Economy to get boost from employment growth and investment by companies - Central Bank

Friday 04 April 2014 18.33
Central Bank says the recovery in economic conditions continues
Central Bank says the recovery in economic conditions continues

The Central Bank expects the economy to grow by 2% in GDP terms this year, driven by employment growth, investment by companies and improving economic conditions in other countries.

In its latest quarterly bulletin, the Central Bank said the balance of evidence from a range of indicators suggests the recovery in economic conditions is continuing.

The clearest sign of recovery has been the growth in employment over the past five quarters, it added.

The Central Bank said domestic demand stabilised last year, and is expected to make a modest positive contribution to growth this year. 

The bank said continued employment growth is likely to support household income and consumer confidence, and it has forecast a modest growth in consumer spending this year.  

Personal consumption is forecast to grow by 1.1% this year, compared with a decline of 1.1% last year, according to the Central Bank's latest projections.

The domestic economy is also set to gain from an increase in investment, which is forecast to grow by 11% this year, compared with 4.2% growth last year. Investment had fallen in each of the previous five years, and the Central Bank thinks businesses are re-stocking their capital bases.  

This includes a 12% growth in construction investment, and 10% growth in plant and machinery. 

Even after allowing for investment in aircraft, which has very little impact in the domestic Irish economy, the Central Bank said it believes investment in machinery by Irish companies increased by 23% last year, though it warns this was from a very low base.

Despite the expected surge in investment, the Central Bank warned it was not enough to return the investment to GDP ratio to more normal levels: at less than 14% it is well below the long run average an international norm of 20% of GDP.

On construction, the bank said it expects between 10,000 and 12,000 new house completions this year and next, adding that there is considerable scope for an expansion in residential investment.

Improving external demand conditions to boost exports

Improving external demand conditions in Ireland's main export markets are projected to support stronger export growth this year and next.  

The Central Bank said the country's merchandise exports performed relatively poorly in 2013, falling by 3.9% in real terms. This decline is almost entirely due to the so called "patent cliff" effect in the pharmaceutical industry. Pharmaceuticals and chemicals account for roughly half of Ireland's goods exports.

But food and related products and computer hardware saw strong export gains last year.

The Central Bank said it expects goods exports to decline slightly this year - by 0.5%, and rise by 0.8% in 2015.  Again the fall is attributed to continued effects of the patent cliff in the pharma sector.  This effect was also seen in the output of the manufacturing sector, which declined by 2.2%, due to developments in the pharmaceutical industry.

Inflation is expected to continue at its current very low level of just 0.5%.  Price pressures are only likely in the domestic services sectors, while food and energy import costs are likely to decline or show no growth.

The Central Bank said that the growing strength of the euro against the US dollar is contributing to a deterioration in competitiveness, though it added that the euro has been relatively stable against sterling.  

It said the competitiveness situation of the country is now similar to that in 2002, after a slight reversal of the competitiveness gains made in the 2009 to 2011 period.  

The substantial gains in productivity and unit labour cost seen in those years is unlikely to be repeated in the coming years, as most of the adjustment has already taken place.