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Some clarification is in order for recent accounts of the EIU’s forecast for Ireland. Specifically, we do not expect a default, as was reported here (and repeated elsewhere). Instead, our central scenario forecasts that Ireland will need to access the IMF-backed European Financial Stability Facility in mid-2011, when the country must return to the capital markets to service its debt. Ireland’s beleaguered banks will likely require further bailouts next year, and the government’s economic projections look far too optimistic. Following the recent spike in Irish yields, the government will struggle to convince bond markets that there is much more it can do to calm investors’ nerves.

The new, independent Office for Budget Responsibility (OBR), created by Britain’s recently installed coalition government, published its first forecasts on Monday. The group’s GDP forecasts were less optimistic than the ones published in March by the treasury under the previous government. The OBR expects the UK to grow by 1.3% this year and between 2.6% and 2.8% in 2011-14. (The EIU expects significantly slower growth, with a rise of 0.8% this year and between 1.1% and 1.6% over the following four years.)

Despite these more downbeat economic expectations, sterling rallied in response to another aspect of the OBR’s report; a lower-than-expected deficit. Thanks to higher-than-expected tax receipts, the UK’s deficit is forecast to reach 10.5% of GDP this year, down from a previous forecast for 11.1%. Although more manageable, this remains a daunting figure. The measures taken to address it, to be announced in an emergency budget on June 22nd, will be closely scrutinised.

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