Don't cut back on fiscal consolidation - Central Bank

Wednesday 02 October 2013 18.18
Central Bank cuts growth forecast for this year from 0.6% to 0.5%
Central Bank cuts growth forecast for this year from 0.6% to 0.5%

The Central Bank has urged the Government not to cut back on fiscal consolidation in this year's Budget.

In its latest Quarterly Bulletin, the Central Bank said there was no point in putting at risk the hard-won gains of the past several years for a relatively small easing of the fiscal adjustment this year.

The bank has also slightly downgraded its growth forecast for this year. It now predicts 2013 GDP growth of 0.5%, down from 0.6% forecast in July.

The latest forecast compares with a Budget estimate of 1.4% growth.

The Central Bank said today that the trend is for a slow economic recovery to continue.

While national accounts data points to weaker than expected growth in the first half of the year, the bank said that the forecast is for a continuation of the gradual recovery in the overall level of economic activity, but at a slightly slower pace than previously expected.

It said that after a weak start there had been some upturn in consumer spending and exports recently.

The Central Bank said the main challenges the Irish economy faces are fiscal consolidation, banking soundness and the competitiveness of wages and prices.

It said more progress is needed on all three fronts to enhance the country's prospects for a successful exit from the EU/IMF programme and to create the conditions for a sustainable economic recovery.

The Central Bank said it expected the economy to grow by 2% next year, also down slightly on the 2.1% predicted in the previous quarter. That would require the nascent recovery in external demand to gain some momentum and domestic demand to make a first positive contribution to growth in four years, it added.

The outlook for the jobs market has brightened, however, with unemployment expected to fall to 13% next year, better than the 13.2% forecast in July and down from an 18-year high of 15.1% last year.

Improvement in competitiveness may be 'overstated'

The Central Bank warned that measures of how Ireland's competitive position has improved in recent years, especially in terms of unit labour costs, have been overstated.

It points to the decline in the relatively labour-intensive construction sector as the main reason for this.

"Ireland's competitive position would seem to be back at around 2003-2004 levels. Given this, further reducing the cost base would greatly enhance the prospects for a return to sustainable growth and rising living standards in the future," it said.

The quarterly bulletin also highlights the prospect for an increase in the number of new homes being built next year and for an end to the six year slump in construction.

Building and construction investment is forecast to increase by 5% this year and 7.2% next year though the bulletin said this was contingent on continued improvement in domestic demand and availability of credit to businesses and consumers.

There is little sign, however, of a pick-up in consumer spending - the biggest component of annual economic output. The Central Bank says the savings rate remains "elevated" as households struggle to manage excessive debts and, in many cases, to deal with unemployment or reduced income.

"Notwithstanding a small pick-up in the second quarter and indications of incipient recovery from mid-year, a decline in consumer spending seems likely for the year as a whole with the prospect of only modest growth in consumption in 2014," it said.