Ireland will lag recovery elsewhere – Central Bank
Ireland’s recovery from recession will be slower than elsewhere, the Central Bank said today as it acknowledged hopes are rising that the global downturn in European and the world economies has now reached a turning point.
Raised Forecasts for Irish Economic Growth
However, despite the gloomy comparisons to other economies, the bank did raise its forecasts for Irish economic growth in its latest quarterly bulletin.
The bank’s latest forecast suggests that, while the pace of decline in economic activity is moderating, the weakness in Irish economic activity is set to persist into the first-half of 2010. However, it has raised its forecast for economic growth in 2009 and 2010 slightly from its last quarterly bulletin.
Improved Forecasts for Economic Decline in 2009 and 2010
The bank said that following a decline in gross domestic product (GDP) of 3pc in 2008, a further decline of 7.8pc seems likely this year, which is an improvement on the drop of 8.3pc it had forecast in its previous quarterly bulletin.
Prospects of Stabilization and Modest Growth
It added that while there is the prospect of stabilisation, followed by a return to modest growth during the course of next year, GDP for 2010 as a whole is projected to be about 2.25pc lower than in 2009, an improvement on the 2.7pc contraction forecast previously.
Dependency on Trading Partners’ Growth
However, this outlook is wholly dependent on the growth of Ireland’s main trading partners, the Central Bank stressed, adding that domestic demand is likely to remain weak until 2011 at the earliest.
“The fallout from the unwinding of the large domestic imbalances created during the earlier boom will continue to restrain economic activity and significant headwinds to recovery remain in place,” the bank said.
“These are projected to ease only gradually, and recovery, when it emerges, will at first most likely be modest. The outlook remains subject to considerable uncertainty,” it added.
Restoring Competitiveness: Key to Ireland’s Recovery
The speed of Ireland’s recovery will also depend on how quickly competitiveness can be restored, the Central Bank cautioned. It singled out the deterioration in Ireland’s international wage competitiveness as one of the major reasons why wage restraint is needed now, which it said would reverse the fall in employment.
‘Critical’ decisions on public spending
The Central Bank also issued a warning about government spending, saying that while “significant efforts” had been made to adjust public spending, “many more critical decisions remain to be made”.
“This unavoidable process of adjustment will involve difficult choices, both in terms of revenue and expenditure decisions emphasising the importance of reducing the cost of providing public services and finding ways of delivering these services more efficiently,” the bank said.
It said the McCarthy Report provides a “valuable framework” for curtailing public spending.
“While raising a number of clearly difficult and sensitive policy options, very significant savings are required to ensure that Ireland moves towards meeting its Stability and Growth Pact obligations in time,” the Central Bank said.
It also indicated its approval of the property tax recommended in the Commission on Taxation report published last month, and the introduction of a carbon tax and water charges: “The Bank notes the economic and fiscal merits of a property tax, which could provide a stable source of revenue while not affecting labour market incentives and whose design should be both equitable and practical.
“Furthermore, it is important that the ‘’user pays principle’ becomes further ingrained in Irish society and, in this context, the proposals for a carbon tax and for water charges appear reasonable, while again not impacting on the labour market and also promoting intergenerational equity and economic efficiency.”