The Irish government's budget woes increased this week as new figures showed the Irish economy contracted in the second quarter of the year and that growth in the first quarter was less than previously estimated.

Strong growth in exports of both goods and services did not prevent the overall economy from contracting again. The gross domestic product (GDP) fell by 1.2 per cent compared with the first quarter, despite expectations from analysts that the economy would grow.

Despite the contraction in the economy, there was no immediate sell-off of Government debt after the figures were released this week. Indeed the absence of negative market reaction to the news may ease the pressure on the Irish Government to tie itself to a budget adjustment in 2011 larger than the 3 billion figure euro it is already committed to.

Just before the release of the GDP numbers this week, the National Treasury Management Agency (NTMA) sold 400 million euro of short-term Government debt.

Gross national product (GNP) – a second measure of economic activity - was less negative, contracting by just 0.3 per cent. GNP excludes the impact of the multinational sector’s repatriated profits and interest on borrowings paid to foreigners.

The contraction in GNP was the lowest quarterly rate of decline since the downturn started more than two years ago, offering hope that a sustainable recovery may not be far off .

Irish Minister for Finance Brian Lenihan denied the economy was sliding into a double-dip recession and insisted the figures indicated the Irish economy was stabilising.