The Republic of Ireland’s economy is in a technical depression but will bounce back faster than the Northern Ireland economy, according to the first major all-island economic forecast.

The Ernst & Young Economic Eye report published this morning predicts that the economy of the island of Ireland will contract by almost 8 per cent in terms of gross domestic product (GDP) this year.

With a decline of more than 10 per cent GDP from its economic height, the Republic will effectively be in depression, it says.

In 2009 alone, the Republic’s economy will contract by 8.9 per cent, the report forecasts. By contrast, there will be a shrinkage of 2.9 per cent in the Northern Irish economy. This will result in a contraction of 7.8 per cent in the all-island economy.

“The island economy is in the eye of an unprecedented economic storm and collateral damage is severe,” said Brendan Lynch, who advised on the report.

“Though early 2009 looks like being the worst period, recovery will be slow and the storm will leave scars on the economic landscape for years.”

Employment figures in the Republic will not return to their 2007 peak until the year 2021. In Northern Ireland, the recovery in the labour market will be slightly quicker, with peak employment numbers returning in 2018.

However, an “over-reliance” in Northern Ireland on the public sector and the relatively closed nature of its economy compared to the Republic means that although the downturn will be less pronounced north of the border, the economy there will enjoy less “bounce back” in its recovery phase.

The strength of the Republic’s services sector exports will aid the recovery south of the border, as many of these exports require specialist skills that make the Republic less “replaceable” as a centre for producing exports, the report says.

Some 44 per cent of the Republic’s exports are in the services sector, but just 6 per cent of Northern Ireland’s exports are in the services sector. This is among the lowest proportions of the developed economies.

The report concludes that the Irish government was “left with little option” but to adopt a radical “tax and cut” approach to correcting its budget deficit. However, it is sceptical about the UK government’s “spend and hope” approach.

“We predict that as spending increases, and with stamp duty holidays and temporary VAT cuts due to reach their end, tax rises [in Northern Ireland] will inevitably follow,” said Neil Gibson, an adviser to the report.

The sluggish nature of the recovery will mean that in many locations in Ireland the recession will have a “generational impact”, bringing severe economic and social hardship to many, Ernst & Young says.