Central Bank downgrades its economic growth forecast to 3%

The Central Bank of Ireland has signalled a marked slowdown in economic growth here next year, suggesting the economy will expand by 3 per cent rather than 4.25 per cent.

The weak international growth prospects are the principal reason for its downgrade although it has also warned about the further erosion of Ireland's competitiveness caused by stubbornly high rates of inflation.

Presenting its Winter Bulletin yesterday, Dr Michael Casey, assistant director general of the Central Bank, said that, while Irish growth rates had slipped, the economy was still performing well and should once again experience economic growth rates of up to 5 per cent.

"There is no reason why we will not get back to our long-term potential of 4 to 5 per cent in due course," Dr Casey said.

The latest forecasts reflect the impact of the recent Budget and the sharp revision was based on an overly optimistic view about the pace of the recovery in the US economy, according to Dr Casey.

There are still some downside risks to its forecast for 3 per cent growth in gross national product (GNP) next year although it does not expect the economy will perform much below that level.

Any acceleration in economic growth rates in the State will depend on how quickly the US economy picks up. Even if the world's biggest economy does begin to exhibit fresh growth, it will take some time for that to benefit the Irish economy, possibly as long as six months, Dr Casey said.

This would suggest it could be well into 2003 before growth rates in the Irish economy accelerate.

The Bank remains very concerned about inflation, which it estimates will run at around 4.5 per cent next year, still almost double the euro-zone average.

"We have had a poor inflation performance since 1999 and there is no sign that things are getting better. We must now talk about restoring competitiveness rather than trying to maintain it. The increase in costs has been well ahead for a long number of years. It has become a stark story," he said.

The Bank believes its inflation forecasts are realistic but says it wouldn't be shocked if the rate of price increases was to finish a bit higher at the end of next year. This forecast was reduced from 4.75 per cent to reflect the 0.5 of a percentage cut in European Central Bank interest rates this month.

Dr Casey said he hoped rising inflation would not do greater damage to Ireland's competitiveness.

The Bank recently expressed concern about the amount of money being lent by the State's financial institutions. Mortgage lending has been particularly strong, rising by 23.5 per cent in the third quarter of 2002. The Bank is concerned about the re-acceleration in house prices but has been reassured that domestic banks are well capitalised.

Earlier this month the international credit rating agency Standard & Poor's expressed concern about the Irish banks' exposure to potential bad debts in the residential property section. Dr Casey said the agency had gone "a little over the top" and that the Central Bank would continue to monitor the sector but did not harbour such concerns.

In the bulletin, the Bank states that house prices have risen by 10.4 per cent in the year to October.

This asset inflation is not included in the inflation forecasts. The Bank has signalled that unemployment will average at about 5 per cent next year.