Central Bank sees soft landing ahead

The economy remains set for a soft landing next year, although a sustained recovery in exports could sustain the current economic boom, according to the Central Bank. John McManusreports.

In its summer review of the economy, the bank says growth will fall to 5 per cent this year from 6.5 per cent last year, with a further easing to 4 per cent in 2008, as activity in the construction sectors slows down and consumer spending falls.

The bank is also forecasting that employment growth will fall from around 4.5 per cent last year to 3 per cent this year and only be 2 per cent next year. However, the number of people seeking work is also expected to ease.

As a result, unemployment will increase only slightly from 4.5 per cent this year to 4.75 per cent next year. "Such a situation would still represent close to full employment conditions," according to the Quarterly Bulletin published yesterday.

The bank also argues that the predicted growth rates of 5 and 4 per cent in 2007 and 2008 respectively are "still strong by international standards".

However, it added that in the short-term the economy will perform below its full potential unless "there is a significant acceleration in export growth".

It believes that the outcome could be better than predicted if there is a recovery in exports, in the chemicals sector in particular, which could compensate for the expected decline in construction and consumer spending.

"Much depends on the performance of the chemicals sector, however, with a stronger performance by this sector capable of boosting overall export growth considerably," according to the report.

The chemicals sector includes the large manufacturing operation of a number of drug companies such as Pfizer of raw materials for drug manufacture.

The bank cautions that the export performance of the economy has been muted, particularly in terms of the sale abroad of goods manufactured in Ireland rather than services provided by businesses based here.

The overall weakness of manufacturing exports is attributed to a combination of the difficulties experienced by some sectors and an underlying deterioration in the competitiveness of the economy. Assuming that there is no dramatic improvement in the chemicals sector, the bank predicts only a modest pick-up in export performance this year.

The international environment remains "broadly benign", with economic growth in Ireland's main trading partners expected to decline only modestly.

Despite this, Ireland is still expected to see its share of the global market for manufactured goods fall. The bank says there is little prospect of a return to the significant increases in export market share which drove the economy in the late 1990s. Elsewhere in the bulletin, the bank points out that the inflationary pressures that have contributed to the loss on competitiveness should ease as growth falls.

The faltering performance of exports has also contributed to a a worsening of Ireland's balance of payment deficit. This is expected to ease next year as consumer demand slackens exerting downward pressure on imports, but "unless there is a significant increase in export growth, the deficit may may not narrow sharply, possibly remaining in the the region of 5 per cent of GNP [ economic growth] next year".

The bulletin also reviews the Government's finances and concludes that Government borrowing this year will be close to the budget day target of €546 million as tax receipts are "likely to be broadly in line with expectations".