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News : Irish Economy Last Updated: Oct 5, 2010 - 5:39:32 AM

Central Bank revises Irish growth in 2011 slightly down; Says December budget must have a reprogrammed tighter fiscal plan
By Finfacts Team
Oct 4, 2010 - 11:17:29 AM

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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 reform.

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 fully restored.

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.

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