Concerted action is needed if economic growth and moderate inflation levels are to be restored in Ireland. That is according to the Central Bank's governor John Hurley, who launched the Central Bank and Financial Services Authority of Ireland's annual report today.
John Hurley said the bank was revising its 2008 growth forecasts downwards for GDP and GNP, saying the economy would grow, but at a rate of significantly less than 1%. He said the significant weakening in the housing sector would detract considerably from growth this year. He added that growth was expected to pick up slightly in 2009, but would remain below 2%.
Mr Hurley also predicts that the unemployment rate will rise to 6% this year, as a result of the slowdown in construction.
He has welcomed the decisions taken by the Government this week on the public finances. 'I think a very good start has been made and it was necessary that it be made,' he said. But he added that although the figures involved were significant, more action was needed.
Asked about the fall in Irish banks' share prices, Mr Hurley said this was 'part and parcel' of the significant volatility in world financial stocks recently. He added that under the Central Bank's measures, the Irish banking system remains strong and the volatility on markets seemed 'a little overdone'.
'We stress test the banks' lending and while the most recent results of that won't be available for some months the early indications are that the banking system is surviving the turmoil well,' Mr Hurley said.
He said 2007 was a challenging year for the Central Bank, both in terms of its domestic and euro area responsibilities.
International influences on the Irish economy, John Hurley said, included 'housing market adjustments in the major economies - namely the UK and US - and increases in food and energy prices.
He said the dollar and sterling's weakness, and Ireland's exposure to the UK and US markets, raised competitiveness problems here. The sharp rise in energy and commodity process has added to the challenging situation, driving inflation higher, he added.
Beyond next year Mr Hurley said economic growth should return to its potential rate of about 4%, but this recovery is not guaranteed. He said it depends on focusing on the public finances, the efficiency of of public spending, especially in relation to the productive capacity of the economy and overall competitiveness.
Mr Hurley said a key infrastructural projects should be given priority, as they would contribute to the productivity performance of the economy.
He said that while the performance of the Irish economy was strong in 2007 as a whole, that there was a significant moderation in growth as the year progressed. 'This slowdown has accelerated considerable this year,' he stated
Governor John Hurley said there has been a 'substantial adjustment' in the domestic housing market, international financial market turbulence, and that higher oil and food prices have been more recent developments developments in the Irish economy.
He said these factors have led to a greater than anticipated slowdown in growth and higher than expected inflation.
The central bank chief said the short-term outlook for the economy is challenging, but that the bank believes that the medium-term outlook is favourable and that growth "should" gradually recover and that inflation should moderate.
'Such an outcome is not guaranteed and will require concerted action,' he cautioned.
He said the housing sector slowdown and a deterioration in the international environment had led to a much faster economic slowdown than anticipated.
Mr Hurley also said that a rise in energy and commodity prices had added to the challenging economic situation, driving headline inflation rates higher globally. He said this high inflation was why the European Central Bank put rates up last week by 25 basis points.
He warned against 'attempts to compensate ourselves for a change in the relative price of imported commodities', echoing the ECB's concern that inflation feeds in to higher wages.
* The Dáil has passed a motion supporting the Government's economic policy, including the spending adjustments announced this week, by a margin of 79 to 62.