The Irish economy economy is set to slow more sharply than previously expected this year, making it difficult for the Government to meet its budgetary targets, the Central Bank said today.
John Hurley, Governor of the Central Bank of Ireland |
In its quarterly economic bulletin, the bank reduced its forecast for 2008 gross domestic product (GDP) growth to 2.4 per cent, compared with a 3 per cent forecast in the previous bulletin and growth of 5.3 per cent recorded last year.
Gross national product (GNP) growth was seen at 1.9 per cent, down from a previous 2.5 per cent forecast as a weaker construction sector slows expansion, but growth is seen recovering next year.
The state’s robust fiscal position will allow it to accommodate short-term pressures, the bank said, but it warned that prudence was needed in the light of increased uncertainty.
The Central Bank said that over the last decade or more, and with only minor interruptions, the Irish economy has experienced very strong rates of growth. For example, annual GNP growth has averaged 6½ per cent between 1994 and 2007.
Employment in the economy has increased by over 900,000 or 75 per cent over this period, and living standards have risen to, or even somewhat exceeded, the levels in the more mature European economies.
At this point, however, the growth rate of the domestic economy is easing, and the volume of GNP is expected to increase by just under 2 per cent this year, following growth of 4.5 per cent in 2007. One aspect of this is the process of adjustment of the residential construction sector to a more sustainable size. The economy is also facing an environment of weaker external demand, together with a strengthening of the euro relative to the dollar and sterling. With the combined effect of these factors likely to be less next year, a recovery in GNP growth to around 3¼ per cent is envisaged for 2009. GDP growth is expected to fall from 5.3 per cent in 2007 to around 2½ per cent in 2008, before rising to 3½ per cent next year.
Fiscal conditions are likely to be much more difficult this year than in previous years. The target set in the Budget was for a General Government Deficit of 0.9 per cent of GDP in 2008. The current Irish fiscal position is strong with the Gross Government Debt ratio standing at some 25 per cent on GDP at the end of 2007 – one of the lowest in the euro area. If the assets of the National Pension Reserve Fund are taken into account, the net debt position is about 12 per cent of GDP. The Government finances are, therefore, robust and can accommodate short term pressures.
The Budget projections reflected both the operation of the automatic stabilisers in a more difficult economic environment as well as a move into modest deficit on an underlying or cyclically-adjusted basis. In the light of the increased uncertainty, the Bank says that it would be prudent to adhere to the budgetary targets for spending.
"In this regard, it is obviously necessary for public pay developments to have regard to the more difficult budgetary position. A higher than projected deficit this year would leave the economy with less room for manoeuvre going into 2009, in the light of the constraints of the Stability and Growth Pact. Lower revenue growth than in the past and the need to prioritise capital expenditure projects underline the importance of containing the growth of current spending in the coming years. Further measures to increase the productivity of public administration and to enhance the efficiency and effectiveness of government spending can play an important role, while also contributing to the objective of improving the economy’s productivity performance," the Bank said.
Brian Cowen, TD, Tánaiste and Minister for Finance commented on the Central Bank's Quarterly Bulletin:
The reduction in the Central Bank economic growth forecast today is a response primarily to the global liquidity crisis, a challenge for every country in the developed world. However, our growth rate this year is expected to be higher than almost all of our fellow EU members. Employment will continue to grow and we will continue to build on the success of recent years.
The Central Bank sees economic activity moving back towards a more optimum growth trend in 2009. By following the right policies now, by holding our nerve, we will come through the current situation with our economic fundamentals intact.
We are clearly in a somewhat more difficult economic environment. However, one of the great strengths of our economy is its ability to adapt and to respond to changing conditions. The limited fall-out from the global ICT shock in the early part of this decade is testament to this resilience.
We will continue with our ambitious investment programme, the National Development Plan 2007 – 2013, which will transform this economy. Infrastructural investment under the Plan will help to eliminate bottlenecks and foster an improvement in our competitiveness. By continuing to invest now, we will ensure that the Irish economy is well equipped to benefit from an improving world economic environment.
By keeping the NDP on track, the Government is giving strong support to domestic activity at a time of global uncertainty.
We can best respond to the deterioration in international economic conditions by raising our productivity and by being realistic in our pay expectations.
Our economy's fundamentals remain healthy and I am confident that we will emerge from the current situation in a strong position. The Central Bank, along with other forecasters, is expecting improved economic growth next year.