'Hard-won credibility' must be sustained, warns Ibec

THE ECONOMY’S “hard-won credibility” in the eyes of international financial markets earned in recent months must be sustained to contain the cost of Government borrowing, business lobby group Ibec warned yesterday.

In its latest quarterly economic report, Ibec said it was more optimistic about a recovery in the Irish economy. It now forecasts that gross domestic product (GDP) will shrink just 0.7 per cent in 2010, rather than its earlier prediction of a 1.6 per cent decline.

For 2011, it has pushed up its forecasted growth rate from 1.7 per cent to 2.1 per cent.

“Tough action to stabilise the public finances has resulted in some restoration of confidence in Ireland on international financial markets. Confidence, however, is a fragile commodity, and any undermining of the national effort will increase the cost of servicing the national debt,” said Ibec director general Danny McCoy.

As the Greek budget deficit crisis has unfolded, the Government has been at pains to stress its record in introducing corrective action designed to stabilise the Irish deficit.

Both Ibec and Government officials attribute the narrowing of Irish bond yields over the benchmark German bonds – a move that reduces the cost of exchequer borrowing – to the cutback measures in the December budget. By contrast, the spreads between Greek, Spanish and Portuguese bonds and the German benchmark have widened, exacerbating deficit problems in those countries.

“This hard-won credibility must be sustained. Financial markets are ruthless in their pursuit of any perceived weakness, and the Irish economy remains in the spotlight,” Mr McCoy said in a statement yesterday.

The Ibec chief added that trade unions “should be aware that threats of industrial action gain international notice”.

Ibec said it had “fully supported” the Government’s “uncompromising corrective action” to stabilise the public finances, notwithstanding the unavoidable short-term damage such actions caused to the economy.

The business group said yesterday that it was important that the Government did not lose sight of medium-term goals such as investment in technology, skills and infrastructure, “which are just as important in reviving and maintaining the confidence of investors in the Irish economy”.

The most recent data from the Central Statistics Office (CSO) shows that the economy technically emerged from recession in the third quarter of 2009, when GDP edged up 0.3 per cent compared to the previous quarter. However, on an annual basis, GDP declined 7.4 per cent.

Many commentators favour the gross national product (GNP) model for calculating Irish national income, as it excludes the profits accrued by multinational companies. By this measure, the economy was still contracting in the third quarter of 2009.

An update on what happened to the economy in the fourth quarter is due to be published by the end of March. Economists expect that GDP will slip back in the period compared to the third quarter, but that the annual rate of decline will have eased.