Rise in consumer prices 'would assist recovery' – ESRI says
Published 11/04/2014 | 02:30
A rise in inflation in Ireland to 1.5pc would knock a percentage point off the debt-to-GDP ratio, the Economic and Social Research Institute (ESRI) has said.
The think-tank said a rise in consumer prices would "grease the wheels" and help push the recovery along.
Inflation last month here moved back into positive territory, rising 0.2pc compared with the previous month which saw a drop of 0.1pc, according to the Central Statistics Office.
ESRI economist Professor John FitzGerald described it as a concern, and said deflation was a possibility.
The think-tank said it remains possible that the European Central Bank (ECB) will announce a cut in interest rate from the current record low of 0.25pc.
"If inflation was 1.5pc in Ireland, tat would knock 1 percentage point straight off the debt to GDP ratio.
"For people who have debts, their incomes would rise. . . which would reduce the burden of their debt.
"So a bit of inflation would grease the wheels very nicely, and no inflation would make things more difficult for us."
The comments yesterday coincided with remarks from Irish Congress of Trade Union President David Begg who said the spectre of deflation could spell disaster for Ireland.
"Deflation is a potential disaster for heavily-indebted peripheral countries like Ireland. Last month average European inflation dropped to 0.5pc.
"When prices start falling, consumer demand collapses and with it goes employment.
"Your debt burden also increases. And if more is needed to repay debt, there is less to spend on goods and services. It is a vicious circle of decline," he explained.
"We urgently need to see a resumption of robust economic growth for debt sustainability, but currently there is no strategy for durable growth anywhere in Europe."
In its latest economic commentary, released today, the ESRI forecast GDP growth of 2.6pc this year, and unemployment falling to 11.4pc and dropping further to 10.1pc next year.
Inflation would run at 0.3pc, before picking up to 1pc in 2015.
Investment would surge 9.6pc this year, exports by 3.7pc, and the budget deficit would fall to 4.5pc of GDP, and drop to 2.8pc next year.
Mr FitzGerald said it's possible the Government could get away with not imposing any new cuts in the Budget if the recovery pans out as forecast.
"If they (the Government) end the austerity now and have a budget along the lines that we're talking about for next year, and in following years you have indexation and wage rates begin to rise, you go back to a more normal pattern of fiscal behaviour, even without any further cuts, (and) the Government would move into significant surplus by 2017," he said.