Central Bank revises economic growth forecast downward

THE CENTRAL Bank has trimmed its economic growth forecasts for this year and next, reflecting continuing worries about the domestic economy.

The bank also warned of the need for reforms in the public sector and in uncompetitive “sheltered” areas of the private sector.

Failing to take action now could hold back the entire economy, according to the authors of the bank’s latest Quarterly Bulletin.

They highlighted areas such as staff transfers and reallocation of resources in the public sector as areas in need of specific attention.

The bank now expects that the economy will expand by 0.9 per cent this year in gross domestic product (GDP) terms, having previously forecast growth of 1 per cent. For next year, the bank has reduced its GDP forecast from 2.3 per cent to 2.2 per cent.

Maurice McGuire, director of economic services, said “a range of both stronger and weaker outcomes remains possible”, adding that the economy is in recovery, even though it may not feel like it.

“For many, there will be little sense of improvement in their economic situation,” he said.

He also made the point that serious adjustments would have been needed even in the absence of an EU-IMF bailout programme.

Mr McGuire dismissed suggestions of a noteworthy gap between the bank’s outlook and that of the International Monetary Fund, which earlier this week cut its Irish GDP outlook for this year from 0.9 per cent to 0.5 per cent.

“I don’t think that is a very significant difference,” he said.

For gross national product (GNP), which excludes the activities of multinationals, the bank expects a flat performance this year, which is a slight improvement on the 0.3 per cent decline it forecast a few months ago.

For 2012, GNP growth is now expected to come in at 1.6 per cent, again up slightly on the previous 1.5 per cent.

The bank does not foresee consumer spending, likely to drive the domestic recovery, picking up before 2013. But Mr McGuire said it was “very hard to say” when it might happen.

For this year the bank has pencilled in a 2.2 per cent decline in consumer spending, informed by an expectation that savings will continue to grow. Mr McGuire said increased savings could equate, in part, to households trying to “recover their net worth”. In tandem with this, householders are using cash to pay down debt rather than spend, he said.

The trend is borne out in a near-tripling in the household savings rate from close to 4 per cent of disposable income in 2007 to roughly 12 per cent last year.

Overall household net worth, or the difference between assets and liabilities, has meanwhile declined by 46 per cent since peaking at the end of 2006. The bank sees unemployment spiking at 14.3 per cent this year before declining to 14.1 per cent next year.