The Central Bank has marginally revised upwards its forecasts on how the economy will fare this year, indicating that the worst of the recession may be over.
In its latest quarterly economic bulletin, the Central Bank says the economy will shrink by 7.8% this year - an improvement on the 8.3% decline forecast by the bank in July.
It says that after an annual rate of decline of 8.4% in the first six months of 2009, the pace of deterioration is set to ease in the second half of the year due to a gradual improvement in the world economy.
However, it says that Ireland's recovery from recession will be slower than elsewhere.
'While the economy is continuing to contract, the pace of decline has moderated from the rapid pace evident between last Autumn and this Spring,' the central bank says in today's report.
The fall in economic growth is mainly due to a severe contraction in domestic demand, with both consumption and investment expenditure falling sharply.
For 2010, the bank says the Irish economy is again likely to record negative growth of about 2.3% with a return to modest, sustainable, growth by 2011. But the bank cautions that this outlook was dependent on a recovery in growth in Ireland's major trading partners.
Unemployment to decline at moderating pace
The Central Bank says that employment is likely to continue to decline at a moderating pace in the second half of the year and for much of 2010 with a 'reasonable' prospect of some stability by the end of the year. It predicts that joblessness will average 12% in 2009 - an improvement on its previous prediction of 12.8%.
It adds that unemployment will rise to an average of 14% next year, but this is still less that its predication of 15% in its previous economic bulletin.
The Central Bank notes that the overall performance of Irish exports has been quite robust this year, given the weakness in world demand. Exports of goods and services rose by 0.2% in the second quarter after a fall of 0.7% in the first quarter and represents a much stronger performance than most of our trading partners.
On inflation, the Central Bank says that prices are forecast to fall by 4.2% in 2009. It says that inflationary pressures are likely to remain subdued into 2010 as consumer demand continues to fall sharply.
Today's report says that housing output is set to decline by almost 60% this year to about 22,000 units with a further decline to about 10,000 next year. This is a massive fall of 90% from the peak level of housing output in 2006.
The bank predicts that for the year as a whole, consumer spending is forecast to decline by 7.6%. It says that given the likelihood of a further fall in disposable incomes, consumption is set to shrink further next year, although at a slower pace than in 2009. It says that at this stage, a decline of about 4% is likely.
On the country's public finances, the Central Bank says the contraction in the economy has had a very big impact on the Government's fiscal position, both in terms of increased spending on social welfare payments and sharply reduced tax receipts.
It says it is crucial that the level of public expenditure is adjusted, as well as the creation of a more stable and reliable tax base to bring spending broadly in line over time with the restructured revenue base.
'Property tax would provide stable source of revenue'
Referring to the recent Commission on Taxation report, the Central 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'.
'It is important that the user pays principle becomes ingrained in Irish society, and in this context, the proposals for a carbon tax and for water charges appear reasonable,' the bank also says.
It added that the speed and extent of economic recovery will also depend on how quickly the country's competitiveness can be restore. It says this must encompass action on a number of fronts including pay and non-pay costs, infrastructure improvements, and continued measures to encourage innovation and research and development.
The Central Bank has backed cuts in public expenditure, including social welfare. The bank pointed out that social welfare payments increased by 100%, child benefit quadrupled and public sector pay doubled from 2001 to 2007.
Despite calls from unions for more tax hikes on the wealthy instead of public sector cuts, the bank says marginal tax rates had effectively risen to 52% due to recent tax increases.
In an interview with RTE News, the Central Bank's assistant director general Tom O'Connell says that house prices had reached 'ridiculous levels' during the boom.
The bank has also attacked professional fees for doctors, lawyers and hospital consultants and said they were too high. It said there also needed to be more competition for sheltered sectors such as education, utilities and public transport.
