Central Bank sees GDP growth of just 1%


THE CENTRAL Bank says the economy in 2011 will grow by considerably less than it had previously anticipated.

In its first economic forecast since November’s bailout and December’s budget, the Central Bank yesterday cited the dampening effects of austerity measures as the main reason why Ireland’s gross domestic product (GDP) will grow by just 1 per cent in 2011.

At the time of its last forecast in October, contained in its Quarterly Bulletin, it had expected an expansion of 2.4 per cent.

The downgrading of its forecasts for gross national product (GNP), which is a narrower measure of economic activity, was more significant. Yesterday’s figures foresee a small shrinking GNP in 2011. If this occurs, it will be the fourth consecutive year of contraction. In October, the Central Bank expected GNP to expand by 1.7 per cent in 2011.

Compared to some of the most closely watched forecasters who have produced forecasts since the budget and the bailout, the Central Bank is more downbeat on growth prospects than either the ESRI or the Government, whose figures are generated by the Department of Finance (see table).

The International Monetary Fund’s predictions for economic growth are more pessimistic than any of the three non-private Irish forecasters.

All institutions have a broadly similar view on the composition of economic growth, with exports as the driving force and the domestic economy remaining weak.

However, the Central Bank foresees exports growing more rapidly than any of the other three institutions and the domestic economy performing more poorly. It expects the largest component of domestic demand – spending by consumers on goods and services – to contract by 2.2 per cent in 2011, a rate of contraction that is sharper than the expected outcome for 2010.

Despite its weaker economic growth forecasts, the Central Bank’s projections for employment and the rate of joblessness are very similar to the other forecasters. In 2011, the bank expects a further net decline of 19,000 jobs, with the rate of unemployment peaking at 13.7 per cent.

In 2012, it expects a small net increase in jobs and believes the percentage of the workforce out of work will fall to 13.4 per cent.

A section of the report also focuses on Ireland’s competitive position, stating that recent figures suggesting a significant recovery of lost ground may overstate the extent of these gains.

The most commonly used measure of competitiveness internationally is unit labour costs – the amount paid to workers to produce a given unit of output. This measure takes account of both wage and productivity levels, ie if workers become more productive and their wages rise, there is no change in an economy’s competitive position.

The analysis suggests the economy-wide decline in unit labour costs, which are estimated to have returned to 2002 levels by 2010, were heavily influenced by the shrinking of the relatively low-productivity construction sector and the rapid growth of the “high-value added but low employment chemicals sector”.

Stripping out these sectors, the bank’s analysis finds that unit labour costs across the rest of the economy had fallen back only to 2005 levels by 2010.

The report also contains an overview of the new European Systemic Risk Board, designed to provide macro perspective on threats to the stability of the EU financial system. It is designed to compliment the “micro” regulators who scrutinise individual banks.

The Central Bank concludes its analysis with the view that the board “will strengthen the assessment of, and response to, systemic risks across the European financial system and address an important failing that existed in advance of the crisis”.