The Irish economy has slowed very sharply and a severe contraction both by international and historical standards is underway. Housing investment has fallen precipitously. Consumption and business investment are shrinking. The sharp fall in demand results from the unwinding of large domestic imbalances, compounded by the effect of the global downturn in reducing exports and by the international financial crisis. The overall fall in economic activity since the beginning of the downturn will be very large and some of the reduction in living standards is likely to be permanent. The downturn will continue for some time and the recovery is projected to be slow. Just as the boom had an impact on many aspects of the economy, the necessary economic adjustment will have wide ranging and painful consequences. Reductions in wages appear to be taking place and prices are currently falling. Substantial fiscal consolidation, which has begun, is required to bring government revenues and spending into line. In the absence of changes to policies towards the unemployed, high current unemployment creates the risk of sustained high rates of joblessness. Policies are required in the longer term to avoid domestic imbalances on this scale from building up in the future. Without the boost from credit and asset prices, appropriate policies to encourage long-run sustainable growth will be more important for raising living standards.