Ireland will lag recovery elsewhere - Central Bank

“The fallout from the unwinding of the large domestic imbalances created during the earlier boom will continue to restrain economic activity and significant headwinds to recovery remain in place. These are projected to ease only gradually, and recovery, when it emerges, will at first most likely be modest,” the bank said as it poured cold water on any possibility of a speedy recovery for Ireland from the economic crisis.

“The outlook remains subject to considerable uncertainty,” it added.

The Central Bank is predicting that GDP for Ireland this year will be about 2.25pc lower than in 2009.

However, it has raised its forecasts for the economy this year, saying that GDP will grow by 0.8pc, although GNP will fall by -1pc.

The bank is also forecasting growth of between 2.2pc - 2.8pc in both GDP and GNP terms in 2011.

While growth in Ireland’s main trading partners should help to boost Irish exports, domestic demand is likely to remain weak until 2011 at the earliest, the bank said.

However, it added that the worst of Ireland’s economic contraction has already taken place, with the most intense contraction phase having occurred in the fourth quarter of 2008 and the first quarter of 2009.

“Since then, however, evidence from a host of indicators suggests that, in recent quarters, while the economy is continuing to contract, the pace of decline has moderated from the rapid pace evident between last autumn and this spring.”

However, the bank warned that output in 2010 as measured by GDP, will be about 14pc below that in 2007, which it said represents “an exceptionally severe contraction by international standards and unprecedented in Ireland since the National Accounts began to be compiled on a regular basis over half a century ago.

Living standards will fall
The Central Bank also noted that this fall in output, which it said is not yet over, is bringing about a “significant” reduction in living standards.

“It is now evident that spending and living standards had leaped to unsustainable levels at the height of the boom.

“Allied to the ongoing rebalancing of activity within the economy, which also has to run its course, domestic sources of demand can be expected to remain weak for a prolonged period. This will tend to hold back any recovery in labour markets,” the bank added.

In terms of unemployment, the Central Bank said Ireland’s jobless rate is projected to average at over 14pc in 2010.

Competitiveness must improve
The Central Bank also warns that in order for Ireland to benefit from any global recovery, competitiveness needs to be restored in the economy as a whole, and that how quickly this can be achieved will determine the speed and extent of the economic recovery here.

In terms of public spending, the Central Bank said that while significant efforts have been made to strike a new balance between expenditure and taxation, “many more critical decisions remain to be made”.

The bank pointed to the Colm McCarthy-authored An Bord Snip Nua report on cutting public spending as representing a “valuable framework” for fiscal consolidation.

“While raising a number of clearly difficult and sensitive policy options, very significant savings are required to ensure that Ireland moves towards meeting its Stability and Growth Pact obligations in time. Decisive action of this magnitude would also send a clear signal to international investors with beneficial effects on the cost of government borrowing and on the funding costs of banks.”

Potential for economic growth
However, in spite of a rather downbeat quarterly bulletin, the Central Bank insisted that the Irish economy has the potential to grow solidly again in the medium term.

“While there are very substantial challenges facing the economy at present, the economy has time and time again proven to be highly resilient and flexible. Moreover, in spite of a very turbulent economic environment, many of the strengths of the Irish economy remain in place, not least in terms of a highly educated and adaptable workforce, a relatively flexible economy and a significant comparative advantage in high productivity modern sectors. If we follow the appropriate policy path, the economy has the potential to grow solidly again in the medium-term.”