THE IRISH economy is “over the worst” and is now “bubbling along at the bottom”, the assistant director general of the Central Bank Tom O’Connell said when introducing the bank’s latest quarterly bulletin yesterday.
The bank estimates that gross domestic product (GDP) will fall by 7.8 per cent this year and by a further 2.3 per cent next year. This compares with its forecasts of 8.3 per cent and 2.7 per cent respectively in its July bulletin.
“The fallout from the unwinding of the large domestic imbalances created during the earlier boom will continue to constrain economic activity and significant headwinds to recovery remain in place,” the bulletin said.
The bank says its outlook is based on a presumption of growth in our main trading partners. It says domestic growth, when it returns in 2011, is likely to be modest, with domestic demand likely to remain weak.
With a presumption of outward migration and a fall in labour force participation, the bank expects unemployment to average more than 14 per cent during 2010.
The high level of unemployment is likely to cause a fall in wage rates in the private sector, leading to a partial reversal of the loss of competitiveness that occurred over recent years.
Output in 2010 is likely to be 14 per cent below that of 2007. “That is the full extent of the hit we have taken, if you like,” Mr O’Connell said.
The bulletin said the policy requirements to deal with the economic challenge were “clear”. The banking system needed to be returned to health, order needed to be restored to the public finances and Ireland had to regain its lost competitiveness.
Mr O’Connell said the absence of an endorsement of the National Asset Management Agency in the bulletin was an “oversight”. He said the Central Bank had been involved in approving the scheme “and it’s implicit that we think it is a good thing”.
He said the “long-term economic value” concept that was to be used to price banks’ assets was “a nebulous concept” but also a reasonable one. The European Commission would be ensuring there was no “State aid” to the Irish banks.
Mr O’Connell said there was a need to widen the tax base and to address public expenditure. He praised both the McCarthy report on potential cuts in public expenditure and the report of the Commission on Taxation. He noted that both public sector pay and social welfare payments had doubled in the 2001 to 2007 period.
Very significant savings were required to ensure Ireland moved towards meeting its Stability and Growth Pact obligations, he said. “Decisive action” would “send a clear signal to international investors with beneficial effects on the cost of Government borrowing and on the funding costs of banks”.
The bulletin said property tax had economic and fiscal merits and that proposals for a carbon tax and water charges would further ingrain the “user-pays principle”.
Mr O’Connell said the planned return to a 3 per cent deficit in the public finances by 2013 was the longest ever “slippage” granted to a country in the euro zone and he was not in favour of seeking to extend the period. To do so would mean increasing the national debt and the associated interest payments burden.
He said there was a risk involved in taking large amounts of money out of the economy but “we don’t have too many choices. We are borrowing €20 billion a year”. The bank expects Government debt to reach 59.1 of GDP by the end of this year and 73 per cent by the end of next year.
Mr O’Connell said the fees charged by professionals such as dentists, doctors and accountants had grown to “ridiculous levels” and there was scope for the Government, as a major purchaser of such services, to seek large reductions in these fees.
The bank said administered charges – such as in health insurance, utilities and transport – had continued to increase when other prices and wages were falling.
