EU predicts lower economic growth for State next year at just 1%

THE EUROPEAN Commission yesterday sharply lowered its forecast for economic growth in Ireland next year. It now expects gross domestic product to expand by just 1 per cent. Three months ago it forecast GDP growth of 1.9 per cent for 2012.

Its forecast is now lower than the Government’s (1.3 per cent) and below any of the main domestic forecasters.

The commission went on to warn that even its lower 2012 forecast may be subject to further downward revision.

“The near-term macro and fiscal outlook has worsened on foot of weakening global activity and higher than anticipated unemployment,” it said.

The forecasts were contained in the commission’s quarterly assessment of the Government’s implementation of the terms of the EU-International Monetary Fund bailout.

The report set out in detail the commission’s positive assessment of the Government’s compliance to date. This assessment clears the way for the latest tranche of EU bailout funds to be released. The monies are expected to be disbursed next month.

There is little indication of differences between the commission and the Government in the report. “Available information suggests that policy conditionality associated with future reviews is also broadly on track to be observed,” it states.

Despite its more downbeat assessment of the short-term economic outlook, the commission believes that the Irish State will meet its budget deficit targets over the coming years, allowing it to resume borrowing from private sources as planned in 2013 and exit the bailout programme by the end of that year.

Over the longer term the commission is positive on the economic outlook. “Ireland’s medium term prospects remain solid, based on strong underlying demographics, continued human capital deepening, and structural reforms of product and labour market under the programme,” it stated.

Despite the anticipated implementation of measures to improve the functioning of the labour market in early 2012, the commission believes that the total number of people at work in the Irish economy will shrink by 0.6 per cent next year.

The rate of unemployment is expected to remain elevated, averaging 14.2 per cent over 2012.

On reform of the banking sector the commission “urged the authorities to thoroughly restructure the [credit union] sector, even at the cost of some additional public funds”.

It also said that the plan to restructure Irish Life and Permanent “requires additional work”.

The report makes only passing mention of the Croke Park agreement on reform in the public sector, noting only that savings to the public sector pay bill have been achieved according to the Government.

Among the risks highlighted in the report were the dangers of the property market falling by more than anticipated in the bank recapitalisation plan and the “political risk” of default coming to be seen as a “less painful” way of addressing debt problems if other countries default on their debts.