The Central Bank has revised downward its growth forecast for the Irish economy next year and warned again that the erosion Ireland's competitiveness is a major concern.
The Ceantral Bank's Winter Bulletin paints a bleak picture of Ireland's economic prospects, predicting GNP growth of 3 per cent this year and 3 per cent next year. But the bank cautioned that even these forecasts are based on the optimistic assumptions of a US recovery and an easing of Middle East tensions.
The Irish economy has slowed markedly from the halcyon days of double digit growth but considering the global downturn it is still performing well, albeit below its potential, the bank said.
Of greatest concern to Dame Street is the steady erosion of competitiveness which could have dire consequences for domestic firms. The growth in Irish labour costs - at 6.6 per cent - is well above the EU average of 2.5 per cent and in absolute terms stands at 9 to 12 per cent higher than the EU average.
Dr Mike Casey of the Central Bank said that Ireland's cost base was now so out of kilter with the rest of the EU that the challenge for Ireland is no longer to maintain competitiveness but to restore it.
Dr Casey pointed that most of the productivity gains seen in recent years have been driven by foreign owned companies largely in the IT sector. A sharp fall in the euro could expose domestic firms to unsustainable cost pressures, Dr Casey warned.
The bank also noted the rise in property prices this year and has recently written to the banks about the danger of a strain in the mortgage market. However the Central Bank said it has been assured by the banks that lending is within accepted stress levels and the recent S&P warning on credit growth may have been a touch excessive.