Economy to grow 1pc in 2011 says Central Bank

However, GNP is expected to contract by 0.4pc this year before returning to growth of 0.7pc in 2012.

This year’s growth is an upward revision of around a quarter of a percentage point from the bank’s previous forecast, while the outlook for 2012 has been revised downwards by a similar margin.

The Central Bank said this is mainly accounted for by somewhat stronger stock building in 2011 and less favourable prospects for external demand from the second half of 2011 onwards.

The bank said the external environment continues to be “characterised by turbulent conditions on financial markets and signs of slower growth in many of the country’s main trading partners”.

It said expectations of somewhat slower growth might normally be expected to prompt a deterioration in perceptions of a country’s financial position. “Recent months have, however, seen a general reduction in yields on Irish Government bonds. While these are not directly relevant to the cost of borrowing, at present, given the country’s access to funds under the EU-IMF Programme, they can be seen as a sign of increased confidence in the country’s financial situation,” said the bank.

It said the development reflected a number of factors, including increasing stabilisation in the economy, the prospect of lower bank recapitalisation, and lower financing costs under the EU-IMF Programme.  

“As regards the public finances, developments for the year to date indicate that the adjustment remains on track. The precise outturn for this year, along with the indications for growth at Budget time, will dictate the extent of the fiscal adjustment required to reach the deficit-to-GDP ratio target of 8.6pc. It is difficult to say at this stage whether this will be the €3.6bn adjustment currently projected under the EU-IMF Programme, or whether a larger adjustment will be needed to achieve this target.

“Aiming to exceed the target will incorporate a degree of resilience into the public finances to cater for the possibility of negative shocks to the economy,” it said.

“It is also possible that bringing forward some of these changes may have less impact on consumption than one might expect, precisely because households are already factoring them into their expectations when making savings and consumption decisions.

“This argument should not be taken too far, however, and it would not be advisable, for example, to frontload the adjustment in a dramatic manner.”

The bank also noted the fact that Ireland seems to be continuing to attract significant inward direct investment, while some of the more indigenous sectors are also contributing to the improved export performance.

“The adjustments in competitiveness, however, though welcome, need to be further reinforced. One way of achieving this is through greater efficiency resulting from increased competition in a range of sectors.”

The bank said it also means pressing ahead with planned public sector reforms to deliver the maximum possible level of public services from the reduced resources available for expenditure.

“Many of the changes required involve difficult adjustments but they will not only increase the underlying resilience of the economy, but act as a powerful signal that the economy is capable of adapting to changed circumstances and, as a result, has the capacity to work itself out of its current challenging situation.

“An increase in such confidence, provided that it is solidly based on tangible progress, would, in itself, be beneficial to the recovery process.”