Lack of spending will stall growth, says EU
Published 14/05/2011 | 05:00
The European Commission has said that Ireland's economy will grow less than expected this year as people concentrate on paying down debt rather than spending money.
The commission yesterday cut its forecasts for Ireland's economic growth, warning that a looming series of interest rate hikes would have a negative effect on the country.
The commission yesterday said in its latest forecast that the economy would only grow by 0.6pc this year, whereas official government forecasts put the growth rate at 0.8pc of GDP.
The annual budget deficit pencilled in by the commission is also slightly worse than the Department of Finance's estimates.
Based on the commission's figures, taxpayers may be facing additional austerity in the year ahead with more tax hikes and deeper spending cuts.
While upbeat about Ireland's export performance, the commission said that future interest rate rises from the ECB and banks themselves were likely to have a "substantial" effect on spending.
Typical households will continue saving at high levels while also paying down debt as the impact of the housing bust lingers on, said the commission.
The report said the "upside" was that Ireland could sell semi-state assets for up to €5bn and reduce its national debt.
The commission and the Government have similar views on where debt levels will end the year. The Department of Finance forecast suggests debt will top 111pc of everything Ireland produces, with the commission at 112pc.
These debt levels are regarded as very high in a European context, although Greece has a far higher debt burden, with Italy also struggling under a heavy debt load.
The type of mortgages used by borrowers in Ireland is also a key concern for the economy, said the EU Commission.
"The large exposure of Irish households to mortgages on short- term rates" could cause trouble for domestic demand, it said.
However, wages in Ireland are becoming more competitive, the commission added. While employment levels will ultimately improve, the commission said, the "lag" before this happens could be "more than usual".
This is because exports are less labour-intensive than other activity, it pointed out.
However, speaking at the launch of the figures, EU Commissioner for Economic and Monetary Union Olli Rehn said: "Growth and jobs are now the real challenge for Ireland, and in terms of growth I think it's important that export growth and industrial production are showing positive signs."