Central Bank wants details on how deficit will be reined in
THE Central Bank has called on the Government to give much more details on its plans to rein in the budget deficit over the next four years to give the international markets greater confidence.
In the bank's quarterly bulletin it also warned that the Government "must stand ready to take further action if growth is weaker than assumed".
The bank raised its economic forecasts for this year and next. It now expects gross domestic product (GDP) to contract by 0.5pc -- half the rate forecast three months' ago -- as unemployment peaks at about 14pc at the end of the year.
This follows the influential International Monetary Fund's slight upgrade in January of its global economic forecasts for this year and next.
"In the current international environment, it is more important than ever to adhere strictly to the agreed fiscal plan," the Central Bank said, noting that the public finances of other countries had deteriorated recently.
"Against this backdrop, it is important to ensure that the State can access funds on good terms and avoid being classified among those countries whose fiscal situation is the most worrying," it said.
The bank's urging of the Government to provide more detail on its plan to slash the budget deficit by eight percentage points over the next four years echoes a similar call from the European Commission last month. Ireland is currently running a deficit of four times the EU limit, but has vowed to get it below 3pc of gross domestic product by 2014.
Brussels main problem is with the Government's prediction that the economy will expand 3.3pc next year. The Commission sees it growing by just 2.6pc, while the Central Bank has pencilled in 2.8pc expansion.
The bank's chief economist Maurice McGuire signalled he was less concerned about the differences in economic forecasts than the need for the State to have a back-up plan if growth turned out to be weaker than expected.
When asked about the effect of mortgage rate increases, such as those confirmed by Bank of Ireland yesterday, on the Central Bank's forecasts, Mr McGuire said "they may have some impact -- but not a large impact on projections".
John Flynn, head of economic analysis and research at the bank, said that the unemployment rate should peak at about 14pc later this year, but average 13.7pc for 2010 as a whole, before dipping back to 13.2pc.
Emigration and a "fall in labour force participation" -- mainly down to people going back into education or retiring early -- will help cap the overall rate. But the bank said: "It is likely to be 2011, however, before (economic) output growth will be strong enough to exert any noticeable downward pressure on unemployment."
The domestic economy is expected to return to growth in the second half of the year, driven by a pick-up in demand in our main export markets.
Developing on the country's improvements in competitiveness was critical to success in the export markets, it said. The country's unit labour costs deteriorated by about 15pc between 2000 and 2008 compared with the entire eurozone, but improved by up to 7pc last year.
The country's unit labour costs deteriorated by about 15pc between 2000 and 2008 compared with the entire eurozone, but improved by up to 7pc last year, the Central Bank said. "During 2010, a further improvement in this measure of competitiveness is expected, perhaps by about 4pc," it added.