The Central Bank said today that taking account of the most recent data, the latest projection is for an average annual increase in the volume of
Irish GDP (gross domestic product) of 0.2% this year, while GNP (gross national
product) is forecast to fall by 1.7%. In 2011, GDP is expected to grow at about
2.4% in GDP terms and 1.7% in GNP terms. The Bank said the 2011 budget, which
will be presented in December, must credibly demonstrates the first step of a
reprogrammed tighter fiscal plan.
It July, the Bank had forecast
an increase in GDP of about 0.8 % this year and a decline of about 1.0 % in GNP
followed by growth in the range of 2.2 to 2.8 % in both measures in 2011.
In its latest
Quarterly Bulletin, the Central Bank says the divergence between GDP and GNP reflects the relative strength of exports.
Foreign-owned firms are responsible for about 90% of Ireland's tradeable goods
and services exports.
The Bulletin says encouragingly, the latest trade data indicate that the export recovery has become somewhat more broadly based and now encompasses some more ‘traditional’ segments of the manufacturing sector. While domestic demand remains weak, there is evidence that consumer spending, although fluctuating somewhat, is starting to stabilise. The continuing weakness of investment, however, remains a considerable drag on growth.
The report says reflecting both the relative weakness of domestic demand and the general pattern that employment lags output developments, employment has continued to fall, although at a diminishing rate.
Looking ahead to 2011, the outlook will be influenced by the extent to which the positive impulse from the external side of the economy
begins to be felt throughout the economy. Economic growth in the advanced economies has moderated and forecasts for the international economy for 2011 have been revised slightly downwards in recent months. Reflecting this, the
Bank says the outlook for the Irish economy (on current budgetary projections) is for growth in 2011 to be about 2.4% in GDP terms and 1.7% in GNP terms, slightly lower than foreseen at the time of the last Quarterly Bulletin. The
Bank says risks to the outlook are tilted to the downside.
For 2010 as a whole, total employment is projected to decline by
about 4%. At this stage a modest average decline in employment of about 0.4% is
forecast for next year.
A decline in labour force participation and the resumption of
net outward migration has mitigated the impact of employment losses on the rate
of unemployment, limiting the likely increase in the unemployment rate to an
average of 13.5% this year with the prospect of a modest reduction in the
unemployment rate to about 13.3% next year.
The Central Bank says that even without the costs of
supporting the banking sector, the State’s expenditures are running well in
excess of its income. This gap amounted to 12.1% of GDP in 2009 and is likely to
be about 11.6% of GDP in 2010.
In order to address this clearly unsustainable situation, the
Government has agreed an adjustment path for the deficit with the EU
Commission, which is designed to bring it down to less than 3% by 2014. This
path seeks to strike a balance between the need to bring the public finances
onto a sustainable footing and limiting the risk that a very rapid adjustment
would affect the economy’s prospects for recovery.
The Bank says against the background of sharply increased
concerns about fiscal sustainability, the main priority in the short-term is to
ensure that the 2011 budget credibly demonstrates the first step of a
reprogrammed tighter fiscal plan aimed at getting back on to a convergent path.
The Bank says this will necessarily mean a larger adjustment
than the €3 billion foreseen until recently. It adds that a review of the
adjustment path should be completed as a matter of urgency, in order to ensure
that it takes account of the many developments that have occurred since it was
originally agreed. These include a generally lower level of prices in the
economy, higher debt servicing costs including those related to intervention in
the banking sector, and the prospect of somewhat lower than projected real
growth next year. Equally important is to provide more details on how the
adjustment will be achieved, as this will add to the credibility of fiscal
The Bank says putting together a detailed programme of the
changes required to get to a fully sustainable position is needed in the current
climate of concern about sovereign borrowing and against a background of further
fiscal reforms in other countries. These actions would help to confirm the view
that Ireland’s debt burden will stabilise, although at a high level relative to
its income, and will then start to reduce over time. This, in turn, should help
to ultimately lower the overall burden of the adjustment on taxpayers and
borrowers, by romoting a reduction in borrowing costs for the State, as well as
limiting the upward pressure on interest rates generally in the economy. This
would particularly be the case if a consensus, or at a minimum acceptance, were
to emerge around the details of a credible reprogramming of the adjustment.
The Bulletin says the final key determinant of the economy’s
growth prospects is the evolution of competitiveness. During the boom years,
prices and wages moved to unsustainably high levels relative to the country’s
trading partners. The Bank says there has been a noticeable improvement in conventional
measures of competitiveness, such as relative unit labour costs, in the last two
years. Some of this has been due to sectoral changes in the economy, however,
such as the contraction of the labour intensive construction sector, so that the
underlying improvement has not been as great, suggesting the need for further
wage restraint relative to Ireland’s main trading partners. The underlying
strengths that were built up in the earlier years of strong growth in the 1990s
largely remain in place and these can contribute positively to growth once wage and price competitiveness is more
The Central Bank says there are areas that still require further
reforms to increase competition such as those identified in the reports of the
Competition Authority, such as some professional services, health services
provision and other areas. There is a need to press ahead with further reforms
in the relevant areas in order to support medium term growth prospects. A
combination of these reforms, further improvements in the country’s competitive
position, along with capital strengthening in the banking sector and
comprehensive measures to address the underlying fiscal position, would enhance
considerably the country’s ability to cope with the current situation.