Slowdown to hit budget targets, says bank chief
THERE is a risk that Ireland could miss its budgetary targets next year, because of the slowdown in the global economy, the chief economist at the Central Bank warned yesterday.
As the eurozone moves into recession, and the economies of the US and China slow, the bank has cut back its forecasts for the Irish economy.
It now expects total output (gross domestic product) to increase by 0.5pc this year, as compared with a 0.7pc forecast it made in July.
For next year, the bank sees GDP expanding by 1.7pc instead of 1.9pc. Irish national income (GNP) will fall by 0.4pc in real purchasing power terms, and expand by 0.7pc next year.
"This reflects a more protracted than expected slowdown in virtually all of Ireland's main trading partners, which seems likely to extend into the first half of 2013," the report says.
Thanks to inflation, though, this year will be better than next for the national debt ratios. The money value of GDP -- which is how the debt ratio is measured -- will expand by 2.3pc in 2012, but only 1.3pc next year, when inflation is expected to fall back to 1pc.
"Additional measures may have to be taken to reach the budgetary targets next year, because of lower growth," chief economist Lars Frisell said. In its quarterly report, the bank calls for the budgetary process to be accelerated.
"Without increasing the overall scale of fiscal correction, there is a case for getting the adjustment over more quickly," it said.
"This would shorten the already lengthy period of uncertainty, which has been bad in itself, and has doubtless slowed investment and other spending plans."
Mr Frisell said it was true that more austerity could damage the economy, but this could be minimised if structural reform was speeded up -- which might help employment -- rather than relying just on financial cuts.
"There is a legitimate debate as to how much austerity the economy can take. There is no alternative to austerity, but how you do it is important. It will not do as much damage if it is also increasing competitiveness."
"We may need to do more than hope that external growth will remove the need for austerity," he said.
He believed that Ireland could cope with its debt burden, even without a deal on bank rescue costs.
"It would be a bonus to get a deal, but it is not impossible to manage without one."
While growth may be slower than had been expected, the bank still thinks that next year will mark a turning point, with investment growing, followed by an increase in consumer spending in 2014.
Unemployment will decline from the present 14.8pc, but only slowly, it says.
But suggestions that Ireland could exit the bailout early and return fully to the markets before 2014 seemed optimistic, Mr Frisell said. "There are a couple more years of austerity to come, and the downside risks are significant," he said.