The Central Bank has called for pay moderation, saying it would be “quite unfortunate” if competitiveness gains that were made since the crash were lost.
An implicit warning from Dame Street on the clamour for pay concessions comes days after Siptu’s call for a 5 per cent pay increase across the economy and ahead of talks on public pay later this year.
Delivering his first quarterly update on the economy since his appointment last October, bank chief economist Gabriel Fagan upgraded the growth forecast for 2015 and said the expansion was set to continue into 2016.
Thanks to the continued pick-up in domestic demand and consumer spending, the bank believes Ireland’s gross domestic product will expand by 3.7 per cent this year.
This represents an increase of 0.3 percentage points since its previous forecast.
The growth rate in 2016 is forecast to advance to 3.8 per cent.
Euro zone
Mr Fagan, who believes an improvement in economic conditions in the euro zone in general will be the main benefit to Ireland from the new ECB stimulus plan, said the forecast had taken account of the likely impact of the quantitative easing programme.
In spite of a “very significant improvement” in the public finances, he said Ireland’s very elevated debt levels marked fragility in the recovery.
On the prospect of pay talks with public sector unions ahead of the election, he noted that the State’s finances were not yet in a position of safety.
Asked about Siptu’s wage demand, he said the final outcome of any pay process was more important than the initial claim made. “But I’d restate that we’d want to be very careful that we do not lose the competitiveness gained over the last few years,” Mr Fagan told reporters.
“It’s essential to build on and consolidate the achievement that have been made so far in a number of areas,” he said. “It’s essential to build up the resilience of the economy so it’s in a position to deal with shocks should they emerge.”
The Cental Bank estimates GDP grew 5.1 per cent in 2014, but said this figure overstates the real underlying strength of the economy for technical reasons.
While attributing the overstatement to the inclusion in Irish export data of contract manufacturing carried out abroad for Irish-registered firms, the bank declined to estimate the extent to which this had boosted growth in 2014.
Its growth forecast for 2015 was conducted on the basis that the export increase seen in the first quarter of 2014 as a result of such activities was a once-off event.
Deficit
Although the headline deficit this year is forecast to drop below the EU threshold of 3 per cent of gross domestic product, Mr Fagan said the Government will be obliged under European rules to take further steps to eliminate the structural deficit. The structural deficit is an estimate of what actual deficit would be if the economy was operating at full capacity.
“There is a need for further fiscal consolidation in the years ahead ahead. In terms of the particular rules it will be a fiscal consolidation in structural terms amounting to at least 0.5 per cent of GDP per year ,” Mr Fagan said.
“So fiscal consolidation is needed. We’re not out of the woods in that sense.”
Domestic demand was likely to the main driver of growth in 2015. “An improving labour market, rising real disposable incomes and higher asset prices should all lend support to domestic demand as the economy returns to more normal operating condition,” the forecast said.
“The growth in net exports in 2014, in part reflecting the impact of contract manufacturing activities, is not anticipated to continue this year with export growth projected to moderate to be more in line with conditions in Ireland’s major trading partners.”
