Growth will not exceed 0.75pc in next three to five years -- Bacon
Published 30/09/2010 | 05:00
ECONOMIST Peter Bacon yesterday delivered a brutal assessment of Ireland's recovery prospects, predicting annual growth will be confined to between 0.5pc and 0.75pc for the next "three to five years".
The comments, delivered at the 2010 Corporate Restructuring Summit, came less than a fortnight after stockbrokers Bloxham pared back its forecasts for growth next year.
Even after the downward revision Bloxham is still predicting an expansion of 2.5pc next year, while fellow broker Davy is pencilling in growth of 2.7pc and Ulster Bank is expecting growth of about 3pc.
Speaking to the Irish Independent on the sidelines of yesterday's conference, Dr Bacon admitted his predictions were "sharply worse" than the views of many other commentators.
"There are two factors that make me more pessimistic than the consensus," said Dr Bacon. "The first is I think households are going to be more cautious about spending than is assumed in some forecasts.
"The second is I think the interest rate consequence of international certainty is going to be a deterrent to investment taking place."
Earlier, Dr Bacon told the audience that Irish firms borrowing money would ultimately end up paying interest rates that were linked to the cost of Irish government borrowings.
"You can call it yourself as to where the risk premium on government bonds is going to go -- where it goes there goes general interest rates for companies in Ireland," he said.
"In the long term, the cost of finance will be 200 or 300 basis points above the cost of government borrowings."
Those interest rates have hovered at record highs in recent weeks, implying higher interest rates for businesses. "Certainly
there is is the potential for the risk premium to increase if there isn't a response [from the Government] that convinces the market," Dr Bacon said.
The economist, who was recently appointed as an adviser to the National Asset Management Agency, stressed that the poor outlook for the Irish economy didn't stem from bad policy decisions.
"There's nothing wrong with the policies that have been taken by the Government, the difficulty is they're not broad enough," he said, signalling his support for plans to cut at least €3bn from this year's Budget.
The outlook could improve if the Government channelled its energies into tackling competitive and regulatory constraints in sectors that "employ and create output", he added.
While higher interest rates linked to the costs of Government borrowing were pegged as the main threat to corporate borrowing and investment, Dr Bacon also described wider shifts going on in the business banking environment.
After viewing property as the default collateral for most business loans, banks are forced to redraw the boundaries and find a new source of security.
This could see banks using equity in the company as security, Dr Bacon suggested, while also positing that the mix of bank finance to market finance in companies might change.