Irish gloom as recession returns

Ireland's economy shrank by 1.2 per cent in the second quarter of this year, new figures show, crushing forecasts for growth and raising the stakes for prime minister Brian Cowen as he seeks to reassure investors that the country is not on the verge of financial meltdown.

Analysts had expected the economy to grow a further 0.5 per cent, building on the first-quarter momentum when GDP grew for the first time since 2007.

Ireland is under huge international pressure to tackle its budget deficit, the worst in the EU, but a fragile domestic economy may prevent Mr Cowen from cutting public spending too zealously, compounding market scepticism about Ireland's ability to shoulder the burden of what proved to be a disastrous property bubble.

With borrowing costs for the country now at unsustainable levels over the medium-term, finance minister Brian Lenihan yesterday reiterated that Dublin was sticking to its target of reducing the public deficit to an EU target of 3 per cent of GDP by 2014.

"A longer timescale for the fiscal plan would denude this country of any credibility in world markets," Mr Lenihan told RTE radio in an interview.