from 7.8% in 2012.

With most of the straightforward revenue-raising fiscal reduction measures having already been taken, we believe austerity will become increasingly painful for Irish citizens over the next few quarters, and expect political unrest to rise gradually as a result. With Irish voters also likely to become increasingly disillusioned with the already unpopular Fine Gael/Labour coalition, we see potential for a greater number of disagreements between the two parties, but expect the coalition to remain committed to bringing down the budget deficit.

Major Forecast Changes

We have revised our real GDP growth forecasts to 0.8% in 2013 and 1.8% in 2014, from 0.4% and 1.4% previously.

Key Risk To Outlook

While the deal with the ECB in February to restructure bank debt servicing costs has made a successful bailout exit likely in 2013, we caution that a deterioration of the eurozone sovereign debt crisis could have disastrous consequences for the country's economic and fiscal positions. As such, a significant downturn in the eurozone's growth trajectory would undoubtedly damage Ireland's economic growth prospects over the next few years. In such a scenario, reduced government revenues would weigh heavily on the country's fiscal position, which could pave the way for the government to seek another debt deal with the Trioka.

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